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LGD 2003 (2) - Deepak Gupta


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The Neoliberal Case for South African Patent Defiance

Deepak Gupta

Associate, Quinn, Emanuel, Urquhart, Oliver and Hedges,
San Francisco

deepakgupta@quinnemanuel.com

Abstract

Recently, the South African government announced its plan to domestically produce generic anti-retroviral drugs for those infected with HIV. This strategy reflects an intention to defy the patent monopolies of powerful western pharmaceutical firms. Such defiance is justified, not only on the bases of human rights and unequal bargaining power, but also on the basis of ‘neoliberalism’. Even according to the economic, market-oriented, capitalistic teachings of the patent zealots, the social value of enforcing patents on AIDS drugs in South Africa is highly suspect.

I contrast the economic welfare consequences of such patents in two hypothetical nations – one with relative income equality called ‘Utopia’and another with severe income inequality called ‘Dystopia’. Graphical models of supply and demand adapted from the canons of law and economics illustrate that such patents in Dystopia result in socially undesirable ratios of inventor profit to market exclusion. The example of Dystopia resoundingly cautions against patents on AIDS drugs in South Africa and many of its counterparts, to the extent they have severe income inequality. I conclude that defiance of the western pharmaceutical companies’ patents on AIDS drugs under conditions of severe income inequality is justified.

Keywords: AIDS, Drugs, Patents, Markets, Neoliberalism, Pharmaceutical


This is a refereed article published on 20 January 2004.

Citation: Gupta, D, 'The Neoliberal Case for South African Patent Defiance', Law, Social Justice & Global Development Journal (LGD) 2003 (2), <http://elj.warwick.ac.uk/global/issue/2003-2/gupta.html>. New citation as at 1/1/04: <http://www2.warwick.ac.uk/fac/soc/law/elj/lgd/2003_2/gupta/>


1. Introduction

In 2000, the Treatment Action Campaign (TAC), a non-governmental organization based in South Africa, embarked on a ‘defiance campaign’ [1] . Adopting the moniker used in the early days of the anti-apartheid movement, it began importing generic HIV drugs in violation of South Africa’s patent law [2] . By importing generics, the TAC defied the de jure monopolies of the patentees and created a de facto regime of market competition for anti-retrovirals, which has increased access significantly [3] .

The epidemic has vast momentum though, so the AIDS crisis has only escalated. The TAC recently intensified its program of protest [4] . It has paraded around effigies of the Ministers of Health and Trade and held them responsible for the deaths of 600 HIV-positive people each day [5] . It is demanding that the government deploy a broad-based anti-retroviral treatment program.

The South African government finally appears to be coming around. It has announced a plan to manufacture its own generics in contravention of the patents of western pharmaceutical firms [6] :

South Africa’s efforts to manufacture its own affordable generic anti-retroviral medicines against HIV/Aids and other epidemics has at last been kick-started and the first pills are scheduled to roll out by next year [7] .

So far price has been a major problem, [8] but once generics produced domestically are made widely available, the situation for the country’s many HIV-positive residents should improve dramatically. The homegrown generics will serve not only South Africa’s own HIV victims, but those throughout Africa. Overnight, the South African government has gone from being viewed as a meek conformist in an overbearing international trade regime [9] to a roaring lion willing to take on the WTO and the western pharmaceutical firms.

Whether the South African government can sustain its domestic generic manufacture will depend on whether its activities are viewed as fitting into the exceptions of the WTO’s global patent framework. While patent defiance is often justified in terms of human rights and unfair bargaining power, such arguments lack force in the discourse of global capitalism. After explaining why such arguments fall short, I mount a neoliberal (market-oriented, economic, capitalistic) defence of patent defiance based on those very economic theories that form the flesh and blood of patent law [10] . The neoliberal argument stands a better chance of convincing the WTO’s power-brokers that defiance is justified.

I first present the domestic and international context in which generics have become an issue (Part 2). Then, I argue that the prevailing liberal reliance on human rights and unequal bargaining power arguments is neither effective nor necessary to justify defying anti-retroviral patents, because the utilitarian source of patent law dries up in relation to AIDS drugs in South Africa (Part 3). Graphical models of supply and demand show that in the context of high levels of income inequality, patents cause severe market exclusion, which cannot be justified in light of their stimulus to innovation (Part 4).

Because patent doctrine recognises the need to balance access and innovation, even if defiance violates the letter of the patent law, it does not violate its spirit. Therefore, South Africa’s generic manufacturing strategy should be viewed as fitting within the exceptions to patents allowed by the WTO framework (Part 5).

2. The Domestic and International Contexts

The South African government has adopted a position that will be viewed as heroic by many and roguish by some. By availing itself of a hitherto dormant provision in its patent law which allows for suspension of patents ‘to ensure supply of more affordable medicines,’ [11] the South African government is likely to draw the scorn of multinational drug manufacturers and possibly the developed countries.

The key legal question will be whether such generic manufacturing fits into the world trade order – the WTO’s Trade Related Aspects of Intellectual Property Agreement (TRIPS), in particular. Signed in 1994, when the WTO was being established, TRIPS requires that member countries institute protection for patents, copyrights, trademarks and trade secrets. This agreement has become a major bone of contention between the North and the South. The concern is that TRIPS sacrifices the developing countries’ need for access at the altar of profits for multinationals. The tension is at its peak in relation to AIDS drugs, because they are a matter of life or death [12] .

