Ralph Nader P.O. Box 19312 Washington, DC 20036 James Love Consumer Project on Technology P.O. Box 19367 Washington, DC 20036
October 9, 1995
Dear Mr. Kantor:
This letter expresses our concerns about the positions taken by the Clinton Administration with respect to the treatment of intellectual property rights on pharmaceutical drugs. In particular, we are concerned that the Administration is advancing positions which are too narrowly focused on the interests of the international pharmaceutical companies, while ignoring important public health and development issues.
In negotiations over NAFTA and GATT and in bilateral trade negotiations, the Clinton Administration has supported policies which would significantly raise the level of protection for intellectual property rights for pharmaceutical drugs. In the new GATT, every country is not only obligated to adopt 20 year patents for pharmaceutical drugs, but also must adhere with new limits on the use of compulsory licenses that will be arbitrated by the World Trade Organization (WTO). In bilateral negotiations with Argentina, Brazil and other countries, the U.S. is asking for changes in patent laws which exceed the provisions of the GATT. The U.S. is perceived to be a vigorous proponent of ever expanding claims of intellectual property rights, constantly raising the level of protection of such rights around the world.
These actions of the U.S. Government in international forums do not reflect a broad consensus of the American public. There are debates over a number of important intellectual property rights issues. For example, agriculture experts have registered strong protests over recent patent awards for genetically altered cotton on the grounds that the patents were far too broad. The U.S. Patent and Trademark Office's (PTO's) decision to grant patents for new life forms created by genetic engineering has become controversial on ethical grounds.
Many physicians have criticized the PTO's decision to grant patents for surgical procedures. Pharmaceutical companies and patients have raised objections to the patenting of gene sequences. Some members of the U.S. Congress have expressed an interest in compulsory licensing as a tool to lower the price of pharmaceutical drugs. There is also considerable debate about the wisdom of assigning exclusive rights to patents and other intellectual property rights that arise from government-funded research programs. In the past several years there has been growing opposition by computer programmers to the granting of patents for software. This is due in part to the notoriously poor state of "prior art" searches by the patent examiners (which in turn is explained by the largely informal way that software innovations are shared among programmers).
As the PTO becomes ever bolder in the areas in which it grants patents, new controversies emerge. For example, the PTO's decision to grant patents on finance methods has become an object of ridicule and scorn. In 1989, the New Jersey-based College Savings Bank was granted patent 4,839,804, titled "Method and apparatus for the funding of a future liability," for the "idea" of tying interest rates for certificates of deposits to expected tuition increases, an "innovation" that was already used by several other lenders. Critics of the PTO say it is absurd to patent business practices, both for practical reasons (business practices are very poorly documented, making it difficult to evaluate novelty claims), and because it involves a large government bureaucracy in regulating methods of innovation which would occur faster without patent protection.
Moreover, intellectual property rights controversies are not confined to patent policy. There is opposition to Congressional proposals to extend the length of copyrights. Library groups and publishers are fighting over the definitions of "fair use" of copyrighted materials. Artists, writers and citizens have challenged overly broad claims for copyright and trademark rights that preclude parody or criticism. Health care advocates and cigarette manufacturers dispute whether or not "distinctive" cigarette packaging is or should be protected under the GATT trademark provisions.
In short, there are many controversies in the United States regarding the appropriate national policies for intellectual property rights and there is no consensus that "more is better." While a strong case can be made for traditional forms of intellectual property rights and authentic trade secrets, it is incumbent upon national governments to limit the widening of such commercial entitlements in order to balance competing public interests.
Patents are government granted monopolies on inventions. The benefit of a patent system is that it encourages investment in the research which produces the inventions that obtains the patent monopoly. Granting patents to cover a field of technology also has costs, however. A monopoly over an invention typically leads to higher prices and limits the use of the patented technology. In the United States, there is a large economics literature examining "sleeping patents," or "defensive patents," and other strategic uses of patents to
discourage others from innovating and competing. In some circumstances, patents clearly discourage innovation, such as when an overly broad patent is granted and the technology is priced too high. In such cases, related inventions, which would further the technology or take it in different directions, may be uneconomical or simply blocked by the patent holder. The costs of obtaining, defending or challenging patents are also high. For these and other reasons, national policies on patents and other intellectual property rights are controversial.
