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Thailand: Medicines, Competition Law and Compulsory Licensing
R IAN MCEWIN AND SAKDA THANITCUL
Implementing and administering an intellectual property right (IPR) regime is costly, particularly a patent system where considerable technical expertise is required. As the vast majority of patents in developing countries are held by companies from developed countries, it is understandable why developing countries are reluctant to enforce IPRs. Implementation and enforcement only raises prices for local consumers and may provide negligible incentives for indigenous research.
Obviously, a country will only start to protect local innovation once it has started to develop its own research and development industry (and so needs to protect it). However, governments in developing countries, where IPRs are enforced, may threaten compulsory licensing as a way of increasing local bargaining power over the prices paid for imports or the royalties paid to overseas licensors. Compulsory licensing can also help to develop local manufacturing industry as part of a country’s industrial policy.
Nowhere has the debate on the intersection between competition law and IPRs been more heated than when dealing with access to medicines and the promotion of generic drug competition through the compulsory licensing of drug patents. In this debate, views about the role of IPRs, and so their dilution, reflect fundamental differences about the policy basis for intellectual property law. On the one hand, there is the ‘privilege’ view that IPRs are not ‘property rights’ as such, but rather rights granted by government to serve public goals such as providing incentives for innovation but also subject to limitations in order to serve other public policy objectives such as health. On the other hand:
The alternative perspective views patents not as a privilege, but rather, as a privileged property right, or an uber-right that is stronger than other property rights. All rights have exceptions, including property rights. Nonetheless, those who subscribe to the uber-right view likely see any possible limitation on patent rights as extremely suspect. While they recognize that property rights may be limited, they nonetheless analogize legal exceptions such as compulsory licensing to stealing. They suggest that limits on patents should be exercised with caution because the nature of the patent right is based entirely in the right to exclude.
Health organisations, not surprisingly, argue the patents as privilege view. As Ho notes, the UN Commissioner for Human Rights argues patents are a privilege that must be ‘subject to limitations in the public interest’ and the United Nations suggests that certain human rights, such as the right to health, are ‘inalienable and universal’ rights that must be recognised over state-granted rights such as patents. According to this view, to the extent that there are ‘actual or potential conflicts’, patent rights should yield to the right to public health.
The United States Trade Representative defines compulsory licensing as where ‘a government conditionally authorizes third parties (or the government itself) to use a patented product without the authorization of the patent holder’. Julian-Arnold estimated in the early 1990s that the patent laws of more than 100 countries provided for compulsory licensing. He found the most common reasons for compulsory licensing were non-use, national security, where food or medicines were involved, the inability to work follow-on patents (also called ‘dependent patents’) and anti-competitive practices.
Countries are limited in their ability to grant compulsory licenses by the Paris Convention and the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement. Under the Paris Convention, compulsory licenses may be issued where the patentee has abused his or her exclusive rights. Compulsory licenses must be non-exclusive and non-transferable (except when the IPR is sold). Article 31 of the TRIPS Agreement (reaffirmed in the Doha Declaration and Public Health 2001) allows for compulsory licenses for national emergencies, situations of extreme urgency, anti-competitive practices, public non-commercial use, and dependent patents (as non-limiting grounds).
Compulsory licensing weakens the patent system and so undermines incentives to innovate (in the country conducting the research and development (R&D)). While a developing country might be able to use competition law to stop anti-competitive practices in its own country, problems of proof and jurisdiction may make it difficult to curb anti-competitive conduct originating overseas. Compulsory licensing could be used to remedy anti-competitive practices outside the country involving IPRs. For example, compulsory licensing could be used to deter collusion between overseas pharmaceutical companies that raise the price in the developing country or to remedy an overseas dominant firm’s unilateral refusal to license.