The international players have already expressed their hostility to patent suspension in South Africa once. South Africa amended its laws to make provision for the importation of generics in 1997 [13] . After the enactment, a consortium of thirty-nine pharmaceutical firms sued the South African government to prevent the amendments from coming into force [14] . The drug companies claimed that the Minister of Health’s power to suspend patents enabled an unconstitutional expropriation of their property and unconstitutionally discriminated against drug companies, in conflict with the guarantees of TRIPS and the South African constitution. That case eventually settled, without a declaration that the enabling provision is invalid [15] . The provision has remained dormant to this day, however and only now is the South African government expressing an intention to move on generics.

South Africa’s program is legitimate from the perspective of the global trade regime if anti-retroviral patent suspension is viewed as fitting within TRIPS’s exceptions [16] . Article 31 of TRIPS is the most relevant exception [17] . It provides for the compulsory licensing of patents. ‘A compulsory licence is an authorisation given by the government for the use by a third party, without the consent of the right-owner of a patent or other intellectual property right’ [18] . TRIPS provides that ‘the right holder shall be paid adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization’ [19] . The patentee is entitled to a license fee, but the authority to determine what comprises ‘adequate remuneration’ and the ‘economic value of the authorization’ is vested with the government issuing the compulsory licence.

Article 31 is vague as to when compulsory licensing is justified. It puts in place various procedural requirements. A prospective grantee must try ‘to obtain authorisation from the right holder on reasonable commercial terms and conditions’ and ‘such efforts [must not have] been successful within a reasonable period of time’ [20] . But little has been clarified as to the substantive requirements. For example, the agreement is silent on the standard whereby the reasonableness of proposed commercial terms might be adjudged.

TRIPS’ vagueness creates ‘wiggle room’ that gives member nations significant flexibility as to how and when they might use compulsory licensing [21] . In 2001, world leaders met at Doha and specifically addressed the question of how Article 31 might promote access to crucial drugs. Agreement was reached that public health should not be a casualty of globalisation [22] . The ambit of Article 31 was also clarified, somewhat. ‘[W]e recognise … [e]ach member has the right to grant compulsory licences and the freedom to determine the grounds upon which such licences are granted’ [23] . While this statement seemed to give developing countries virtually unlimited discretion, it is doubtful that a compulsory licensing spree would be tolerated by the WTO.

Article 31, even as clarified at Doha, is not adequate to ensure access in many countries. While it allows for compulsory licensing, it requires that ‘any such use shall be authorized predominantly for the supply of the domestic market of the Member authorising such use’ [24] . In other words, if a government grants a compulsory license then the grantee must produce primarily for domestic use. Hitherto, South Africa and most underdeveloped nations have not had the capacity to produce generic version cutting-edge pharmaceuticals domestically. Therefore, Article 31 has been of little use to them. At Doha, this shortcoming of TRIPS was recognised and the WTO promised to come up with a way that developing countries without domestic manufacturing capacity could get access [25] .

Permitting parallel importation was perceived by many to be the most expeditious solution. The infected could get their drugs from Brazil or India (countries having significant generic manufacturing capacities). This was the means chosen by the TAC in its defiance campaign. But, in the wake of Doha and with the looming threat of profit-eroding generic competition in the marketplace, the resounding commitment to public health lost some of its most important voices. ‘For the past two years the World Trade Organisation has been in bitter dispute over patents on medicinal drugs. Powerhouses such as the US, the European Union, Japan and Canada want to backtrack on the Doha agreement of November 2001’ [26] . Parallel imports are a cause for great alarm among the multinational drug manufacturers. They fear a massive international trade in generics that might significantly cut into their profits, particularly if parallel imports were to find their way through the streams of global commerce into developed country markets. In a recent WTO negotiation on drug patents in Geneva –

[t]he US showed no sign of loosening its veto on the lucrative patent rights enjoyed by its powerful pharmaceutical industry. Yesterday, there was evidence of growing anger among other countries over the behaviour of the WTO's most powerful member, whose opposition has deadlocked discussions for more than a year on clarifying the rules that allow poor countries to break patents and import cheap copies of medicines [27] .

Those with much to lose in the way of profits have stood fast in their opposition to parallel importation and hence the deadline for a solution to the access problem set at Doha was not met. The recent Cancun negotiations also failed to result in any progress on the drug issue. Those negotiations ended in a deadlock, so the promises of Doha are yet to materialise [28] .

The western pharmaceuticals will not be pleased with South Africa’s recently announced strategy. It threatens some portion of their profits [29] . South Africa’s strategy is clever, however, because by opting for domestic manufacture it avoids the pitfall of parallel imports to supply those within its own borders who are HIV positive. That portion of the strategy seems to fit within the capacious interpretation accorded to Article 31 at Doha. However, South Africa also plans to service the entire African market. Both aspects of the strategy are liable to WTO scrutiny, but the parallel exports will draw greater resentment from the multinational pharmaceutical firms because of the perceived danger to their most lucrative markets. If the strategy is viewed as breaching the limits of Article 31 – if, for example, the predominant purpose of the plan is viewed not as being to supply the domestic market, but rather all of Africa – then South Africa may become the patent pariah of the global trade regime.

