South African Institute of Race Relations NPC
Submission to the
International Trade and Economic Development Division of the
Department of Trade and Industry,
regarding the
Intellectual Property Consultative Framework
approved by Cabinet on 6th July 2016
Johannesburg, 30th September 2016
Contents
Introduction, p2
Changes proposed in the IP framework, p2
The rationale for patent laws and how they work in South Africa, p4
The objectives underpinning the IP framework, p6
Making new patents harder to obtain, as proposed in paras 4.1.2 to 4.14, IP framework, p7
Expanding the scope for compulsory licences, as proposed in para 4.1.9, IP framework, p11
Voluntary versus compulsory licences, as covered in para 4.1.9, i to v, IP framework, p11
Adequate remuneration, as proposed in para 4.1.9.2 of the IP framework, p12
Compulsory licences for government use, as proposed in para 4.1.9.3, IP Framework, p13
Extending the meaning of ‘anti-competitive’ conduct, as proposed in para 4.1.9.5 of the IP framework, so as to facilitate the granting of compulsory licences, p15
Compulsory licences under the Patents Act and the TRIPS Agreement, p15
The meaning of ‘anti-competitive’ practices, p16
The Hazel Tau case, p17
What the IP framework seeks, p19
Compulsory licences for export, as proposed in para 4.1.9.4, IP Framework, p20
Replacing the patents court with a patents tribunal, as proposed in para 4.1.9.1, IP framework, p22
Ramifications of the IP framework, p24
Ramifications in the health-care sector, p24
The extent of the patent ‘problem’, p24
Other barriers to good public health care, p26
Better solutions available, p29
Ramifications for industrialisation, p32
Ramifications for the wider economy p34
Local innovation, p34
The investment climate and the rule of law, p37
Introduction
The International Trade and Economic Development Division of the Department of Trade and Industry (the DTI) has invited public comment on the Intellectual Property Consultative Framework approved by the Cabinet on 6th July 2016 (the IP framework).
Public comment is due not later than 30th September 2016. However, the IP framework was never gazetted and was posted on the DTI’s website at some point in July, without adequate notice to the public. In these circumstances, the period allowed for comment has been far too short to meet the constitutional requirement for proper public consultation.
The IP framework should also have been accompanied by an initial socio-economic assessment of its likely economic and other ramifications, as envisaged in the government’s new Socio-Economic Impact Assessment System (SEIAS). Any future such assessment must also, if it to provide sufficient guidance, take full account of all the issues raised in this submission. These range from the conflict between the DTI’s proposals and binding international agreements on intellectual property rights to the likely ramifications of these proposals for the health care sector, the pharmaceutical sector, local innovation, and the wider economy.
This submission is made by the South African Institute of Race Relations NPC (IRR), a non-profit organisation formed in 1929 to oppose racial discrimination and promote racial goodwill. Its current objects are to promote democracy, human rights, development, and reconciliation between the peoples of South Africa.
Changes proposed in the IP framework
The IP framework suggests that the changes it proposes would initially apply in the public health sector only, as ‘this area…should be the immediate priority’, it says. This suggests that the DTI wants a different set of patent rules to apply in the health sphere. However, this would be contrary to Article 27 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which was adopted in 1994 and entered into force the following year. This agreement is administered by the World Trade Organisation (WTO) and is binding on all WTO member states, including South Africa. It sets down minimum standards for the regulation of patents, which are enforced through the normal dispute settlement mechanisms of the WTO.
Article 27.1 states that ‘patents shall be available for any inventions…in all fields of technology’, and that ‘patent rights shall be enjoyable without discrimination as to…the field of technology’. South Africa thus cannot adopt a different set of rules for patent rights for patents in the health sphere. Moreover, though the IP framework indicates that patent rights may be reduced in the interests of public health, it omits to mention some of the key provisions in the Doha Declarations dealing with patents and health concerns. [IP framework, para 4.1,ii, p5]
These declarations were adopted in 2001 at a WTO ministerial conference in Doha on health and other matters. This culminated in the adoption of a wide-ranging Doha Declaration, which deals briefly with health (among a host of other issues), and stresses the importance of ‘implementing and interpreting the TRIPS Agreement in a way that supports public health – by promoting both access to existing medicines and the creation of new medicines’. However, the declaration’s emphasis on the need also to ‘promote…the creation of new medicines’ is overlooked in the IP framework.
The same dual emphasis is evident in a supplementary Doha Declaration on ‘The TRIPS agreement and public health’, which was adopted at the same time. This says that TRIPS ‘does not and should not prevent member states from taking measures to protect public health’, while recognising that both access to existing medicines and the creation of new medicines are important. This document reaffirms their ‘ability to use the flexibilities’ built into the TRIPS Agreement, so as ‘to promote access to medicines for all’, but it does not sanction measures going beyond these flexibilities. In addition, while acknowledging concerns about prices, the declaration also ‘recognises that intellectual property protection is important for the development of new medicines’.
The IP framework effectively misquotes the Doha documents, for it overlooks the extent to which these require countries to support public health, not only be promoting access to existing medicines, but also by ‘promoting the creation of new medicines’ and ‘recognising that intellectual property protection is important for the development of new medicines’.
The IP framework also stresses that ‘the South African government has to date not made full use of the flexibility within international law through the pursuit of appropriate policy and legislation’. [IP framework, p5] It thus seeks to make greater use of TRIPs flexibilities to reduce the patent protections currently available for pharmaceuticals (and, perhaps, for other health products). However, this selective focus on health patents is itself problematic. Often, moreover, its proposals for change go well beyond what the TRIPS Agreement allows, as further described below.
The DTI also notes the constitutional right of access to health care in Section 27 of the Bill of Rights. According to this provision, ‘everyone has the right to have access to health care services’, while ‘the state must take reasonable legislative and other measures, within its available resources, to achieve the progressive realization of this right’. [Section 27(1), Constitution of the Republic of South Africa, 1996] According to the IP framework, the government thus ‘has a constitutional imperative to increase access to medicines’. [IP framework, page 5] However, the state is also obliged to take ‘reasonable’ measures in fulfilling its obligations under Section 27, and abrogating treaty obligations binding on it is not a ‘reasonable’ way of increasing access to medicines, especially when better methods are available. In addition, the state is obliged to act within ‘the limits of its available resources’ and must respect this limitation, rather than seek to overcome its limited revenues by undermining patent rights.
The IP framework also notes the guarantee of property rights in the Constitution and correctly notes that these extend beyond land to include patent rights and other kinds of intellectual property. However, it also suggests that patent rights can be abrogated in the public interest, which it defines as ‘including the nation’s commitment to bring about reforms that promote equitable access’. [IP framework, p3] This is again misleading, for the property clause defines the public interest as including ‘the nation’s commitment to land reform, and to reforms to bring about equitable access to all South Africa’s natural resources’. [Section 25(4)(a), Constitution of the Republic of South Africa, 1996] By leaving out these references to land reform and the country natural resources, the IP framework fundamentally distorts the meaning of the clause.
In addition, the government’s wish to expand the local pharmaceutical manufacturing industry and boost the operations of a state-owned pharmaceutical company, Ketlaphela, as the IP framework envisages, [IP framework, p6] does not justify South Africa’s abrogation of TRIPs obligations that are binding on it. This is especially the case when it is the government own dirigiste interventions which have significantly weakened the pharmaceutical industry and made it more difficult for it to prosper.
Before proceeding to comment on the specific recommendations in the IP framework, a brief explanation of the rationale for the patent system and key patent rules in South Africa is needed.
The rationale for patent laws and how they work in South Africa
The property rights protected in most countries cover not only physical property, such as land or factories, but also intellectual property (IP) in the form of patents and copyright. The patent system is particularly important in promoting innovation because it gives inventors who are granted patent rights a 20-year period to make and sell their new products, without competitors being allowed to copy them. However, once a patent has expired, competitors are entitled to use the innovation, so making its benefits more broadly available.
In essence, the inventor – the patent holder – is given a ‘window of opportunity’ for the exclusive exploitation of his innovation. In return, he must make a full disclosure of his invention, the benefits of which, in time, become available to all. This system brings advantages all round: the patent holder is rewarded for his creativity, insight, and costly research and development (R&D), while everyone else can copy, sell, or otherwise use his innovation after 20 years. At the same time, because the invention is disclosed in the patent application, this creates the possibility of unauthorised copying and ‘free-ridership’, which patent laws seek to counter by providing various remedies against infringements.
In South Africa, the granting of patents is governed by the Patents Act of 1978, which covers patents over medicines as well as all other innovations. Under its terms, patents are granted by the Patents Office – now the Companies and Intellectual Property Commission (CPIC) – and are then published in a ‘patent journal’, which is open to public inspection. Patents remain in force for 20 years from the date an application is lodged, even if the patent is granted only some time later. During this 20-year period, a patented invention may not be used, made, sold, or imported into South Africa without the consent of the patent holder.
Disputes over patents are adjudicated in a specialist court known as the Court of the Commissioner of Patents (the patents court). This follows the usual rules of civil procedure and functions in much the same way as other divisions of the country’s high court. The commissioner of patents (the patents commissioner) is a judge of the Pretoria high court, whose sole function – despite a statutory title which may suggest something wider – is to hear and decide patent cases. These commonly range from objections to patents granted to applications for compulsory licences (as further explained in due course) and litigation to enforce patents against alleged infringements.
In the health sector, most patent applications are made by foreign pharmaceutical corporations or their South African subsidiaries. This is especially so in the context of HIV/AIDS, where life-saving antiretroviral medicines (ARVs) have generally been developed in the United States and Europe by pharmaceutical companies such as Boehringer Ingelheim, Bristol-Myers Squibb, GlaxoSmithKline, Hoffmann-La Roche, Merck, and Pfizer. Many of these companies, or their local subsidiaries, have sought and obtained South African patents to protect their innovations from being copied by generic manufacturers for the normal patent period of 20 years.
In the early 2000s, as the HIV/AIDS pandemic in South Africa accelerated, health activists in the AIDS Law Project, the Treatment Action Campaign (TAC), and other organisations began to criticise the patent system for keeping the costs of ARVs higher than they would be if more generic competition was permitted at an earlier stage. They have repeatedly urged that the Patents Act be amended to take full advantage of the flexibilities included in the TRIPS Agreement, the Doha Declarations, and the ‘30 August Decision’ of the General Council of the WTO, as further described in due course.
At the same time, however, the costs of researching and developing safe and effective new pharmaceuticals are high, especially as failed attempts inevitably far outnumber successes. In addition, writes Jasson Urbach, a director of the Freedom Market Foundation in South Africa: ‘It often takes a decade to take a molecule through testing and regulatory approval – a process which begins only after a patent has been granted as no company will invest in an unpatented molecule. Most medicines thus have an effective patent term of approximately ten years. Given the huge investment required to bring a drug to market, this window of opportunity does not leave companies much time to earn adequate returns on their investments.’ By contrast, as Canadian IP experts Ashley Weber and Lisa Mills note, ‘the cost of imitation is relatively low, meaning that once a drug has been developed, it can be generically reproduced at a fraction of the cost’.
