On February 12, the International Trade Commission held its first day of a two day hearing on Trade, Investment, and Industrial Policies in India: Effects on the U.S. Economy.
Last August, Sen. Baucus, Sen. Hatch, Rep. Camp and Rep Levin requested that the Commission provide a report on “Indian industrial policies that discriminate against U.S. imports and investment for the sake of supporting Indian domestic industries.” The report, due November 2014, is supposed to address a series of questions, which include the effect of intellectual property policies.
At the first day of hearings, the Commission heard from a diverse set of witnesses, including American and Indian industry representatives, as well as academics and civil society groups from opposing sides of the ongoing IP debates. After opening statements, there were four rounds of questions. Throughout the hearing, intellectual property concerns (including patents, copyrights, and trade secrets)were major topics of discussion, but other policies (agriculture, technology policy ) were covered as well. This blog will focus on the IPR discussions. [See also: notes on the second and third panels.]
Claire Cassedy from Knowledge Ecology International filmed much of the hearing, and videos are posted on KEI’s YouTube Channel.
Very brief notes on prepared statements
Brain Pomper from the Alliance for Fair Trade with India argued that Indian policies are harming U.S. companies. He said that the Indian government has taken small but inadequate measures to strengthen intellectual property. For instance, the most recent copyright legislation did not address illegal camcording, and failed to provide substantial protection against illegal downloads on the internet. The pharmaceutical industry is facing IP barriers which have included the eradication of numerous patents, the denial of patent applications, and the approval of generic drugs during the patent term of the corresponding branded drugs. Pomper also said that India has taken a “divisive tone in international forums.”
Arvind Subramanian from the Peterson Institute for International Economics stressed that there is a very strong bilateral trade relationship between the U.S. and India. India has seen both positive and negative developments in the field of intellectual property. Over last 2 years, processes have become more expeditious and transparent, rightholders have had recourse to appeal unfavorable decisions, remuneration has been provided (often at higher levels than required by international norms), and several recent decisions gone in favor of foreign patent holders. On the other hand, Subramanian believes that Section 3(d) and aspects of the compulsory license violate TRIPS and should be adjudicated at the WTO. He thinks that getting compulsory licensing policy right is a difficult task. India must balance three interests – contributing its share to global R&D, promoting domestic technologies, and providing access to medicines. He said there is an emerging model of cooperation in the area of pharmaceuticals that involves tiered pricing, which the panel may want to further consider. He also would like to see a U.S.-India Free Trade Agreement.
Mark Elliot from the Chamber of Commerce’s Global Intellectual Property Center (GIPC) discussed his organization’s Intellectual Property Index, released last month, which measures the IP environment in 25 different countries. India has the lowest score. Elliot noted that Foreign Direct Investment (FDI) is down in India. However, he said that there are signs the Indian leadership wants to strengthen IP, noting a statement by the president in May about the need for greater innovation and more patenting activity by Indian firms.
Michael Schlesinger from the International Intellectual Property Alliance (IIPA, a coalition of trade associations representing copyright owners) testified next. He said that India has a very large creative sector – is a major producer of movies, music, and software – but that these industries are not reaching their full potential due to widespread copyright infringement. Intellectual property violations prevalent in India include lack of enforcement, lack of a notice and takedown system, and restrictions on freedom of contract. Schlesinger would like to see a policy that considers software piracy a form of tax evasion, and gives auditors the ability to search company records to find it. He suggested that India should commission a report to measure the impact of intellectual property on its economy using the WIPO methodology that many others have used.
D.G. Shah from the Indian Pharmaceutical Alliance, which represents 80% of Indian pharmaceutical manufacturers, told the panel that India does protect pharmaceutical R&D, and this protection is currently driving innovation. Since 2005, there have been over 1500 pharmaceutical patents issued in India, and there has been one compulsory license (for a drug that was priced far out of reach for the majority of the population). The controversial Section 84 of the Patents Act applies equally to foreign and domestic patent holders. Shah noted that many pharmaceutical patents have been issued for new uses of known substances that do show increased efficacy in treatment, thus passing the patentable subject matter test in section 3(d) of the Patents Act. (Section 3(d) of India’s Patents Act does not allow a patent to be granted for a “new form of a known substance which does not result in the enhancement of the known efficacy.”)