As noted above, through a series of multilateral foreign trade agreements, including GATT and NAFTA, the U.S. Government has successfully advocated rules that will require nations to offer 20 year patents on all fields of technology, with limits on compulsory licensing of the patented inventions. In the case of GATT, vague or broad provisions of the treaty will be interpreted by World Trade Organization (WTO), a secretive organization that will operate with little accountability to the press or the general public.
In addition to these multinational agreements, the U.S. is engaged in aggressive bilateral negotiations which are designed to strengthen international protections for monopoly intellectual property rights. The result of these negotiations are a web of new international agreements which set severe limits on what any government, including the United States, can do with its intellectual property rights policies.
In these international forums the U.S. Government works closely with pharmaceutical, software, entertainment and other industry groups. U.S. officials in the departments of State (DoS) and Commerce (DOC) and the Office of the United States Trade Representative (USTR) often act as if their over-riding mission is to advance the narrow interests of these industry groups.
This uncritical acceptance by U.S. trade negotiators of the agendas of the largest business enterprises has led to pernicious effects throughout the world. Here we are
particularly concerned about the provisions in trade agreements which address matters involving health care.
A number of countries have come under immense pressure from the United States government to adopt stronger monopoly patent protections for pharmaceutical drug companies. Often nations have been branded pirates by U.S. trade negotiators because they have chosen to treat the pharmaceutical sector different from other sectors of the economy, either by declining to grant patents for pharmaceutical inventions, or by ordering compulsory licensing of the pharmaceutical patents, in order to ensure a ready supply of pharmaceutical drugs at lower prices. India is embroiled in deep controversies over U.S. pressures for changes in patent policy toward pharmaceutical drugs. In Argentina, U.S. pressure to adopt U.S. style pharmaceutical laws has provoked a political crisis between President Menem and the Argentine Congress. President Menem, under pressure from U.S. trade officials, had earlier threatened to implement new patent laws by executive fiat, unless the Argentine Congress enacted legislation acceptable to the United States government. In Brazil, labor unions and public health officials expect changes in pharmaceutical patent policies to price many drugs out of reach for more than 30 million of the county's poorest citizens. The U.S. government pressured Canada to repeal its modest compulsory licensing program in order to join NAFTA.
In these confrontations the United States often takes extreme positions. For example, in Argentina, after the Argentine congress had agreed to abide by the intellectual property provisions of the new GATT, the U.S. sought even greater concessions, such as shortening the transition period allowed by GATT, making it difficult for the Argentine domestic drug manufacturers to survive under the new patent regime. The United States has asked for retroactive patent protection for drugs already on the market, an action that will enrich the
drug companies at the expense of consumers, without creating incentives for new drug development. The U.S. is also involved in negotiations with Argentina to determine whether that country's proposed system of compulsory licensing is acceptable. One U.S. State Department official told our researchers that the U.S. wanted Argentina to be "more Catholic than the Pope," by adopting rules even stronger than those adopted by members of the European Union.
Clearly ethical issues are raised by these U.S. policies. The U.S. Government is lobbying the world to adopt policies that not only extend new property rights to pharmaceutical drugs, but also make it difficult for countries to foster domestic drug manufacturers or control drug prices. The predictable result of these policies is a restriction of access to pharmaceutical drugs among the worlds poorest citizens. It is one thing for the U.S. Government to choose its own regime of intellectual property rights for pharmaceutical drugs in the United States, but it is another thing to impose our system on a country like Brazil, where the minimum wage is less than $70 per month.
