Summary:

As the Canadian government prepares to adopt legislation to implement the WTO Paragraph 6 Agreement, government officials have expressed concern that their efforts may run into NAFTA problems. This brief note concludes that Canada does not face a NAFTA problem.

This note first reviews the WTO Paragraph 6 Agreement.

A second section considers whether there is a problem under NAFTA's intellectual property chapter for Canada in implementing the Paragraph 6 Agreement. It concludes there is not. Good-faith negotiators could not reasonably have intended to reach agreement in the WTO forum and then effectively rescind the agreement in the NAFTA forum, based on NAFTA language that is almost identical to the WTO TRIPS provision that the Paragraph 6 Agreement was intended to address. Even if the United States were to insist that the Paragraph 6 Agreement does not cover NAFTA -- an argument that would be difficult to sell before a trade tribunal -- Canada could defend its Paragraph 6 Agreement implementation under NAFTA's general exceptions language for intellectual property. It is very hard to see how Canada could lose with this argument.

A final section of the note considers NAFTA's investment chapter. It notes that the investment chapter specifically states that its relevant provisions do not apply to permissible compulsory licensing of intellectual property. Thus there is no concern that the investment chapter provides an independent basis for challenging Canadian action to implement the Paragraph 6 Agreement.

I. The Paragraph 6 Agreement

In November 2001, WTO member countries adopted the Doha Declaration on the TRIPS Agreement and Public Health. The Doha Declaration reiterated countries' right to use the flexibilities, including compulsory licensing, contained in the TRIPS Agreement.

The text of the Declaration is at: http://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_trips_e.htm

Paragraph 6 of the Declaration focused on a particular problem in the TRIPS Agreement, contained in Article 31(f). This provision stipulates that compulsory licenses must be issued predominantly for supply of the domestic market, meaning 50 percent or more of sales of compulsorily licensed products must be in the domestic market.

This poses a problem for countries desiring to import. They have complete rights to issue a compulsory license for import, and can import the totality of the product to be put on the market pursuant to the compulsory license. But if the product is on patent in the potential exporter, a double problem arises. First, a compulsory license must be issued in the exporting country; and second, most of what is produced under the compulsory license in the exporting country must be for domestic consumption. But what if the potential exporter does not want to issue a license for the domestic market? Of what if domestic sales of the potential exporter aren't large enough to enable significant exports (since under Article 31(f) exports cannot exceed domestic sales)?

In Paragraph 6 of the Doha Declaration, countries committed themselves to reaching a solution to this problem by the end of 2002. Prolonged negotiations ensued, and an agreement was finally reached in August 2003. Subject to certain conditions, the Paragraph 6 Agreement permits countries to issue compulsory licenses exclusively for export.

Implementing this agreement in exporting countries requires the adoption of national legislation.

A news release from the WTO summarized the problem and solution as follows: "Article 31(f) of the TRIPS Agreement says products made under compulsory licensing must be 'predominantly for the supply of the domestic market.' This applies directly to countries that can manufacture drugs -- it limits the amount they can export when the drug is made under compulsory licence. And it has an indirect impact on countries unable to make medicines and therefore wanting to import generics. They would find it difficult to find countries that can supply them with drugs made under compulsory licensing. … This 30 August 2003 agreement allows any member country to export pharmaceutical products made under compulsory licences within the terms set out in the decision. All WTO member countries are eligible to import under this decision, but 23 developed countries are listed in the decision as announcing voluntarily that they will not use the system to import."

The text of the agreement, and a TRIPS General Council Chairperson's accompanying statement are at: http://www.wto.org/english/tratop_e/trips_e/implem_para6_e.htm
http://www.wto.org/english/news_e/news03_e/trips_stat_28aug03_e.htm

Many public health and advocacy groups strongly criticized the agreement, as overly complicated and bureaucratic. A statement criticizing the deal is at: http://www.cptech.org/ip/wto/p6/ngos09102003.html

Many public health and advocacy groups had urged a much simpler solution, based not on Article 31 of TRIPS, but Article 30, a general exceptions provision. This approach, which was adopted by the European Parliament, would have clarified an exception to patent rights in an exporting country, when a firm is exporting a medicine to a country where a compulsory license has been issued or where no patent is in effect. The idea was for the patent holder's rights to be realized in the importing country.

The public health groups' proposed approach is at: http://www.cptech.org/ip/health/art30exports.html

The European Parliament legislation is at: http://www3.europarl.eu.int/omk/omnsapir.so/calendar?APP=PDF&TYPE=PV2&FILE=p0021023EN.pdf&LANGUE=EN
(Then go to Amendment 196; ARTICLE 1, POINT 7; Article 10, paragraph 4, subparagraph 1 a (new) (Directive 2001/83/EC))

II. Canada Seeks to Implement the Paragraph 6 Agreement - NAFTA Intellectual Property Issues

Following resolution of the Paragraph 6 negotiations, UN Special Envoy for HIV/AIDS in Africa Stephen Lewis and others issued calls for Canada to adopt legislation to implement the Paragraph 6 Agreement. The government subsequently said it would affirmatively respond to these requests, and is now drafting implementing legislation.

