India needs to revisit its bilateral investment treaties programme to ensure that multilateral gains on patents are not lost

Desperate to finance the high Current Account Deficit (CAD), India has approved seven proposals for brownfield FDI (foreign investment in existing companies) in the pharmaceutical sector. Under the extant regulatory framework, 100 per cent FDI in the pharma sector is allowed through the automatic route in new projects (greenfield investments) but brownfield investments require the approval of the Foreign Investment Promotion Board (FIPB). Given the critical linkages of the pharmaceutical sector with public health, this piece seeks to highlight the need for caution in approving FDI in the pharma sector in the light of India’s international commitments under Bilateral Investment Treaties (BIT).

Gains

International commitments on intellectual property rights especially patents have always been a sensitive issue especially in the context of the pharmaceutical sector. While one side of the debate argues that stronger patent protection incentivises innovation, the other side has argued that a strong patent regime results in a monopolisation of production of essential medicines, accompanying high prices, and consequent exclusion of large sections of the population from essential medicines.

This tension was best depicted in the troubled negotiations that led to the adoption of the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). The agreement brings the protection of intellectual property within the multilateral framework of trade rules established by the WTO. In these negotiations, while the developed nations wished to keep to a minimum government interference with intellectual property, including the interference through compulsory licensing (authorising a third party to produce the patented drug), developing nations tried to preserve their regulatory freedom. A compromise is embodied in Article 31 of TRIPS, which allows countries to issue compulsory licences on patented drugs. While this provision does not lay down the grounds on which compulsory licences may be issued, it provides certain procedural safeguards and requires payment of “adequate remuneration” to the patent holder.

Indian patent law

Even after the agreement entered into force on January 1, 1995, certain concerns remained, which were sought to be addressed by the Doha Declaration on TRIPS and Public Health. The declaration reiterated the commitment of WTO countries not to sacrifice public health at the altar of patent protection. It clarified the sovereign right of individual countries to decide for themselves the circumstances warranting issuance of compulsory licenses.Making use of the flexibilities in TRIPS, the Indian patent law has made an attempt to balance the need for patent protection of pharmaceutical drugs with the public interest of access to medicines. Thus, while it allows patenting of pharmaceutical inventions, it does not allow ever greening of patented drugs by prohibiting patents on “the mere discovery of a new form of a known substance.” Further, it also allows for the grant of compulsory licences at any time after three years from the sealing of a patent. The requirement to wait for three years is waived in cases of national emergency or extreme urgency. Patents can also be revoked in public interest.

Relying on this balanced statutory framework for patent protection, India issued compulsory licence on German drug major Bayer AG’s cancer drug Nexaver in March 2012. Also, the Supreme Court in Novartis A.G. v. Union of India upheld the rejection of a patent application by Novartis, a Swiss pharma major, to patent a new version of the anti-leukaemia drug Glivec.

Conceding bilaterally

However, the gains that India got multilaterally on patents and public health may be lost bilaterally through BITs. BITs are treaties aimed at protecting foreign investment. These treaties allow foreign investors to bring cases, in front of three privately appointed arbitrators; against host states challenging the latter’s sovereign regulatory measures. This is known as investment treaty arbitration (ITA). India has entered into BITs with 86 countries out of which 73 have already come into force. This includes almost all the major European countries like the United Kingdom, Germany and Switzerland. Further, in recent times, many foreign corporations — from global telecom giants to hedge funds — have issued ITA notices to India for alleged BIT breaches.

Most Indian BITs define investment broadly to include intellectual property like patents. This gives an ITA tribunal jurisdiction over regulatory actions of India that impact the intellectual property like a patent held by a foreign pharmaceutical company. Indian BITs protect “investments” from expropriation. The term “expropriation” is defined in Indian BITs to include direct taking of an asset by the government as well as all other measures having the effect of “direct taking” that deprive the investor of an asset or its use. Typically, Indian BITs permit expropriation only for a public purpose, in a non-discriminatory manner and against compensation. Often, the expression “compensation” is qualified by adjectives like “prompt,” “effective,” “fair,” and “full,” with a requirement to pay interest on compensation. This makes the compensation requirement in BITs much more stringent than the “adequate remuneration” requirement mandated by the TRIPS agreement for issuance of compulsory licence.

Since patents fall within the definition of “investment,” its “taking” by way of compulsory licensing or its revocation would trigger the expropriation provisions in Indian BITs. This would give a privately-appointed arbitral tribunal an opportunity to decide whether sovereign measures like issuance of compulsory licence or revocation of patents is legal or not. Further, to bring this international claim, the foreign investor is not required to exhaust local remedies or get the approval of her government.

In this regard, it is important to derive warning signals from the service of an ITA notice, under the North American Free Trade Agreement (NAFTA), by Eli Lilly and Company, a U.S.-based corporation, against Canada for invalidating two of its pharmaceutical patents. Consequently, nothing stops Bayer and Novartis from initiating international law proceedings against India under India’s BITs with Germany and Switzerland. To add to the worries, the proposed India-U.S. BIT is back in the news and progress is expected on that front during the meeting between Prime Minister Manmohan Singh and President Obama in late September. Apart from the protection already enjoyed by pharma firms under the WTO, a BIT with the U.S. will grant additional protection to the patent rights of American pharma companies in India. Thus, it is imperative that India revisits its BIT programme to ensure that multilateral gains on patents and public health are not lost bilaterally.

(Prabhash Ranjan is associate professor at National Law University, Jodhpur. Deepak Raju recently graduated with an LLM in international law from University of Cambridge.)

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