TRANSFERRING CLEAN TECHNOLOGY TO DEVELOPING NATIONS: WHY COMPULSORY LICENSING IS NOT THE ANSWER Hillary Musselman December 12,

2009 Introduction In order to achieve the maximum desired result, clean technologies must be implemented globally. If the use of a technology is limited to the country in which it was developed, or a few specified others, the environmental benefits of that technology will only be localized. Global propagation of innovations is essential if clean technologies are to have the optimum effect. However, the state of intellectual property protection regimes in many countries creates a significant barrier to the transfer of technology. This is particularly true in the case of developing countries, which often provide only weak IP protections. As a result, many countries have been unable to gain access to the clean technologies they need to help remedy harmful environmental conditions. In response, developing countries, such as India and Brazil, have made calls for the compulsory licensing provisions that exist under TRIPS to be applied to clean technologies as they have been to pharmaceuticals.1 Such calls, however, fail to take into consideration the many differences that exist between clean technology and medications, the most significant of which are the sources of the technology, the sources of R&D funding, and the effects of implementation. These differences indicate that compulsory licensing is not the best way to ensure that innovations will be spread globally and that it may actually have the unintended effect of reducing investment in, and development of, new technologies. In order to facilitate the

Robert Collier, Dispute over clean-tech patent protections, SAN FRANCISCO CHRONICLE, July 28, 2009, at A11, available at http://www.sfgate.com/cgibin/article.cgi?f=/c/a/2009/07/28/ED3018UQR3.DTL&type=tech.

global implementation of clean technology and help ensure that innovations will have the maximum impact, alternative transfer schemes and incentives need to be devised.

II. TRIPS and the Doha Round TRIPS, the Agreement on the Trade Related Aspects of Intellectual Property Rights, is a bargain between members of the World Trade Organization. Developed nations are assured of receiving minimum levels of intellectual property protections in all member-states in exchange for ensuring that developing nations will have greater access to basic goods.2 The terms of this agreement establish the minimum level of protection that must be provided by a member-states intellectual property regime, but individual countries remain free to craft their laws according to their needs.3 As a result, developed nations tend to implement far more extensive protections than developing nations.4 This is due to the fact that the economies of countries like the United States are highly dependent on strong intellectual property rights, particularly patents, while developing countries benefit from offering lower levels of protection, which allows them to take advantage of the ability to free-ride on existing IP.5 WTO members are required to provide patent protections, but compulsory licenses may be granted in certain circumstances. Article 30 of TRIPS states that Members may provide limited exceptions to the exclusive rights conferred by a patent, provided that such exceptions do not unreasonably conflict with a normal exploitation of the patent and do not unreasonably prejudice the legitimate

Rahul Rajkumar, The Central American Free Trade Agreement: An End Run Around the Doha Declaration on TRIPS and Public Health, 15 Alb. L.J. Sci. & Tech. 437 (2005). 3 id. at 443. 4 id. 5 Benjamin K. Sovacool, Placing a Glove on the Invisible Hand: How Intellectual Property Rights May Impede Innovation in Energy Research and Development (R&D), 18 Alb. L.J. Sci. & Tech. 381, 391 (2008).

interests of the patent owner, taking account of the legitimate interests of third parties.6 Although it does not explicitly say so, this is the provision that allows compulsory licenses to be granted, subject to terms identified in Article 31, including non-exclusivity, non-assignability, and geographic limitations.7 These provisions, read in conjunction with Article 8, which allows member-states to take steps to protect public health and nutrition,8 indicate that in the case of a public health crisis, states should be free to issue compulsory licenses of patented goods. In 2003, as a part of the Doha round of discussions aimed at liberalizing trade between WTO members, the Doha delegation recognized the need to ensure that developing countries have access to pharmaceuticals, particularly those used to treat AIDS and Malaria.9 They issued an amendment to TRIPS expressly stating that the agreement should be read liberally to protect the public health and that pharmaceuticals could be the subject of compulsory licenses.10 This amendment made explicit the allowance implied by Articles 8, 30, and 31.