Patent rights are thus important in encouraging innovation and the development of new medicines against a host of ailments.
The objectives underpinning the IP framework
The IP framework, like the DTI’s earlier Draft National Policy on Intellectual Property, published in September 2013 (the draft policy document), is brief and often lacks the information needed to understand the ramifications of its proposals. To grasp its full import, it needs to be read in the context of an article published by the United Nations Development Programme (UNDP) in October 2013, under the title ‘Using law to accelerate treatment access in South Africa’. This UNDP document (the UNDP article) was drawn up with significant input from the AIDS Law Project, an activist civil society organisation now known as Section27, and often provides further insight into what the DTI has in mind via the IP framework.
As the IP framework indicates – and the UNDP article and the draft policy document also earlier made clear – the DTI’s two stated goals are to:
However, these objectives cannot easily be realised for as long as South African patents are protected by the current Patents Act. In addition, the bilateral investment treaties (BITs) that South Africa entered into with the United Kingdom and various European countries in the mid to late 1990s limit the abrogation of patent rights by prohibiting their direct or indirect expropriation. These BITs also entitle the international investors covered by their provisions to ‘prompt, adequate, and effective compensation’ in the event of any expropriation of their intellectual (or other) property. This helps explain why South Africa has terminated its UK and European BITs and replaced them with the misleadingly named Protection of Investment Act of 2015 (still to be brought into force), which provides no meaningful protection for investors at all. However, the terminated BITs all contain ‘sunset’ clauses protecting existing investments for specified periods ranging from ten to 20 years, providing a further practical constraint on the abrogation of patent rights the DTI seemingly envisages.
In order to achieve its two stated goals, the DTI is seeking to change the relevant rules in five key spheres. In a nutshell, it wants (among other things) to:
Making new patents harder to obtain, as proposed in paras 4.1.2 to 4.14, IP framework
The basic requirements for the granting of a patent in South Africa (as in other countries) are novelty and utility. In essence, a patent may be granted under the Patents Act for any ‘new’ invention which involves ‘an inventive step’ and is ‘capable of being used or applied in trade, industry, or agriculture’.
South Africa is a ‘depository’ or ‘non-examining country’, in which all patent applications made to the Patent Office – now, as noted, the CIPC – are granted, provided a detailed patent ‘specification’ (or description of the invention) is provided and the necessary fees are paid. In various other countries, by contrast, all patent applications are examined for their novelty and utility before patents are granted.
Critics of the depository system suggest that the absence of prior examination inevitably leads to the granting of ‘weak’ or ‘frivolous’ patents that do not satisfy the relevant requirements or merit protection. The UNDP article adds that it is ‘expensive and time-consuming’ to contest the validity of a patent after it has been granted. It thus seeks the introduction of an examination system which would prevent new patents from being granted until objections from civil society organisations have been heard and adjudicated upon.
The IP framework echoes this idea, saying that substantive search and examination should, at least, be introduced patents ‘in certain fields’, [IP framework, p7] by which it presumably pharmaceutical patents and others in the health sphere. It claims that this would not contradict the ‘non-discrimination’ requirement in Article 27 of the TRIPS Agreement because this does not deal with ‘the examination of patents’. [IP framework, p7]
However, this is again incorrect and misleading. Article 27 falls within Part II of TRIPS, which lays down standards for ‘the availability, scope, and use of intellectual property rights’. This focus includes the way in which patents are granted, which is clearly highly relevant to their ‘availability’. Article 27 also expressly states that ‘patents shall be available for any inventions’ which meet the standard criteria for patentability, and ‘without discrimination as…the field of technology’. Hence, introducing an examination system solely for pharmaceutical and other health-related patents – and for the express purpose of making these patents more difficult to obtain – is clearly in breach of Article 27, despite the claims in the IP framework to the contrary.
In addition, the depository system has important safeguards too, for it puts pressure on all applicants to ensure that no similar patent already exists. If an earlier patent for essentially the same invention subsequently comes to light, the later patent is invalid, the money spent on its development is wasted, and damages for infringement may also be payable.
Rowan Joseph, an intellectual property lawyer based in Cape Town, points to another safeguard, saying: ‘The absence of patent examination in South Africa sounds bizarre, but it actually works because the examination system is the same throughout the world.’ Hence, if an invention has been patented in the United Kingdom under the examination system in operation there, it will qualify to be patented in South Africa as well. Moreover, given the fact that virtually all developed economies have examination systems and most patents registered in South Africa come from developed countries, it makes little sense for South Africa to duplicate the procedures in operation elsewhere.
Also relevant is the fact that South Africa used to have an examination system, but had to abandon it in 1978 because it lacked the necessary skills. Notes Judge Louis Harms, a retired judge president of the Supreme Court of Appeal: ‘[South Africa] had an examination system from 1952, but we had to abolish it in 1978 because we never had the people to do [the job]. It's highly specialised. You need [a person who is both] a scientist and a lawyer, and will also do the job at a government salary.’
The IP framework claims that the capacity of the CIPC to conduct examinations can be ‘augmented…by affording third parties an opportunity to bring their resources to bear and present relevant information to patent examiners in an opposition process’. However, South Africa would do better to avoid this additional burden on the state altogether by retaining the present system which, as the IP framework acknowledges, has ‘the major benefit…of placing the cost of substantive examination on parties that are directly interested’ in opposing its grant. [IP framework, p7]
In addition, even with the help of the objectors who might in some instances be helpful to patent examiners, the CIPC will still battle to get through the workload. If South Africa is to adopt an examination system, it must do so for all patent applications – not only for those in the health sphere.
To obtain the necessary skills, the CIPC has for some time been planning to recruit 20 patent examiners, ‘who will undergo intensive training’, the IP framework says. [IP framework, p7] However, this will hardly suffice. As an article in the Mail & Guardian cautioned in October 2014: ‘Twenty patent examiners will find it difficult to make a dent in the about 7 000 patents granted by the CIPC each year.’ Given the number of patent applications received, 110 examiners would be a more realistic number.
David Cochrane, a patent attorney at Spoor & Fisher, adds that any benefits there might be in moving to an examination system are likely to be negated by poor implementation. Says Mr Cochrane: ‘The biggest risk...is whether we have the capacity and the ability to implement it. A patent examination system will require graduates who have engineering and science degrees, and these graduates will have to undergo expert training to become patent examiners. If there are not enough patent examiners, or if they are not properly trained, this could lead to bad patent examinations...and long delays before patents are granted, [which could see] the whole patent system fall apart.’
In practice, even if the patent system avoids such a collapse, the mooted change will add significantly to the costs and complexities in obtaining patents. Ironically, the burden will fall most heavily on local inventors lacking the experience to navigate the new requirements. By contrast, multinational corporations seeking to supplement patents obtained elsewhere with a South African one too will find it easier to cope because they are already well versed in the procedures and are likely to have more resources to draw on.
The time needed for examination will inevitably also generate long delays in the granting of patents. This will make it more difficult for all applicants, whether local or foreign, to obtain patents within a reasonable time. This will reduce the normal period of patent protection (20 years from the date of filing an application) to something significantly shorter. This in itself – apart from all the other damaging changes proposed – is likely to become a major barrier to local innovation.
The IP framework seeks divert attention from practical problems of this kind by claiming that revocation proceedings to challenge patents after their grant ‘entail the prohibitive costs and risks of litigation’. [IP framework, p8] However, as an international patents lawyer has pointed out, the hearing of objections prior to the grant is unlikely to be any less costly or time-consuming than the hearing of objections thereafter, if these should be lodged.
The IP framework does not overtly deal with this, but the underlying purpose of its proposal is clearly to halt what health activists have long described as the common practice by pharmaceutical companies of ‘evergreening’ their patent rights.
As the UNDP article puts it, pharmaceutical companies often obtain new patents on the basis of trivial improvements to their existing medicines, or by putting forward new forms of existing substances. However, a new form of an existing medicine (a syrup version of nevirapine, for instance) should not warrant patent protection if it has no additional therapeutic efficacy, but simply makes it easier to store, manufacture, or administer the drug. According to the UNDP article, pharmaceutical companies nevertheless often obtain new patents on the basis of such inconsequential improvements to their existing medicines.
The Treatment Action Campaign (TAC), a South African civil society organisation with links to Section27, has weighed in on this issue too. As part of its ‘Fix the patent laws’ initiative launched in November 2011 (the tenth anniversary of the Doha Declaration on TRIPS and public health), the TAC argues that pharmaceutical companies commonly ‘evergreen’ their patents by ‘developing new formulations...and new forms of existing medicines’, which in fact offer ‘nothing new’ and ‘have no therapeutic benefits’.
The Fix the Patent Laws Campaign continues to make similar claims. According to this coalition, which includes the TAC and various other health organizations: ‘South Africa’s legal framework for patents makes it too easy for pharmaceutical companies to extend their monopoly period on drugs…applying for multiple patents on individual medicines over time – a tactic known as ever-greening.’ It blames this phenomenon on ‘shortcomings in South Africa’s laws’ and particularly on ‘the lack of examination for patent applications’, as the coalition told the media in September 2016. [Business Day, The Star 27 September 2016]
However, this criticism by the TAC and the wider coalition overlooks the clear wording of the South African Patents Act. This statute allows the granting of ‘patents of addition’ for any ‘improvement in or modification of’ the original invention. However, it also states that a patent of addition expires at the same time as the original patent. Hence, the original patent term cannot be ‘extended’ in South Africa through minor improvements in the way the TAC and the Fix the Patents Law Campaign suggest.
Moreover, even if a second patent is wrongly granted for an improvement or modification too inconsequential to warrant this, there is nothing in South African law to prevent the copying of the initial version once the first patent has expired. But health activists seem to disregard this option. In addition, the validity of a second patent granted in these circumstances can always be challenged in the patents court.
The IP framework adds that South Africa’s depository system ‘renders government unable to use’ the flexibilities that TRIPS allows ‘in the grant of patents’. It also claims that South Africa has a right to ‘interpret the TRIPS patentability requirements in a manner consistent with…public interest concerns’. [IP framework, p8] It says this flexibility is to be found in Article 1 of the TRIPS Agreement, read with Articles 7 and 8. Again, however, the IP framework is misleading as to what TRIPs both requires and allows.
Article 1 of TRIPS states that ‘members shall give effect’ to its provisions. This wording is peremptory, not permissive. It also says that members are free to ‘implement in their law more extensive protection than is required by this Agreement, provided that such protection does not undermine the provisions of this Agreement’. Hence, though members are free ‘to determine the appropriate method of implementing the provisions of this Agreement within their own legal system and practice’, this does not mean that they can overlook or undermine the obligations they have agreed to fulfil. [Article 1, TRIPS Agreement]
Article 7 states that ‘the 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’. [Article 7, TRIPS Agreement] This provision does not entitle South Africa to undermine innovation or ignore the interests of pharmaceutical companies or other ‘producers of technological knowledge, by narrowing the normal patentability criteria, as the IP framework suggests. There is also no justification for South Africa to do so when the Patents Act already provides that ‘patents of addition’ expire at the same time as the original patent – and so cannot be used to ‘ever-green’ patent rights, as health activists claim.
