compulsory licensing of clean technology

8/3/2019 Compulsory Licensing of Clean Technology

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TRANSFERRING CLEAN TECHNOLOGY TO DEVELOPING NATIONS: WHYCOMPULSORY LICENSING IS NOT THE ANSWERHillary MusselmanDecember 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

1 Robert Collier,Dispute over clean-tech patent protections, SAN FRANCISCO CHRONICLE, July28, 2009, at A11, available athttp://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/07/28/ED3018UQR3.DTL&type=tech.


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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 apatent, provided that such exceptions do not unreasonably conflict with a normalexploitation of the patent and do not unreasonably prejudice the legitimate

2Rahul Rajkumar, The Central American Free Trade Agreement: An End Run Around the DohaDeclaration on TRIPS and Public Health, 15 Alb. L.J. Sci. & Tech. 437 (2005).3id. at 443.4id.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).


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interests of the patent owner, taking account of the legitimate interests of thirdparties.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

6 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, art. 7,Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, THE LEGALTEXTS: THE RESULTS OF THE URUGUAY ROUND OF MULTILATERAL TRADENEGOTIATIONS 320 (1999), 1869 U.N.T.S. 299, 33 I.L.M. 1197 (1994) [hereinafter TRIPSAgreement].7id. at art. 31.8id. at art. 8.9Rajkumar, supra note 2, at 440.10id.


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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.


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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.

16G8 Finance Ministers' Statement on Climate Investment Funds, DOW JONES FACTIVA, June 14,2008.17id.18 Mary Tripsas,Everybody in the Pool of Green Innovation, NEW YORKTIMES, October 31,2009, available at http://www.nytimes.com/2009/11/01/business/01proto.html?ref=business.


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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 orlicensing of equipment from jurisdiction to jurisdiction (although clearly someearly climate and political victories might emerge from ensuring this happens). Italso concerns the development of skills and know-how in order to use equipmentand 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 FORAMERICAN PROGRESS AND GLOBAL CLIMATENETWORK, BREAKING THROUGH ONTECHNOLOGY OVERCOMING THE BARRIERS TO THE DEVELOPMENT AND WIDE DEPLOYMENT OFLOW-CARBON TECHNOLOGY, 1 (2009).20

id. at3.


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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.

21Rajkumar,supra note 2, at 439.22Id.23Id.24 Michael Hasper, Green Technology in Developing Countries: Creating Accessibility through aGlobal Exchange Forum, 2009 Duke L. & Tech. Rev. 1, 5 (2009).25id.


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[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 ofenvironmentally sound technology, protecting intellectual property rights leads toadvances in environmentally sound technology. Thus, environmentally soundtechnology transfer requires a careful balancing act that includes fair treatment forinnovators and energy policies that stimulate diffusion of environmentally soundtechnology 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 Sovacool, supra note 5, at 391.27id.28

id. at 385.29 Burleson, supra note 11, at 86.30 PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA, PHARMACEUTICALINDUSTRY PROFILE 2009, 2,58 (2009).31id. at 52,53.32id. at 64.


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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?&re=spf.34

CENTER FORAMERICAN PROGRESS AND GLOBAL CLIMATENETWORK,supra note 20, at 8.35VC cleantech deals in Q3 up 46% to $965M, SILICON VALLEY/SAN JOSE BUSINESS JOURNAL,October 29, 2009, available athttp://sanjose.bizjournals.com/sanjose/stories/2009/10/26/daily89.html.36 Manuel A. Utset,Reciprocal Fairness, Strategic Behavior & Venture Survival: A Theory ofVenture Capital-Financed Firms, 2002 Wis. L. Rev. 45, 90 (2002).37Eran Kahana,Intellectual Property in an Informational Economy: Protecting Intellectual Capitalin Startups: A Guide for the Entrepreneurial Attorney in the New Economy, 28 Wm. Mitchell L.Rev. 1187, 1194 (2002).


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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 thoseattributes, which is particularly true in first round financings. Instead, they arevalued on their potential earnings power, which is usually extracted from theperceived 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.

38id. at 1198.39id. at 1195.40 Hasper, supra note 25, at 2.41id. at 3.


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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 2009.43id.44id. at 2.45 Hasper,supra note 25, at 5.


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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 thatwould not be viable in a higher-end competitive market, they have a lot of latenttechnology that is not exchanged in the marketplace. Because this forum wouldinvolve a lot of entrepreneurs in countries that have not reached the cutting-edgeon the technological scale but still demand green technology in a form that ispreferable to conventional methods and would help plant the seed for technologyutilization in a "green" direction, the forum essentially opens up demand andsupply that otherwise is obfuscated by the prior inability of the market to

effectively capture these elements.

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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

46id.47 Hasper, supra note 25, at 6.


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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


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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 Collier,supra note 1.49 Burleson, supra note 11, at 86.


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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.


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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.

compulsory licensing of clean technology

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