U.S. attempts to secure greater trademark protection for Levi jeans, copyright protection for Disney's Pocahontas videos, or similar initiatives may be justified by national economic interests. But the same is not true of many of the sweeping policies which have been advocated. It is clearly appropriate for nations, including the United States, to treat pharmaceutical drugs and other health care goods different from other products and services. Although public health concerns should be paramount, positions the United States has taken in trade negotiations will lead to public health problems here and elsewhere.
U.S. trade negotiators, when not simply appealing to U.S. economic nationalism, assert that stronger intellectual property right protections for pharmaceutical drugs are actually in every country's interest, because of the putative positive impact of new policies on private sector R&D investments. U.S. trade officials also argue that stronger intellectual property (IP) protections are necessary to increase worldwide R&D levels and to prevent U.S. consumers from footing the world's R&D bills.
The first argument, that the U.S. is actually doing the world a favor by forcing countries to changes IP polices, is not taken too seriously abroad. As a practical matter, only
a few countries are responsible for the development of most new drugs, and those that do tend to be the industrialized countries which directly subsidize pharmaceutical R&D. Many countries that are asked to modify their IP laws to satisfy U.S. trade pressures lack the public infrastructure and educated work force that are so important to R&D efforts. Even technologically advanced Canada suffered pharmaceutical sector employment declines following adoption of stronger forms of monopoly patent protection for pharmaceutical drugs.
The second argument concerning the worldwide level of R&D is an important one that, unfortunately, misses the point. The U.S. leads the world in public spending on pharmaceutical R&D, which explains why the U.S. also leads the world in new drug discoveries. U.S. consumers do indeed bear the burden for much of the world's R&D on pharmaceutical drugs, first as taxpayers, and once again by paying higher prices for drugs than do consumers elsewhere. While public policies can simply rely upon higher drug prices here or abroad to provide incentives for R&D, there are better options available, in terms of both economic efficiency and social fairness.
At the one extreme, one could imagine a world where companies enjoyed super patent protection, with broader rights for inventions, perpetual terms, and no price controls. Such a regime would certainly lead to higher company profits, and possibly some increases in private firm R&D investments, but at a price that many would judge unacceptable. There would be no generic drugs -- every drug would have monopoly patent protection forever. The poorest consumers, including large portions of citizens in the poorest countries, would suffer from even greater barriers to access to medical care. Middle class consumers in the U.S. also would be forced to pay much higher costs for drugs than they do today. This approach is rejected,
even in the United States, because the putative R&D incentives are deemed too costly to be justified.
Fortunately, countries have other options available to promote public health objectives. Governments can and do directly subsidize pharmaceutical R&D, and have the option of compelling companies to reinvest a portion of revenue from drugs sales into new R&D. The best policies are those that accomplish public health objectives most efficiently -- at the lowest costs to consumers and taxpayers -- and equitably share the burden of financing worldwide health care R&D.
Outside of the United States, many governments have used either price controls or compulsory licensing programs to control drug prices. Under a compulsory licensing regime, countries retain the right to require patent holders to issue licenses to manufacture and sell a drug to one or more of their competitors. A compulsory licensing program may require the firm receiving the compulsory license to pay royalties to the patent holder as compensation for the license. Many countries express preference for compulsory licensing over price controls, because it is easier to administer -- the government is not required to independently determine a price for the drug -- and it encourages the development of a vibrant domestic generic drug industry.