Article 8 is also far more limited than the IP framework suggests. It says that ‘members may, in formulating or amending their laws and regulations, adopt measures necessary to protect public health,…provided that such measures are consistent with the provisions of this Agreement’. [Article 8, TRIPS Agreement] Hence, though South Africa may ‘adopt measures necessary to protect public health’, it must also uphold its TRIPs obligations in doing so. In addition, there is no ‘need’ to narrow the normal criteria for patentability when ‘patents of addition’ already prevent the alleged ever-greening problem.
Expanding the scope for compulsory licences, as proposed in para 4.1.9, IP framework
The IP framework identifies the increased use of compulsory licences as ‘one of the most important tools to ensure that patent rights do not unduly restrict access to essential innovations’. [IP framework, p9] The IP framework thus seeks new rules which would make it easier to bypass existing patents by greatly extending the scope for ‘compulsory licensing’.
Voluntary versus compulsory licences, as covered in para 4.1.9, i to v, IP framework
Where patent holders see commercial advantage in such agreements, they often grant individuals or firms voluntary licences to exploit their patents. Such agreements allow licensees to make, import, or sell patented products in return for the payment of agreed royalties to the patent holder.
The IP framework acknowledges that ‘in the South African public health context, voluntary licensing has contributed to generic competition, particularly where ARVs used in the treatment of HIV/AIDS are concerned’. However, ‘voluntary licences may not always provide the requisite level of access in other disease areas’. Hence, it goes on, ‘government requires a mix of policy options where voluntary mechanisms prove inadequate’. [IP framework, p9]
As the IP framework hints, the key objective is to give the DTI the power to make much more use of compulsory licences. Compulsory licences are different from voluntary ones because, as their name suggests, they give licensees the right to exploit patented products without the consent of the patent holder. Compulsory licences thus erode patent protections against the inventor’s will.
South Africa’s Patents Act already allows the issuing of compulsory licences, but solely to counter the ‘abuse’ of patent rights, as further described below. In addition, such licences may be granted only by the patents commissioner, and then only after a comprehensive hearing in the patents court. Moreover, in deciding what royalties should be paid, the patents commissioner is expressly enjoined to consider ‘the research and development’ (R&D) undertaken by the patent holder. He must also take into account the terms and conditions ‘usually stipulated’ in voluntary licence agreements.
The UNDP article criticises these requirements, saying they are likely to ‘produce excessively high royalty rights’ and make for ‘lengthy litigation during which the issuance of a compulsory licence will be delayed’. It thus seeks various changes to the Patents Act which it says are in line with TRIPS flexibilities and will make compulsory licences both easier and cheaper to obtain.
The IP framework echoes this, saying: ‘The TRIPS Agreement sets conditions for the use of compulsory licences. Provided that these are complied with, it is now a matter of course that states have the right to determine the grounds upon which they issue compulsory licences.’ [IP framework, p9] Again, however, the IP framework overlooks or misinterprets what TRIPs in fact says in this regard.
Article 30 of the TRIPS Agreement does indeed allow ‘limited exceptions’ to the exclusive rights conferred by a patent. However, it also says that such exceptions must not ‘unreasonably conflict with the normal exploitation’ of a patent or ‘unreasonably prejudice the legitimate interests of the patent owner, taking into account the legitimate interests of third parties’.
The IP framework seems to think that this wording authorises the granting of compulsory licences in wide-ranging circumstances. However, the changes it proposes go significantly beyond the scope of the TRIPS exceptions, as further described below.
Adequate remuneration, as proposed in para 4.1.9.2 of the IP framework
The IP framework notes that TRIPS requires ‘adequate remuneration’ for patent holders against which compulsory licences have been granted. It claims that the Patents Act ‘does not contain guidelines on how to ascertain what would constitute adequate remuneration’ – though it does on to acknowledge that the Act in fact ‘provides a non-exhaustive list of factors that may be relevant’. [IP framework, p10]
This is again incorrect and misleading, for the Patents Act (as earlier noted) expressly requires the patents commissioner, in deciding what royalties should be paid, to consider ‘the research and development’ (R&D) undertaken by the patent holder. He must also take into account the terms and conditions ‘usually stipulated’ in voluntary licence agreements. These provisions are also fully in line with TRIPs, whereas what the IP framework is seeking is a way to circumvent binding TRIPS requirements.
The UNDP article provide an insight into how the DTI may be planning to do this. The article proposes the introduction of new rules stating that a compulsory licence must be issued if negotiations on a voluntary agreement have not succeeded within a set period (say, 60 days) and if the patent holder has rejected mooted royalty payments (set, say, at 3% of the price of the copied product).
The UNDP document also claims that such rules would be in keeping with TRIPS, which states that a compulsory licence is permitted if the would-be licensee has first ‘made efforts to obtain authorisation from the right holder on reasonable commercial terms and conditions’ and ‘such efforts have not been successful within a reasonable period of time’. The article also emphasises that TRIPS seeks only ‘adequate remuneration’ for the patent holder, which its proposed new regulatory framework would allegedly provide.
However, what Article 31(h) of the TRIPS Agreement actually says is that the patent holder is entitled to ‘adequate remuneration in the circumstances of each case, taking into account the value of the authorisation’ to use the patented product without the patent holder’s consent. Moreover, when TRIPS says that ‘adequate remuneration’ should reflect the value of the compulsory licence, this does not mean that royalties may be based on the price of the copied products. Rather, it means that royalties must take into account the full market value of the patent the compulsory licensee is being permitted to use.
The IP framework avoids directly endorsing the UNDP article’s proposals. Instead, it calls for ‘the provision of guidelines that can assist parties to achieve timely conclusion of the voluntary licence negotiations that are mandatory in certain cases’. Here, the IP framework is referring to Article 31(b) of TRIPS, which says that the grant of compulsory licences must normally be preceded by voluntary negotiations with the patent holder. Only in limited and specified circumstances, such as ‘public non-commercial use’ or to counter ‘anti-competitive’ conduct, as further described in due course, can this requirement for prior negotiation be waived. Given the usual need for prior negotiation, the IP framework, like the UNDP article before it, sees a regulatory framework of the kind proposed as an effective way of putting great pressure on patent holders and so, in the words of the IP framework, ‘preventing undue delay in the voluntary licence negotiation process’. [IP framework, p11]
Like the UNDP article, the IP framework also claims that a ‘precedent’ for this kind of regulatory framework is to be found in the Canada Access to Medicines Regime (CAMR). [IP framework, p11] According to the UNDP article, this Canadian legislation is a suitable model, as it allows compulsory licences on medicines intended for export, ‘caps the royalty rate at 4% of the price of the generic products, and adjusts the royalty rate downwards according to the importing country’s rank on the UNDP Human Development Index’. (This index, developed by the United Nations Development Programme, measures nations according to three basic criteria: average years of schooling, gross national income per capita, and life expectancy at birth.)
However, the Canadian legislation cited both in the UNDP article and the IP framework has a narrow ambit and deals with a very different situation. It was adopted in 2004 under the 30 August Decision of the WTO (see Rights to export, below); and its purpose is to help developing countries which lack their own pharmaceutical manufacturing capacity to import generic ARVs from Canada, provided that they comply with a number of stipulated conditions. Hence, this statute is no precedent at all for the regulatory framework the IP framework plans to introduce.
Compulsory licences for government use, as proposed in para 4.1.9.3, IP Framework
Though prior negotiation is generally needed before a compulsory licence can be issued, the TRIPS Agreement states that this requirement may be waived by a member state ‘in cases of public non-commercial use’. [Article 31(b), TRIPS Agreement] The IP framework thus claims that ‘the South African Patents Act goes beyond what is required in TRIPS by requiring ministers of state to enter into such negotiations before an application to the commissioner of patents is made’. [IP framework, p11]
This assertion is again misleading. What Section 4 of the Patents Act in fact says is that ‘a minister of state may use an invention for public purposes on such conditions as may be agreed upon with the patent holder, or in default of such agreement, on such conditions as are determined by the patents commissioner on application by the minister and after hearing the patent holder’.
Under these provisions, as the UNDP article points out, a patent holder cannot be compelled to allow the South African government to use a patented invention without either his agreement or a prior ruling by the commissioner to that effect. In addition, such a ruling can be issued only after ‘potentially lengthy and expensive court proceedings’. According to the article, this overlooks a TRIPs flexibility which allows the issuing of compulsory licences without prior negotiation ‘in cases of public non-commercial use’.
The UNDP article thus urges that the Patents Act be amended to reflect this flexibility. This, it says, would allow the government to use any patented invention ‘after a fixed period of unsuccessful voluntary negotiations’ and ‘subject to the determination of adequate royalties after the fact’. The DTI’s earlier draft policy document adds that no compensation for expropriation would be payable to the patent holder in these circumstances, as the patent holder would still retain its patent. Said this DTI document: ‘The compulsory licence does not deprive [the patent holder of] ownership...rights over protected IP. It is just an exception to the exclusive right. This is the reason why it is not treated as direct expropriation.’
The IP framework is less clear in spelling out what it seeks. Instead, it simply states that the requirements in the Patents Act ‘may cause unwarranted delays and should be reviewed’. Like the UNDP article and the DTI’s earlier draft policy, it also seems to believe that the TRIPS Agreement gives carte blanche to compulsory licences ‘in cases of public non-commercial use’. But this again disregards the usual TRIPS requirements for the granting of compulsory licences. It also assumes that any use by the state will automatically fall within the category of ‘public non-commercial’.
The TRIPS Agreement does not attempt to define ‘public non-commercial use’, perhaps because it sees the clause as self-explanatory. It does, however, distinguish between this and other ‘use by government’, to which the normal rules regarding compulsory licences clearly apply. [Article 31, TRIPS Agreement] The activist view is that any governmental use will fit within ‘public non-commercial use’ but this interpretation is strained, especially given the distinction that TRIPs draws.
Moreover, if the aim is to empower the government to acquire compulsory licences over ARVs and other medicines and then authorise their use by a state pharmaceutical company charged with manufacturing generic copies for sale both in South Africa and abroad, it is all the more doubtful whether this would count as ‘non-commercial’ use. For patents outside the health sector, any similar claim would be even more difficult to sustain.
Extending the meaning of ‘anti-competitive’ conduct, as proposed in para 4.1.9.5 of the IP framework, so as to facilitate the granting of compulsory licences
According to the IP framework, Article 31(k) of TRIPS ‘allows members to use compulsory licensing as a remedy to anti-competitive practices’. This Article also allows ‘such licences to be issued without complying with a number of TRIPS conditions, most notably: prior negotiation with patent holders…and the requirement of being predominantly for domestic use’. Against this background, the IP framework criticises the compulsory licensing provisions in the Patents Act for ‘not taking full advantage of TRIPS flexibilities’. It adds that ‘the judicial process provided by the Patents Act is, in general, more cumbersome than required in TRIPS,…particularly [as regards] Article 31(k). [IP framework, p11]
The IP framework thus seeks ‘a more streamlined administrative process for the issuing of compulsory licences’. It also suggests that ‘guidance be introduced as to which practices would be considered anti-competitive’, saying this could be done either ‘by way an amendment to the Patents Act’ or through ‘guidelines’. [IP framework, p12] Such guidelines would presumably be introduced via regulation, outside the ambit of the normal legislative process, and may thus be the option that the DTI prefers.
