February 2001
Patent Reform in the Wind
by Owen Lippert
A recent World Trade Organization (WTO) ruling against Canada will likely lead to the Patent Act being amended in 2001. Other housekeeping and policy measures might possibly lead to a second round of amendments in 2002. The potential scope of amendments to the Patent Act over the next two years range from small improvements to the status quo ante to significant changes in the regulatory environment. As is too often the case, the main sticking point on patent reform concerns prescription drugs. The key issue remains whether the current government views intellectual property reform from the perspective either of encouraging economic growth and diversification or of reducing drug costs in the state's near-monopoly health care system. As we enter into the period of possible patent reform, it is instructive to review Canada's position and posture in the WTO ruling as a guide to its attitudes towards patent reform.
The Canadian government must now amend the Patent Act as a result of the final ruling on September 18, 2000, of another World Trade Organization (WTO) Appellate Body ruling in the case of the so-called "17-20" dispute. The importance of the "17-20" dispute lies less in the issue at stake than what it signals about the current government's long-term intentions for the patent regime, particularly in the area of pharmaceuticals.
That said, it is worthwhile to review the facts. In July 1999, the United States, after failed negotiations with Canada, requested that the WTO Dispute Settlement Body establish a panel to address its complaint that Canada had failed to provide full patent term protection for a select number of patents. In failing to provide such protection, Canada, the US alleged, had violated its commitments under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).
Who were the aggrieved patent holders? Specifically they were individuals and companies who applied under the pre-1987 rules (which gave a life of 17 years from the grant of patent) and who had not received patent approval within three years of filing, so that when the new rules took effect in October 1989, they received a shorter patent life than available to them under either the old or the new rules. According to the Tech Law Journal, as of January 1, 2000, there were 169,966 patents outstanding under the pre-1989 patent rules, of which 103,030 had a term of protection greater than 20 years from the date of filing and are not under dispute. Of the remaining 66,936 patents, 77 percent had a term of protection greater than 19 years from the date of filing, so for the vast majority of disputed patents, the term of protection under dispute is less than one year. Most of these patents are now reaching the end of their protection term.
The final ruling of the WTO against Canada was never in much doubt. Six other developed countries, including the US, had the same problem when they shifted patent life from 17 years from grant to 20 years from filing. They all fixed it.
Why, then, did Canada put up such a fight? Indeed, even after losing the appellate decision, Canada continues to resist implementation.
One obvious explanation is that the Liberal government wanted to assist the domestic generic drug industry. The sooner the patents expire, the sooner Canadian generic drug companies can start selling their version of these drugs. Jim Keon of the generic industry's trade association claimed that if Canada did not comply with the WTO ruling, it would save $100 million.1 That amount represents the difference, over roughly 18 months, of the cost of the patented versions of drugs in question versus their generic substitutes.
What did Ottawa have to pay in order to attempt to "save" that $100 million? First, it had to pay the cost of the WTO dispute hearings. The legal bills involved in that process were large, particularly since, in most observers' views, Canada's chances of success were close to nil. Second, dragging out the "17-20" dispute with the US created additional tension just when Ottawa was beginning to look for concessions on much bigger issues, such as softwood lumber.
Third, Canada's appeal had the appearance of nitpicking the very rules of international trade under which it has done so well. (At present, 40 percent of Canada's GDP is dependent on trade.) This could only encourage similar behaviour by other nations with whom Canada has trade disputes, most notably Brazil, which is stonewalling in its implementation of the WTO ruling against its subsidies for aircraft purchases.
On balance, whatever benefit the generic industry might gain from even a successful Canadian defense of its "17-20" position does not appear to justify Canada's position. What else was at stake in the "17-20" dispute? A close reading of Canada's submissions to the WTO Dispute Settlement Panel and to the Appellate Body reveals greater—and more complex—concerns.
One could read Canada's arguments in the "17-20" dispute as an audacious attempt to rewrite its TRIPS obligation. On one hand, its creative arguments can be seen simply as a way to buy time by complicating matters. In hockey slang, it is known as "ragging the puck." At another level, the arguments could be interpreted as a forward agenda seeking to provide maximum latitude in any further changes to its Patent Act. Had Canada's argument prevailed in the WTO process, it would have had the potential to achieve through legislative or regulatory means the following.
Canada could deny TRIPS protection for any patent or patent application in force or filed before January 1, 1996. (That date is day when the TRIPS obligations came into force for the developed nations. The usual interpretation holds that the obligations are binding on patents past, present, and future.) TRIPS protection might also fail to apply to "subject matter" present, but not in the patent stream as of January 1, 1996. As the initial panel report in May 2000, noted, Canada's position opened up the possibility of compulsory licensing on any patent not applied for after that date.2
Canada would have full latitude to take whatever time deemed necessary in the granting of a patent application and to refuse any claim for patent term restoration such as currently practised in the US, Europe and Japan. The resulting complete precedence of procedures of domestic law over international obligations might have made a mockery of the TRIPS protections.
Canada could reject some investment protection claims against its treatment of intellectual property. As Canada's position in the "17-20" dispute was that TRIPS protection could not be applied "retroactively" to cover existing patents, it raises the question of whether remedies might also not be permitted in disputes over existing patents. It is only speculation but had the WTO panel accepted Canada's arguments, the consequences could have included a weakening of the intellectual property section of the North American Free Trade Agreement (NAFTA). It may have undermined the ability of companies to pursue compensation for losses arising from discriminatory and arbitrary intellectual property policies. Thankfully, we will never know.
The current government has found the final WTO ruling difficult to accept precisely because it denied unfettered latitude to future changes in Canada's patent regime. That led to a certain amount of peevishness, as evident when Tony Marcello, a political assistant to the Industry minister, speculated in the press that non-compliance remained an option, this after the Trade minister, Pierre Pettigrew, had stated that Canada would comply. Corrections were soon issued by the Department of Foreign Affairs and International Trade (DFAIT) that indeed Canada would comply.
At latest word, the negotiations are now under way fitfully between Canada and the US as to an implementation schedule. It is very likely that the WTO will have to appoint an arbitrator to resolve the currently deadlocked negotiations between Canada and US on implementing the appellate ruling. This is not a good sign.
Notes
1 Internet at: http://www.newswire.ca/ releases/September2000/18/c4625.html
2 The panel made this point in somewhat stilted language. "There would be no need to state in paragraph 6 that members are not required to apply rules concerning compulsory licensing to compulsory licenses granted before the date the agreement became known. In addition, to the extent that Article 70.1 is construed to mean that a member has no TRIPS obligations with respect to intellectual property for which the act of filing an application occurred prior to 1 January 1996, Article 70.7, which permits pending applications for protection to be amended to take into account enhanced protection, would be reduced to inutility."
Reference
Tech Law Journal, "WTO Appellate Body Rules that Canada's 17 Year Patent Term Violates TRIPS," September 19, 2000. Available at www.techlawjournal.com.
Owen Lippert (owenl@fraserinstitute.ca) is a Senior Fellow in Law and Markets at The Fraser Institute. He received his Ph.D. in History from the University of Notre Dame, Indiana.
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