There is no telling how the pharmaceutical firms, who have already once demonstrated their propensity to litigate, will react to South Africa’s defiance of patents. Here, I argue that South Africa’s defiance is justified due to nuances of the markets of many developing countries. Its defiance of anti-retroviral patents to serve its own market and those of other African countries should be viewed as fitting within TRIPS’ exceptions on the grounds of economics.

3. Why Human Rights and Unequal Bargaining Power Arguments Fail

3.1. Human Rights

The typical case presented for defiance rests mostly on human rights and unequal bargaining power arguments rather than economics. Though these arguments appeal to the common sense of most people, they fail in the context of the international trade discourse. This is because these arguments are foreign to the language of neoliberalism – the ideological basis for the international and domestic pressure not to suspend patents. After pointing out why neoliberals are deaf to human rights and unequal bargaining power, I advance an alternative justification of defiance, one rooted in neoliberalism. South Africa’s defiance of anti-retroviral patents to serve both its own market and that of other African nations with high- rates of HIV infection is justified on the basis of market capitalism.

The human rights arguments focus on the guarantees of natural law, international treaties or a constitution. People infected with a deadly disease should not be impeded in prolonging their lives, taking refuge from their pain, and achieving some measure of dignity by a government that purports to serve them [30] . People have a right to life and medical care when it is within reach. The anti-retroviral drugs that the TAC has imported from Brazil in defiance of patent laws are extending the lives and increasing the health of many infected with the virus [31] . Besides, the loss to the pharmaceutical firms is minimal since the developed world presents a miniscule market anyway [32] . Isn’t the defiance of a father who steals a loaf of bread from a rich bakery because his children are starving justified?

The neoliberal responds, no. In a neoliberal world a shortage of money is akin to a terminal illness. A homeless person in a New York winter is at a high risk of contracting potentially fatal pneumonia. An uninsured person is at the mercy of the market for healthcare [33] . The neoliberal extremist might go so far as to argue that the fact that a shortage of money is a lethal condition is in fact the lifeblood of neoliberal society. After all, isn’t a significant part of what drives the middle class American worker the possibility that they and their posterity are always at risk of having next to nothing? ‘Capitalism can be cruel at times, but it is for the greater good,’ might be a crude way to rephrase the neoliberal response to the human rights argument.

Neoliberals condemn defiance as an anti-neoliberal act. ‘Those crazy protestors do not realize that prosperity depends on free trade which in turn depends on fair trade. You do not have a human right to anti-retrovirals, only to live in a world where production and distribution are structured in a manner that is just and tends to fulfil human needs most of the time. That world is based on laws, amongst which are intellectual property laws’.

3.2 . Unequal Bargaining Power

The alternative pro-defiance argument states that the TRIPS agreement is the product of unequal bargaining power. [34] Advocates of this line argue, we do not need to live by the terms of the TRIPS bargain because we were coerced into it.

This argument runs into similar kinds of resistance as the human rights argument. No one is coercing the developing countries to stay in the WTO. They can always withdraw if they do not wish to be bound by the terms of the agreement [35] . For South Africa to defy patents while simultaneously reaping benefits of the WTO undermines the system of contract on which capitalism must be based. ‘Fair trade means both sides must honour their promises, not just the wealthier party. If the developing countries want to flout the agreement as a product of unfair bargaining power then they might as well get out of the WTO and renegotiate at another time when they have more bargaining power. If they want to stay in the WTO, they ought not to defy TRIPS’.

Both the human rights argument and the unequal bargaining power argument, for all of their humanitarian appeal, fail with neoliberals because neoliberalism consciously and deliberately views compassion in the individual situation as secondary to the achievement of its vision of a world – one, in which production and government are ordered in a particular manner – one that it views as most conducive to long term fairness – one that is compassionate on the whole. The only way to make the neoliberal dogmatist budge is to show how defiance is in fact a neoliberal act. For defiance to be justified in the eyes of the neoliberals it must be grounded in economics, capitalism, markets.

4. A Neoliberal Basis for Patent Defiance

Patent law always entails a compromise between the interests in innovation and those in access [36] . Balancing those two interests in a prudent manner is the challenge facing any patent regime. The ‘ratio test,’ (described below) developed in the literature on law and economics can help with balancing. When the ratio test is applied in the context of patents on anti-retrovirals in many poorer countries the balance tips in favour of access and against patent protection. This is because severe income inequality distorts the balance between access and innovation and consequently undermines the economic justification for patents.

4.1 The Economic Model of the Patent Monopoly

Patents are an intervention in the free play of competition in the marketplace intended to stimulate innovation. Inventors of sufficiently non-obvious technologies are granted a monopoly to manufacture and sell embodiments of their technology. The right to sell without competition means patentees can earn above normal profits. Without this allure little would be invested in costly research and development. Without the protection of a patent, free-riders could copy an invention as soon as it hit the market [37] . With protection, costly research and development can be highly lucrative. Innovation flourishes.