To understand the significance of these proposals – and assess whether they in fact comply with TRIPS – some background information is needed.
Compulsory licences under the Patents Act and the TRIPS Agreement
Section 56 of the Patents Act already empowers the patents commissioner to grant compulsory licences. However, this can be done solely to counter four types of ‘abuse’ by patent holders, these being:
failure adequately to ‘work’ (or exploit) an invention in South Africa within three years of a patent being granted, provided ‘there is no satisfactory reason for such non-working’;
The TRIPS Agreement also allows the granting of compulsory licences, but only if these ‘do not unreasonably conflict with a normal exploitation of a patent and do not unreasonably prejudice the legitimate interests of the patent holder, taking account of the legitimate interests of third parties’. [Article 30, TRIPS Agreement]
The TRIPS Agreement further protects patent rights by saying that, where a compulsory licence is granted (including for ‘use by the government’), then a number of stipulated provisions ‘shall be respected’. As earlier indicated, preliminary negotiations with the patent holder and adequate remuneration are both required. In addition:
However, members are ‘not obliged to apply’ some of these conditions – specifically, those dealing with prior negotiation, the scope and duration of the authorised use, and predominantly domestic supply – if the compulsory licence is ‘permitted to remedy a practice determined after judicial or administrative process to be anti-competitive’. In addition, ‘the need to correct anti-competitive practices may be taken into account in determining the amount of remuneration in such cases’. [Article 31(k), TRIPS Agreement]
These provisions make compulsory licences against anti-competitive conduct particularly valuable. They have thus prompted health activists to take a particular interest in the meaning of ‘anti-competitive’ – and to try and extend this far beyond its normal interpretation.
The meaning of ‘anti-competitive’ practices
According to the IP framework, ‘the TRIPS Agreement gives members scope to use competition policy as an instrument to facilitate access to medicines’. It claims that ‘Article 8 on its own and, in particular, read through the interpretive lens of the Doha Declaration on TRIPS and Public Health, empowers WTO members to take measures aimed at restraining anti-competitive practices’. It also claims that Article 40 gives members ‘a large degree of discretion in defining prohibited anti-competitive practices’. [IP framework, p12]
Again, however, the IP framework distorts and misinterprets the relevant TRIPS provisions. Article 8 says that ‘appropriate measures…may be needed to prevent the abuse of intellectual property rights holders’, but also stresses that these measures must be ‘consistent with the provisions of this Agreement’. [Article 8.2, TRIPS Agreement] In addition, the ‘abuse’ of a patent right is different from an anti-competitive practice.
An abuse of patent rights, as the Patent Act indicates, typically arises where a patent holder fails to ‘work’ or exploit the patent for three years after its grant and without having a satisfactory reason for this failure, as described above. [Section 56, Patents Act] This is not an ‘anti-competitive’ practice, within the meaning of competition law. The Doha Declaration on TRIPS and Public Health, to which the IP framework misleadingly refers, does not change this reality – especially as that Declaration (as earlier described) seeks to promote both access to existing medicines and the development of new medicines through patent protection.
Article 40 of the TRIPS Agreement is also more limited than the IP framework admits. To begin with, it deals with ‘control of anti-competitive practices in contractual licences’– which means that it applies to voluntary licences and not to compulsory ones. Within this context, it says that members may ‘specify in their legislation [voluntary] licensing practices or conditions that may in particular cases constitute an abuse of intellectual property rights having an adverse effect on competition in the market’. It also gives examples of contractual provisions which might have this anti-competitive effect, saying these might include clauses in voluntary licences that prevent the licensee from ‘challenging the validity’ of the patent in issue. [Article 40, TRIPS Agreement]
In a nutshell, Article 40 applies solely to voluntary licences, and gives examples of the contractual clauses it would regard as problematic. It certainly does not suggest, as the IP framework indicates, that countries are free to adopt their own definitions of anti-competitive conduct and then apply them in the very different context of compulsory licensing.
Health activists in South Africa have nevertheless long been seeking to extend the meaning of anti-competitive practices in ways that go far beyond what either TRIPS or established principles of competition law would allow.
The UNDP document, for example, urges that the Patents Act be amended to state that the ‘abuses’ of patent rights which it lists in Section 56 (see above) would automatically be identified as ‘anti-competitive’ practices. It also wants Section 56 tightened up in various ways, so as to expand the conduct that would be ‘deemed’ uncompetitive and would thus warrant the granting of compulsory licences without prior negotiation or adequate remuneration.
The IP framework is again shorter and less clear, but what it does say is fully in line with these proposals. Like the UNDP article, it also seems to assume that changes of this kind would be in keeping with the TRIPS Agreement. However, there is little in TRIPS to support this interpretation. In addition, the ‘deeming’ clauses proposed by health activists overlook the emphasis in TRIPS on any abuse of IP rights having to be ‘determined’ through judicial or administrative processes, rather than presumed.
The Hazel Tau case
The IP framework regards the Hazel Tau case as particularly important in stretching the usual limits of competition law. To understand this decision, some understanding of key provisions in South Africa’s Competition Act of 1998 is necessary.
The Competition Act aims, among other things, at ‘providing consumers with competitive prices and product choices’. The statute also prohibits firms with ‘market dominance’ from ‘charging an excessive price that harms consumers’, or refusing a competitor access to ‘an essential facility’ when it is economically feasible to provide this.
Under the Competition Act, ‘market dominance’ is deemed to exist wherever a business has a 35% share of the market and cannot disprove its market power. In addition, an ‘essential facility’ is defined as ‘an infrastructure or resource that cannot reasonably be duplicated and without access to which competitors cannot reasonably provide [goods or services to] their customers’.
Under American anti-trust law, essential facilities include infrastructure such as railway bridges, local electricity transmission networks, and sports stadiums. This is also the usual meaning of the term. However, in the Hazel Tau case, the competition commissioner, Menzi Simelane, re-interpreted the term in an extraordinarily different way.
The case began in 2002, when the TAC and other various others lodged a complaint with the Competition Commission against GlaxoSmithKline and Boehringer Ingelheim. The complainants alleged that, even after allowing for reasonable profits, licensing costs, and R&D expenditure, these firms were charging excessive prices for some of their patented ARVs, which made it difficult for people living with HIV/AIDS to gain access to these medicines.
In 2003 the commission ruled against both companies, saying they had ‘abused their dominant position in their respective ARV markets’. It found that the companies had not only engaged in excessive pricing but had also denied competitors access to an ‘essential facility’. According to the competition commissioner, Menzi Simelane, this ‘essential facility’ was the patented formula for their AIDS drugs. An editorial in Business Day warned that this was a ‘novel interpretation of competition law’, which would undermine patent protection in South Africa, not only in the health sector but also in all other spheres.
Mr Simelane recommended that the matter be referred to the Competition Tribunal for a confirmation of his ruling. However, the companies avoided these further proceedings – and the additional one-sided and damaging publicity they were likely to generate – by seeking a voluntary settlement. Though they denied contravening the Competition Act and said their AIDS drug prices in South Africa were already among the lowest in the world, they also agreed to issue a total of seven voluntary licences to local firms to either produce or import relevant generics. The royalties payable were fixed at 5% of net sales of the generics. The two companies also granted these licensees permission to sell their generic copies not only in South Africa but also in all other countries in sub-Saharan Africa.
Questions nevertheless remain as to whether Mr Simelane was correct in ruling that GlaxoSmithKline and Boehringer Ingelheim were engaged in ‘excessive pricing’ when their ARV prices were reportedly already the lowest in the country. In addition, there are doubts as to whether the commissioner’s ‘novel’ interpretation of an ‘essential facility’ is defensible in the light of competition decisions elsewhere.
Mr Simelane’s finding on the ‘essential facilities’ doctrine contradicts relevant rulings in Europe, which caution that an overly broad approach in this sphere is likely to negate patent rights and undermine innovation. Writes James Turney, research fellow at the Centre of European Law and Politics at the University of Bremen:
Where the intellectual property owner has an objective justification for refusing to allow access to an essential facility, a compulsory licence should not be granted… If a licence to a right is granted in most circumstances where a competitor needs access to compete with the rights holder, the advantages associated with intellectual property protection become illusory… Any other interpretation of the essential facilities doctrine would undermine the very substance of an intellectual property right… A broader interpretation of essential facilities also ignores the need to compensate the right holder for the risk undertaken [by him]…. [Moreover,] it is one of the key aims of competition policy to increase innovation.
Given the pharmaceutical companies’ decision to settle the dispute, the validity of Mr Simelane’s ruling was never put to the test. Had the matter gone to adjudication before South Africa’s Competition Tribunal, it is doubtful whether Mr Simelane’s ruling would have been upheld. The TAC seems also to have acknowledged this in 2003, when it hailed the settlement reached as ‘going well beyond what could conceivably have been won by pursuing the prosecution of the complaint under the Competition Act’.
It is doubtful too if the outcomes of the Hazel Tau case would have survived critical scrutiny under the TRIPS dispute settlement mechanisms, had this occurred. For the TRIPS Agreement makes it clear that the ‘limited exceptions’ to patent rights that it allows must not ‘unreasonably conflict with the normal exploitation of a patent’, or ‘unreasonably prejudice the legitimate interests of the patent holder’. Though TRIPS adds that ‘the legitimate interests of third parties must also be taken into account’, this last consideration does not outweigh the other two. Moreover, the patent holders here had already taken account of the ‘legitimate interests of third parties’ by significantly reducing their ARV prices. Despite this, they were penalised in ways that ‘unreasonably conflicted’ with their patent rights, ‘unreasonably prejudiced’ their legitimate concerns, and effectively made a mockery of the patent protection that TRIPS requires its member states to provide.
What the IP framework seeks
The IP framework ignores the fundamental weaknesses in the Hazel Tau decision. Instead, it hails the case as ‘a watershed’, showing how competition law could be used to strike what the IP framework (wrongly) describes as ‘an appropriate balance between the interests of the creators and users of IP’. [IP framework, p13]
The IP framework adds that ‘few parties have sought to use the provisions of the Competition Act to alleviate the adverse impacts of [patent rights] on…public health’. It blames this on the costs of litigation, ‘the highly technical nature of the requisite analysis’ and the fact that the South African market is too small for generic manufacturers to have much interest in pursuing this option. To overcome these obstacles, it proposes that ‘guidelines on IP and competition could be developed’. [IP framework, p13] These would no doubt seek to build on Mr Simelane’s flawed decision and to expand the meaning of anti-competitive practices in ways that TRIPS would not in fact allow.
