Patent exhaustion and the rule of law

The philosophy of "rule of law" is very explicit that a law should apply to all and everything, and no one or nothing is exempted. That not even the legislators and administrators of the State should be exempted or have the power to make exemptions. That is why classical political philosophers (like Friedrich Hayek) argued that not all output by the legislature, national or local government councils, can be considered as "general laws" because many rules created by modern legislatures often make certain exemptions. And those "exemptees" and "above the law" are usually the economically protected and politically connected ones.

Take the case of patents or other forms of intellectual property rights (IPR). A patent is granted by a national government to a product or invention by a certain manufacturer. This is the State's way of saying "Thank you for producing an innovative product for the use of the people". But before the State grants such compliment, it first requires lots of papers and permits, authorizations and accreditations, taxes and fees. Once the manufacturer and inventor of such product has complied with all those regulatory requirements, the State, through its agencies that handle and grant IPR, finally gives the patent.

So, securing a patent, complying with the State's various regulatory requirements for an IPR protection, are neither short nor cheap. It takes long and expensive procedures -- from the actual invention itself, discovering the basic and applied sciences that govern the molecules and physical energy of one's invention, checking and counter-checking that there will be no harmful risks to the consumers, to complying with the bureaucracy, discovering the rules and regulations, both printed and hidden, that govern the molecular behavior of government regulators.

This sends mixed signals to entrepreneurs and traders out there. Let us tackle two prominent and opposing signals or options, and the corresponding behavior to each respective option.

One, by requiring stringent and expensive patent approval system, the State will be accountable to protect an IPR, come high or low water.
Corresponding behavior: Go through the entire process, endure the bureaucracy, taxes and fees. This is the route taken by law-abiding individuals, inventors, scientific institutions, and corporations.

Two, by requiring stringent and expensive patent approval system, there should be some loopholes or "exemptions" somewhere.
Corresponding behavior: Don't go through the entire process, don't endure the bureaucracy, taxes and fees. Find those loopholes and exemptions, or introduce and lobby the introduction of such exemptions, and still make money in the end. This is the route taken by less innovative, or bleeding heart collectivist, and often shrewd, individuals, inventors, and corporations.

In the patent and IPR system of many developing countries like the Philippines, the policy of "national exhaustion", meaning a patent on an invention in a particular country will stay until the end of its patent life, is followed. But with growing socialization of health care campaigns in the world, a new concept called "international exhaustion" – for drugs and medicines only – was introduced and negates "national exhaustion". It was introduced first in the WTO under the Trade-Related Aspects of IPRs (TRIPS), and second in the country through the "Cheaper medicines law" (Republic Act 9502). This unfortunately, is a violation of the "rule of law" principle because it grants exemption to the general rule of protecting private property rights, regardless of reason or alibi, social, cultural or whatever.

The scheme violates "national exhaustion" rule but the said violation is legalized and implemented by the State under the "international exhaustion" rule is called "parallel importation". Drug manufacturer X went through option one discussed above (i.e., endured all the bureaucracies and paid all the taxes and fees to get a patent, say in the Philippines). Now the government agency that granted the patent to company X can now say, "The patent that I gave to drug manufacturer X is now 'exhausted' and useless because the same patented drug it sells here has been introduced and sold in other countries. So other firms can now parallel import said drug and sell it here; no need to go through the long process of securing a patent."

This sudden about-face can be done instantly and the national patent system for the affected drug becomes a farce and a hypocrisy. The plentier the practice and declaration of "international exhaustion", the bigger the hypocrisy.

But that's on the level of political and legal philosophy alone. Let us tackle the implication of "parallel importation" scheme on public health, which is the main reason why said violation of the rule of law on patent has been justified in the first place.

Drug trader Company Y buys "cheaper medicines" from the sister firm of Company X from abroad, then transported, stored, and distributed said drug to various drugstores, pharmacies and other drug retail outlets in the home country – all without permission or approval by Company X being the national patent holder of said drug. One or more patients develop bad allergies, or develop negative side effects, after taking the "cheaper medicine" imported and distributed by Company Y. It turns out that any or all of the following possibilities happened:

The imported "cheaper medicine" was mishandled, mis-stored (say a few degrees Celsius hotter than the minimum temperature required for effective storage), opened from original containers and repacked, and consequently contained wrong labels and wrong expiration date, etc.
The imported "cheaper medicine" was counterfeit, produced by a fake and unlicensed drug manufacturer abroad, and the medicine contained very little or no active ingredients that can cure a particular disease.
The original manufacturer (sister firm abroad of Company X) found some health risks in the medicine and was recalling it, but Company Y is just a trader and has spent money already for the importation, transportation, storage and distribution to many retail outlets here, and would not care recalling said drug since it will not be affected anyway because it does not carry the corporate brand of the drug manufacturer.
Who will the adversely affected patient complain and possibly sue? Company X at home country, or its sister firm abroad, or drug trader Company Y, or the physician who prescribed the medicine, or the drug store?

Recently the Philippines and other importing countries were gripped by the scare of melamine-tainted milk from China. The chemical melamine is said to cause kidney problems on babies and children who consumed the milk. A number of raids were conducted, by the police, the Health department, and other government agencies, to remove from the shelves and storage areas of supermarkets, drug stores and warehouses, milk products that are proven or even suspected of containing melamine. The panic was wide but pinpointing who is responsible for manufacturing and distributing said melamine-tainted milk was not clear.

A similar scare in the distribution of counterfeit medicines, or original but mis-handled and mis-stored medicines, or medicines recalled by drug manufacturers but not recalled by drug traders, can happen someday in this country or other countries that implemented the "parallel importation" and "junk the national patent" scheme.

But policy damage has been done, because laws have been enacted in a number of countries that legalized the violation of the rule of law on national patent and IPR protection. And pretty soon, an implementing rules and regulations (IRR) will be promulgated in the Philippines to give more meat and mechanism on how to operationalize the violation of the rule of law.

Some "remedies" or remedial measures can be introduced though, in order to reduce the potential risks and damage by this scheme. This author has proposed some safeguard measures to be incorporated in the planned IRR. Seems that not one of them has been considered by the government agency that has the power to give patent and the power to render said patent "exhausted" and meaningless later on under the "international exhaustion" rule as legalized by the new law.

Another remedy perhaps, is for the all government agencies involved that required the submission of various regulatory requirements and agencies that collected various taxes and fees, to reimburse the full costs of compliance by the patent holder. The latter's right to private property protection of an invention has been disregarded by the same government agencies that promised to protect such private property right. Hence, the patent holder should be fully reimbursed at least, as a way of the State saying, "Sorry for disregarding your private property right and for my violation of the rule of law on IPR protection."