Compulsory licenses are often used to curb anti-competitive practices. In 2002 the US Department of Justice made Microsoft provide uniform licenses to original equipment manufacturers (OEM), with rates published on the web, dealing with the protocols that products needed to inter-operate with Windows. In 2007, the US Federal Trade Commission (FTC) ordered Rambus (a computer chip maker) to license patented technology. Rambus had concealed essential patents it held from an industry-wide standards setting organisation. The FTC imposed a compulsory license by setting a maximum royalty rate. In the European Union, competition law has been used to force compulsory copyright licenses.
Many developing countries have used compulsory licensing for a number of reasons including national emergencies. Thailand issued compulsory licenses on drugs to promote greater access to medicines (although some also say to help Thailand develop a generic drug industry). Faced with compulsory licensing, the reaction of one multinational pharmaceutical company, Abbott Laboratories Ltd, was to refuse to continue to register new drugs in Thailand. This cross-border refusal was challenged in Thailand on competition law grounds. This chapter examines that decision in Thailand’s context as a developing country dealing with the intersection between IPRs and competition law.
II. Thailand: Economic Background
Thailand is a middle-income country that has only recently introduced intellectual property (patents 1979 and competition laws 1999). Thailand has a population of slightly over 66 million with a gross national income (GNI) per capita of $9,947. Its gross domestic product (GDP) in 2007 was US$54,583.79 billion, with an annual growth rate in recent years of slightly less than four per cent. Between 1977 and 2004 increases in total factor productivity (TFP) added about one per cent to Thailand’s aggregate growth. The source of this growth was mainly the movement of rural workers into more productive manufacturing jobs. By comparison, TFP increases per annum between 1975 and 2000 for other East Asian economies were as follows:
— China (3.9 per cent).
— Indonesia (0 per cent).
— South Korea (1.1 per cent).
— Malaysia (0.9 per cent).
— Singapore (1.8 per cent).
— Taiwan (2.4 per cent).
— Thailand (1.4 per cent).
These figures suggest that Thailand has considerable scope for improving its productivity via better technology and education.
The World Economic Forum’s Global Competitiveness Report 2008–09 placed Thailand in the ‘second stage of development’ along with Malaysia and Brazil, whereas Hong Kong, Japan, Korea, Singapore were placed in the third (and highest stage). Thailand’s overall competitiveness ranking was 34th out of 134, but had fallen six places from the previous year. The Report commented that its competitive strengths were market size, an efficient labour market (due to strong employer-employee relations), and good transport infrastructure. Its competitive weaknesses included low technological readiness (66th) with low penetration rates for internet, broadband and mobile phones, concerns about the soundness of the banking sector and a weakening of government institutions.
In 2008, in a major joint report by the Thai Office of National Economic and Social Development and the World Bank, it was noted that Thailand’s technological capacity lagged for four main reasons:
— ‘The business sector, and in particular the medium and large-sized firms responsible for most technology development, are unmotivated, unwilling or unable to invest substantially in R&D whether in-house or through outsourcing … Absorbing technology from abroad is viewed as the lower cost and preferred route to technology upgrading.’
— ‘Numerous government programs to encourage R&D and technology developments have failed to produce the desired effect.’
— ‘The supply of S&T (science and technology) workers as a percentage of university graduates is below that of Thailand’s principle competitors. But perhaps more serious are the deficiencies in the training of these workers, which reflects the quality of Thailand secondary education and universities, even the leading ones. None of Thailand’s tertiary institutions are ranked among the leading universities of East Asia.’
— ‘Although technology development in Thailand has derived benefits from globalisation this has been in the form of technology that is embodied in equipment. FDI by MNCs has transferred amazingly little tacit knowledge and disembodied technology through vertical or horizontal spillovers. Only a handful of companies have set up research facilities in Thailand and the scope of the research carried out is limited. Thailand has a substantial diaspora of S&T workers in the U.S, in Taiwan (China), Singapore and Malaysia. However this diaspora has not been a source of local entrepreneurship, venture capital, angel investors or a vehicle for the technological leadership unlike the Chinese and Indian diasporas.’
