By Raj Bhala

A “Special 301 Report” is prepared every year by the Office of the United States Trade Representative (the “USTR”) under Section 301 of the Trade Act of 1974.  The report identifies trade barriers to U.S. companies and products due to the intellectual property laws of other countries.  The USTR is also required to identify “Priority Foreign Countries” (“PFCs”), which are those countries deemed to have inadequate intellectual property laws.  Being designated a PFC may subject a country to U.S. trade sanctions.  In the Spring of 2014, the USTR  came under pressure from American trade lobbies to designate India as a Priority Foreign Country.  The USTR acknowledged problems in India with respect to securing and enforcing patents, protecting trade secrets, counterfeiting trademarked goods, IP piracy, and localization rules.  Localization rules favor a domestic industry or service provider, or domestic IP, vis-à-vis foreign competitors.  While localization rules serve a legitimate purpose, such as protecting data privacy or national security, others are overtly protectionist and implemented largely to enhance the strength of domestic industry.  Unsurprisingly, the reaction in India was anger.  To Indians, the action was an American bullying tactic and unjustified legally.  In a speech delivered in March 2014 in Chicago, the Indian Ambassador to the United States, S. Jaishankar stated that “it would be a mistake [for the U.S.] to pile up public pressure, especially through a misrepresentation of the facts.”  Indrani Bagchi, India’s Fresh Attack in U.S. Trade War, The Times of India, at 19 (Mar. 4, 2014).  Did the ambassador have a point?

First, India pointed out that the U.S. was displeased by its stands on an array of non-IP matters.  For example, in January 2014, the Indian government had reacted strongly against what it claimed was abusive treatment by U.S. federal agents of one of its consular officers in New York while she was in detention on felony charges of having made fraudulent statements in a visa application for her maid.  In addition, several American multinational corporations have recently been embroiled in income tax disputes with Indian revenue authorities.

Yet another instance was India’s import prohibition on American solar panels using thin-film technology.  India claimed the panels contained environmentally unfriendly components, such as cadmium telluride, which Japan and other WTO Members have banned, in contrast to the domestically produced variation, which uses crystalline technology.  The Indian product was also more efficient than its American counterpart (using 4.5 acres to generate a megawatt of power compared to the 6-7 acres needed by the American version to generate the same), reached stabilized output levels more quickly, degraded more slowly, was more durable, and was cheaper to manufacture.  India also required American imports to meet central-government level domestic content requirements.  This dispute itself triggered an American WTO complaint against India in February 2014, with India arguing that its local sourcing rules were GATT-WTO compliant, partly because India had not joined the WTO Government Procurement Agreement.

These non-IP issues should be irrelevant to a decision about Section 301 blacklisting, but to India, they were not.  Instead, they only reinforced the view that the USTR was determined to punish India.  Nevertheless, there is a persuasive argument to be made that not even the IP issues gave the USTR a sound basis for putting India on the Priority List and that the U.S. was legally incorrect with respect to each of the three issues.

(1)        Compulsory Licensing

In March 2012, India granted its first compulsory license to a domestic generic pharmaceutical company, Natco, for the medication, Nexavar (used to treat kidney and lung cancer) over the objections of the Swiss patent holder, Bayer.  The U.S worried about a slippery slope on which Indian authorities would grant compulsory licenses on a range of medications unconnected with public health emergencies like HIV-AIDS, malaria, or tuberculosis.  The U.S. had reason to fear a slippery slope. For example, India’s November 2011 National Manufacturing Policy promotes compulsory licensing of patented products as a way to encourage the transfer of clean energy technologies.  See Michael F. Martin, Shayerah Ilias Akhtar, K. Alan Kronstadt, Samir Kumar & Alison Siskin, India – U.S. Economic Relations: In Brief, Congressional Research Service 7-5700, R43741 at 5 (Sept. 26, 2014) [the “September 2014 CRS Report”].

India viewed the USTR Special 301 action as unveiled pressure to restrict its grants of compulsory licenses.  India noted Nexavar had been the only instance of it granting such a license, and argued that its procedures for doing so were more “nuanced and balanced” than their American counterparts, which permit compulsory licensing by “executive fiat.”  Madhur Singh, U.S. Concerned Over Indian Drug Licenses, State Department Official Says, 31 International Trade Reporter (BNA), 508 (Mar. 13, 2014).  India also cited the fact that it has to attend to the public health concerns a population  four times that of the U.S., living on one-third the land mass.