III. The Argument for Compulsory Licensing of Clean Tech In 2007 the UN Climate Change Conference was held in Bali, Indonesia. The conference was held to develop an agreement that would facilitate technology transfers in order to reduce greenhouse gas emissions according to the targets established by the Intergovernmental Panel on

Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, art. 7, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, THE LEGAL TEXTS: THE RESULTS OF THE URUGUAY ROUND OF MULTILATERAL TRADE NEGOTIATIONS 320 (1999), 1869 U.N.T.S. 299, 33 I.L.M. 1197 (1994) [hereinafter TRIPS Agreement]. 7 id. at art. 31. 8 id. at art. 8. 9 Rajkumar, supra note 2, at 440. 10 id.

Climate Change.11 However, concerns of developed countries about inadequate protections for IP were too great, and the conference ended without any substantive agreements. Prior to the 2009 Climate Change Conference in Copenhagen, both Brazil and India made calls for compulsory licensing provisions to be applied to clean technology.12 This was not, however, the first time the issue had been raised. The European Parliament has investigated whether or not TRIPS may act as a barrier to transfers, and in 2008 the US National Intelligence Council indicated that developing countries might ask for green technology based on AIDS provisions.13 These requests are based on the known health consequences of unsafe environmental conditions and international governmental recognition of the threats created by global warming and pollution. According to the World Health Organization more than 10% of the deaths in twenty-three countries are caused by dirty water, unsanitary conditions, and indoor pollution caused by unclean cooking fuels.14 Additionally, in the same way developed countries have recognized the need to increase funding and international cooperation for AIDS research, the global community has recognized the need to work together to facilitate the development and transfer of clean technology to developing countries. In 2008, the United States established the Clean Technology Fund. At its launch, President George W. Bush said, [w]ell call on all nations to help spark a global clean energy revolution by agreeing immediately to eliminate trade barriers on clean energy goods and services.15 The same year, G8 Finance ministers issued a statement in support

11

Elizabeth Burleson, Energy Policy, Intellectual Property, and Technology Transfer to Address Climate Change, Climate Change and Human Rights Symposium, 18 University of Iowa Transnational Law and Contemporary Problems, 69, 71 (2009). 12 Collier, supra note 1. 13 Burleson, supra note 11, at 90. 14 Burleson, supra note 11. 15 Burleson, supra note 11, at 80.

of the launch of the Climate Investment fund and explicitly stated their conviction that urgent and concerted action is needed to help developing countries move towards a lower carbon growth path. . .16 and recognized that developed nations have a . . .responsibility to show leadership in tackling climate change.17 However, despite recognition of the public threat created by both AIDS and unclean environmental conditions and international calls for increased collaboration and funding and for the elimination of barriers to trade, there are extensive differences between the two types of technology. These differences make calls for compulsory licenses of clean technology impractical.

IV. IMPLEMENTATION AND EFFECT OF CLEAN TECHNOLOGY Key differences between pharmaceuticals and clean technology are the ability to prove effectiveness and the ability to prove that when prices are reduced through compulsory licensing technologies can actually be implemented in order to achieve the desired result. When medications are the technology at issue, the problem is specific and identifiable and the effectiveness of a drug in treating a specified problem is proven. In a study on the effectiveness of generic antiretroviral drugs administered in poor, rural areas of Africa, the HIV virus could not be detected in 85% of patients who had been on fixed-dose therapies for more than six months.18 With clean technology, however, the effectiveness of a given technology in adequately addressing a problem for the benefit of the public health is far less certain.
16

G8 Finance Ministers' Statement on Climate Investment Funds, DOW JONES FACTIVA, June 14, 2008. 17 id. 18 Mary Tripsas, Everybody in the Pool of Green Innovation, NEW YORK TIMES, October 31, 2009, available at http://www.nytimes.com/2009/11/01/business/01proto.html?ref=business.