The stimulus to innovation of patents comes at the cost of market exclusion. Because of their monopolies, patentees can price without concern to competition, and thereby command high margins. Some who could afford the product if it were sold at a price just adequate for the inventor to recoup her costs and make a modest margin are priced out of the market [38] . Access suffers.

The trade-off between innovation and access lies at the heart of patent law and is the challenge facing every government that embraces this intervention. The wiggle room made available to legislators and judges by international agreements and statutes should be exercised in a manner that optimises the trade-off.

4.2. The Ratio Test

Leading scholars of law and economics have endorsed the ratio test as a heuristic to judge the trade-off. The ratio test looks at the inventor profits in relation to the market exclusion yielded by any patent entitlement. It is:

the ratio between the reward the patentee receives when permitted to use a particular restrictive practice and the monopoly loss that results from such exploitation of the patent. Because reward is assumed to induce inventive activity and thus to produce social benefits, this ratio indirectly reflects a relationship between social benefit and social cost (monopoly loss) [39] .

The ratio reflects the amount of innovation inducement achieved per unit of market exclusion.

The ratio can be modelled graphically:

Graph 1


This graphic captures how the basic economic principles of supply and demand apply in the context of a patent monopoly [40] . The x-axis is quantity and the y-axis is price. The diagonal descending line is the demand curve. It represents the intuition that as price decreases, the quantity demanded increases. The horizontal line, above the x-axis is average cost. This is the per-unit cost of the good for any given quantity. In this simplified model, average cost is a horizontal line, which represents the simplification that there are no ‘economies of scale.’ In other words, as quantity increases, the costs increase proportionately, so the average cost does not change with quantity. This simplification is of little consequence, because when you are dealing with large quantities of production the variation in per-unit costs is usually very small. Since this article is about AIDS – a pandemic of epic proportions – large quantities of treatment are assumed. The point at which the demand curve intersects the average cost curve is the efficient market price. That is the price at which the producer would reap his average cost and the market would absorb all the product. At a lower price the producer would not break-even; at a higher price, people who should be able to afford the drug, would not have access.

The monopoly price is the price exacted by the patentee. It is the price that maximizes the patentee’s profits. Absent competition, the patentee does not need to bring down his price any lower than the profit-maximizing price. The patentee profits are represented by the checkered square – the quantity sold * the profit margin (or the difference between price and average cost). The checkered square represents the optimal pricing strategy from the patentee’s perspective.

However, from the consumer perspective this is an inefficient strategy. The price significantly exceeds the average cost, so people who in an efficient market could afford the product cannot do so under the patent. This market exclusion is represented by the solid block. It is the number of people who can not but should be able to afford the product, multiplied by their willingness to pay. For our purposes it is simply ‘market exclusion.’

The ratio test looks at the size of the checkered area divided by the size of the solid gray block for any patent. This is a measure of the prudence of the patent regime, because it reflects indirectly the amount of invention inducement achieved per unit of market exclusion. It reflects the extent to which government’s use of the patent intervention is channelling productive resources towards inaccessible patented invention and away from alternatives promising broader accessibility. The higher the ratio of any patent the less society is harmed and more it is benefited because of it. The lower the ratio, the less compelling the trade-off; a poorer policy choice.

4.3. Applying the Ratio Test in the South African Context

Applying the ratio test to anti-retrovirals in the South African context reveals an imprudent policy choice. This results from the unusual shape of the demand curve for anti-retrovirals. Several facts contribute to this outcome:

1) AIDS anti-retrovirals have a low average cost.
2) There is little individual variation in preference for anti-retroviral treatment.
3) South Africa has serious income inequality.
4) Income inequality leads to increasing concavity of the demand curve.
5) Increasing concavity of the demand curve leads to poorer ratios.

The first three of these facts should not be hard to accept. The low average cost of anti-retrovirals reflects that when you divide the total cost of production of all treatments by the number of treatments produced, the per-treatment cost is quite low. This occurs because even though the research and development cost of the drugs is high, the number of treatments required is also very high and the raw materials in each treatment are quite cheap [41] . At a low average cost and with minimal government assistance, most >South Africans could afford the needed treatment if it were sold for a modest profit.

There is very little variation in individual preference for anti-retroviral treatment. Once someone is infected, anti-retroviral treatment is a necessity. Unlike for pink trousers, individual preference does not factor into the shape of the demand curve. If you have the disease, you are willing to pay for the drugs along with the other necessities of life. The fact that there is little variation allows us to remove a variable and simplify our demand curves.

That South Africa has one of the highest levels of income inequality in the world is well known. According to the World Bank, the income of the top 20 percent of earners divided by the bottom 20 percent of earners in South Africa ranks quite high [42] .

Country

Income of top 20% of earners / Income of bottom 20% of earners

Brazil

24.2

Germany

4.7

South Africa

22.3

UK

6.5

USA

8.9


South Africa is only slightly more equal than Brazil, while Germany, UK and US all have far more equitable income distributions. [43]

The final two assumptions – that all else equal, income inequality leads to increasing concavity of the demand curve, and increasing concavity leads to bad ratios are less obvious. But these can be illustrated graphically by using two hypothetical nations.