Quality education has been a low priority of successive Thai Governments. For a long time the Thai education system has stressed basic literacy (for which it measures well in international comparisons) but also rote memorisation. By contrast, other Asian countries such as China, India, Singapore and Taiwan have invested substantially in university education and promoted higher-value skills. As a result, they have developed innovative companies able to compete internationally. Thailand, on the other hand, has continued to rely on low-value, export-oriented manufacturing. Large Thai conglomerates (grown big through government licenses) have been more concerned with shielding local industries from international competition than developing competitive, export-oriented products.
III. Thailand’s Intellectual Property Laws
Thailand’s legal system was originally based on the common law system but changed to a civil law system in 1924. Thailand introduced patent protection relatively recently. In 1979 the Patents Act (BE 2552) was introduced which followed the World Intellectual Property Organisation (WIPO) model for developing countries. Initially the Act provided 15 years protection (after filing) for inventions and seven for product designs. Exclusions included agricultural machines, pharmaceuticals, animals and plants. The 1979 Act allowed for compulsory licensing (section 46) where the patentee did not make the product available to local producers within three years of the patent grant and the needs of the Thai economy were not met—unless there were legitimate reasons. Licensing could not contain conditions, restrictions or royalties detrimental to the development of industry and commerce. Also, competition law (the Price-Fixing and Anti-Monopoly Act 1979) prohibited these conditions, etc in licenses where consumer interests might be adversely affected.
In 1992, a new Patent Act (No 2 BE 2535) brought Thai patent law into conformity with TRIPs—patents were now protected for 20 years and designs for 10 and the exclusions were limited. The Act was further amended in 1999 to allow for, inter alia, national treatment and compulsory licensing, parallel importing and the extension of patentability to drugs, food, beverages and life forms.
Endeshaw examined patenting in the Association of Southeast Asian Nations (ASEAN) between 1997 and 2007. With the exception of Singapore, he found a continuing trend in foreign penetration of each country’s patent system. After examining WIPO statistics for ASEAN countries he concluded that:
Overall, the general picture that emerges from the contrast between resident and non-resident applications and grants in IP rights in ASEAN is an absolute domination by non-residents. In spite of the relatively high figures for residents in Thailand and Indonesia with respect to trade and service marks, the overwhelming sway in IP right by non-residents is very clear. Even in the case of Thailand and Indonesia, it would not be surprising if the resident applications were from foreign rights holders doing business in the two nations.
It is not surprising that a lack of domestic innovation results in limited domestic protection of IPRs. In 2009 the Office of the United States Trade Representative (USTR) placed Thailand on its Priority Watch List in the 2009 ‘Special 301 Report’. This Report is an annual review of the global state of IPR protection and enforcement. In the Report, the USTR expressed that it had concerns about the lack of progress since the previous year in addressing widespread problems of piracy and counterfeiting in Thailand as demonstrated by ‘the lack of sustained and coordinated enforcement efforts, and, in particular, the lack of successful prosecutions’. It was noted that the US pharmaceutical industry was continuing to be concerned about the uncertain climate for their industry there.
The Pharmaceutical Research and Manufacturers of America (PhRMA) in its Special 301 Submission in 2010 pointed to a lack of patent examiners and the use of compulsory licensing as a ‘cost containment tool’. It said:
In 2009, PhRMA welcomed Thailand’s announcement that it intended to foster a better environment for intellectual property industries and increase dialogue between healthcare stakeholders and the Royal Thai Government. However, to date, there has been little action taken on these pledges … PhRMA does agree that reforms are needed to improve the Thai patent registration system which has a backlog of patent applications in the thousands. Effective reform will start with ensuring there is an adequate number of patent examiners and that all patent examiners are sufficiently trained. When these resources are available there can then be additional reforms to create a predictable and efficient patent system that stimulates and rewards innovation … Other actions by the Thai government indicate that the use of compulsory licensing remains a cost containment tool to be used when negotiating with individual PhRMA member companies.