For example, a technology that provides a clean source of energy for cooking in order to reduce airborne pollutants created by fuels like wood will not have an effect on airborne pollutants from heating fuels. Part of the problem would be solved by the cooking fuel, but the underlying problem the technology was created to address, airborne pollutants in homes, would remain. The benefits of the cooking fuel alone are probably not significant enough to justify issuing a compulsory license on the basis of public health. In the case of clean technology, proving that granting a compulsory license would achieve the desired results requires extensive analysis on a case-by-case basis that is not necessary with pharmaceuticals. Additionally, developing countries may not be able to effectively implement technologies for which compulsory licenses are granted. The Center for American Progress and Global Climate Network asked more than one hundred experts from governments, universities, and businesses what they viewed to be the primary barriers to transfers of low-carbon technologies.19 They cited lack of technical capabilities as one of the key obstacles to successful transfers. Technology transfer is not wholly or perhaps even mostly about the movement or licensing of equipment from jurisdiction to jurisdiction (although clearly some early climate and political victories might emerge from ensuring this happens). It also concerns the development of skills and know-how in order to use equipment and to innovate in the future.20 Developing countries may also lack the infrastructure needed to support new technology. Therefore, even if prices are reduced to levels that make technology diffusion possible, receiving countries may not be able to put it to use. Where medications are concerned, however, infrastructure and technical know-how do not play the same role in successful implementation.

19

CENTER FOR AMERICAN PROGRESS AND GLOBAL CLIMATE NETWORK, BREAKING THROUGH ON TECHNOLOGY OVERCOMING THE BARRIERS TO THE DEVELOPMENT AND WIDE DEPLOYMENT OF LOW-CARBON TECHNOLOGY, 1 (2009). 20 id. at 3.

Studies show that use of medications is highly price sensitive and, where costs are reduced, people are able to obtain and use drugs.21 Early programs indicate that other problems cited by drug companies as reasons why generics would be ineffective, such as lack of infrastructure, doctors, and information, have shown to not act as barriers to use of medications where lower priced generics are made available.22 Unlike clean technology, little specialized knowledge or skill is required to distribute medications and far less is required by way of infrastructure to ensure access.

V. DIFFERENCES IN DEVELOPMENT AND PRICING Market forces and the impact of substitute goods play an important role in technology pricing. One year of a brand name antiretroviral treatment costs $15,000, while one year of a generic therapy costs $140.23 The difference between the cost of a brand name drug offered in the United States and a generic offered under a compulsory license exists because drug companies enjoy monopolistic pricing power over their medications.24 With clean technology, however, there is far more competition between firms, indicating that the knowledge required to provide an end-product is shared between competitive firms and thus is not the basis upon which competitive advantage is garnered.25 Multiple technologies may produce similar effects and, therefore, be subject to the forces of market competition. Because of the impact of substitute goods, it may be difficult to reduce the price of a technology much below market valuation. Market forces also play a critical role in the development and protection of technologies.
21 22

Rajkumar, supra note 2, at 439. Id. 23 Id. 24 Michael Hasper, Green Technology in Developing Countries: Creating Accessibility through a Global Exchange Forum, 2009 Duke L. & Tech. Rev. 1, 5 (2009). 25 id.

[I]f competitors can successfully copy innovations without having to share in the initial costs and risks of making them, inventing firms are always at a disadvantage.26 Without intellectual property protections a company that invests in research and development will always lose because competitors can reproduce their work and sell it at lower prices while still making a profit, thereby driving the inventor, who must charge higher prices to recover the costs of development, out of the market.27 The patent system recognizes this and offers inventors the promise of a limited monopoly and the opportunity to recoup R&D investments in exchange for the work of invention and disclosure. This system is intended to ensure that people will invest their resources, both mental and financial, in innovation for the benefit of all.28 Since intellectual property rights fuel innovation necessary for the development of environmentally sound technology, protecting intellectual property rights leads to advances in environmentally sound technology. Thus, environmentally sound technology transfer requires a careful balancing act that includes fair treatment for innovators and energy policies that stimulate diffusion of environmentally sound technology to address climate change.29 Patents and certainty in IP protection are particularly important when funding for development comes from investors. In 2008 77%30 of all expenditures in pharmaceutical R&D were made by just 29 companies31 whose combined annual sales totaled $288,285,500,000.32 Drug development is conducted primarily by large companies with massive budgets and extraordinary profits. These companies are able to rely on their own resources to fund research