4.4. The Effect of Income Inequality on the Ratio in Two Hypothetical Nations

The increasingly unfavourable ratio incident upon increasing income inequality can be illustrated by comparing a patent monopoly on a mythical anti-retroviral, Elixir, in two hypothetical nations, Utopia and Dystopia. Utopia has a relatively equitable income distribution, while Dystopia has a relatively unequal income distribution.

The market for Elixir in Utopia is represented by the standard graphical model used above to explain the ratio test. The demand curve for anti-retrovirals in Utopia conforms to a downward sloping diagonal line. As price decreases the quantity demanded steadily increases in proportion to the number of people who can now afford Elixir [44] . I use a flat line to model average cost, which is a fair simplification assuming large quantities of product.

Graph 2

In Utopia, the patentee prices at the point labelled ‘monopoly price’. That is the price which maximises the patentee’s profits. The ratio is the area of the producer profit (the checkered area) divided by the area of the market exclusion (the solid area). In this example, the ratio is 2:1. Two of the solid triangles could fit in the checkered square. Let us see what happens to the ratio under conditions of income inequality.

The demand curve in Dystopia, a nation characterized by severe income inequality, is very different. In Dystopia, ten percent of the society commands ninety percent of its wealth, and the remaining ninety percent commands the other ten percent of its wealth. Assume that by virtue of their wealth, the amount that the top ten percent are willing to pay for Elixir is ten times that which the poor 90 percent are willing to pay. In Dystopia it is not the case that as the price of Elixir falls the demand steadily increases. Rather, falling prices have no effect on demand until they come down significantly. At a very low price we see a sudden step up in demand. In Dystopia the demand curve for Elixir takes on an L-shape.

Graph 3

In this circumstance the patentee will set its monopoly price on Elixir so that that the treatment is within the reach only of the wealthiest segment of the society, and will forgo the profits it might have reaped by selling to the whole society. This is because, by so doing, the patentee’s profits will be maximised [45] . That is the strategy represented by the monopoly price. The checkered area represents the monopolist’s profits.

However, this pricing choice results in a far less compelling ratio of inventor profit to market exclusion than was the case in Utopia. In the diagram, the area of the inventor profit is virtually equivalent to that of the market exclusion. This means the ratio is roughly 1:1. Patents on Elixir in Dystopia are therefore far more weakly beneficial to society than in Utopia, where the ratio was 2:1.

4.5. The Effect of Income Inequality on the Ratio in Actuality

The diagrams show that income inequality rapidly erodes the justification for drug patents in two highly stylised societies, but does income inequality erode the justification in real societies? While the demand curve for anti-retrovirals in South Africa certainly does not conform to the strict L-shape presented in Dystopia, it is related. It probably takes on a smoother, more continuous concave shape.

Graph 4
 

This smoother L-shaped curve reflects income inequality in that the number of treatments demanded increases very rapidly at lower prices. The smoothness reflects that inequality exists at all levels of society. Even among the rich there are only a few who can afford treatment at a very high price, while others begin to buy it as the price drops.

In this realistic model, profits to the inventor are maximised by pricing at the monopoly price shown. The profits are represented by the solid block. The ratio of the inventor profit to the market exclusion is far less favourable in this diagram than in the Utopian case. In fact, the market exclusion to the right of the solid block looks to exceed the area of the solid block. This suggests a ratio of less than one (even worse than Dystopia).

This shows a peculiar property of the demand curve. As its concavity increases, the ratio becomes less and less favourable. Since the concave curve is a quite realistic model of demand under conditions of income inequality, the inverse correlation between income inequality and the ratio is a real world phenomenon. As income inequality increases the ratio decreases.

This observation allows us to draw a conclusion regarding anti-retroviral patents in unequal nations. Where there is high inequality, enforcing such patents without regard to their demand curve is dangerous business. Profits and margins can be maximised by selling to the upper class and ignoring the masses. Rather than promoting ‘the greatest good for the greatest number,’ such patents inure to the exclusive benefit of a wealthy few. Indeed, the promise of high margins from selling life-saving drugs to the rich in unequal nations, to the extent it is an effective incentive at all, distracts productive resources away from projects that would have wider access and thereby reduces the underclass’ share of all that is produced. To proclaim a utilitarian justification for such a policy is deeply ironic.

The relevance of the analysis above does not end at the border of South Africa. Throughout Africa, and indeed much of the world, income inequality is severe and often more intense than it is in South Africa. As a result, the phenomenon discussed above is replicated elsewhere. This justifies the South African plan to export generics throughout Africa. The same poor ratios resulting from anti-retroviral patents domestically are in effect throughout the continent. Further, the relevance of the above analysis is not limited to AIDS drugs. It applies in the case of all life-saving drugs. Life-saving drugs in unequal societies all exhibit L-shaped demand curves, because societal upper classes are willing to pay whatever it takes in order to purchase them.

4.6 The Utility of Some Patents Despite Income Inequality

Does this mean that patents are altogether unwarranted in highly unequal societies? No. It is possible to use patents in unequal societies in a manner that promotes social utility. Restricting patents to goods and services having demand curves that are not L-shaped is a good starting point.