IV. Thailand’s Competition Law
Unlike intellectual property law, competition law is not subject to an international agreement that prescribes minimum standards with which World Trade Organisation (WTO) Members must comply. While the United Nations General Assembly agreed on a ‘Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices’ in 1980, the WTO dropped negotiations on competition policy in 2004. So, countries have considerable discretion in setting competition law standards.
Thailand’s first competition law was the Price-Fixing and Anti-Monopoly Act 1979. The Act had two objectives—consumer protection and price regulation. Next, the Trade Competition Act (BE 2542) was enacted in 1999. Thanitcul notes that the Trade Competition Act was based on competition laws in South Korea and Taiwan. The prime objective is to protect the competitive process.
Exemptions from the Trade Competition Act were given for the central, provincial and local governments, state enterprises, farmer’s co-operatives, etc and businesses exempted by Ministerial Regulation. Thanitcul notes that the exemption for state enterprises was the most controversial (as they competed against private companies in the electricity, telecommunications and railways sectors). Export cartels were not exempted.
The Trade Competition Act includes: abuse of dominant position (section 25); mergers (section 26); horizontal and vertical restraints (section 27); abuse of dominant position (section 25) and unfair trade practices (section 29).
Abuse in section 25, includes exploitative conduct (ie setting high prices) and vertical restraints such as:
2. Unreasonably fixing compulsory conditions, directly or indirectly, requiring other business operators who are his customers to restrict services, production, purchase or distribution of goods …
The use of the term ‘unreasonably’ suggests vertical restraints (such as licensing) are subject to a kind of rule of reason. It could be argued that ‘unreasonably’ only applies to the ‘fixing compulsory conditions’—if so then the remainder of the conduct in section 2 might constitute per se offences. Section 25 (3) goes on to say:
3. Suspending, reducing or restricting services, production, purchase, distribution, deliveries or importation without justifiable reasons …’.
Refusals to supply, then, are subject to a rule of reason to establish whether there are ‘justifiable reasons’.
In January 2007, the Cabinet approved a new definition of dominant market position under the Act. A dominant market position occurs:
— where a business operator selling any product or providing any service, which in the previous year had a market share of 50 per cent or more and whose sale proceeds amounted to one billion Baht or above; or
— where the first three ranked business operators of any product or service, during the previous year had a market share of 75 per cent or more and whose sales proceeds were one billion Baht or more. This excludes a business operator whose market share in the past year was less than 10 per cent, or a business operator whose sales proceeds in the past year were less than one billion baht.
Section 28 contains an unusual and unique competition law provision. It says:
— A business operator who has business relations with business operators outside the Kingdom, whether it is on a contractual basis or through policies, partnership, shareholding or any other similar form, shall not carry out any act in order that a person residing in the Kingdom and intending to purchase goods or services for personal consumption will have restricted opportunities to purchase goods or services directly from business operators outside the Kingdom.
Apparently, it was introduced to allow wealthy Thais to buy luxury cars directly from foreign manufactures without having to go through local Thai dealers. It effectively allows for parallel imports and so promotes competition by preventing foreign producers from price-discriminating against consumers in Thailand. Presumably this would have allowed the import of the drugs that Abbott refused to register (as the patent on those drugs was not registered then it would be open to a parallel importer to register).
Section 29 is a ‘catch-all’ provision dealing with unfair business practices—which can also cover exclusionary conduct. It says:
Section 29 A business operator shall not carry out any act which is not free and fair competition and has the effect of destroying, impairing, obstructing, impeding or restricting business operation of other business operators or preventing other persons from carrying our business or causing their cessation of business.
This is broad and could allow other objectives (eg protecting small businesses) rather than economic goals such as efficiency. Section 29 does not require market dominance. Instead, practices where there is unequal bargaining power may be proscribed. Deunden Nikomborirak, in describing action taken by the Trade Competition Commission under section 29 rather than section 25 against Honda (who allegedly had 80 per cent market share and engaged in exclusive dealing by stopping retailers from selling competing brands) said:
[t]he fact that this case was handled differently from the whiskey and beer abuse of dominance case raised suspicions of selective enforcement of the competition law in favour of powerful local businesses and against foreign companies with little or no political connections.