(2)        Patent Evergreening

In 2005, the Indian legislature amended India’s patent laws to comply with the Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS”).  The amendments specifically allowed for product patents on chemicals, food, and pharmaceuticals.  See September 2014 CRS Report at 4.  Nevertheless, starting in 2012, India denied or revoked patents on certain foreign medicines, explaining that they failed to satisfy its patent laws.  Most notably, in April 2013, the Supreme Court of India rejected an evergreening patent application of Novartis AG.  Novartis AG v Union of India & Others, (2013) 6 SCC.  Under Section 3(d) of The Patents Act 1970 (India), novelty is construed to exclude patent evergreening.  Specifically, Section 3 states:

 

3. What are not inventions. – The following are not inventions within the meaning of this Act, –

(a)        an invention which is frivolous or which claims anything obviously contrary to well established natural laws;

(b)        an invention the primary or intended use or commercial exploitation of which could be contrary public order or morality or which causes serious prejudice to human, animal or plant life or health or to the environment;

(c)        the mere discovery of a scientific principle or the formulation of an abstract theory or discovery of any living thing or non-living substance occurring in nature;

(d)       the mere discovery of a new form of a known substance which does not result in the enhancement of the known efficacy of that substance or the mere discovery of any new property or new use for a known substance or of the mere use of a known process, machine or apparatus unless such known process results in a new product or employs at least one new reactant.

Explanation. – For the purposes of this clause, salts, esters, ethers, polymorphs, metabolites, pure form, particle size, isomers, mixtures of isomers, complexes, combinations and other derivatives of known substance shall be considered to be the same substance, unless they differ significantly in properties with regard to efficacy;

(e)        a substance obtained by a mere admixture resulting only in the aggregation of the properties of the components thereof or a process for producing such substance;

(f)        the mere arrangement or re-arrangement or duplication of known devices each functioning independently of one another in a known way;

(g)        Omitted by the Patents (Amendment) Act, 2002;

(h)        a method of agriculture or horticulture;

(i)         any process for the medicinal, surgical, curative, prophylactic diagnostic, therapeutic or other treatment of human beings or any process for a similar treatment of animals to render them free of disease or to increase their economic value or that of their products;

(j)         plants and animals in whole or any part thereof other than micro organisms but including seeds, varieties and species and essentially biological processes for production or propagation of plants and animals;

(k)        a mathematical or business method or a computer program per se or algorithms;

(l)         a literary, dramatic, musical or artistic work or any other aesthetic creation whatsoever including cinematographic works and television productions;

(m)       a mere scheme or rule or method of performing mental act or method of playing game;

(n)        a presentation of information;

(o)        topography of integrated circuits;

(p)        an invention which in effect, is traditional knowledge or which is an aggregation or duplication of known properties of traditionally known component or components.

The Patents Act, 1970, Chapter II, Inventions Not Patentable, Section 3 available at  http://ipindia.nic.in/ipr/patent/eVersion_ActRules/sections/ps3.html).

The essence of the Novartis decision was that India takes seriously its requirement of “enhanced efficiency.”  That is, even if a pharmaceutical company satisfies international standards for patentability, it also must meet India’s requirement of “enhanced efficiency,” which means that a company may not make minor modifications of its patented product merely to extend the life of that patent – i.e., it cannot engage in evergreening.  See September 2014 CRS Report at 4.

From the U.S. perspective, India was restricting the patentability of potentially innovative and useful drugs.  From the Indian standpoint, the U.S. was applying pressure via Special 301 on India to alter Section 3(d) to create a “TRIPS plus” obligation to allowing evergreening—an obligation to which India had not agreed. The dispute involved tricky issues as to whether better delivery systems, for instance decreased toxicity, fewer side effects, or greater storage and temperature stability, were significant enough modifications to a patented drug to justify a new or extended patent.

(3)        Generic Pharmaceutical Importation

For years, leading Indian generic pharmaceutical producers like Ranbaxy Laboratories, Ltd. (“Ranbaxy”) and Wockhardt, Ltd. (“Wockhardt”) shipped medicines from their factories in India to the U.S.  Overall (as of May 2014), the Indian generic pharmaceutical industry accounts for $34 billion in output, and India is the second largest exporter of over-the-counter generic drugs to the U.S., second only to Canada.  In February 2014, the U.S. Food and Drug Administration (the “FDA”) barred the importation of medications produced in the fourth of four Ranbaxy factories, having previously banned shipments from the other facilities.  The FDA alleged that Ranbaxy employees improperly re-tested ingredients that had failed to pass initial testing, and then certified those ingredients and the generics that incorporated them as safe.  Likewise, the FDA also banned imports from Wockhardt.