The United States has the authority to use compulsory licensing for drugs, when the patented invention was developed with federal assistance, under the Bayh-Dole Act. This provision in U.S. law covers an estimated 80 percent of the research funds administered by the National Institutes of Health (NIH), as well as a significant share of health care R&D funding from other U.S. federal government agencies. The U.S. government may exercise its right to issue a compulsory license if the "action is necessary to alleviate health or safety needs which are not reasonably satisfied by the contractor." [35 U.S.C. Sec. 203 (1)(b)]
Price controls are allowed under the GATT, while compulsory licenses are highly restricted. On the surface, it is difficult to understand the rationale. Price controls and compulsory licensing both reduce patent owner profits. Moreover, it is arguably easier to set standards for "fair" compulsory licensing schemes than to monitor every country's system of
price controls. In addition, aspects of the current systems of price controls are creating new international problems. Several countries set drug prices according to a comparison of drug prices in foreign countries. Developed countries want to pay prices that are "below average," and developing countries want to pay prices that are no higher than those charged for the least developed countries. While drug companies historically have used price discrimination to charge higher prices in higher income countries, they are now increasingly moving toward uniform prices in order to avoid the downward ratchet effect of cross-country comparisons. This trend is raising prices for new drugs in the poorest countries. The small domestic markets in the poorest countries do not justify the potential risk of providing a basis for price roll-backs in the more profitable developed countries.
It would seem, then, that compulsory licensing systems have several appealing features, when compared to price controls. International trade agreements could promote standards for compulsory licensing, establishing terms such as "fair" royalties to patent owners, including differential treatment of rich and poor countries, or conditions (excessive prices) or classes of drugs (essential drugs, drugs for severe illnesses) that should be emphasized in a compulsory licensing program.
Of course, the very features that make compulsory licensing appealing to public health authorities make it unattractive to the pharmaceutical companies. But U.S. government should not confuse our national interests with the interests of the large pharmaceutical companies.
To achieve public health goals, international agreements should focus on alternative methods of world-wide sharing of R&D costs. For example, agreements could set national targets for minimum R&D investments, and national governments could decide how to achieve these targets, including such innovations as dedicated "R&D" royalties from drug sales, R&D reinvestment requirements, or direct government investments in R&D. Indeed, if the objectives are to promote R&D investments and improve the public health, programs of compulsory licensing of technologies, and a combination of government-funded-health care R&D and mandatory private sector minimum reinvestment targets may be far more efficient than simply increasing pharmaceutical company profits in the hope that some of the money will trickle down to R&D.
Despite misconceptions promoted by industry groups such as the Biotechnology Industry Organization (BIO) and the Pharmaceutical Research and Manufacturing Association (PhRMA), the U.S. experience with direct investments in health care R&D have been very effective. For example, our study of all new "priority" drugs approved by the U.S. FDA between 1987 and 1991, found that 70 percent of the drugs first discovered in the U.S. were developed with significant U.S. government support. Another study, covering all new FDA approved cancer drugs developed from 1955 to 1992, found that 34 out of 37 of these drugs benefited from significant U.S. government support. Moreover, most specialists who have studied pharmaceutical R&D investments find that industry investments are often targeted at lower-risk and less innovative "me too" drugs, while government R&D investments tend to be targeted toward higher-risk and more innovative drugs, as well as drugs for the most severe illnesses.
Approaches that encourage broader experimentation and diversity in R&D efforts should be fostered. Policies that encourage and support the development of indigenous pharmaceutical R&D efforts in biologically rich areas such as Brazil or Madagascar have enormous appeal, for obvious reasons.
Unfortunately, U.S. policy makers seem intent on acting as if they are wholly owned subsidiaries of the commercial biotechnology and pharmaceutical industry. The range of policies that they consider are too predictably those that advance the narrow interests of a handful of large corporations. As a result, the U.S., like other countries, is increasingly being constrained by treaties which make it difficult to protect consumers and promote ethical policies toward intellectual property rights that best serve the public health.
For the reasons stated above, we urge the Clinton Administration to undertake a fundamental reassessment of its trade policies. Regardless of Administration's views on the broader question of the GATT and NAFTA, it must certainly find that the provisions of trade agreements which concern public health deserve special consideration. We urge the following measures to address our concerns:
1) Initiate an immediate review of the Administration's positions toward countries that are modifying patent laws for pharmaceutical drugs, including a reevaluation of the Administration's opposition to compulsory licensing programs.
2) Convene a meeting of U.S. and international consumer and public health organizations to discuss new frameworks for trade agreements that address intellectual property rights and health care.