University of Oklahoma Professor Srividhya Ragavan addressed allegations that Section 3(d) is a fourth requirement for patentability, and thus in violation of TRIPS. Ragavan told the panel that Section 3(d) is not a fourth requirement, rather it’s is a threshold test for a particular subject matter – something which is common in other patent laws. She also noted that incremental inventions have passed the 3(d) test and have received patents; that 3(d) was implemented in response to prevent the types of evergreening causing problems in the U.S.; and that 3(d) is not discriminatory because foreign and domestic firms are treated the same. Ragavan further said that Section 84 of the Patents Act (on compulsory licenses) was TRIPS compliant. Importation could qualify as “working” the patent in India if markets are served, but the Nexaver license was issued in response to a situation where the patentee had failed to import the medicine in the quantities necessary to meet public need.
American University Washington College of Law Professor Sean Flynn testified that the ITC’s analysis of empirical data will likely show that Indian policies have a limited impact on American pharmaceutical firms. Sales by Indian generic firms do not equal lost sales by American branded firms because the branded products are priced out of reach for the majority of the population. The case of Nexaver is a good example – the drug was priced to serve a very small elite, so the volume of sales was negligible. (This dynamic is common in developing countries with skewed wealth distribution. As discussed in a 2009 paper, the profit maximizing point for a monopolist will be to sell at a very high price to a very small proportion of the population. The price cut necessary to serve the next segment of the population would be large enough to negate the effect of the growing quantity sold.) Flynn also wanted the Commission to beware of selection bias if it gets its information about intellectual property in India mainly from U.S. companies that are very angry about intellectual property in India.
Jerry Rao, from the National Association of Software and Service Companies (NASSCOM), testified that American companies are heavily invested in India. It is a low income country, but there is a growing middle class, and American firms want to invest there. American firms have interests in 10 of the top 15 technology companies, and there was $27.1 billion of inward FDI in 2010. (Rao sold his own company to American investors.) NASSCOM companies have been lobbying the Indian government to strengthen IP protection, and the government has been acting. Government actions to increase IP protection have increased, and there have been more investigations. One result has been a decline in software piracy. The U.S. government should recognize that this is a process, and should show patience and restraint in its diplomacy over IP in India.
The final panelist was Stephen Ezell from the Information Technology Innovation Foundation. He said that after a period of liberalization and market reforms, India has more recently embraced mercantilist trade policies that harm U.S. companies. These include local content requirements, compulsory licenses and price subsidies. Ezell said that the practice of issuing compulsory licenses based on local working was troubling, because it could lead to a situation where firms would need to manufacture the same product in multiple countries. He also warned the panel that the practice of compulsory licenses could expand beyond pharmaceuticals, and said that compulsory licenses undercut the ability of firms to pay for further research and development.
Questions and answers:
Commissioner Johanson asked if the Indian policies under discussion had actually benefitted Indian firms. Schlesinger said that there are two related areas in which India’s weak copyright policies harm local creators: the lack of rules prohibiting the circumvention of technological protection measures, and the lack of enforcement in the online environment. He said that there are hundreds of businesses that exist for the main purpose of pirating Indian movies and music.
Johanson noted that some of the prepared testimony had argued that Indian IP policies would have little impact on U.S. firms. He asked the witnesses to explain how this could be the case, considering how strongly U.S. firms are arguing against Indian policies. Flynn said that developed country drug companies might lose some sales, but they are already selling at very low volumes because they are pricing out most of the market. Shah said that Indian companies are currently serving the 80% of the world’s markets that American firms do not serve, and the effect on the American firms’ businesses has been negligible. Pomper said that Indian firms could lead to a “contagion effect” where other countries follow India’s lead. He further said that until recently there has not been enough concern in the U.S. government that other countries might emulate India.
Commissioner Kieff asked for more information about Schlesinger’s idea to treat software piracy as tax evasion. Had other countries tried this, and did it work? Schlesinger said that it would comport with international best practices. Auditors would be given the ability to check the software licenses on firms’ computers. It would help firms be good corporate citizens. Kieff asked Schlesinger to provide more information in the post-hearing submissions regarding any country where this approach has been successfully implemented.
Kieff’s time for questions had ended, but he asked Ragavan to address TRIPS and compulsory licensing in her post-hearing comments. Does the TRIPS Agreement have any requirements regarding reasonable terms and conditions for compulsory licenses?