Ranbaxy responded that it was doing nothing different in its facilities than it had done over the previous decade, and that a reputable Japanese company had acquired it, which surely enhanced its reputation for scrupulous adherence to quality conformity assessment procedures.  Besides, India and the U.S. had a shared interest in safe generics, and India had no desire to cultivate the negative reputation for quality that American consumers may often associate with Chinese goods.

To that end, in May 2014, G.N. Singh, the Drug Controller General of India, pledged to boost the number of inspectors for India’s 10,000 generic factories from 1,500 to 5,000 by 2017-2018.  See Ketaki Gokhale, India To Double Drug Regulators Staffing, Test Drugs at Ports, 31 International Trade Reporter (BNA) 993 (May 29, 2014); Amrit Dhillon, India Steps Up to Improve Image of Generic Drug Industry, 31 International Trade Reporter (BNA) 867 (May 8, 2014).  Also that month, the Indian Commerce Ministry announced a “zero tolerance” policy and the expenditure of ₹ 30 billion over three years to: (1) double, (to 1,000, its drug inspectors at the central government level; (2) hire 3,000 inspectors at state agencies; and (3) set up new testing labs at ports to ensure the quality of pharmaceuticals exported from India.  For its part, the FDA said it would expand its offices in India, help train Indian inspectors, and increase its inspections in India and other countries.

Similarly, on a fourth issue—data exclusivity via a patent linkage system—what the U.S sought from India was merely a policy preference, not a multilateral IP obligation.  The U.S. wanted India to ensure that holders of branded patented biologic medicines would not have to compete with generic pharmaceuticals during the lifetime of the patent.  That protection could occur through a non-patent form of IP, data exclusivity, whereby generic manufacturers cannot, for purposes of getting regulatory authorizations, use clinical trial data generated by the original patent holders to obtain their patents.  See Yu-Tzu Chu, Taiwan to Create Patent Linkage System For Drugs in Quest for TPP Membership, 31 International Trade Reporter (BNA), 1530 (Aug. 21, 2014).  How long that prohibition would exist or last would be a matter for negotiation, but from the perspective of original patent holders, the longer the better.  As its name suggests, a “patent linkage” system connects the introduction of a generic drug to the expiration of a patent, plus any data exclusivity period.  Free trade partners with the U.S., such as Australia, Canada, Korea, and Singapore, have them, so, argued the U.S., why not India, assuming that India wants to upgrade its bilateral trade relationship?

With respect to all such disputes, India viewed the underlying problem to be the increasingly protectionist tendencies of U.S. pharmaceutical manufacturers, coupled with corporatization of a U.S. trade policy that lacked empathy for poor countries.

India argued (1) that U.S. pharmaceutical companies are uncompetitive globally without ever-longer and more draconian patent monopolies;   (2) that these behemoth companies are saddled with large overhead expenses thanks to bloated bureaucracies, on top of the roughly $1 billion in costs they incur to secure approval for a medication from the FDA; (3) that Wall Street investment banks are generally unwilling to finance promising, but unproven, technologies, despite the need for transformative drugs to treat dreaded diseases, preferring typically instead to provide more funding for cosmetics research for products like Botox or wrinkle creams because they are perceived as less risky (see David Shaywitz, Addiction to Deals Reveals the Depth of Pharma’s Ills, Financial Times, at 7 [May 2, 2014]); (4) that “PhRMA” companies are no longer the source of innovation—rather, in the U.S., promising new medications increasingly come out of university laboratories or innovative research companies like Steve Jobs-like garages and basements, which explains why those “dinosaur” companies seek to acquire entrepreneurial ventures and their patents—this also highlights the fact that these companies try to survive by extending patents through evergreening as they approach the patent cliff (the end of the 20 year protection period); and (6) and unreasonably demand TRIPS Plus treatment in bilateral trade talks with India, as well as in Free Trade Agreement negotiations (e.g., through 12-year data exclusivity periods in Trans Pacific Partnership negotiations).

The Indian Commerce Minister Anand Sharma resisted U.S. insistence (which was perceived in India as bullying) to make TRIPS Plus commitments, and the Federation of Indian Chambers of Commerce and Industry stated:

India has a well-established legislative, administrative, and judicial framework to safeguard IPRs [Intellectual Property Rights] which meets its obligations under . . . [TRIPS] ….  The two Trade Policy Reviews conducted by [the] WTO in respect of India in 2007 and 2011 have found the Indian IPR regime to be adequate. India has an independent authority and appellate board and courts to decide on due processes ….  There has been no concerted effort by the Indian system discriminating [against] foreign companies, and there have been a number of Indian patents also being invalidated.