We are prepared to work with your office on both endeavors.
The recent heightened concern by infectious disease specialists at the Centers for Disease Control and medical schools about the prospect of more serious global viral and bacteriological epidemics warrants a comparable level of urgency by those officials in charge of writing the rules of trade in pharmaceutical commodities. We look forward to receiving your response to these suggestions.
Sincerely /s/ /s/ Ralph Nader James Love
 An early but still instructive survey of the literature on this problem is found in Fritz Machlup, An Economic Review of the Patent System, Study No. 15, U.S. Congress, Senate, Subcommittee on Patents, Trademarks, and Copyrights, 85th Congress., 2nd sess., 1958. Other examples including J. R. Gilbert and D.M.G. Newbery, "Preemptive patenting and the persistence of monopoly," American Economic Review, 72:514-526, 1982; Jennifer F. Reinganum, "Practical implications of game theoretic models of R&D," American Economic Review, 73:741-748, 1984; and Michael Katz and Carl Shapiro, "R&D rivalry with licensing or imitation," American Economic Review, 77:402-420, 1987.
 Trade agreements are now being used to defend cigarette advertising in Canada and Thailand, causing collateral deaths of dolphins in Mexico, and to prevent the United States Environmental Protection Agency from raising air quality standards. Controversies over the patenting of seeds in India and software in the United States are also tied to trade agreements.
 Under immense pressure from the U.S. government, the Argentine Congress passed a new patent law, which provided for patents on pharmaceuticals. But the law contained features that the U.S. government opposed, including a compulsory licensing system for patents on pharmaceuticals, and a transition period to the new system. President Menem vetoed the law, but the veto was overridden by the Argentine Congress. Last week the Argentine Congress passed a "corrective" law with additional changes designed to accommodate U.S. government trade officials. The U.S. position is described in more detail below.
 The repeal of Canada's program of compulsory licensing for pharmaceutical drugs occurred in February 1993.
 Investment decisions are forward looking. Ex post changes in patent protection for drugs already on the market increase returns for owners of some patents, but do not increase returns for investments in new drugs.
 The provisions of NAFTA and GATT which severely limit the use of compulsory licensing of pharmaceutical drug inventions make it more difficult to use compulsory licensing as a tool to control drug prices in the United States, even in those cases where policy makers would prefer compulsory licensing over a system of price controls.
 Whatever correlation there may be between strong intellectual property rights and private sector R&D efforts, it is decidedly secondary to the even stronger correlation between government R&D investments and new drug development.
 Overly broad patent protection would discourage investments in new technologies that are preempted by the patent.
 The U.S. does not grant perpetual patents for drugs, and indeed perpetual patents would not be allowed under the U.S. Constitution, which limits both patents and copyrights to a "limited time." It has been long recognized that private investment decisions are based upon relatively short term returns. The promise of profits from exclusive marketing rights more than twenty years into the future is so highly discounted by the private market that it is a trivial consideration for today's investment decisions. By limiting patent length, consumers benefit from lower prices in the future, when patent rights expire. The choice of patent life is a decision that should balances the public interest in providing investment incentives against the public interest in competition and lower prices.
 Proposals to require R&D reinvestment levels were made during 1994 hearings in the U.S. Senate, and may be included in legislation introduced later this year in the House of Representatives.
 The United States also has a compulsory licensing program for patents involving nuclear technology, which gives the U.S. government the right to issue non-exclusive licenses to privately held patents, when "the patent has been declared affected with the public interest." [42 U.S.C. Sec. 2183 (b)]. The United States has long relied upon various forms of compulsory licensing to promote public interest objectives in the copyright law, to address problems in such areas as public broadcasting, cable television, jukeboxes and player pianos.
 As more countries rely upon international comparisons to impose domestic price controls, some drug companies have become reluctant to offer newer drugs at discounts in poorer countries, for fear that the discounts will be used as a rationale to lower prices in the more developed countries.
 Particularly with respect to enabling competition from the generic drug industry.
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