The Innovation Files: 2014 Special 301 Report Highlights Continuing Concerns over India’s Protection of Foreign IP Rights

The Innovation Files

2014 Special 301 Report Highlights Continuing Concerns over India’s Protection of Foreign IP Rights

May 1, 2014

By: Stephen Ezell

The United States Trade Representative Office’s (USTR’s) 2014 Special 301 Report, released April 30, again places India on the Priority Watch List, highlighting continuing concerns over India’s inadequate protections of foreign intellectual property rights (IPRs), many of which were raised in ITIF’s recent report The Indian Economy at a Crossroads. USTR’s Special 301 reports raises intellectual property concerns in India across a wide range of sectors—including life sciences, renewable energy, digital content, and information and communications technology (ICT) products—so much so that USTR took the unusual step of announcing an out-of-cycle review (OCR), meaning that USTR will undertake an additional review of India’s intellectual property rights protection policies in the fall of 2014.

As the 2014 Special 301 Report notes, “Serious difficulties in attaining constructive engagement on issues of concern to U.S. and other stakeholders have contributed to India’s challenging environment for IPR protection and enforcement.” And while the report does commend India for making “some limited progress in improving its weak IPR legal framework and enforcement system” at the same time it notes that “IP protection and enforcement challenges are growing, and there are serious questions regarding the future of the innovation climate in India across multiple sectors and disciplines.” These conclusions mirror the findings of other independent studies, such as the U.S. Chamber of Commerce’s GIPC International IP Index: Charting the Coursewhich ranked India last out of 25 countries on 30 factors indicative of an IP environment that fosters growth and development.

A particular concern of the 2014 Special 301 report is India’s growing use of compulsory licensing of foreign intellectual property across multiple sectors, including life sciences and renewable energy. As ITIF writes, compulsory licenses were originally intended for use in extraordinary situations of extreme urgency or other national emergency, but India appears to be increasingly using them to obtain technology or intellectual property developed by others without having to pay the substantial costs associated with developing and testing the product. For example, on March 9, 2012, the Indian Patent Controller General granted a compulsory license to Natco, an Indian pharmaceutical company, enabling it to produce a patented cancer drug (Nexavar) made by Bayer. As the Special 301 Report notes, “the grant of the compulsory license was based, in part, on the innovator’s failure to “work” the patent in India because it imported its products, rather than manufacturing them in India.” Specifically, this stems from an interpretation made by the Indian Intellectual Property Appellate Board (IPAB) of Section 84 of India’s Patents Act which “suggests that a patent could be subject to a compulsory license if it is not manufactured in India.” As the Special 301 Report summarizes the potentially far-reaching consequences of such as decision, it “could inappropriately pressure innovators outside of India—including those in sectors well beyond pharmaceuticals, such as green technology and ICT—to manufacture in India in order to avoid being compelled to license an invention to third parties.”

And in fact this is precisely what has happened in the renewable energy sector. As the Special 301 Report continues, although India’s government has issued only one compulsory license under Section 84, “India has made clear that it views compulsory licensing as an important tool of industrial policy for green technologies, with the potential to be applied more regularly across economic sectors.” Indeed, India has promoted compulsory licensing as a “mechanism available for government entities to effectuate technology transfer in the clean energy sector” and has even sought to “multilaterialize this approach in ongoing negotiations under the United Nations Framework Convention on Climate Change.” But clearly clean energy is not in the same category as medicines. The benefits of clean energy accrue to the planet through lower CO2 emissions, and as ITIF’s Center for Clean Energy Innovation states in a forthcoming report, compulsory licensing of clean energy technologies will slow the rate of global clean energy innovation, harming the planet, not helping it.

It’s clear that India’s increasing use of compulsory licenses is spreading to other developing nations. For instance, in September 2013, South Africa’s Draft National Policy on Intellectual Property proposed using compulsory licensing both as a bargaining tool in price negotiations with producers of innovative medicines and as a means to promote technology transfer to South Africa, noting that it took the policy inspiration in part from India.

The 2014 Special 301 Report also notes that piracy and counterfeiting continue to present considerable challenges in India, the former particularly with regard to digital media and the latter with regard to generic pharmaceuticals. The 301 cites a report from the International Chamber of Commerce and the Federation of Indian Chambers of Commerce and Industry, Counterfeiting, Piracy and Smuggling in India—Effects and Potential Solutions, which analyzed seven key industry sectors vulnerable to such activities—automotive parts, alcohol, computer hardware, mobile phones, packaged foods, personal goods, and tobacco products—and concluded that rights holders in 2012 suffered lost sales in India amounting to 21.7 percent or approximately $11.9 billion. Collectively, the Indian government’s economic loss tied to these illicit activities totaled approximately $4.26 billion.