26 27

Sovacool, supra note 5, at 391. id. 28 id. at 385. 29 Burleson, supra note 11, at 86. 30 PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA, PHARMACEUTICAL INDUSTRY PROFILE 2009, 2,58 (2009). 31 id. at 52,53. 32 id. at 64.

and development efforts. As a result, they are less affected by the uncertainty created in an IP portfolio by the risk of being subjected to a compulsory license. Large, self-reliant companies such as IBM and GE invest extensively in clean tech R&D, to be sure, 33 but much development in this sector comes from smaller firms that depend on venture capital funding. In 2006, cleantech became the third-largest North American venture capital investment category (11 percent of all venture investments), behind software and biotechnology,34 and VC firms invested $965,000,000 in clean technology companies in the third quarter of 2009 alone.35 In a venture capital transaction investors provide funding to developing companies in exchange for an ownership interest, which includes a stake in later profits and some level of control over corporate decision-making. Experienced VCs come to the negotiating table with a set of expectations based on previous experiences, and they assess the value of potential investment opportunities on the basis of these expectations.36 It is here, in the valuation stage, that certainty in an IP portfolio becomes essential. Intellectual property is an intangible asset that does not fit neatly within the confines of generally accepted accounting principles (GAAP).37 Instead, it is assessed according to the perceived ability of a company to successfully capitalize

33

GE Innovation Battery Feature: Hybrids, Electric Car, A123Systems, http://www.ge.com//innovation/battery/index.html; IBM Smart Grid- Ideas- United States, http://www.ibm.com/ibm/ideasfromibm/us/smartplanet/topics/utilities/20081124/index.shtml?&r e=spf. 34 CENTER FOR AMERICAN PROGRESS AND GLOBAL CLIMATE NETWORK, supra note 20, at 8. 35 VC cleantech deals in Q3 up 46% to $965M, SILICON VALLEY/SAN JOSE BUSINESS JOURNAL, October 29, 2009, available at http://sanjose.bizjournals.com/sanjose/stories/2009/10/26/daily89.html. 36 Manuel A. Utset, Reciprocal Fairness, Strategic Behavior & Venture Survival: A Theory of Venture Capital-Financed Firms, 2002 Wis. L. Rev. 45, 90 (2002). 37 Eran Kahana, Intellectual Property in an Informational Economy: Protecting Intellectual Capital in Startups: A Guide for the Entrepreneurial Attorney in the New Economy, 28 Wm. Mitchell L. Rev. 1187, 1194 (2002).

on it. A company that is able to successfully defend against competitors and license its products is worth far more than one whose ability to enforce its IP rights is in question.38 New Economy companies are not valued based on their historical earnings and tangible assets for the simple reason that they usually have none of those attributes, which is particularly true in first round financings. Instead, they are valued on their potential earnings power, which is usually extracted from the perceived caliber of their intellectual property.39 When a compulsory license is granted, a company does not reap the same benefits as it does in a bargained for agreement, and the risk of being subject to such a license creates uncertainty in IP rights. This decreases the perceived value of a company and reduces the amount that a VC may be willing to invest in a company or technology. If companies are not able to obtain adequate funding to support new ventures, they will be forced to scale back on, or eliminate, research and development efforts, thereby greatly reducing the number of new technologies that become available.

