Five Common Mistakes by Reporters covering US/South Africa disputes over compulsory licensing and parallel imports

September 23, 1999

James Love

1. Contrary to reports in USA Today, the Chicago Tribune, and a few other news outlets, South Africa did not back down in the trade dispute. The US government has ended its trade pressures against South Africa's efforts to use compulsory licensing and parallel imports. The only "concession" that the South Africa government made was to repeat earlier promises that South Africa would abide by the WTO's TRIPS agreement. In fact, South Africa has said it would do this on several occasions over several years, and South Africa is of course bound to do so as a member of the WTO. The TRIPS permits both compulsory licensing and parallel imports, and so saying a country would abide by its WTO obligations is not a rejection of either policy. And, the South Africa government has issued a number of statements saying it would proceed with both parallel imports and compulsory licensing. It is the US government that has backed down, which is a good thing.

2. Contrary to reports in the Washington Post, the Baltimore Sun, CBS, ABC and elsewhere, the South Africa government does not have to abide by US patent laws, or for that matter, by any other country's laws. South Africa is sovereign, just like the USA is sovereign. This seems like a simple point, but apparently it needs to be emphasized. South Africa is a member of the WTO, and does have to deal with the WTO rules. But the WTO rules are not US laws. They are rules determined by negotiation among the WTO member countries.

3. Parallel Imports are not prohibited by the WTO/TRIPS agreement. Article 28 of the TRIPS gives a patent owner the right to prevent third parties from "making, using, offering for sale, selling, or importing" a product. However, countries also determine when these rights are "exhausted." The "first sale doctrine" is an example of when rights are exhausted. Once a good is sold, either domestically or internationally, countries can and often do declare that the patent owner's rights have been exhausted. Under Article 6 of the TRIPS, countries can (and do) whatever they want with regard to exhaustion. In general, parallel imports do not violate US, European Union or Japanese patent laws. In some cases, manufacturers argue that parallel imports can be blocked under trademark laws, or under regulatory policy, such as FDA regulation in the USA. Under the WTO, these are matters for national policy, and are not restricted by the TRIPS.

4. Contrary to many news reports, the WTO does not limit the grounds on which a country can use compulsory licenses. For example, compulsory licenses are not limited to cases of national emergencies. Indeed, countries can and do issue compulsory licenses (or government use of a patent) for a wide range of purposes. In cases of "national emergency or other circumstances of extreme urgency," as well as in "cases of public non-commercial use," or when there is a "need to correct anti- competitive practices," countries are not required to negotiate with patent owners. In all other cases, there has to be a prior attempt to negotiate a license "on reasonable commercial terms and conditions." In most cases, patent owners must be paid "adequate remuneration" for the use of a patent. However, in cases where the license is needed to correct anticompetitive practices, royalties can be as low as zero. Other conditions on compulsory licensing are set out in Article 31. Decisions regarding the amount of compensation are made under the legal system of the country issuing the compulsory license. Thus, under the WTO rules, the royalty on a license for an HIV drug would be set by the South African government, according to the South Africa government's own legal system.

5. There is no requirement in the WTO TRIPS agreement for local manufacturing with a compulsory license. Countries can issue compulsory licenses to firms that manufacture elsewhere and import the drug into the domestic market. This will often be the most efficient method of drug procurement. Important drugs like AZT, 3TC or fluconazole are readily available in bulk from generic manufacturers now, and could be easily imported into any country that issues a compulsory license, at large discounts. The ability of a country to import under a compulsory license is determined by its own national laws. The TRIPS does have some limits on the ability of a country to export under a compulsory license, but drugs can be acquired from non-WTO member countries, and from WTO members countries where the drug is off patent, or where exports are not the predominant activity, or in countries that provide patent exceptions for imports into countries that have TRIPS compliant compulsory licenses.