Many, if not most, inventions should fit this requirement. The demand curve for many inventions would not exhibit a sudden step-up at low prices like that for anti-retrovirals. For most inventions the willingness to pay of the rich does not increase in proportion to their wealth. Rather, it tends to level-off as price increases.

For example, in South Africa, the wealthy class would not pay extraordinary sums of money for a car with a fuel efficient motor that sacrificed some horsepower. Generally, they could afford high-performance vehicles and the fuel needed to make them go. The underclasses, on the other hand, would probably find such an invention highly appealing, and might even pay a premium in order to realise greater savings on fuel costs. Therefore, the demand curve would probably be relatively straight and diagonally downward sloping as in the case for Elixir in Utopia.

Such innovations are good and proper candidates for patent protection in the context of severe income inequality. By virtue of their non-L-shaped demand curve, monopoly pricing does not yield poor ratios. Incentives to develop inventions like a more fuel-efficient motor would not represent a diversion of socially productive resources to relatively inaccessible products. Awarding patents to such inventions accords with the utilitarian maxim of the greatest good for the greatest number.

5. Conclusion

Although this analysis is little more than an elaborate thought experiment leaving much open for empirical research, it does strongly suggest that anti-retrovirals fall into the group of inventions for which patents are imprudent in nations with severe income inequality. Where the ratio of inventor profit to market exclusion for a patent is very low because of its demand curve, the justification for patents is at its weakest. Such patents are good candidates for Article 31 suspension. By enforcing such patents, governments offer a relatively small stimulus to pharmaceutical companies in exchange for tragic market exclusion. In the case of anti-retroviral patents in the South African context, defiance rather than obeisance is consistent with the capitalistic, market-oriented teachings of neoliberalism.



Endnotes

[1] < http://www.tac.org.za/Documents/DefianceCampaign/Q_A_ImportBrazil.htm> and < http://www.tac.org.za/Documents/DefianceCampaign/defiancecampaign.htm>. Doctors without Borders (Medecins Sans Frontières) is working with TAC on importing anti-retrovirals into South Africa in contravention of the patent laws. ‘Physician’s Group Defies Patent Law to Bring AIDS Drugs to South Africa,’ Wall Street Journal, 30 January, 2002.

[2] [2] The original ‘Defiance Campaign’ was a program of civil disobedience in protest of apartheid undertaken by the African National Congress and the South African Indian Congress in 1952. See Nelson Mandela, Long Walk to Freedom, pp 119-130. ‘We made many mistakes, but the Defiance Campaign marked a new chapter in the struggle. The six laws we singled out were not overturned; but we never had any illusion that they would be. We selected them as the most immediate burden pressing on the lives of the people, and the best way to engage the greatest number of people in the struggle.’ Id at 129.

[3] According to the TAC they have achieved between 50 percent and 75 percent price reductions by importing generics. <http://www.tac.org.za/Documents/DefianceCampaign/Q_A_ImportBrazil.htm>. At one time, the $350 price tag on a generic version of a one-year regiment of a triple-drug anti-AIDS cocktail set by an Indian generic manufacturer was one-thirtieth the price being charged by a Western multinational pharmaceutical firm. That differential ‘sparked price cuts by the furious multinationals.’ ‘Anglo in Talks to buy AIDS drugs from Cipla,’ Mail and Guardian, 19 August 2002.

[4] Recently, the police used a water cannon to disperse 70 TAC supporters who had gathered outside of a police station to protest South Africa’s response to the AIDS crisis. ‘AIDS Protestors Dispersed by Water Cannon’, Mail and Guardian, 21 March 2003.

[5] ‘I do not apologise for holding Tshabalala-Msimang and Minister of Trade and Industry Alec Erwin responsible for thousands of HIV/Aids deaths.’ Zackie Achmat, chairperson of the TAC, ‘The long walk to Civil Disobedience,’ Mail and Guardian <http://www.mg.co.za/Content/l3.asp?ao=12840>.

[6] ‘Cheaper Aids drugs to be made in SA,’ Mail and Guardian, 8 April 2003. <http://archive.mg.co.za/nxt/gateway.dll/DailyNews/MGO2003/3lv00000/4lv00071/5lv00076.htm?>

[7] ‘SA to produce its own Aids drugs,’ IOL, 6 April 2003, < http://www.iol.co.za/index.php?click_id=13&art_id=qw1049634901645C312&set_id=1>.

[8] The Health Minister recently stated, ‘The reason we haven't said we will provide anti-retrovirals is because they are costly, the price is just enormous.’ ‘Zuma backs Manto on nutrition and Aids,’ IOL < http://www.iol.co.za/index.php?set_id=1&click_id=13&art_id=vn20030403060210489C868252>.

[9] James Love, Global Intellectual Property Rights: Knowledge, Access and Development, pp 75, 77 (‘Despite a public health crisis of enormous proportions for HIV/AIDS, apparently no African country has issued a compulsory licence for any medicine. Given the permissive global trade framework for compulsory licensing, one has to wonder why this is so…Developing countries have not enacted good TRIPS-compliant state practice models for authorizing the use of patents on medicines.’)