VI. ALTERNATIVE OPTIONS TO ENCOURAGING TRANSFERS In recognition of the inadequacy of compulsory licensing as a means of facilitating transfers of clean technology, a number of scholars have proposed alternative solutions. One option is to rely on the market incentives that come with innovation. In a survey of Swiss companies, 66% cited internal cost savings and 80% cited product development as reasons to innovate.40 Additionally, banks are making it easier for firms developing clean technology to borrow money.41 The problem with relying solely on the benefits of development to encourage invention is that it assumes that a company has adequate resources to develop in the first place.
38 39

id. at 1198. id. at 1195. 40 Hasper, supra note 25, at 2. 41 id. at 3.

For large existing innovators, like GE or IBM, this may be true, but where smaller firms are concerned, the problem of access to R&D funding remains. And, although clean technology companies may have increased access to debt financing from banks, a business cannot be built on debt alone. Access to equity markets is essential. Itaru Nitta, Chair of the Green Intellectual Property Project, proposed a Patent Insurance system that would take the form of an additional fee paid when filing a patent application. The extra fee would serve as a premium for defending patent rights against the risk of compulsory license.42 It would be paid into a trust fund that would be used to provide a subsidy for developing countries to buy patented products and would ensure royalty payments to patentees for use of their inventions.43 The fee would also include a translation waiver and discounted examination fees.44 The challenge with this solution is that establishing such a system requires a level of international cooperation, which has so far acted as a stumbling block in Doha discussions. An additional solution that has been proposed is to create a non-governmental organization (NGO) exchange that would bring together venture capitalists, firms in developing countries, and technology owners in order to reduce transfer costs and cut down on informational asymmetries that exist between those who have technology and those who need it.45 As a part of the exchange, a firm in need of technology would submit a demand/business proposal to a participating VC who could assess it and determine whether or not it wanted to work with that firm. After deciding to work with a firm, the VC would then locate a technology available

42

Itaru Nitta, Patent Insurance: A future legitimacy for fostering true innovations and ensuring access to them, PATENT WORLD, March 2009. 43 id. 44 id. at 2. 45 Hasper, supra note 25, at 5.

through the exchange and approach the owner who would be able to decide if providing the technology to a given deal would serve its interests.46 This plan presupposes that the technologies offered on such an exchange would not be the best and newest technology, which is highly dependant on market advantage. Since many technology holders have working forms of green technology that would not be viable in a higher-end competitive market, they have a lot of latent technology that is not exchanged in the marketplace. Because this forum would involve a lot of entrepreneurs in countries that have not reached the cutting-edge on the technological scale but still demand green technology in a form that is preferable to conventional methods and would help plant the seed for technology utilization in a "green" direction, the forum essentially opens up demand and supply that otherwise is obfuscated by the prior inability of the market to effectively capture these elements.47 The forum provides the means by which a company can receive additional funding to further develop a technology that has been left by the wayside, thereby creating an alternative market for technologies that are not competitive in the primary market. The problem with this is that it requires inventors to be able to develop their ideas to a certain level of concreteness, which requires initial funding. Therefore, smaller companies and start-ups are not likely to be able to participate without additional incentives for inventors and investors. Larger companies have larger budgets with which to engage in research and development, and they frequently begin to work on technologies that are abandoned before they are fully developed. Such firms are likely to find participation in an NGO exchange lucrative because it provides an alternative outlet for technologies that have been abandoned prior to marketing because they are not considered competitive. These companies may find it worthwhile to invest a little more to fully develop an otherwise abandoned technology to a level where it is

46 47

id. Hasper, supra note 25, at 6.

viable in an exchange and will allow the company to recover some or all of its initial R&D investment, which would have been lost if the technology had been abandoned. The same is probably not true of smaller firms, which must allocate resources carefully. Smaller companies are not able to engage in semi-experimental R&D the way that larger companies do, particularly where VCs are involved, as VCs require proof of concept as a condition of investment. If a project is not going to be successful on the broader market, a smaller company will not be able to continue to invest funds and talent simply for the sake of participating in a secondary market where return on investment is likely to be significantly reduced.