Commissioner Williamson asked witnesses to further discuss the link between intellectual property and development. Flynn answered that the link is more nuanced than it is often made out to be. IP has both costs and benefits, and countries need to take them both into account when setting policy. The costs include excessive pricing caused by the temporary monopolies conferred by IP, and these excessive prices require a policy response in developing countries. Subramanian said he agreed with Flynn, but added that one shouldn’t think of intellectual property as “good” or “bad.” Global intellectual property norms as defined by TRIPS are a fact of life, since they were part of the bargain struck between developed and developing countries when forming the World Trade Organization. As part of the bargain, mid-sized economies said they would agree to support global innovation. The correct type of question would try to ascertain the fair share to global R&D that middle-sized or developing countries ought to contribute. Ragavan asked the panel to consider the situation in the U.S., where extremely broad patentable subject matter and over-patenting have led to patent thickets that block innovation. Shah noted Bayer’s sales of Nexaver have doubled in India after the compulsory license was issued. He also said that the bargain developing countries made when they entered into the TRIPS agreements was supposed to include technology transfer as set out in Articles 7 and 8. Schlesinger said it would be helpful for India to conduct a study on the impact of copyright to their economy, following the WIPO guidelines for such studies.
At this point Ezell said that the Doha Declaration on the TRIPS and Public Health affirmed that compulsory licenses could only be issued in extreme situations or emergencies. Flynn and Ragavan indicated they wanted to speak again, but Commissioner Williamson cut off this line of answers. [Doha Declaration 5(b): “Each member has the right to grant compulsory licenses and the freedom to determine the grounds upon which such licenses are granted .” Full text here.]
Commissioner Pinkert told the panel that the ITC’s internal research had shown that U.S. firms are not facing discrimination, and asked them to comment. Shah said that most American branded pharmaceutical companies partner with Indian companies in many areas of business, including both R&D and marketing. This week, the head of the USFDA is in India to work on cooperation between the two regulatory systems. India currently supplies 30% of the generic medicines consumed in the U.S. Businesses on both sides of the relationship are flourishing. Ragavan told the panel that the Indian price controls for medicine are currently being reformed in order to increase biotechnology innovation. India is moving to advance the innovative sector, but it does not want to do so at the expense of access to medicines for the population.
Pinkert asked Shah if his organization’s members had faced patent denials or compulsory licenses. Shah said that most of his members only recently began developing their own medicines, so most of their new products are still awaiting approval – and there they are facing a problem familiar to American companies. Significant regulatory delays are complicating their efforts to bring drugs to the market, and are eating up the products’ effective patent lives. Shah would like to see the Indian equivalent of the FDA upgraded, and he said that capacity building measures are needed.
Pinkert asked if the compulsory license issue is about allocating R&D costs between developed and developing countries. Ragavan answered that it is a question of access – the Nexaver compulsory license helped to protect public health. Shah said that access to medicines in a very large problem in India, so it is wrong to think about pharmaceutical compulsory licenses in terms of R&D alone. Before the compulsory license was issued on Nexaver, there were only about 200 patients receiving the drug, out of 15,000 people who needed it. He also noted that there have been two other applications for compulsory licenses that the Indian government rejected. Ragavan said that the U.S. considered issuing a compulsory license in 2001 in the wake of an anthrax scare, and the number of Americans who actually got sick from Anthrax was very small compared to the number of Indians with cancer that need Nexaver.
Commissioner Pinkert asked if India’s policies were hurting its own firms. Pomper answered yes – Indian companies are receiving less FDI and are less innovative as a result of the policies. Shah said that India was in compliance with TRIPS standards, and no other WTO Member has challenged its TRIPS compliance through a formal dispute. He said that U.S. industries have been trying to get India to abide by American IP laws.
Pinkert asked if Indian IP policies could help India in the short run, but harm it in the long run. Flynn answered that there is no tension. He noted that only one compulsory license had been issued, and that a lot of the controversy concerned the fact that local working was one of the three grounds upon which it was issued. But this was only a small point argued by the licensee – the real issue at the heart of the matter was pricing. Flynn also said that the Commission should consider how quickly India had changed its laws to meet the norms in TRIPS.
Shah also said that there is not a tension between the two, and that many businesses are successful in India. He noted that Roche has been trying out ways to implement tiered pricing, and said that Merck is growing twice as fast in India as it is growing in the rest of the world.
Commissioner Johanson asked for the rate of use of pirated software in government offices. Schlesinger said he would look up the figure and report it to the Commission in his post hearing statement. Rao said that the issue at hand is not officially sanctioned use of unauthorized software, but instances where employees are loading the software onto their computers at work. The issue is whether or not government offices are adequately policing their employees. For this reason, he is enthusiastic about the idea of taxing (and auditing) offices for their employee’s use of illegal software.
