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An Economic Justification for Open Access to Essential Medicine Patents in Developing Countries

Published online by Cambridge University Press:  01 January 2021

Sean Flynn ,
Aidan Hollis  and
Mike Palmedo
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Extract

Not all intellectual property rights grant the right to exclude that is indicative of “property rules,” as that term was used by Guido Calabresi and A. Douglas Melamed in their seminal article. Some intellectual property rights are “liability rules,” in which the right holder has an entitlement to compensation for use of the protected invention, not a right to preclude the use. Although patent laws normally grant a right to exclude others from use of the protected invention as a default, most countries’ laws allow the government to convert the patent property rule into a liability rule through a compulsory license. It has been noted, for example, that by the end of the 1950s, the U.S. had issued compulsory licenses covering 40 to 50 thousand patents, including substantial portions of the patent portfolios of AT&T, General Electric, IBM, and Xerox. The U.S. Supreme Court recently expressed a willingness to accept liability rules over injunctions in some patent infringement cases.

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Symposium
Information
Journal of Law, Medicine & Ethics , Volume 37 , Issue 2 , Summer 2009 , pp. 184 - 208
Copyright
Copyright © American Society of Law, Medicine and Ethics 2009

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References

Calabresi, G. and Melamed, A. D., “Property Rules, Liability Rules, and Inalienability: One View of the Cathedral,” Harvard Law Review 85, no. 6 (1972): 1089–1128, at 1092; see also Merges, R. P., “Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations,” California Law Review 84, no. 5 (1996): 1293-1393; Reichman, J. H., “Of Green Tulips and Legal Kudzu: Repackaging Rights in Subpatentable Innovation,” Vanderbuilt Law Review 53, no. 6 (2000): 1743-1798.CrossRefGoogle Scholar
Liability rules are the default form of protection for digital broadcasting of copyrighted music in the U.S., for example, where “certain non-interactive digital audio services [may] transmit sound recordings under a compulsory license, provided that the services pay a reasonable royalty fee and comply with the terms of the license.” Determination of Reasonable Rates and Terms for the Digital Performance of Sound Recordings, 37 C.F.R. §260 (2007); see 17 U.S.C. 106(6) & 114(d) (2001). Liability rules are also used to compensate American agricultural chemical companies when competitors use their test data submitted to the FDA for regulatory approval under the Federal Insecticide, Fungicide, and Rodenticide Act. See Basheer, S., “Protection of Regulatory Data Under Article 39.3 of TRIPS: A Compensatory Liability Model?” (Intellectual Property Institute, forthcoming 2008).Google Scholar
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In a perfectly competitive market, each firm is a price “taker,” and must accept the market price, which competitors drive down until it is approximately equal to the firm's marginal cost. Patented items in an imperfect, but still competitive, market will be restrained by the same market forces to a greater or lesser extent depending on the degree to which substitutes are functionally equivalent.Google Scholar
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Generally, the exclusive marketing right to which we refer would be granted by a patent. But other such rights, for example those created by “data exclusivity” protections that prevent generic products from being registered for sale for a period of time based on the safety and efficacy data submitted by the innovator firm, may cause similar access problems.Google Scholar
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Our assumptions understate the steepness of the demand curve for the higher income segments since, in fact, wealthier segments of the population are likely to be willing and able to spend a greater share of their income on a needed good. AIDS is also not evenly distributed, but rather is concentrated among urban populations with somewhat higher incomes and mobility. See Piot, P., Greener, R. and Russell, S., “Squaring the Circle: AIDS, Poverty and Human Development,” PLOS Medicine 4, no. 10 (2007) (noting that AIDS is “more concentrated among the urban employed and more mobile members of society, and consequently the more wealthy groups”).CrossRefGoogle Scholar
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As noted above, the prevalence of HIV/AIDS is not uniform across deciles, but higher among South Africans with higher incomes. We assume uniformity in order to simplify our demonstration that a firm will maximize sales by selling exclusively to the elite. If we were to weigh demand at each income decile to account for differences in prevalence of HIV/AIDS, it would lead to an even greater difference between demand and sales at the upper and lower income deciles (firms would be less likely to sell to the middle and lower classes).Google Scholar
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Norway also has an excellent health insurance system so that in principle income need not be a barrier for anyone to obtain needed drugs there. Also, we are once again assuming uniformity in HIV/AIDS prevalence across income deciles.Google Scholar
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Other tools may include prize-type mechanisms, price controls, use of formularies, reference pricing, and mandatory rebates. For a discussion of cost control measures used by OECD countries, see International Trade Administration, Pharmaceutical Price Controls in OECD Countries (Washington, D.C.: U.S. Department of Commerce, 2004); Outterson, K. U.S. Senate Testimony on the Dept. of Commerce OECD Drug Pricing Report, U.S. Senate, Health Education, Labor and Pension Committee Hearings, February 2005. We believe that compulsory licenses to create competitive market in developing countries is a preferable tool for a host of reasons that we will not canvass here. See Watal, , supra note 9 (preferring compulsory licenses to price controls for administrative efficiency reasons).Google Scholar
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