Nikomborirak goes on to argue that the Act’s implementation ‘has been opaque, selective and arbitrary’ due to political intervention, a lack of ‘due process’ in administering the law and a lack of a competition constituency among non-governmental organisations (NGOs), academics and the media.
V. TRIPS and Compulsory Licensing
The TRIPS Agreement established minimum standards for intellectual property protection (based on IPR standards applicable in developed countries) that had to be complied with by all WTO Members by 1 January 2006. In exchange for taking on these obligations, developed countries had to provide better access to developing country exports—particularly for agricultural products, textiles and clothing and a commitment by developed countries to stop imposing unilateral trade sanctions for inadequate IPR protection. Bhagwati has said that developing countries did not believe they would get better access to agriculture and textiles without TRIPS; that the United States would ‘punish’ developing countries that did not protect US IPRs; that IPRs would attract foreign investment and that IPRs would help developing countries such as India develop of its own creative industries. World Bank economist Michael Finger estimates that the cost of TRIPS compliance would exceed $150 million per country. However, developing countries accepted TRIPS because they believed it was in their mutual interest.
TRIPS contains several articles of direct relevance to the compulsory licensing debate. They are:
Art 8.2 … appropriate measures, provided they are consistent with the provisions of this Agreement, may be needed to prevent the abuse of intellectual property rights by rights holders or the resort to practices which unreasonably restrain trade or adversely affect the international transfer of technology.
This is a broad provision, which could include, potentially, all kinds of anti-competitive conduct. Article 31 deals specifically with compulsory licensing:
Art 31 Other Use Without Authorization of the Right Holder
Where the law of a Member allows for other use of the subject matter of a patent without the authorization of the right holder, including use by the government or third parties authorized by the government, the following provisions shall be respected:
(a) authorization of such use shall be considered on its individual merits;
(b) such use may only be permitted if, prior to such use, the proposed user has made efforts to obtain authorization from the right holder on reasonable commercial terms and conditions and that such efforts have not been successful within a reasonable period of time. This requirement may be waived by a Member in the case of a national emergency or other circumstances of extreme urgency or in cases of public non-commercial use …
(c) the scope and duration of such use shall be limited to the purpose for which it was authorized, and in the case of semi-conductor technology shall only be for public non-commercial use or to remedy a practice determined after judicial or administrative process to be anti-competitive …
(f) any such use shall be authorized predominantly for the supply of the domestic market of the Member authorizing such use …
(k) Members are not obliged to apply the conditions set forth in subparagraphs (b) and (f) where such use is permitted to remedy a practice determined after judicial or administrative process to be anti-competitive. The need to correct anti-competitive practices may be taken into account in determining the amount of remuneration in such cases …
Article 40.2 gives countries considerable discretion in specifying anti-competitive practices that constitute an abuse of IPRs:
Art 40.2 ‘ … nothing in this agreement shall prevent Members from specifying in their legislation licensing practices or conditions that may in particular cases constitute an abuse of intellectual property rights having an adverse effect on competition in the relevant market. As provided above, a Member may adopt, consistently with the other provisions of this agreement, appropriate measures to prevent or control such practices, which may include, for example, exclusive grantback conditions, conditions challenging challenges to validity and coercive package licensing, in the light of the relevant laws and regulations of that Member.
At the time TRIPS was signed in 1994, patent protection for pharmaceuticals was minimal in developing countries. So developing countries could make and (more likely) buy generic drugs (especially from India) at a small percentage of the price of branded drugs. TRIPS meant that developing countries had to grant pharmaceutical patents. The necessary consequence was less competition from generic drugs. However, under TRIPS, as article 31 above indicates, countries can issue compulsory licenses on a number of grounds including public interest, anti-competitive conduct and for non-commercial government use.