South Asia Watch on Trade, Economics & Environment (SAWTEE)

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Interfacing competition policy with IPR
Published: The Kathmandu Post, 06&07 February 2004
By: Ratnakar Adhikari

The debate on competition policy and intellectual property rights (IPRs) is not new because of the potential impact of 'limited monopoly' granted by the state to IPR holders. Economics of IPR suggests that it is necessary to grant limited monopoly and provide an opportunity to the creator of knowledge to exploit the same so as to provide him/her an incentive which in turn helps in spurring innovation and creativity. As a public policy tool granting of limited monopoly to IPR holders is absolutely justified. However, the implicit assumption of this hypothesis, which is very naïve, is that human being is rational, moral and ethical. Ever since human beings 'graduated' from being rational to maximisers, public policy instruments are generating highly unpredictable results. While some governments are quick to react and fix the problem, some others are least bothered. It is the second category of governments that make their people suffer the most.

There is no disagreement over the fact that creators of knowledge need to be rewarded. It is also true that in the current state of global economies, there is no better system than IPR that provides necessary stimulus to innovation (another instrument being the provision of direct subsidy to the creator/innovator – which tends to be less efficient compared to IPR). This, however, does not mean that the state should accept the supremacy of private interests over public interests. On the contrary, it should be exactly the opposite.

It is often a convenient cliché to justify strengthened IPR protection, particularly in the developing countries, arguing that it spurs innovation, results in higher flow of foreign direct investment (FDI) and accelerates the process of technology transfer. However, in reality, strengthened IPR protection has only served to bolster the market power of the innovators (mainly private firms) and create severe distortions in the economy.

As is evident from the example of China, it is clear that the proponents of IPR are making facile arguments. Despite poor IPR protection, the Chinese society is highly innovative, the country has been receiving the highest amount of FDI among the developing countries and the foreign companies have been transferring their technology to Chinese enterprises without much hesitation.

The developed countries, which hold more than 80 percent of global IPRs managed to get the issue of IPR included within the sanction-based mechanism of the World Trade Organisation (WTO) in the form of the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS).

The TRIPS Agreement sets out minimum standards of protection for all forms of IPRs and stringent requirements to ensure that the infringement of IPR is virtually eliminated from all the member countries of the WTO. This effectively means that the member country not fulfilling all the substantive as well as procedural requirements of the TRIPS Agreement has to face the challenges at the Dispute Settlement Body (DSB) of the WTO.

TRIPS provides strengthened IPR protection in a number of areas, some of which are worth highlighting. The period of protection for patent, which used to be seven years to 10 years in most countries, has now been increased to 20 years! Even in the USA, where business corporations – the demandeur of higher IPR protection – set the entire economic agenda of the government, the period of protection is only 17 years. There is no economic rationale for providing patent protection for 20 years. Within 20 years' period, the IPR holder is expected to earn several times more than his/her actual investment – which is socially sub-optimal.

There have been examples of IPR holder companies deliberately pursuing anti-competitive practices by obtaining board patents. This tendency is more evident in the area of patenting of the bio-technology products. For example, Monsanto, a US based agrochemical giant has been granted patent on 'all varieties of genetically engineered soyabean' including those they did not invent. Here the intention is not to serve the society, as is often claimed, but to prevent the competitors from conducting research and development (R&D) in this area so that their market power remains intact. There is no remedy against such practices in the TRIPS Agreement.

Other means through which monopoly/oligopoly and exploitative position(s) of the company/ies are maintained are through refusal to license their technology to others and by preventing parallel import (i.e., import of the products manufactured by own company abroad). Fortunately, some remedies do exist against such practices in the TRIPS Agreement. However, their application is severely constrained by the extremely onerous conditions. Two recent examples, both related to pharmaceutical products, are worth discussing here.

First example relates to Merck – a US pharmaceutical major, which refused to license its technology to the local drug manufacturers in Brazil to allow them to manufacture anti-retroviral drugs. They were being ultimately purchased by the Brazilian government, as part of its public health campaign against HIV/AIDS. The Brazilian government, exasperated with Merck's policy of abusing its monopoly power, forced the company to grant compulsory license to local manufacturers, in TRIPS-compatible manner. However, the US government, at the insistence of Merck, challenged this decision of the Brazilian government before the DSB of the WTO.

A second example concerns 39 pharmaceutical companies, mostly affiliated to global pharmaceutical majors, which filed a case against the decision of South African Government to allow, through the enactment of a legislation, the import of generic version of anti-retroviral drugs from outside the country. The major bone of contention of the companies which filed the case in the Pretoria High Court was that since they had the monopoly/oligopoly power not only to manufacture but also to market the drugs, which were patented by them, the government was acting in bad faith to allow import of generic medicine.

Both these examples highlight the pinnacle of corporate greed. In these instances the pharmaceutical companies' attitude of making profit on deathbed by charging higher price for their drugs and abusing their monopoly/oligopoly position provided to them by patent was cruelly exposed. Civil society organisation (CSOs) across the globe got united on this emotive issue and launched a strong media advocacy campaign. This led to bad publicity of the pharmaceutical companies forcing them to withdraw the cases – both at the national court and the WTO.

In both cases, pharmaceutical companies justified their stands by saying that they were trying to prevent the governments from taking TRIPS-inconsistent measures. These cases, therefore, exposed the vulnerability of pro-competitive provisions of the TRIPS Agreement. Realising the need to provide a solid basis to the provision of compulsory licensing, trade ministers gathered in Doha for the fourth Ministerial Conference of the WTO decided to issue the Declaration on TRIPS and Public Health.