As the Special 301 Report notes, the problem is particularly acute in the audiovisual sector, with “India having one of the highest rates of piracy of audiovisual works in the world.” In 2012, the motion picture industry experienced losses estimated at $1.1 billion, an increase of 15.8 percent from 2008. However, as ITIF writes in The Indian Economy at a Crossroads, such high piracy rates affect domestic as much as foreign digital content creators. For example, a study undertaken by the Motion Pictures Distributor’s Association, The Economic Contribution of the Indian Film and Indian Television Industry, placed India among the top 10 countries in the world for Internet piracy, as pirated films out of India appear on the Internet in an average of 3.15 days. The report found that Hollywood (English Films), Bollywood (Hindi Films), Tollywood (Telugu Films), and Kollywood (Tamil Films) are the primary victims of this piracy. Moreover, online piracy is particularly concerning because India is expected to have the world’s second largest Internet user base by 2015.

The Special 301 Report further notes “the proliferation of counterfeit pharmaceuticals manufactured, sold and distributed in trading partners, especially from India” and notes that “India is the largest source of counterfeit pharmaceuticals shipped to the United States.” While the report does vouch that “India is one of the world’s largest producers of legitimate, high-quality generic pharmaceuticals, with the United States as India’s single largest market for generic pharmaceuticals,” it also affirms that “anywhere from 10 to 40 percent of drugs sold in Indian markets are counterfeit” and that this represents a potentially serious threat to patient health and safety, both in India and the United States.

The Special 301 Report further touches upon a number of additional intellectual property issues of concern, including difficulty in obtaining remedies and damages for trade secret theft in India, in part because India appears to rely on contract law in governing trade secret theft, and this can be less effective in addressing situations where there is no contractual relationship, such as in case of theft by a business competitor. It also notes concerns regarding regulatory data protection and difficulty securing and enjoying patent rights. With regard to the latter, it notes that individuals can “at minimal cost, challenge a patent through both pre-grant and post-grant opposition proceedings on any of eleven enumerated grounds, including by citing the same grounds in both pre- and post-grant challenges.”

Finally, the Special 301 Report raises serious concern over Section 3(d) of India’s Patents Act, which holds that pharmaceutical companies have to prove significant clinical efficacy enhancements in their drugs over already-patented compounds. The patentability standards established under Section 3(d), requiring a demonstration of “enhanced efficacy,” erects an additional hurdle to obtaining a pharmaceutical patent in India that goes beyond the TRIPS standard that inventions that are new, involve an inventive step, and are capable of industrial application are entitled to patent protection. As the Special 301 Report asserts, “The United States is concerned that section 3(d), as interpreted, may have the effect of limiting the patentability of potentially beneficial innovations. In practice, this standard has already been applied to deny patent protections to potentially beneficial innovations, some of which enjoy patent protection in multiple other jurisdictions.”

In conclusion, as ITIF writes in The Global Innovation Policy Index, nations that have not implemented or do not enforce robust intellectual property rights protections hurt their economic development in at least three principal ways. First, they deter future innovative activity by their innovators.

Second, they discourage trade and foreign direct investment, hurting their own consumers and businesses, both by limiting their choices and by inhibiting their enterprises’ ability to access best-of-breed technologies that are vital to boosting domestic productivity. Third, in countries with weak IPR protections, firms are forced to invest undue amounts of resources in protection rather than invention. The reality is that developing countries’ own economic development opportunities and intellectual property development potential are inhibited by their weak intellectual property protections.

Ultimately, a strong intellectual property environment is in the interest of India, its trading partners, and the entire global innovation system, as ITIF writes in Designing a Global Trade System to Maximize Innovation. As USTR’s Special 301 Report notes, “In the coming months, the United States will redouble its efforts to seek opportunities for meaningful, sustained, and effective engagement on IP-related matters with the new government, including at senior levels and through technical exchanges, that will both improve IP protection and enforcement in India, and support India’s efforts to achieve a “Decade of Innovation” and advance its legitimate public policy goals.” Hopefully this will lead to a constructive and robust discussion that helps improve India’s IPR environment going forward.