In the course of preparing the legislation, Canadian officials have raised concerns about whether their efforts will be compatible with Canadian obligations under the North American Free Trade Agreement (NAFTA).

NAFTA contains an intellectual property agreement that is very similar to the WTO's TRIPS Agreement.

While the Paragraph 6 Agreement purports to solve the problem posed by Article 31(f), the same problem is posed by NAFTA Article 1709 (10)(f), which similarly requires that "any such use [compulsory licensing] shall be authorized predominantly for the supply of the Party's domestic market."

Thus, the United States (or Mexico), as party to NAFTA, could argue that, while it is permissible in WTO terms for Canada to adopt a licensing system for exports under the Paragraph 6 Agreement, such a system would violate Canada's NAFTA obligations.

Politically, it is very hard to imagine the United States filing such a NAFTA complaint. The U.S. would certainly face an enormous backlash, following the prolonged and difficult Paragraph 6 negotiations, and the worldwide recognition that the negotiations were designed to address a real and serious problem in the global trading system.

But Canada might reasonably be concerned with meeting its legal obligations under NAFTA, even if they were not likely to be subject to challenge.

Canadian officials should not worry. There are overwhelming legal arguments that Canada can proceed to implement the Paragraph 6 Agreement while respecting its NAFTA obligations.

Canada's first argument should be that the Paragraph 6 Agreement extends to NAFTA. All parties to NAFTA are parties to the WTO. The WTO engaged in extensive and high-profile negotiations over the Paragraph 6 issue. The source of the Paragraph 6 problem -- TRIPS Article 31(f) -- is almost exactly replicated in the NAFTA agreement. Good-faith negotiators could not reasonably have intended to reach agreement in the WTO forum and then effectively rescind the agreement in the NAFTA forum, relying on almost exactly the same legal conundrum that the Paragraph 6 Agreement was intended to resolve. The Paragraph 6 Agreement is intended to address pressing health problems and to give force to the WTO rights of importing countries, and restrictive maneuvers in potential exporting countries would effectively sabotage the Paragraph 6 Agreement.

If the United States pressed the issue, and argued that the plain terms of the Paragraph 6 Agreement do not apply to NAFTA, it would have a difficult time explaining why the NAFTA parties' agreement to the Paragraph 6 solution should not be interpreted as an agreement to apply the same terms to NAFTA.

If for some reason Canada did not prevail on this issue, it could rely on an even stronger second line of defense. NAFTA Article 1706 contains a general exceptions provision similar to that contained in TRIPS Article 30.

Canada could argue that its system to implement the WTO Paragraph 6 system was authorized under NAFTA Article 1706. This would have been a strong argument even in the absence of the Paragraph 6 Agreement -- this was the position urged by public health groups -- but is extremely strong given the existence of the agreement. The Paragraph 6 Agreement is an international agreement to design a system specifically intended to address the problem Canada is trying to address and specifically intended to authorize the implementation approach Canada is seeking to employ. Given this context, Canada could argue that, if the general exceptions clause of NAFTA is to mean anything, it must be broad enough to authorize Canada's Paragraph 6 implementation legislation. It is very hard to see how Canada could lose with this argument.

Canada would be especially well positioned to make such arguments, because it has previously argued before WTO dispute settlement panels for broad interpretations of TRIPS Article 30 in relation to pharmaceutical production. Canada has specifically made the argument in relationship to the importance of exports and economies of scale in pharmaceutical manufacturing -- the very issues underlying the Paragraph 6 conundrum. (See Canada - Patent Protection of Pharmaceutical Products - Complaint by the European Communities and their member States Report of the Panel, World Trade Organization, WT/DS114/R, 17 March 2000. For the key excerpt, see section 4.38.)

III. The Investment Issue

NAFTA contains another section that might hypothetically pose difficulties for Canadian implementation of the Paragraph 6 Agreement. Chapter 11 of NAFTA protects investments. Its most notable feature is that it permits investors directly to bring suit against, and seek compensation from, countries that have injured them. Other provisions of NAFTA and most trade agreements enable only countries on behalf of their firms to bring challenges against other countries. The investor-to-state element of the investment chapter (as opposed to the state-to-state framework for most trade agreement provisions) removes some of the political checks on filing challenges.

NAFTA Article 1110 prohibits "expropriation" of a foreign investors' property, except upon payment of compensation equivalent to fair market value for the expropriated property. Under NAFTA, compulsory licensing probably qualifies as a form of "expropriation," and the compensation owed under the investment agreement probably exceeds what would be owed for compulsory licensing under the intellectual property agreement.

However, NAFTA specifically provides that investment suits may not be brought against compulsory licensing efforts. Article 1110 (7) states:

"This Article does not apply to the issuance of compulsory licenses granted in relation to intellectual property rights, or the revocation, limitation or creation of intellectual property rights to the extent that such issuance, revocation, limitation or creation is consistent with Chapter Seventeen (Intellectual Property)."

Thus, if Canada is compliant with the intellectual property provisions of NAFTA, there is no basis for an investment challenge.