However, this document ~ ~ too became less meaningful than what was initially envisaged because the US backed out from its earlier stance at the insistence of its pharmaceutical lobby. The only paragraph of the Declaration, which remained inconclusive, was the one relating to the provision of allowing countries with insufficient or no manufacturing capacity to import generic version of medicines from other countries. When the final decision was reached on August 30, 2003, its spirits got severely diluted – thanks to the US pharma lobby.

Anti-competitive practices are also found in the seed sector – a sector of economy that is important for an agricultural economy like Nepal. As of now, three seed companies in the world, namely Du Pont (which acquired Pioneer Hi-bred), Pharmacia (which acquired Monsanto) and Novartis (which spunned off Syngenta) hold 63 per cent market share in corn seed market and 46 percent of soybean seed market. These companies, with the help of their expertise in biotechnology, are further trying to consolidate their position in the market and competition authorities in the home countries of these companies are also aiding the process.

These very companies were the chief architects of the provision on 'life form' patenting as well as mandatory requirement to protect plant varieties either through patent or an 'effective sui generis' system, included in the highly convoluted and most contentious Article 27.3 (b) of the TRIPS Agreement. Due to the opposition of the developing countries at the time of finalising the Agreement, the developed countries trade negotiators could not impose 'patent only' requirement for the protection of plant varieties. They had to finally agree to a mechanism whereby plant varieties could be protected through one of the three means: a) patent; b) effective sui generis system; and c) any combination of a and b.

Since developed countries are the chief architects of the global trade regime, they had hoped to impose their own standards for plant variety protection too. As per them the only effective sui generis system is their own system, which is known as International Union for the Protection of New Varieties of Plants (UPOV) – a convention exclusively prepared by the developed countries in 1961 to suit their requirement of commercial farming at the insistence of the commercial plant breeders. What this system does for the interest of these monopolists/oligopolists is that it prevents farmers from saving, replanting, exchanging and selling seeds so that they will have to come back to the supplier every season for the purchase of seeds and often pay exploitative price.

These companies are relentlessly lobbying their governments to pressurise developing countries to become a member of UPOV, so that they are able to eliminate their major competitors – the disorganised farmers who supply more than 80 percent of the seed requirements of most developing countries. This example too exposes the desperate attempt made by the companies of the developed countries to stifle competition in the name of protecting IPR, either through the multilaterally harmonised system like TRIPS or plurilaterally harmonised system like UPOV. It is also now being argued that countries like the US and the EU are imposing TRIPS-plus standards to the developing countries at the time of signing bilateral trade agreements. Thanks to the desperate desire of willing victims (like Jordan, Chile, Vietnam) and would be ones (like Sri Lanka) to sign Free Trade Agreement (FTA) with the US, they are becoming a party to a dangerous, anti-public gameplan of the US. For some of these countries, this does not really matter as long as they get incremental access to the US market.

The points mentioned above prove beyond doubt that the global corporates are not happy with the competition taking place in the sectors of their interest. Accustomed to derive monopoly rents, they would like to maintain their monopoly position in the key sectors by creating entry barriers for their competitors. They are attempting, and in some cases have succeeded, to create market power through such mechanisms as heavy advertising outlay, brand image (or trademark, which is a form of IPR) and research and development. This shows that the IPR and competition policy issues are at loggerheads and the types of problems highlighted above are not going to be solved soon.

The problem is not only with these two issues being at loggerheads, but also the increasing supremacy being accorded to IPR over competition policy. For example, competition authorities are becoming extremely lenient to the seed companies which are trying to merge with each other or buying off small companies . The recent disapproval by the US Department of Justice to Monsanto's proposal for acquiring Delta and Pine Land for US$1.9 billion is a rare exception.

Competition policy is seen globally as a tool not only to promote consumer welfare, but also to enhance economic efficiency which ultimately leads to enhanced competitiveness of the business enterprises. Countries have enacted legislation to check abuse of market power, but most of them have, probably deliberately, failed to address the abuse by IPR holder. The TRIPS Agreement, which was never meant to provide a sense of respite to the developing countries, does contain some provisions to control anti-competitive practices, but there are a number of grey areas which are subject to varied interpretation.

Given this complex situation at the global level coupled with the apathy of the WTO to provide supremacy to competition (ironically considered its raison de etre) over IPR issue, how should a least developed country like Nepal respond at the time of implementing its WTO commitments in the post accession era? Nepal has to prepare a competition law by June 2004 to give practical shape to its exiting competition policy. At the same time, it has to prepare a major IPR related legislation in the form of Industrial Property Act by December 2005.

A bit of tactfulness and innovative adaptation on the part of our lawmakers and implementers could save us from the potential disaster. Some of them, mentioned below, are worth considering.

First, in order to ensure supremacy of competition issue over IPR, the power of the state to prevent the misuse of IPR in the public interest should be clearly articulated in each of the TRIPS compliant legislation to be drafted in the near future. Secondly, the issue of parallel import and compulsory licensing, which are the cornerstone of TRIPS, should be incorporated in all the IPR related legislation.

Thirdly, competition law should also specifically outlaw the IPR-induced abusive practices and make explicit mention of parallel import as well as compulsory licensing.

Fourthly, competition advocacy role of the competition authority should not only be included at the time of drafting legislation but also strengthened through an institutional mechanism, so that the authority is consulted and heard at the time of making any decision having repercussions on competition.

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