Commissioner Baldwin asked if compulsory licenses could eventually be applied to semiconductors. Ezell said this could definitely happen, and that the expansion of compulsory licenses to other fields was a real fear. India’s 2011 manufacturing policy specifically mentions compulsory licenses for green technologies.
Commissioner Kieff indicated that he is interested in exploring tiered pricing as a possible solution for medicines. He noted that in the U.S. there is a lot of price discrimination for goods such as hotel and airline tickets – where prices for identical goods can vary greatly. Wouldn’t it be rational for IP owners to do this with medicines? Kieff is interested in seeing if tiered pricing could balance the need of companies to recoup investments in R&D, while still allowing people access to medicines. Shah told Kieff that tiered pricing is already happening in some instances. Roche and Merck are experimenting with these types of models, and they are doing well. Subramanian said it is important to note the difference between inter- and intra-country price discrimination. He also said that problems can arise when drugs are re-exported from a low-price country to a high-price country. Furthermore, firms worry that consumers will notice large price differences.
Elliot told the Commission that until the Nexaver compulsory license, there had only been about 12 compulsory licenses issued anywhere, and these had all been for HIV or anthrax, although maybe one had also been issued for erectile dysfunction. [KEI has a long list of examples of compulsory licenses for many different types of inventions, online here.]
Commissioner Pinkert asked if it is possible to quantify the effect of patent policy without seeking input from the businesses affected by it. Shah answered that the Commission should go for “evidence=based” data rather than “perception-based” data. For instance, if you look at the data on Bayer’s sales and royalty income from Nexaver after the compulsory license was issued, it is doing quite well. Subramanian agreed with Shah that it is important to use impartial data, and said this is most true in the area of intellectual property, were tensions run high.
Commissioner Johanson asked if it is difficult for American firms to seek redress in Indian courts, and if they actively make use of the court system. Elliot said that it is not hard to start a court case, but courts’ interpretations of the law and of international obligations can be a problem. There are some anomalies such as Section 3(d) of the Patents Act that are problematic. Schlesinger said that IIPA members have reported structural difficulties in the courts. These include retaining evidence after raids, problems enforcing civil judgments, and low fines in criminal cases. Subramanian argued that general problems with India’s courts and bureaucracy are well-known, but these two institutions work better for intellectual property than for anything else. There is better due process for intellectual property than for other areas of the economy. Ragavan said that firms might not like unfavorable judicial interpretations, but the law is fair.
Commissioner Broadbent asked about the status of the Bilateral Investment Treaty (BIT) the two countries had been negotiating, but which seems to have stalled. Shah said that two items in particular caused the Indian government to take a second look at the BIT – the fact its expropriation provisions cover intellectual property, and the arbitration provisions allowing dispute to be settled outside of India.
Broadbent asked if the Trans Pacific Partnership (TPP) would disadvantage India. Subramanian said that they expected the TPP would lead to about $1 billion worth of trade diversion. This amount of diversion is not negligible, nor is it a huge amount of the bilateral trade between the US and India. The impact of the TPP on India would grow if China were to join. Ezell said that if the TPP is “done right” – to include strong IP, data exclusivity, and protection of trade secrets – then India would be disadvantaged by not being part of the agreement.
Commissioner Kieff once again brought up price discrimination. He asked the witnesses to address it in their post-hearing comments; to discuss whether or not they work, and what factors make them succeed or fail. He asked the witnesses to discuss the social and individual costs of such a system.
Commissioner Williamson asked the witnesses what indices or measurements would be useful for the ITC to use when trying to understand the effects of the policies at the center of this investigation. Subramanian said that the World Bank has good data on human development indicators, and other sources have good data on tariffs. Schlesinger said that IIPA works with many metrics, and they have access to piracy impact studies, but that it can be hard to measure the impact of piracy.
Commissioner Broadbent asked the witnesses to discuss copyright concerns further, and whether local groups in India were working with American companies to strengthen copyright. Schlesinger said that India has the basic TRIPS requirements in its laws, but it lacks a comprehensive IP environment. For instance, there is no system of notice and takedown for online infringements. Local companies are working with the US to help persuade the Indian government to enact notice and takedown.
An ITC staffer asked a question about the competitiveness of Indian firms. Shah said that the Indian generic pharmaceutical industry is unbeatable, and they don’t only compete on price. Indian chemists have developed the most efficient processes to make medicines, and it is less expensive to set up a manufacturing plant in India than elsewhere. This is one of the main reasons why the U.S. branded industry is attacking them.
