[Ip-health] IP-Watch: Inside Views (Biswajit Dhar and TC James) USTR’s Investigations On IP Rights Against India: Is There A Tenable Case?

Thiru Balasubramaniam thiru at keionline.org
Mon Oct 20 10:30:44 PDT 2014


By Biswajit Dhar and TC James

On 14th October, the US Trade Representative (USTR) began the out-of-cycle
review (OCR) of India’s intellectual property (IP) laws, the mandate which
it gave itself in the 2014 Special 301 Report. Like several years in the
past, the USTR once again included India in the Priority Watch List, but
this time, India’s IP laws are being subjected to the additional scrutiny
through an OCR. It is to be seen whether the OCR sets the stage for naming
India as a Priority Foreign Country (PFC), viewed by the USTR as worst
offender of intellectual property rights (IPRs), in the next Special 301

Although the USTR has listed several areas of its concerns in India’s IP
protection and enforcement regime, patents and regulatory data protection
have been most extensively covered in the report. The issues listed here
are the exclusions from patentability provided in Section 3(d) of the
Patents Act, the use of compulsory licences and India’s refusal to
introduce market exclusivity while protecting data on clinical trials
before marketing approval is given to a pharmaceutical product, inadequacy
of measures to prevent online piracy of films. The USTR raised serious
concerns about the innovation climate in India, which, in its view, was
hindering India’s progress towards an innovation-focused economy.

USTR’s inclusion of India for the OCR was a reflection of the influence
that the domestic lobbies have on the country’s engagement with its partner
countries. The hawkish industry lobbies, especially the PhRMA, whose
support the USTR has often taken to push its global aspirations in IPRs,
have been seeking the strongest possible action against India. In its 2014
Special 301 submission, the PhRMA had demanded that India should be
included as a Priority Foreign Country (PFC) and has urged “USTR to take
resolute action to remedy these violations, including the consideration of
WTO dispute settlement, as necessary.” A PFC, according to the United
States Trade Act of 1974 (as amended in 2012), is a country that that has
“the most onerous or egregious acts, policies, or practices that deny
adequate and effective intellectual property rights, or deny fair and
equitable market access to United States persons that rely upon
intellectual property protection; whose acts, policies, or practices … have
the greatest adverse impact (actual or potential) on the relevant United
States products, and that are not entering into good faith negotiations, or
making significant progress in bilateral or multilateral negotiations, to
provide adequate and effective protection of intellectual property rights.”

Under the provisions of Section 301 of the Trade Act of 1974, if the USTR
determines that an act, policy, or practice of a foreign country is
unreasonable or discriminatory and burdens or restricts United States
commerce, it take the following trade retaliatory measures. One, it can
suspend, withdraw, or prevent the application of, benefits of trade
agreement concessions extended to the PFC, or impose duties, fees or other
import restrictions on the goods and, notwithstanding any other provision
of law, services of such a country. In other words, Section 301 and the
related provisions (Sections 302-310) can be used to authorise trade
retaliation against countries, whose IP laws do not find the approval of
the USTR.

This threat of unilateral action against India using the provisions of
Section 301 of its trade act brings out two bleak facets of US trade
administration’s conduct. In the first instance, the USTR has displayed the
tendency to challenge the disciplines of the multilateral trading system
and secondly, the trade administration has virtually downgraded the
bilateral process of engagement with India, which it does through the Trade
Policy Forum and which was recently revived after Indian Prime Minister
Modi’s visit to the US.

The multilateral trading system has been challenged on two fronts. First,
the continued use Section 301 provisions is a violation of an undertaking
the trade administration has given to the Dispute Settlement Panel in 1999
not to take unilateral action before the exhaustion of Dispute Settlement
Undertaking’s proceedings. This Panel heard EU’s challenge to the Sections
301-310 of the US Trade Act of 1974 (hereinafter US – Section 301 Trade
Act). Secondly, the USTR has repeatedly challenged India, a country whose
patent regime is entirely in conformity with the provisions of the TRIPS

Redressing Violations of Obligations under the Covered Agreements of the WTO

Article 23 of the ‘Understanding on Rules and Procedures Governing the
Settlement of Disputes’ lays down the procedures that WTO members must
follow when they “seek the redress of a violation of obligations or other
nullification or impairment of benefits under the covered agreements or an
impediment to the attainment of any objective of the covered agreements.”

