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NAFTA’s DISMANTLING OF CANADIAN COMPULSORY LICENSING SYSTEM WILL BE EFFECTIVE RETROACTIVELY FROM DECEMBER 1991; TREATY ALSO INCLUDES PIPELINE PROTECTION

Executive Summary

The North American Free Trade Agreement's provisions to eliminate Canada's compulsory licensing system would extend patent protection to new chemical entities stretching back to Dec. 20, 1991. An industry advisory group to the U.S. negotiators of the North American Free Trade Agreement notes in a recent report that, under Article 1709:7 of the treaty, "Canada will be required to dismantle its compulsory licensing system that discriminates against pharmaceutical products for all compulsory licenses granted after Dec. 20, 1991." Called IFAC-3 (Industry Functional Advisory Committee on Intellectual Property Rights for Trade Policy Matters), the advisory group said that the NAFTA provision dealing with Canada's compulsory licensing law for pharmaceuticals "was one of the major intellectual property objectives" of the industry group "in the NAFTA negotiations." The U.S. Pharmaceutical Manufacturers Association estimates that there are currently "four to five dozen" compulsory license applications covering a number of major pharmaceutical products that will be affected by NAFTA, including several approved since Dec. 20. Under NAFTA, the Canadian government has agreed to revoke those compulsory licenses granted to generic firms after Dec. 20, 1991 once the free trade treaty is enacted. Since 1987, Canada has granted seven years of marketing exclusivity to new chemical entities discovered and developed outside of its borders. Prior to 1987, Canada granted no exclusivity from compulsory licensing. At the end of the seven- year exclusivity period, Canadian generic manufacturers currently are allowed to market competitive products after receiving approval for a compulsory license application. Legislation (C-91) to dismantle Canada's compulsory licensing system and provide 20 years of patent protection for pharmaceuticals was introduced in Parliament last June ("The Pink Sheet" July 13, p. 6). That bill, called the Patent Act Amendment Act, 1992, was "tabled" on June 23 and was read a second time on Sept. 17. The bill is expected to pass Parliament next spring. NAFTA essentially "ratifies" C-91 because the bill will have to be enacted if the trade pact is cleared by Parliament. NAFTA is set to go into effect on Jan. 1, 1994 provided that the legislative bodies of Mexico, Canada, and the U.S. ratify the agreement by that date. A "handshake" agreement was announced on Aug. 12 ("The Pink Sheet" Aug. 17, In Brief) and a cermonial signing of the agreement took place between the heads of state of the three countries on Oct. 7 in San Antonio, Texas. Another important NAFTA provision for the pharmaceutical industry essentially extends patent protection granted in one NAFTA country prior to the effective date of the agreement to other NAFTA countries. The IFAC-3 report notes that NAFTA article 1709:4 "will require countries that provide for the first time patent protection for pharmaceutical and agrichemical products already patented elsewhere to provide pipeline protection." The pipeline provision applies to naturally occurring substances without patent protection in a NAFTA country prior to January 1, 1992 and all other pharmaceutical and agrichemical products without patent protection in a NAFTA country as of July 1, 1991 that had received patent protection in at least one NAFTA nation. The treaty requires the NAFTA signatories to provide companies with the means to obtain patent protection in their countries for the remaining life of a patent granted in other NAFTA countries. The provision contains two caveats -- the product has not been marketed in the country where patent protection has been denied; and companies must make a "timely request" for patent protection. The inclusion of the pipeline provision has relatively little immediate significance for the industry, according to PMA, given that Mexico's 1991 patent act already includes a pipeline provision and that Canada, prior to NAFTA, essentially has not provided any pharmaceutical patent protection. However, because NAFTA is expected to become a prototype for other free trade agreements, the inclusion of a pipeline protection provision in the treaty is expected to serve as a precedent in future trade negotiations, particularly with Latin American nations, such as Brazil, Argentina, Venezuela, and Chile. PMA indicated that inclusion of a pipeline provision in NAFTA sends a signal to GATT negotiators as well. Overall, the IFAC-3 report is very favorable toward NAFTA. "IFAC-3 believes, that taken as a whole, the NAFTA intellectual property provisions represent the highest standards of protection and enforcement so far achieved by U.S. negotiators," the report states. In addition, IFAC-3 commended the negotiating team and proferred its support for the treaty. Members of IFAC-3 associated with the pharmaceutical industry included PMA Senior VP- International Affairs Harvey Bale, PhD, Pfizer VP and General Counsel Constantine Clemente, Monsanto General Patent Counsel William Duffey, and P&G Associate Director-International David Elliott. Other industries represented on the committee included entertainment, broadcasting, publishing, apparel, motor vehicle manufacturing, chemicals, and computers. However, the committee also highlighted several "problematic" provisions in the treaty, which the group suggested should be "remedied in future negotiations." Among the "most serious problem areas" in NAFTA, according to the committee report, include: "the optional exclusion from patentability of plants and animals, and of diagnostic, therapeutic and surgical methods"; and "overly broad exceptions to the exclusivity of the patent grant that may negate the patent right." The report points out that the treaty allows participating nations a number of exclusions to patentability that are similar to patent law in Western Europe, including diagnostic, therapeutic or surgical methods, plants and animals other than microorganisms, and biological processes for producing plants and animals other than non-biological and microbiological processes. However, IFAC-3 noted that the exclusion provision in NAFTA, unlike the European Patent Office, also covers plants and animals that are "not varieties." IFAC-3 said it is "especially concerned that transgenic plants and transgenic animals may be excluded from patentability by parties to NAFTA." To North American biotech firms, the report suggests, "this is very disquieting." The report adds that the level of patent protection available in the U.S. "is critical as an incentive for the business entrepeneur who is making risky and expensive research investments in this new science of biotechnology."

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