Compulsory licences for export, as proposed in para 4.1.9.4, IP Framework
The normal rule under the TRIPS Agreement is that products made under compulsory licence must be used ‘predominantly for the supply of the domestic market’. However, as the UNDP article has pointed out, if South Africa is to build up an extensive local pharmaceutical industry producing a number of affordable generic medicines, it is vital that it should be able to sell not only into the country’s relatively small domestic market but also into foreign ones. As the article puts it: ‘The lack of a [domestic-use] restriction could result in a significant drop in prices, as licensees could achieve economies of scale by manufacturing for both South African and foreign markets.’
As earlier noted, the normal TRIPS constraint on exports falls away where the patent holder has ‘abused’ his patent. Assuming that abuse extends to anti-competitive conduct, this makes compulsory licences against such conduct particularly useful. In addition, so the UNDP article argues, the usual constraint on exports can be circumvented to a significant extent under the 30 August Decision of the General Council of the WTO. However, this is not so.
The 30 August Decision, adopted in 2003 under paragraph 6 of the Doha Declaration on TRIPS and Public Health, seeks to make it easier for countries which lack manufacturing capacity to import generic medicines that are made under compulsory licence elsewhere. However, various conditions must be met if this waiver is to apply. Importing countries must notify the TRIPS Council that they lack manufacturing capacity in the pharmaceutical sector, or face situations of national emergency or extreme urgency, or require particular products for public non-commercial use. They must also ‘specify the names and expected quantities of the products needed’.
Exporting countries may supply only the quantities needed, and must use special packaging or apply ‘special colouring or shaping to the products themselves’ to help prevent their exports being diverted to other markets. They must also notify the TRIPS Council of the countries and the products they are supplying. In addition, if a country wants to export to more than one country, it must apply for separate compulsory licences for each separate order. Moreover, the TRIPS requirement of prior negotiations with the patent holder is not waived, and must be met in both the importing and the exporting countries.
Contrary to what the IP framework claims, it is under these provisions that the Canada Access to Medicines Regime (CAMR) has been drawn up. As earlier noted, this law allows compulsory licences solely on medicines intended for export, ‘caps the royalty rate at 4% of the price of the generic products, and adjusts the royalty rate downwards according to the importing country’s rank on the UNDP Human Development Index’, see Adequate Remuneration, above.
The limitations in the 30 August Decision are clearly intended to prevent the waiver from being abused. Developing countries have complained about the practical difficulty of meeting them, which prompted further discussions on the issue by the TRIPS Council in 2010. As yet, however, the 2003 conditions remain in place.
The 30 August Decision also provides a broad export waiver for all countries which belong to a regional trade agreement, provided that half of its members are least developed nations. In these circumstances, a generic medicine produced under a compulsory licence in one country may be exported to all other members of the regional association which ‘share the health problem in question’. This is particularly relevant to the 15 members of the Southern African Development Community (SADC), as eight of them (more than half) are recognised by the United Nations as ‘least developed’ nations.
Under these provisions, as the UNDP article points out, South Africa could export generic ARVs manufactured here to all SADC members sharing the same health problems. All that South Africa need do to benefit from this general waiver is to amend the Patents Act to incorporate the 30 August Decision. This argument is well-founded, but the SADC market is a relatively small one and would probably not be capable in itself of helping to sustain the expanded pharmaceutical industry the DTI seeks.
To circumvent this problem, the UNDP article argues that South Africa does not in fact need to comply with the 30 August Decision and is thus entitled to export generics beyond the limits of the SADC region. The article fails to explain the basis for this view, simply asserting that South Africa may ‘choose’ whether or not to operate within the 30 August constraints.
The UNDP document also urges that the export ‘procedure should not be made more cumbersome than necessary’, saying: ‘Thus, for instance, South Africa could set a fixed time after which voluntary negotiations are deemed to have been unsuccessful (say, 30 days), and waive the requirement of prior negotiations altogether where the importing country has issued its compulsory licence under a situation of emergency, extreme urgency, or for government use’. On this basis, says the article, a generic ARV manufactured in South Africa under a compulsory licence could be exported to any country which either also confronts a severe HIV/AIDS pandemic or has issued a compulsory licence allowing government use of the patent in issue.
However, if South Africa were to follow these recommendations, it would clearly be in breach of the TRIPS Agreement and the 30 August Decision. These agreements simply do not allow the untrammelled export of generic medicines produced under compulsory licence in the way the UNDP article envisages.
The IP framework brushes over these issues, simply noting that South Africa has ‘adopted the Paragraph 6 mechanism [ie, the 30 August Decision] through ratification’, as have many other WTO members. It is silent on whether it plans to try and push ahead with the proposals set out in the UNDP article. Instead, it merely states that the government is ‘cognisant of the stated limitations’ and will ‘engage with stakeholders’ to find ways of ‘simplifying’ implementation and ‘streamlining the Paragraph 6 mechanism’. [IP framework, p11]
Replacing the patents court with a patents tribunal, as proposed in para 4.1.9.1, IP framework
The IP framework notes that ‘all applications for compulsory licences in South Africa are subject to a judicial process before the commissioner of patents’. The upshot, it says, is that ‘the grant of a compulsory licence is subject to the timeframes and expenses that apply to litigation’. In addition, these difficulties can be ‘exacerbated and access further delayed in the event that the decision of the commissioner to grant a licence is appealed’. [IP framework, p10]
Against this background, the IP framework claims that ‘the TRIPS Agreement does not require the grant of compulsory licences to be made subject to a judicial process’. Hence, ‘a more streamlined and accessible administrative process should be considered’. [IP framework, p10]
Here, the IP framework again echoes the UNDP article, which likewise criticises the fact that patent matters are currently heard in the patents court – where the relevant rules of civil procedure make for complexities, costs, and delays, the article says. It thus recommends that these court proceedings be replaced by a simplified process, in which decisions on compulsory licences would be made by an ‘administrative tribunal’. Such decisions would have to remain subject to court review, as this is required by constitutional rights to administrative justice and access to court. However, the practical value of seeking judicial review could be limited by another new rule, under which the use of a compulsory licence granted by such a tribunal would not be stayed (placed on hold) pending the finalisation of the review.
The DTI’s earlier draft policy document took a similar view, saying that the ‘enforcement of intellectual property is expensive and that judicial systems are under severe strain’. It thus proposed the establishment of a patents tribunal, which would operate outside South Africa’s high court and would be responsible for hearing all patent matters. This new tribunal, it said, should not be ‘dominated by lawyers’ or subject to high court rules, as these make for ‘highly technical and legalistic procedures’.
In seemingly endorsing these views and urging a shift from judicial to administrative process, the IP framework claims that that the TRIPS Agreement does not require the judicial proceedings for which the current Patent Act makes provision. Again, however, this is not so.
Here, the IP framework overlooks Article 42 of TRIPS, which states: ‘Members shall make available to rights holders civil judicial procedures concerning the enforcement of any intellectual property right covered by this Agreement... Parties shall be allowed to be represented by independent legal counsel,...and all parties to such proceedings shall be duly entitled to substantiate their claims and to present relevant evidence.’ In addition, says Article 49, where ‘any civil remedy is ordered as a result of administrative procedures on the merits of a case’, these administrative procedures must ‘conform to principles equivalent in substance’ to those applicable in the civil courts. These provisions are peremptory, and cannot simply be disregarded.
The IP framework does not elaborate on the further changes it might seek as part of a ‘more streamlined and accessible administrative process’. However, it may still be planning to introduce the further changes that were mooted in both the DTI’s earlier draft policy document and the UNDP article.
These proposals sought to limit the remedies available to patent holders by barring them, in many instances, from obtaining either interim or final interdicts (injunctions). Yet an interim interdict – to stop sales of copied products pending a court order confirming the alleged infringement – is often the most effective remedy available to the patent holder. In addition, refusing to grant a final interdict (after infringement has been established by the patents court) ‘amounts to granting the infringer a compulsory licence’, as Judge Louis Harms, a retired deputy president of the Supreme Court of Appeal, has noted.
Should the DTI attempt to introduce these shifts, this will also contravene the TRIPS Agreement, which requires member states to ensure ‘effective action’ against any infringement of intellectual property rights. TRIPS also stresses the need for ‘remedies which constitute a deterrent to further infringements’. TRIPS further states that ‘the judicial authorities [in a member state] shall have the authority to order prompt and effective provisional measures’; and that such authorities ‘shall have the authority to order a party to desist from an infringement’. Again, these provisions are peremptory and cannot be ignored. [Articles 41, 43, 44, TRIPS Agreement; see also Article 50, TRIPS Agreement]
In further peremptory language, the TRIPS Agreement also states that ‘the judicial authorities shall have the authority to order the infringer to pay the right holder damages adequate to compensate for the injury the right holder has suffered’ because of the infringement. In addition, ‘the judicial authorities shall have the authority to order the infringer to pay the right holder expenses, which may include appropriate attorney’s fees’. [Article 45, TRIPS Agreement] In these ways, the TRIPS Agreement seeks to restore patent holders to the position they would have been in without the infringements – not limit the remedies available to them. That those who infringe patents right may have to pay damages and costs is also, of course, an important deterrent against infringement.
The UNDP article also urged that patent holders should be deterred from enforcing their rights by new rules that would entitle the defendants in infringement proceedings to counterclaim for compulsory licences on all the new grounds envisaged. However, any such changes would also be contrary to the overall TRIPS scheme (in Part III of the Agreement), for ‘the enforcement of intellectual property rights’. It would also be in breach of a TRIPS provision stating that ‘procedures’ for the enforcement of intellectual property rights must be ‘fair and equitable’. [Article 41.2, TRIPS Agreement] Penalising patent holders for trying to enforce their rights would hardly satisfy this requirement.
Ramifications of the IP framework
The IP framework, like the UNDP article and the DTI’s earlier draft policy document, assumes that the changes it proposes are in keeping with the TRIPS Agreement, the Doha Declarations, and the 30 August Decision of the WTO. However, as described above, this is not so.
The IP framework also assumes that many positive consequences will flow from its proposals: the allegedly common practice of ‘evergreening’ patented medicines will fall away; a host of generics manufacturers (including a state pharmaceutical company) will spring up to produce cheap generic drugs for both domestic and export markets; the current ‘de-industrialisation’ of South Africa will be reversed; and poor people suffering from AIDS, drug-resistant TB, malaria, and other serious illnesses will have early and cheap access to the new and more effective medicines yet to be developed in the United States, Europe, Japan, and elsewhere. However, abrogating patent rights in the way proposed is unlikely to improve health care or promote industrialisation – and could have many adverse consequences for the wider economy.
Ramifications in the health-care sector
Activists often exaggerate the extent of the patent ‘problem’ within the heath-care sector and to assume that generic substitutes will always have the same therapeutic quality as original medicines. In addition, undermining patent rights will do little to overcome a host of other barriers to good public health care in South Africa. Moreover, there are different and more effective steps that could be taken to bring down the prices of patented medicines, improve the quality of public health care, limit the spread of HIV and drug-resistant TB, and make it easier for many more South Africans to buy high-quality health care from the private sector.