[10] I use ‘neoliberal’ tongue in cheek. This is a term around which the globalisation debate is highly polarised. To me it denotes the Washington Consensus. ‘The three big ideas here are macroeconomic discipline, a market economy, and openness to the world (at least in respect of trade and FDI).’ John Williamson, ‘Did the Washington Consensus Fail?’ 6 November 2002 <http://207.238.152.36/publications/papers/williamson1102.htm> ‘For the most part they are motherhood and apple pie, which is why they commanded a consensus.’ Id. By using the loaded term, and showing how the ideology has the capacity to work for those it is believed to be harming indiscriminately, I hope to contribute to the quelling of extremism on both sides.

[11] Medicines and Related Substances Control Amendment Act No. 90 of 1997, Provision 10.

[12] Joseph Stiglitz,Globalizationa dn its Discontents, p 8, stating, ‘[Because of TRIPS,] [p]rofits of the Western drug companies would go up. Advocates said this would provide them more incentive to innovate; but the increased profits from sales in the developing world were small, since few could afford the drugs, and hence the incentive effect, at best, might be limited. The other side was that thousands were effectively condemned to death, because governments and individuals in developing countries could no longer pay the high prices demanded.’

[13] Above fn 11 .

[14] <http://www.cptech.org/ip/health/sa/pharmasuit.html>. ‘What lies at the bottom of the concerted fight by these companies, represented by the Pharmaceutical Manufacturers’ Association (PMA), is their determination, which is implicit in their claim that the Medicines and Related Substances Control Amendment Act of 1997 undermined their patent rights, to defend their astronomical profits against the desperate need and right of millions of people to have access to cheap drugs.’ Ebrahim Harvey,Mail and Guardian, 16 March 2001, < http://www.wto.org/english/docs_e/legal_e/27-trips_01_e.htm>.

[15] ‘Shamed and humiliated - the drugs firms back down,’ Guardian, 19 April 2001, <http://www.guardian.co.uk/Print/0,3858,4172208,00.html>.

[16] I do not address the possibility that South Africa’s program for generic anti-retroviral production may be protected under the doctrine of sovereign immunity.

[17] The full text of the agreement may be found on the internet: <http://www.wto.org/english/docs_e/legal_e/27-trips_04c_e.htm>.

[18] Correa, Carlos M (2002) ‘Pro-Competitive Measures under TRIPS’, in Drahos (ed) Global Intellectual property Rights: knowledge, Access and Development (Palgrave McMillan), p 48.

[19] TRIPS Article 31(h).

[20] TRIPS Article 31(b).

[21] See Reichman, J H (1998), ‘Securing compliance with the TRIPS Agreement After US v India’,Journal of International Economic Law 585, p 591.

[22] ‘1. We recognize the gravity of the public health problems afflicting many developing and least-developed countries, especially those resulting from HIV/AIDS, tuberculosis, malaria and other epidemics. ….

4. We agree that the TRIPS Agreement does not and should not prevent members from taking measures to protect public health. Accordingly, while reiterating our commitment to the TRIPS Agreement, we affirm that the Agreement can and should be interpreted and implemented in a manner supportive of WTO members' right to protect public health and, in particular, to promote access to medicines for all.’ < http://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_trips_e.htm>.

[23] Doha 5(b)

[24] TRIPS Art. 31(f).

[25] Doha ‘ 6. We recognize that WTO members with insufficient or no manufacturing capacities in the pharmaceutical sector could face difficulties in making effective use of compulsory licensing under the TRIPS Agreement. We instruct the Council for TRIPS to find an expeditious solution to this problem and to report to the General Council before the end of 2002.’

[26] Love, James (2003) ‘WTO Reneges on Drug Patents – Prescription for Pain,’ Le Monde Diplomatique, March 2003.

[27] ‘Prescription for world’s poorest stays unwritten’ Mail and Guardian, 20 February 2003.

[28] Elliot, L (2003) ‘Blow to World Economy as Trade Talks Collapse,’ Guardian Unlimited , 15 September 2003 <http://www.guardian.co.uk/international/story/0,3604,1042269,00.html> (‘The fragile global economy received a damaging blow last night when trade talks in Cancun collapsed after a walkout by African countries protesting at the west’s failure to open its markets to the poor.’). Chase, S (2003) ‘Cancun WTO trade talks fail,’ The Globa and the Mail, 14 September 2003 (‘The talks ran out of steam because, for the first time in WTO history, developing countries refused to let the United States and Europe steer negotiations to suit their interests…’).

[29] A small share, but a share nonetheless. Above n 12 . ‘The empirical evidence demonstrates that for therapies for global diseases, the profit derived from having a monopoly over sales in poor countries makes only a marginal contribution to the total worldwide profit of pharmaceutical firms and therefore only marginally increases their incentive to invest in research. At the same time, in a poor country even a small price increase due to such a monopoly can greatly reduce the number of people able to purchase patented drugs and welfare of those who do.’ Lanjouw, Jean O (2002) A New Global Patent Regime for Diseases: U.S. and International Legal Issues,Harvard Journal of Law and Technology 85, p90.