Article 23.2(a) is more explicit about the rights and responsibilities of
the members in this regard. It states that “[m]embers shall … *not make a
determination to the effect that a violation has occurred*, *that benefits
have been nullified or impaired or that the attainment of any objective of
the covered agreements has been impeded, except through recourse to dispute
settlement in accordance with the rules and procedures of this
Understanding*, and shall make any such determination consistent with the
findings contained in the panel or Appellate Body report adopted by the DSB
(Dispute Settlement Body) or an arbitration award rendered under this
Understanding” (emphasis added).

This issue was in fact re-emphasised by the Panel in US – Section 301 Trade
Act: “Article 23.1 is not concerned only with specific instances of
violation. It prescribes a general duty of a dual nature … [I]t imposes on
all Members to ‘have recourse to’ the multilateral process set out in the
DSU when they seek the redress of a WTO inconsistency. In these
circumstances, Members have to have recourse to the DSU dispute settlement
system to the exclusion of any other system, in particular a system of
unilateral enforcement of WTO rights and obligations. This, what one could
call ‘exclusive dispute resolution clause,’ is an important new element of
Members’ rights and obligations under the DSU.”

The Panel made several critical comments regarding the use of unilateral
action. It observed that “when a Member imposes unilateral measures in
violation of Article 23 in a specific dispute, serious damage is created
both to other Members and the market-place.” The damage, in view of the
Panel, was not confined to actual conduct in specific cases. It opined that
a “law reserving the right for unilateral measures to be taken contrary to
DSU rules and procedures, may – as is the case here – constitute an ongoing
threat and produce a “chilling effect” causing serious damage in a variety
of ways.”

The first of the damages pointed out by the Panel was the one caused
directly to another Member. A Member, when faced with the threat of
unilateral action, especially when it comes from an economically powerful
member, may be forced to give in to the demands imposed by the Member
holding out the threat, even before DSU provisions have been invoked.

The Panel remarked that “merely carrying a big stick is, in many cases, as
effective a means to having one’s way as actually using the stick.” The
threat alone of action “prohibited by the WTO would enable the Member
concerned to exert undue leverage on other Members.” The Panel surmised
that this situation “would disrupt the very stability and equilibrium which
multilateral dispute resolution was meant to foster and consequently
establish, namely equal protection of both large and small, powerful and
less powerful Members through the consistent application of a set of rules
and procedures.”

A second damage was the one caused to the marketplace itself. The
imposition of WTO-prohibited unilateral measures against other Members with
which it is locked in a trade dispute, may prompt “economic operators” to
change their operations in a manner that could result in trade distortions.
The Panel observed that “economic operators” may be wary of continuing to
trade with, or invest in, the industries and/or products that are facing
the threat of unilateral action. Trade may thus get distorted as “economic
operators” may need to take additional insurance for the “illegal
possibility” that the unilateral action contemplates.

According to the Panel, the damage caused to the marketplace could increase
when a “national legislation empowers individual economic operators to
trigger unilateral State action, as is the case in the US which allows
individual petitioners to request the USTR to initiate an investigation
under Sections 301-310.” When “economic operators” are able to “threaten
their foreign competitors with the triggering of a State procedure which
includes the possibility of illegal unilateral action,” it may affect their
“competitive economic relationship and deny certain commercial advantages
that foreign competitors would otherwise have”. The Panel remarked that the
“threat of unilateral action can be as damaging on the market-place as the
action itself.”