The extent of the patent ‘problem’
Roughly 98% of the medicines needed to treat the majority of patients in South Africa – as set out on a list of essential medicines compiled by the World Health Organisation (WHO) – are already off patent. The TAC discounts this, saying that many of the medicines found on the WHO list have been included not only because of their ‘efficacy’ but also because of their ‘comparative cost-effectiveness’. This means, it says, that many innovative medicines are left off because of their price, whereas ‘if costs were no barrier, many additional medicines would be included’. [Urbach, ‘Protected Patents’, p8; TAC, The Economic and Social Case, p9] But costs are unavoidably important, while undermining patent rights to bring them down puts innovation at risk. Without secure patent rights, there is less incentive to explore and develop new drugs – and the pipeline of innovation on which generics manufacturers depend is likely to dry up. There are few benefits to anyone in this scenario.
It is also over-optimistic to presume that the generics to be produced under compulsory licence will have the same quality as original medicines. Moreover, if the active pharmaceutical ingredients are not in fact equivalent, this can have serious consequences. ‘Inferior versions can be fatal to the patients and promote drug resistance,’ warns a recent report by the National Bureau of Economic Research in the United States. The bureau’s researchers tested some 1 470 products made by Indian generics manufacturers and sold in Africa, India, and elsewhere. They found, for example, that 17.5% of the TB therapy rifampicin sold in Africa tested sub-standard, as ‘the drug had less than 80% of the active ingredient that it should’.
Other evidence also indicates that the generics drug industry in India, in particular, is falling short on quality standards. A number of Indian pharmaceutical companies have recently had to recall various medicines from the US market. In June 2014, for instance, Sun Pharmaceutical Industries, one of the largest Indian generics companies, recalled close on 400 000 bottles of a decongestant and more than 250 000 of an antidepressant because the pills failed to dissolve properly, reducing the bioavailability of their active pharmaceutical ingredients.
In the US, generic versions of a heart disease drug (Toprol XL) have had to be recalled at various times for the same reason – and this after thousands of patients had complained of increased blood pressure, nausea, headaches, and dizziness after switching from the branded product. Since 2012, Ranbaxy Laboratories, another major Indian generics manufacturer, has three times had to recall its generic versions of a cholesterol drug from the US market. The biggest of these events took place in 2012, when the company recalled close on 500 000 bottles because some of them were found to be contaminated with tiny glass particles.
In January 2014 the Food and Drug Administration (FDA) barred the entry into the US of drug ingredients made at some Ranbaxy plants in India because of the alleged faking of test-quality results by plant workers. In 2013, moreover, Ranbaxy agreed to pay $500m in fines and to plead guilty to criminal charges of selling adulterated drugs and making false statements to the FDA. Overall, FDA has become so concerned about the quality of Indian drug manufacturers that it has barred 36 manufacturing plants, including facilities owned by Ranbaxy and Sun Pharmaceuticals, from sending their products to the US.
If India’s established generics industry fails to maintain adequate standards of quality, South Africa’s proposed new state pharmaceutical company – and the other new manufacturing entities the DTI hopes to see springing up – are likely to face similar challenges in doing so.
These considerations are not lightly to be discounted. Moreover, there is little reason to believe that undermining patents will help to improve public health care in South Africa when intellectual property rights are not the key reason for problems in this regard. Even if various domestic manufacturers were to start producing high-quality generics at low prices under the DTI’s proposed new rules, this would do little to improve the quality and availability of public health care in South Africa as all the other obstacles to sound health care would remain.
Other barriers to good public health care
As the government itself has acknowledged, the quality of the public healthcare system has deteriorated sharply since 1994. Much of the decline stems from what health minister Dr Aaron Motsoaledi has described as ‘the management crisis’ in public hospitals. In 2011 a competency report commissioned by him found that ‘teachers, nurses, and even clerks whose highest qualification was a matric certificate’ were running public hospitals, even though they lacked the experience to administer these complex institutions.
Partly because of poor management, performance standards have deteriorated across a host of indicators. A recent official audit of health standards at some 3 900 public hospitals and clinics reported in 2012 that average compliance scores were:
Some compliance scores were even worse. The availability of essential drugs in clinics was a 77% ‘failure’, while the score for vital health technology in maternity wards and operating theatres was a 93% ‘failure’ in both instances. All this, the audit added, was despite the fact that public sector health funding had increased by an average of 8.5% a year in real terms over the past five years.
In 2013, in an attempt to overcome these problems, the Office of Health Standards Compliance Act was adopted. Dr Motsoaledi said that inspectors from this office would in future ‘visit hospitals unannounced’ to assess issues such as cleanliness, staff attitudes, infection controls and the availability of medicines. However, wrote journalist Moshoeshoe Monare in The Sunday Independent: ‘The health minister wants another layer of bureaucracy to deal with what the provincial departments of health, hospital CEOs, and nursing matrons are supposed to be attending to… If the nursing and medical staff are unable to attend to patients, disciplinary action – not a lengthy process to the ombudsman – must be taken immediately. Lack of discipline, professionalism and poor service are a reflection of the managerial and leadership ethos, and no external person or body will fix it.’ [The Sunday Independent 8 July 2012]
The Office of Health Standards Compliance (OHSC) was nevertheless established the following year, while in 2014/15 the OHSC re-inspected 417 state facilities. The results were dismal, for only 3% of these facilities were found to be ‘compliant’. Another 13% were compliant ‘with requirements’ or were ‘conditionally compliant’. The remaining 84% were non-compliant, of which 16.5% were ‘conditionally compliant with serious concerns’, 27.8% were ‘non-compliant’ and 39.8% were ‘critically non-compliant’. [Dr Johann Serfontein, HealthMan Consultancy, Address to Free Market Foundation, Johannesburg, 20 April 2016]
Stock-outs of essential medicines are becoming increasingly common. In 2012 Professor Ashraf Coovadia, a paediatrician specialist at the Rahima Moosa Mother and Child Hospital in Johannesburg, warned that drug shortages had grown steadily worse in recent years. ‘Before 2011, we had good alternatives when we ran out of one drug. Now we are finding the “stock-outs” of essential drugs to be more protracted, and directly linked to the non-payment of suppliers.’
In the same year, an audit of public health care facilities, as earlier outlined, found that average compliance scores were 54% on the availability of medicines and supplies. A one-time head of a trauma unit said the government hospitals often ran out of such essentials as pain-killing drugs. ‘One day we run out of Panado, so we have to use morphine even on small babies. The next day there will be no morphine, so we have to use Panado.’ [Kane-Berman, From Last Grave at Dimbaza, p4]
In 2013 a group of non-governmental organisations in the health field reported that 20% of more than 2 000 facilities surveyed ran out of ARVs and TB medication. [Kane-Berman, From Last Grave at Dimbaza, p4] Also that year, Section27 surveyed South Africa’s state pharmacies and found that 20% had run out of drugs for AIDS or TB at various times. Mark Heywood, executive director of the organisation, said the problem was theft from government warehouses by local officials, against whom little action was being taken. Dr Motsoaledi agrees that many warehouses are sites of ‘corruption and pilferage’ and has vowed to act against them – but little improvement is evident.
In July 2014 the National Treasury was forced to take over the financial administration of the Free State healthcare system, which had racked up R700m in debt and was on the verge of collapse. According to Section27, provincial health facilities were short of more than 200 essential drugs, including ARVs, antibiotics, pain killers, and medication for diabetes, epilepsy, and high blood pressure. This left the 2.5m people in the Free State who depended on public healthcare ‘uncertain’ as to what treatment they could expect.
Since then, complaints about medicine stock-outs have increased rather than declined. In May 2015 The Times reported that ‘the current list of medicines that are out of stock or in short supply around the country runs to six pages’. It includes antibiotics, TB medicines, ARVs for adults and children, and drugs to treat high blood pressure, anxiety, epilepsy, fungal infections, and pain. A civil society organisation, Stop Stock-outs, added that shortages were assuming ‘crisis proportions’. The deficits were also increasing the risk of drug resistance developing among patients, which could make it even more difficult to counter the massive HIV/AIDS pandemic. In addition, as one Gauteng doctor noted, a ‘severe’ shortage of first-line antibiotics meant that ‘much more potent and expensive ones had to be used to treat simple infections’. This was ‘bad practice and could lead to antibiotic resistance, but clinicians had no choice’. [The Times 18 May 2015]
Dr Motsoaledi blamed the deficits on a global shortage of the active ingredients needed for various medicines, while a national survey by Stop Stock-outs found that manufacturers had difficulty in supplying in roughly 20% of cases. But the survey also showed that 80% of the shortages were due to logistical problems. Reported Business Day: ‘[Stop Stock-outs] said that 80% of reported cases were due to challenges between medicine depots and clinics at provincial and district levels, such as incorrect quantities of drugs ordered, inaccurate forecasting, and poor stock management’. Often, as the Mail & Guardian added, ‘the medicine was in fact available at the storage depot – but the drugs could not be traced because there was no proper record-keeping system’. [The New Age 20 May, Business Day 25 May, 8 June, The Citizen 11 June 2015, Mail & Guardian 12 June 2015]
Another key problem is the acute shortage of health practitioners within the public health service. In March 2014 The New Age reported that public healthcare facilities face a shortfall of some 80 000 medical personnel. The situation is particularly serious in rural areas, where only 12% of the country’s doctors and 19% of its nurses work. The situation had also deteriorated since 2012, when government figures showed that vacant posts in the public health sector totalled some 44 800 for professional nurses, 10 900 for doctors, and roughly 3 500 for specialists.
Mistaken policies contribute to the shortage of health practitioners. One of the key problems is the government’s refusal to allow private institutions to train doctors. [City Press 13 March 2016] Yet if this were permitted, private institutions could be established on either a for-profit or non-profit basis and could play a major part in alleviating the current shortage. The country’s private hospitals are centres of excellence and world-renowned for their high levels of care. Hence, privately-run education facilities, working together with private hospitals, could attract internationally recognised teaching staff and provide high quality training that would attract both local as well as international students.