VII. RECOMMENDATIONS In attempting to craft a workable alternative to compulsory licensing, it is important to realize that the ultimate goal is ensuring access to technologies without significantly reducing the intellectual property protections that are crucial to innovation. Despite a need for low-cost access to clean technologies to protect and maintain public health, it is not in the best interest of developing countries to issue compulsory licenses where doing so introduces uncertainty into the IP protection system and harms inventors ability to engage in research and development. Although each of the previously discussed alternatives is in some way flawed, there are elements of each that could be combined into a more viable option. International cooperation is critical. Developing countries must understand and accept the essential role that IP plays in the economies of developed countries, but developed countries must to be willing to take action at home in order to promote technology transfers. In June 2009, the US House of Representatives unanimously rejected allowing any reduction in IP protections

as a part of a new climate change treaty,48 but there are other options available to the government that exist beyond the intellectual property protection regime, most notably, tax incentives,49 which may piggyback on the existing market incentives that exist for R&D in clean technology. The key to the success of such a program is that it be enacted so as to promote development and diffusion of technology despite uncertainties that may exist in IP. It must allow technology/patent sharing to become part of a sound and successful business plan that investors can support, and it must be applied to both inventing companies and the firms that invest in them. By applying tax incentives in this way, governments of developed countries would make it far easier for smaller firms to participate in an NGO exchange or to negotiate independently with foreign companies for licenses at rates lower than those that could be offered without the benefit. The first step of such an incentive is for governments to create a schedule of technologies that tax deductions may be applied to. When a company develops a technology that is listed on the schedule they, and their investors, will be eligible for one deduction, and when they then transfer the technology to a developing country, to be defined in the code, they may claim another, more significant deduction. The company and its investors will be eligible for the transfer deduction in each year that the license to the developing country remains in effect, or, if the technology is deployed in a developing country which then subjects it to a compulsory license, the company and its investors may claim the deduction in each year that the compulsory license is in effect. Although this does not eliminate the risk that a compulsory license may be granted if a technology is transferred to a developing nation, it mitigates the damage of uncertainty by providing an alternative financial benefit to those who choose to develop and transfer, and those
48 49

Collier, supra note 1. Burleson, supra note 11, at 86.

who invest in development and transfer despite the risks. If a company is able identify a particular technology that it is working on as fitting into the class of technologies eligible for deductions it will be able to include the tax incentive in its business plan and make it beneficial for VCs to invest in clean technology to the benefit of people at home and abroad. Tax incentives serve the dual purposes of encouraging R&D in clean technology generally and encouraging transfers to developing countries. They fulfill the obligation of developed nations to help facilitate technology transfers to developing nations, which exists under TRIPS Article 66.50 And, they help to ensure that clean technology can be deployed globally, thereby achieving the maximum benefits of its use and helping protect the people who need it the most.

VIII. CONCLUSION Compulsory licensing has been used successfully in order to ensure that developing nations have access to pharmaceuticals in accordance with TRIPS Articles 8, 30, and 31, and in recent years calls have been made for these articles to be read so as to allow compulsory licenses to be granted for clean technologies. These calls do not, however, take into consideration the many differences between the two types of technology. Because the deployment of clean technology is not certain to solve a given problem and because its development is largely dependent on investor funding, compulsory licenses will not be as effective as with medications. Additionally, introducing uncertainty into the IP system may have a chilling effect on investments and may reduce the ability of companies to secure funding to support development. A number of alternatives to compulsory licensing have been proposed, but none has fully addressed the realities of how clean technology is developed or the challenges of achieving
50

TRIPS, supra note 6, at art. 66.

international cooperation. In order to ensure that technology transfers can take place and that developing countries will have access clean technology, developed countries need to create incentives, such as tax deductions, to encourage inventors and investors to devote resources to development and transfers even where there may be uncertainty in the IP protections provided to the technology in the developing country. If companies and their investors are given additional incentives for creating and transferring clean technology they can incorporate these incentives into a sound business plan and they will be more able to participate in previously suggested alternatives, such as an NGO exchange.