Madhur Singh, U.S. Concerned Over Indian Drug Licenses, State Department Official Says, 31 International Trade Reporter (BNA), at 508 (Mar. 13, 2014).

Further, India listed the demands that, it argued, the U.S. had failed to satisfy.  For instance, Indian Ambassador to the U.S., Mr. Jaishankar, expressed India’s concerns: “[o]ur concerns include immigration reform provisions that attack our service industry’s viability in the U.S., [tax] revenues [from American multinational corporations doing business in India] forfeited by the absence of progress on a totalization agreement, and restricted market access.  India also cited localization [i.e., local content rules], where advocating against it abroad does not include practicing it at home [as 16 American states, but no Indian state, has sourcing requirements].”  Indrani Bagchi, India’s Fresh Attack in U.S. Trade War, The Times of India, 19 (Mar. 4, 2014).  For example, the November 2011 National Manufacturing Policy seeks to boost employment in India’s industrial sector.  It calls for government procurement in certain sectors, such as clean energy and Information and Communications Technology, to follow greater local content rules—in effect, to use more Indian inputs, intermediate goods, and finished products.  In another example, effective July 2014, all telecommunication equipment vendors had to test their products in a laboratory in India.  Pursuant to this Policy, India issued a Preferential Market Access Mandate, which sets local content rules for government procurement of electronic goods.  These examples, as well as Indian local content rules and government subsidies for solar panel products, were a source of Indo-American trade friction and WTO litigation.  See September 2014 CRS Report at 5.  Notwithstanding the presentation of its list, Indian trade officials said “discussions with U.S. trade officials are like a ‘dialogue of the deaf.’”  Id.

Much was at stake for both sides.  The U.S. threatened India with loss benefits under the Generalized System of Preferences.  India, in turn, could even further limit the access of American exporters and investors to Indian markets.  In April 2014, however, the USTR opted not to designate India a PFC, although it kept India on the Priority Watch List, and stated that it would subject India to an out-of-cycle review of its IP rules.  See September 2014 CRS Report at 3-4.

Five months later, following the overwhelming victory of Narendra Modi and his Bharatiya Janata Party in India’s 16th general election held in April-May 2014, the new Prime Minister met President Barack Obama in September 2014.  The two leaders agreed to create an IP Working Group within the framework of the existing Indo-American Trade Policy Forum.  The group was to meet annually, host frequent technical discussions, and was given “appropriate decision-making” authority.  See Stephanie Cohen, Obama, Modi Agree to High-Level IP Working Group, Financing, Infrastructure Initiative, 31 International Trade Reporter (BNA), 1748 (Oct. 2, 2014).  However, the ambiguity surrounding the group’s structure and goals warrants concern given the broad range of IP issues in dispute between the two countries.  The two leaders also expressed their desire – manifested in an “Indo-U.S. Investment Initiative” – to boost capital markets and flows to finance Indian infrastructure projects under an “Infrastructure Collaboration Platform” that would ensure participation of American companies in those projects.  Whether legal uncertainty over intellectual property rights will dampen enthusiasm to participate remains to be seen.

 

Raj Bhala, J.D., Harvard (1989); M.Sc., Oxford (1986); M.Sc., London School of Economics (1985); A.B., Duke (1984), is Associate Dean for International and Comparative Law, and Rice Distinguished Professor, The University of Kansas, School of Law.  He has been a Marshall Scholar (1984-86) and is a member of the Council on Foreign Relations, the Royal Society for Asian Affairs, the Indian Society of International Law, the All India Law Teachers Congress, and the Fellowship of Catholic Scholars. He is author of the monograph Trade, Development, and Social Justice (Carolina Academic Press 2003), a textbook International Trade Law: Interdisciplinary Theory and Practice (LexisNexis, 3rd ed. 2008), a reference Dictionary of International Trade Law (LexisNexis, 3rd ed., 2008, 4th ed. forthcoming), a textbook: Understanding Islamic Law (Sharī‘a) (LexisNexis 2011), and a treatise: Modern GATT Law (Thomson: Sweet & Maxwell, 2nd ed., 2013).  He can be reached at bhala@ku.edu. See also http://en.wikipedia.org/wiki/Raj_Bhala.