Despite its adverse observations, the Panel was persuaded not to rule the
entire process of Section 301-310 investigations illegal. The reason: the
“undertakings” given in the Statement of Administrative Action accompanying
the Uruguay Round Agreements Act, the legislation the US Congress had
adopted for implementing its WTO commitments. One of these undertakings was
to “base any Section 301 determination that there has been a violation or
denial of US rights … on the panel or Appellate Body findings adopted by
the DSB.” The Panel ruled that this “limitation of discretion would
effectively preclude a determination of inconsistency prior to exhaustion
of DSU proceedings.”

Subsequent developments have, however, proved beyond doubt that the US
investigations under Section 301 were an affront to the ruling of the
Panel. The USTR may not have made a formal “determination of violation or
denial of US rights” as provided under Section 304 of the Trade Act of
1974, but the investigations and the adverse reporting of its trading
partners’ have been mirrored on the provisions of Section 304. Through
these investigations, the USTR brings to bear upon its trading partners
enormous pressure to amend the IP laws that they have enacted in fulfilment
of their TRIPS obligations. Clearly, the intent of the US Administration is
to compel the partner countries to amend their laws before approaching the

Challenging India’s TRIPS-Compliant Patent Law

The feature of India’s Patent Policy, which has been in place since the
adoption of Patents Act, 1970, is its ability to strike a balance between
the interests of the owners and users of patented inventions. Almost
quarter of a century later, the Agreement on TRIPS underlined the
imperative of a similar balanced approach that have been captured in its
objectives and principles. The TRIPS Agreement, which established global
standards for IPRs, states in its objective that “protection and
enforcement of intellectual property rights should contribute to the
promotion of technological innovation and to the transfer and dissemination
of technology, to the mutual advantage of producers and users of
technological knowledge and in a manner conducive to social and economic
welfare, and to a balance of rights and obligations.”

Further, the principles on which the Agreement has been founded emphasises
that while amending their laws, WTO members must “adopt measures necessary
to protect public health and nutrition, and to promote the public interest
in sectors of vital importance to their socio-economic and technological
development and that they need to adopt appropriate measures to “prevent
the abuse of intellectual property rights by right holders or the resort to
practices which unreasonably restrain trade or adversely affect the
international transfer of technology.” In fact, the Special 301 report
itself talks about “market access barriers …that appear to impede access to
health care” as a concern, (p.6) which seems to have been ignored when
India’s case was taken up.

In the spirit of establishing this balance, India’s patent law includes
several provisions that do not allow the patent holders to exert excessive
influence over the market for patented products, to the detriment of the
interests of the public at large. Thus, Section 3(d) of the Patents Act
does not allow grant of patents on “mere discovery of a new form of a known
substance which does not result in the enhancement of the known efficacy of
that substance or the mere discovery of any new property or new use for a
known substance or of the mere use of a known process, machine or apparatus
unless such known process results in a new product or employs at least one
new reactant.”

This exclusion is aimed at ensuring that rights cannot be obtained if an
inventor made only minor modifications to an existing product. After all, a
20-year patent term was agreed to only because the large pharmaceutical
firms argued that they needed a longer period of patent monopoly to recoup
their substantial research and development (R&D) costs for producing new
molecules. This logic, therefore, demands that entities making minor
modifications of an existing product should not enjoy the rights as those
making substantial investments in R&D.

However, as was made clear by India’s Supreme Court in the case involving
Novartis’ anti-cancer drug, Gleevec (imatinib mesylate), which was denied
patent rights by the court since it did not meet the test of novelty and
inventive steps besides failing to meet the requirements of Section 3(d),
the Indian Patents Act did not deny patents on incremental innovation. The
Supreme Court in India had thus emphasised that the India was keen to
promote innovators, contrary to the view being propagated by the USTR that
India’s innovation climate remains grim because of its patent regime.