Instead, the burden of training new doctors continues to rest solely on the country’s public universities, which for many years have had the capacity to train only some 1 300 new doctors a year (a total first reached in the 1970s). Though the number being trained at these institutions is now being pushed up to some 1 900, there has been little matching increase in the resources made available to universities for this purpose, so undermining the quality of the tuition provided. In addition, this increase is still too limited to meet the needs of an expanding population with a growing burden of disease and high numbers of trauma cases. In addition, the number of specialists being trained in public hospitals has declined in recent years, mainly because of budgetary constraints. Hence, whereas 165 specialists were trained by the KwaZulu-Natal health department in 2013, only 39 were trained in 2014. [Sunday Times 5 April 2015, The Times 8 February 2016]
The government also curtailed the training of nurses in the mid 1990s by closing a number of nursing colleges. Though it has since pledged to reopen these, little progress has yet been made. Despite private sector efforts to fill the gap (private institutions now train more than half of the registered nurses who qualify in South Africa), the government’s own actions have contributed to a critical shortage of nurses, especially in specialist areas such as intensive care. [The Citizen 19 February 2015, The New Age 12 May 2016]
Since 2008, moreover, the public health care sector seems to have put its focus on hiring administrative staff, rather than medical personnel. As a result, the number of ‘core administrative’ staff employed in the public sector went up from some 33 330 in 2012 to roughly 37 330 in 2015, an increase of some 12%. At the same time, the number of doctors shrank slightly (from 19 422 to 19 352). This has resulted in doctors being outnumbered by administrative staff by two to one. [Business Day 9 February 2016]
Better solutions available
Rather than undermining patent rights, the key need is to improve efficiency and quality in the public health-care service, make better use of the tax revenues available, limit the spread of HIV and drug-resistant TB, allow pharmaceutical companies to provide discounts for bulk orders for medicines in the private sector, and increase access to private medical aid and health insurance. Where health needs nevertheless remain beyond the capacity of the government to address, it should not seek to transfer part of this burden to the private pharmaceutical industry but could rather request the help of international donors.
The immediate priority is for the government to put its own house in order. Much of the country’s health budget (set at R159bn budgeted for public health care expenditure in 2015/16 and projected to rise to R168bn by 2016/17) is badly used. South Africa allocates around 12% of budgeted government spending to public health care, amounting at present to some 3.7% of GDP. In nominal terms, the health budget has increased by some 975% since 1994, while in real terms it has gone up by an average of 8.5% a year over the last five years or so. In addition, primary health care expenditure per capita almost doubled in real terms from R666 in 2005/06 to R1 100 in 2010/11. [IRR, Fast Facts, March 2016, pp3, 11; Kane-Berman, From Last Grave at Dimbaza, p3] However, South Africa gets little bang for its health care buck.
Financial mismanagement is also a key part of the reason. In June 2015 a study carried out by the School of Public Health at the University of the Witwatersrand reported that the health care system was ‘sick with corruption and haemorrhaging money in irregular spending’. The study, carried out by Professor Laeticia Rispel and two of her colleagues, was based on reports by the auditor general over nine years, interviews with leaders in healthcare, and an analysis of media reports. It found that R24 billion of provincial health department expenditure between 2009 and 2013 was ‘irregular’ (not in keeping with procurement procedures), though not necessarily corrupt. The number of provincial health departments receiving unqualified audits had also decreased, from seven in 2004/05 to three in 2012/13. [The Times 26 June 2015]
Many health department employees said they felt ‘disempowered’ and unable to act against corruption and irregular spending, while a trade unionist told the researchers: ‘If you are a strong manager, you get targeted and destroyed. If you want to keep your job, you become corrupt yourself.’ The chief executive of a state hospital added: ‘Attitudes are appalling. People know that they can get away with it.’ The national health department said it was ‘concerned about corruption and encouraged people to report it regardless of who the perpetrator was’. However, the researchers cautioned that much stronger leadership and a good deal of ‘political will’ was needed to target it effectively. Poor supply chain management and a failure to pay suppliers have also contributed to shortages of medicines, medical equipment, and other supplies. [The Times 26 June 2015]
Where more money for medicines is required, the government could thus help meet this need by cutting back on its own corrupt and wasteful spending. How much the state loses each year to corruption is impossible to tell, but one informed estimate (by Willie Hofmeyr, then head of the Asset Forfeiture Unit, an anti-corruption entity within the National Prosecuting Authority) has put it at between R25bn and R30bn in every year.
Preferential procurement under the rubric of black economic empowerment (BEE) also costs the state dearly. The secretary general of the ANC, Gwede Mantashe, acknowledged this in 2012 when he said that BEE companies must ‘stop using the state as their cash cow by providing poor quality goods at inflated prices’. Added Mr Mantashe: ‘It is unacceptable for contractors to charge taxpayers R20m for a public school when the private sector spends between R5m and R10m on a similar project.’ On a state procurement bill running into hundreds of billions of rands, the cumulative waste is enormous.
The government has the power to stamp out corruption and stop wasteful spending, if it so chooses. It also has the capacity to change its current policy and allow the establishment of many more private universities and colleges, so as to increase the supply of doctors and nurses. By improving the often appalling conditions in many public hospitals and clinics, it could also reduce the impetus for South Africa’s medical practitioners to shift into the private sector and/or move abroad.
The government could also take more effective steps to reduce the number of new HIV infections, which in turn would reduce the demand for costly ARVs. In 2012, for instance, new HIV infections in South Africa numbered 400 000. This was seven times the number of new infections in the United States, which has six times the population, and made South Africa number one in the world in HIV incidence. In the words of the then leader of the Democratic Alliance, Helen Zille, the government needs to move away from its current focus on condoms, testing, and ARVs to tackle ‘the underlying behaviour responsible for the rampant spread of the virus: multiple concurrent (or overlapping) sexual partners, and inter-generational sex’. Moreover, the success of the ‘zero grazing’ programme in Uganda – which focused on the need for fidelity between ordinary people in ordinary relationships and helped bring Uganda’s infection rate down by two-thirds within a decade – shows how effective such initiatives could be. However, no similar initiative has been taken in South Africa, where the number of new infections, at some half-a-million, remained very much the same in 2015.
As for TB and the drug-resistant varieties of the disease now on the rise, the Government needs to begin by ensuring the efficient operation of the country’s 3 200 or so primary care clinics. On this basis, it could implement much more comprehensive screening for TB. It could also be more effective in monitoring patients and ensuring their proper compliance with treatment protocols, so as to halt the rise of drug-resistant strains of the disease.
Medicine prices in the private sector could also be reduced in at least two ways, without interfering with patent rights. To begin with, the government could remove VAT (levied at the general rate of 14%) on all medicines sold within the private sector. Secondly, it could change the law so as to enable the private sector and civil society organisations to negotiate with pharmaceutical companies for major discounts on bulk purchases. At present, the government itself has barred such discounts via amendments made in 2002 to the Medicines and Related Substances Act of 1965, but these rules could easily be repealed. (However, in the attempt to reduce drug prices, it must also be remembered that the higher prices in the private sector help subsidise much lower prices in public hospitals and clinics. So great is the differential that the state sometimes pays only a tenth of the cost of the same medicine in the private sector.)
The government also has the power to shift the focus of its policies from redistributing the existing economic pie to growing it through rapid rates of economic growth. In addition, the state could take various steps to foster entrepreneurship and encourage job creation, thereby making it possible for millions more people to earn their own living and buy the health care they need.
In addition, the government could reduce the cost of medical aid membership by sanctioning a return to the risk-rating of premiums. At the same time, it could encourage individuals to buy supplementary hospital and ‘gap’ medical insurance, instead of trying to restrict or eliminate these options.
The state could also privatise floundering public hospitals and clinics and use the proceeds, along with tax revenues, to issue all households with annual health vouchers that would help them buy the medical aid membership and additional health insurance they require. In combination with measures to increase the supply of health practitioners and reduce the regulatory burden within the health sector, these initiatives would help to hold down medical inflation and raise the quality of health services within the country.
Where the health needs of the poor still cannot be met, the answer is not to undermine patent rights but rather to seek the help of international donors. In its fight against AIDS, South Africa has already benefited enormously from the President’s Emergency Plan for AIDS Relief (Pepfar), which started in 2003 under President George W Bush. Since then, as The New York Times reports, ‘Pepfar has poured more than $3bn into South Africa, largely for training doctors, building clinics and laboratories, and buying drugs’. Though the US contribution had passed largely unremarked within South Africa, it is Pepfar that has played the major part in expanding the number of AIDS treatment clinics (from 490 in 2008 to 3 500 in 2013) and in increasing the number of trained nurses (from 250 to 23 000 in the same period).
Pepfar is now shifting its contributions to poorer nations and so reducing its assistance to South Africa. This means that rougly a million South Africans, whose ARVs were previously funded by Pepfar, must in future be treated out of the nation’s own resources. The reforms outlined above would help to achieve this. However, if South Africa nevertheless remains unable to manage the AIDS burden without outside help, it should seek this from international donor agencies rather than trying to shift the responsibility on to the shoulders of private pharmaceutical companies.
Ramifications for industrialisation
Part of the DTI’s purpose in seeking to abrogate patent rights is to foster the ‘re-industrialisation’ of South Africa. It assumes the granting of many more compulsory licences over patented medicines will encourage the growth of a vibrant domestic pharmaceutical industry, including a state pharmaceutical company, which will be able to sell high-quality generics at low prices both locally and in export markets.
As the IP framework puts it, ‘the pharmaceuticals industry is one of the priority sectors identified by IPAP’ or the Industrial Policy Action Plan. It notes that ‘the contribution of manufacturing in this industry to South Africa’s GDP has declined from 1.6% to 1.1% over the past six years’. However, it still provides approximately 10 000 direct jobs and another 25 000 indirect ones. Moreover, says the IP framework, ‘the local pharmaceutical market…is the largest in sub-Saharan Africa and is worth a total estimated R40bn’. However, 65% of domestic demand has to be met by imports, which contributes to South Africa’s trade deficit. [IP framework, p6]
The IP framework seems to assume that patents rights are the key barrier to the growth of a local pharmaceutical industry, but this is not the case. Far more relevant are a host of other obstacles, ranging from poor skills and limited productivity to electricity shortages, fractious labour relations, limited logistics, and high input costs of various kinds. Making it easier and cheaper to copy patented inventions will do little to overcome these problems. On the contrary, it will reinforce perceptions that the government is hostile to business and the free market, giving potential direct investors more reason to bypass the country.
In addition, it will not be easy to revive South Africa’s pharmaceutical industry when this has been shrinking, rather than expanding, over the past two decades. Since 1994, some 35 pharmaceutical factories have shut down, while the number of people employed by the industry has shrunk from 16 000 in 2000 to 11 000 in 2007, and now stands lower still at 10 000, as the IP framework notes.
Moreover, much of the reason for this decline lies in the government’s own policies. Particularly damaging has been the introduction in 2004 of stringent price controls on medicines, via the ‘single exit price’ mechanism. Since then, the Department of Health has repeatedly declined to allow these regulated prices to increase in line with inflation, rand weakness, and rising production costs. [bdlive.co.za 13 June 2016]
These price controls have increasingly eroded the profitability of the remaining pharmaceutical manufacturers. In 2008 an analyst for the research house Frost & Sullivan described South Africa’s pricing regulations as ‘disgraceful’. He noted that a number of foreign firms had already withdrawn from South Africa and predicted that many others would follow. ‘What’s been going on has made the international community look with jaundiced eyes and dampens prospects for foreign investment,’ he added. [Jeffery, Chasing the Rainbow, p302]
Since 1994, the state has also subjected pharmaceutical (and other) companies to a barrage of ‘transformation’ requirements that are not only difficult and costly to fulfil but also continually in flux, making adequate planning and implementation still harder to achieve. At the same time, South Africa’s skills and productivity have remained poor, its crime rates have remained high, and the growing inefficiency of government has become a major burden to business in every sphere.