[30] The TAC states: ‘We do believe that the government has a Constitutional duty to act and take effective measures against this epidemic. This is because it must ‘respect, protect, promote and fulfill’ all people's rights to equality, dignity, and life. This can be done by improving access to health services in general, and HIV/AIDS treatment in particular.’ < http://www.tac.org.za/Documents/CivilDisobedience/briefingdocument.htm> See also, UN Sub-Commission on Human Rights Resolution: E/CN.4/Sub.2/2000/L.20 (stating, ‘that since the implementation of the TRIPS Agreement does not adequately reflect the fundamental nature and indivisibility of all human rights, including the right of everyone to enjoy the benefits of scientific progress and its applications, the right to health, the right to food and the right to self-determination, there are apparent conflicts between the intellectual property rights regime embodied in the TRIPS Agreement, on the one hand, and international human rights law, on the other.’ <http://www.urfig.org/sup-eng-trips-human%20rights-pt.htm>)

[31] ‘They have given me life,’ Mail and Guardian, 15 February 2002, in which nine HIV-positive people tell of how they have benefited from anti-retroviral therapy.

[32] See above fn 12 . Though this argument is marginally economic in nature, it is not ‘neoliberal.’ The developed countries knew full well they were only marginally going to contribute to pharmaceutical profits when they signed TRIPS. They agreed to impeded access to drugs in exchange for other trade concessions that held the promise of economic growth.

[33] ‘[F]or most well-insured Americans there really hasn't been any [healthcare] rationing. Anything they want, ultimately they usually got. But for the 40 million uninsured, we have brutal rationing by price and their income.’ Interview with Uwe E. Reinhardt, PhD, James Madison Professor of Political Economy Professor of Economics and Public Affairs Princeton University < http://www.pbs.org/healthcarecrisis/Exprts_intrvw/u_reinhardt.htm>.

[34] Peter Drahos, ‘Negotiating Intellectual Property Rights: Between Coercion and Dialogue’ in Global Intellectual Property Rights: Knowledge, Access and Development at 179-80 (stating, ‘Democratic bargaining minimally requires that the conditions of representation, full information and non-domination be met. In the past these conditions have not often been fulfilled. The international expansion of intellectual property regimes has been more a result of processes of colonization and coercion than democratic bargaining. On the basis of the evidence it is also difficult to say that TRIPS itself was the product of democratic bargaining.’)

[35] I do not present the argument that tacitly, a form of tacit economic coercion is keeping many developing countries in the WTO.

[36] This is affirmed in TRIPS and the Doha Resolution. TRIPS Article 7 states

Objectives --

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 and in a manner conducive to social and economic welfare, and to a balance of rights and obligations.

< http://www.wto.org/english/docs_e/legal_e/27-trips_03_e.htm>

The Doha Resolution states:

3. We recognize that intellectual property protection is important for the development of new medicines. We also recognize the concerns about its effects on prices.


<http://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_trips_e.htm>

[37] Michael Kremer, Patent Buyouts: A Mechanism for Encouraging Innovation, 113 Q.J. Econ. 1137 (1998) (stating, ‘Economic growth ultimately depends on the production of new ideas, but competitive markets do not provide appropriate incentives for the production of ideas. If consumers pay only the marginal cost of transmitting ideas, revenues will be insufficient to cover the cost of producing ideas.’)

[38] J.H. Reichman, Legal Hybrids Between the Patent and Copyright Paradigms, 94 Colum. L. Rev. 2432, 2434 (stating, ‘Intellectual property rights, though costly in social terms, stimulate the production of needed inventions and cultural goods that might remain underprotected in a purely free-market system.’).

[39] Louis Kaplow, The Patent-Antitrust Intersection: A Reappraisal, 97 Harv. L. Rev. 1813, 1816, (1984) The ratio test has been used in an analogous manner to determine what unauthorized uses of copyrighted material ought to be considered ‘fair uses.’ See William W. Fisher III, Reconstructing Fair Use Doctrine, 101 Harv. L. Rev. 1661 at 1707 (stating, ‘The purpose of the ratio is to provide the judge with a preliminary indication of the net economic benefits of according authors the entitlement in question.’)

[40] This is the diagram typically used in American legal texts to explain how patent law works. See e.g., W. Kip Viscusi, John M. Vernon & Joseph E. Harrington Jr., The Economics of Regulation and Antitrust (2000) at 803, 805.

[41] A rough measure of the raw material and production costs is encapsulated in the price at which generic manufacturers are willing to provide the drugs. See fn 3 above. Average cost would additionally need to include the pro-rated research and development costs.

[43] Chart derived from data on World Bank website. <http://www.worldbank.org/data/pdfs/tab2_8.pdf>.

[44] It does not reflect absolute income equality. If we continue to assume no variation in preference, then under conditions of absolute income equality, the demand curve would be a vertical line up to the universal maximum willingness to pay. At any price within every HIV-infected person’s reach all would demand treatments.

[45] Assume the poor are able to pay one Note for the Elixir treatment and the rich can pay ten Notes. If there are only ten people in Dystopia and one is rich then the patentee will make ten Notes revenue by selling to the one rich person. Selling to the whole society at one Note per treatment will also yield a total of ten Notes of revenue. However, it is more profitable to sell only to the rich person, because the costs of production and distribution would be marginally less than for ten treatments.

References

To be supplied

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