Public interest considerations have resulted in the adoption of the system
of compulsory licensing in India. These provisions can be invoked where the
patent monopolies are in conflict with public interest. Such circumstances
can arise when a patent holder charges exceptionally high prices for a
patented medicine or does not make a medicine available when the country
faces a public health crisis, namely, a national emergency or other
circumstances of extreme urgency. Under these conditions, India’s patent
authorities can issue a licence to anyone other than the patent holder who
is willing to produce the patented product in the country, on payment of
royalty to the patent holder.

These provisions are wholly consistent with the Doha Declaration on TRIPS
Agreement and Public Health. In the Doha Declaration, adopted in 2001,
Ministers of WTO Member states agreed that the “TRIPS Agreement does not
and should not prevent members from taking measures to protect public
health.” More importantly, they agreed that the “Agreement can and should
be interpreted and implemented in a manner supportive of WTO members’ right
to protect public health and, in particular, to promote access to medicines
for all.” And last, but not the least, the Declaration affirmed that
“[E]ach Member has the right to grant compulsory licences and the freedom
to determine the grounds upon which such licences are granted.”

It should be noted that India has exercised a high degree of prudence in
the use of compulsory licensing provisions. In the post-TRIPS regime, there
has been a solitary instance of the use of these provisions. This was done
when the German firm, Bayer, the patent holder of an anti-cancer drug
(Nexavar), charged extra-ordinarily high prices for the product and also
did not make the drug available in sufficient quantity even through import.
The generic drug producer, Natco, was granted a compulsory licence to
ensure that patients paid Rs. 8,000 (nearly $ 130) for a month’s supply of
Nexavar instead of Rs 280,000 ($ 4600) charged by Bayer. Natco is also to
pay royalty of 7 % to Bayer.

But while it has targeted the inclusion of compulsory licensing system in
India’s patent law, the US has issued more compulsory licences than any
other country in the world. Issuance of most of these licences have been
authorised by the Federal Trade Commission, which has often forced the
patent-holders to licence their patents on a royalty-free basis such as in
the cases of Bosch and Google, which were not aimed at meeting the critical
needs of the public, unlike in India’s case.

Online Piracy

The challenge to India’s copyright regime is baffling since it is a very
robust one. The Copyright and other related laws such as Information
Technology Act have incorporated provisions of even the latest
international agreements. They have very strong provisions for tackling
online piracy including notice- and-take down procedures, in accordance
with best international practices. John Doe orders issued by the Indian
courts also emphasise the attention India is paying to tackle online
piracy. The reports relied on by the USTR for highlighting high rate of
online piracy of films in India are questionable, industry sponsored, using
non- transparent methodologies and without any peer review, as brought out
by recent studies.

With its abject rejection of the due processes provided by the multilateral
rules, the question that arises is whether the bilateral process of
engagement put in place during Prime Minister’s Modi’s recent visit to the
US would become yet another platform for the US lobbies to seek changes in
India’s patent regime.

India-US Bilateral Engagement on IP Issues

In September 2014, the heads of Governments of India and US endorsed the
first “Vision Statement for Strategic Partnership”, which included a
significant agreement on IP-related issues. The two governments “committed
to establish an annual high-level Intellectual Property (IP) Working Group
with appropriate decision-making and technical-level meetings as part of
the Trade Policy Forum.”

The big picture against which this IP Working Group has been established
raises several questions regarding its functioning. India clearly faces the
challenge to prevent the Working Group from being used by the US trade
administration to establish a tacit link with the Section 301 process. This
will require India to assume a proactive role to define the mandate of the
Working Group. India’s best interests would be served if it was able to
ensure that the Working Group agrees to initiate a process through which
the US trade administration is sensitised about the imperatives that
underline India’s intellectual property regime. As indicated in the
foregoing, India has established a balance between the need to protect
innovators and safeguarding public interest, which is consistent with the
framework provided by the TRIPS Agreement.

Biswajit Dhar is Professor, Jawaharlal Nehru University, New Delhi. TC
James is an Independent IP Consultant based in New Delhi.

More information about the Ip-health mailing list