The IP framework sets much store by ‘Project Ketlaphela’, the government’s attempt to establish a state-owned pharmaceutical company. The DTI sees this company as playing a vital role in the manufacture of the active pharmaceutical ingredients (APIs) the IP framework identifies as being globally in short supply. In time, the IP framework adds, this company will also engage in tablet formulation and start expanding into the SADC region. This, it claims, will be ‘key to improving the domestic component of the supply of ARVs and improving security of supply both domestically and sub-regionally’. It also wants ‘South Africa’s IP regime to complement the country’s industrial development ambitions’ in the pharmaceutical sector. [IP framework, p6]
However, South Africa’s experience to date with its state pharmaceutical company is not encouraging. In 2007, at the Polokwane national conference that elected Jacob Zuma as president of the ANC, the ruling party resolved to ‘explore the possibility of a state-owned pharmaceutical company that intervenes in the curbing of medicine prices’. In 2012 a state pharmaceutical firm was established; but it has yet to assume operations or even to complete the construction of a pilot plant.
The firm, called Ketlaphela, was initially a joint venture between the state-owned fluorochemical producer Pelchem – a subsidiary of the South African Nuclear Energy Corporation – and a Swiss company, Lonza Pharmaceuticals. However, Lonza withdrew from the venture in 2013. Ketlaphela (a Sesotho word meaning ‘I will survive’) is intended to manufacture active pharmaceutical ingredients (APIs) for the production of ARVs and was initially expected to start producing APIs in 2016. However, officials now see 2017 or 2018 as more likely start dates.
Comments Ryan Lobban, a healthcare analyst at Frost & Sullivan: ‘Manufacturing APIs is a sophisticated business. It requires special skills. The set-up costs are very high.’ In addition, the manufacturing of APIs is also a low-margin business, which Western pharmaceutical companies often outsource to low-cost producers in countries such as India and China. Hence, Ketlaphela will consistently have to beat these established and experienced producers, on both cost and quality, if it is to persuade local pharmaceutical companies to shift away from their Asian suppliers.
Whether Ketlaphela will succeed in achieving this is doubtful. Already, many of South Africa’s state-owned enterprises – including long-established ones such as Eskom, the South African Airways, the Post Office, and the South African Broadcasting Corporation – are poorly managed, singularly inefficient, and heavily dependent on billions of rands in bail-outs from the fiscus.
According to the ANC-aligned National Education Health and Allied Workers’ Union (Nehawu), Ketlaphela offers ‘the most sustainable way of expanding domestic production’ and ‘the best way to keep the costs of medication down’ because, unlike private firms, it will not be trying to ‘commodify and prolong sickness’. However, these claims are based more on optimism and ideology than on the record to date of either Ketlaphela or the country’s other SOEs.
The IP framework also seems to think that there is ‘tremendous potential for the pharmaceutical sector to grow and contribute further jobs to the South African economy’. [IP framework, p6] However, it will battle do so in an economy confronting zero growth, high inflation, and a host of obstacles to successful business operation. Moreover, if the DTI wants the local pharmaceutical industry to expand beyond South Africa to achieve economies of scale, this may also be difficult to achieve. Under the 30 August Decision, South Africa will be entitled to export ARVs and other medicines to SADC countries facing similar health problems, but this additional market is unlikely to suffice. The key factor will be the capacity to export to non-SADC countries, which the 30 August Decision makes difficult to achieve. In addition, South Africa will battle to compete with India, in particular, which has better skills and productivity, plus lower labour and other input costs.
Ramifications for the wider economy
In seeking to limit patent rights, the DTI and health activists have made the plight of AIDS and other patients their key focus. However, this is misleading when the proposed diminution in patent rights cannot lawfully be confined to pharmaceuticals and other health products and will thus extend to patents in all spheres. The proposals are also likely to have major ramifications in inhibiting local innovation, undermining South Africa’s position in Africa and the world, and eroding the investment climate and the rule of law.
Local innovation
Since local inventors must generally start by seeking a South African patent before they can apply for patents in other countries, the content of the Patents Act is vital to local innovation. South Africa also has a proud record of local innovation in deep-level mining, the development of petrol from coal, and many other spheres. Several key local inventions have also been in the health sector, where the DTI seeks to make patents harder to obtain.
Important South African inventions include:
Local innovations in the health sector include:
The DTI and other government departments are also trying hard to promote local innovation because (as Business Day reported in October 2014) ‘both industry and the government are well aware that R&D is an important stimulant to industrial and economic growth’. South Africa’s spending on R&D has nevertheless been declining, rather than improving, over the last four years. According to Derek Hanekom, who was minister of science and technology until the May 2014 general election, South Africa spent R22.2bn or 0.76% of GDP on R&D in 2011/12 (the same as the ratio reported for 2010/11). But this was a decline from previous years, for the ratio stood at 0.87% of GDP in 2009/10, at 0.92% in 2008/09, and at 0.93% in 2007/08.
Overall, the country continues to lag behind the government’s goal of spending 1% of GDP on R&D in every year. Moreover, even if this target is achieved, South Africa will still be spending less than the international average of 1.77% of GDP. The country also trails behind most of its BRIC counterparts: for China spent 1.84% of GDP on R&D in 2012, while Brazil spent 1.16% and Russia 1.09%. Only India comes in behind South Africa, for it spent 0.76% of GDP on R&D in 2008, the latest year for which its figures are available.
As Mr Hanekom put it, ‘the government measures R&D expenditure as a percentage of GDP because it regards [such spending] as a fundamental contributor to innovation-led economic growth and competitiveness’. The government also has three incentive programmes to promote innovation: two of them administered by the DTI and the third (a tax relief initiative) available through the Department of Science and Technology.
The current minister of science and technology, Naledi Pandor, has recently restructured the National Advisory Council on Innovation (Naci) to give the council easier access to the Cabinet on all matters affecting South Africa’s National System of Innovation (NSI). Under the new requirements, the Cabinet is obliged to respond to Naci’s recommendations and must give reasons if it does not. Cheryl de la Rey, vice-chancellor of the University of Pretoria and the new head of Naci, wants the council to play a larger role in stimulating innovation, saying: ‘We need to take stock of where we are [as regards innovation] and identify the most urgent issues that need to be addressed, the levers that are most likely to institute the most change in the shortest period of time.’ Ironically, one of her most pressing tasks will be to counter the DTI’s proposed changes to patent legislation, which will serve to stifle the innovation the council is intended to promote.
The investment climate and the rule of law
One of the most disturbing elements in the IP framework is the implicit proposal (previously made clear in the 2013 draft policy document) to replace the existing patents court with a new patents tribunal. This tribunal (as the DTI earlier put it) is intended to operate outside South Africa’s high court, and without being bound by the usual ‘legalistic’ rules of civil procedure.
Though the administrative decisions of this tribunal will be subject to judicial review, the ambit of such review is generally limited. It covers issues of procedural fairness (audi alteram partem, or hear the other side, for example) but, on substantive issues, judicial review of administrative action is limited to such questions as whether a decision was taken ‘in bad faith’, or ‘for a reason not authorised by the empowering provision’, or was ‘so unreasonable that no reasonable person could have taken it’.
However, the importance of effective judicial remedies is difficult to overstate. Writes Judge Harms: ‘[In the context of intellectual property], there is a significant direct link between judicial system performance and economic development... For intellectual property rights to serve their purpose, effective judicial support is necessary... [A] right without a remedy turns out to be an expensive fallacy. When judicial support for these specialised rights is feeble, mobilisation of that natural resource [ie, innovation] falters, with considerable losses to the country.’
This warning is a salient one, raising further questions as to why the existing and effective patents court should be replaced by an administrative tribunal. This prospect is disturbing in itself. More worrying still is the possibility that the patents tribunal could serve as a precedent for similar tribunals with decision-making powers over other kinds of property. The patent proposals – which are being communicated to the public as a vital and effective way of saving the lives of millions of AIDS and other patients – could become the thin edge of a much larger wedge, which cumulatively puts the property rights of all South Africans increasingly at risk.
Innovation is also vital to investment, growth, and jobs, as the government is well aware. The known nexus between innovation and prosperity is the key reason the state provides significant incentives for innovation and is trying hard to raise spending on R&D to 1% of GDP, still far behind the global norm.
Perversely, the DTI’s IP proposals contradict all the state’s endeavours to stimulate innovation. They also contradict the key goals of the National Development Plan (NDP): to raise the economic growth rate to 5.4% of GDP a year and reduce the unemployment rate from 25% to 6%. Neither growth nor jobs will increase without much more direct investment – but investors will have little reason to risk their capital, skills, and other resources within South Africa unless they know their property rights, including their intellectual property rights, are secure.
Says the International Chamber of Commerce, the largest business organisation in the world with hundreds of thousands of members in more than 150 countries: ‘The protection of intellectual property stimulates international trade, creates a favourable environment for foreign direct investment, and encourages innovation, transfer of technology and the development of local industry, all of which are essential for sustainable economic growth.’
By contrast, the proposed changes in the IP framework will also make it still more difficult to generate growth in the economy, which is expected to stagnate this year. By contrast, if South Africa’s annual growth rate could be raised to 7% of GDP, the size of its economy would double every ten years. Nothing could do more to build prosperity for all. If South Africa is to reduce unemployment and attendant poverty, foster local innovation, encourage direct investment, and increase its access to sophisticated global technology of every kind, it is vital that the DTI should scrap these damaging proposals.
South African Institute of Race Relations NPC 30th September 2016
References
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Anthea Jeffery, Patents and Prosperity: Innovation + Investment = Growth + Jobs, IRR policy paper, 2014, p3
Article 17, Doha WTO Ministerial Declaration, 14 November 2001; Articles 3 and 4, Doha Declaration on the TRIPS agreement and public health, 14 November 2001, www.wto.org; WTO, TRIPS and Pharmaceutical Patents: Obligations and Exceptions, p4
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The New York Times 25 August 2014
The New York Times 25 August 2014
Jeffery, Chasing the Rainbow, pp299-302
African National Congress, National Conference, Health resolutions, Polokwane, 2007; Financial Mail 25 February 2013
Financial Mail 25 February, Mail & Guardian 24 May 2013
Business Report 20 January, Business Day 23 October 2014
Extracts by Popular Mechanics and others from Mike Bruton, Great South African Inventions, Cambridge University Press, 2011
Extracts by Popular Mechanics and others from Mike Bruton, Great South African Inventions, Cambridge University Press, 2011
BBC News, South African innovators, www.bbc.co.uk/2/shared/spl/hi/picture_gallery
bdlive, 9 April 2014; Business Day 15 October 2014
bdlive, 9 April 2014
bdlive, 9 April, Business Day 15 October 2014; SARS, R&D Incentive, www.sars.gov.za
Mail & Guardian 10 October 2014
Jeffery, Chasing the Rainbow, pp107-108
Harms, ‘The Role of the Judiciary’, p12
Urbach, ‘Protected Patents’, p7
