‘Operationalizing’ an ARV/FDC Patent Pool

Warren A. Kaplan, PhD, JD, MPHBoston University School of Public HealthAssistant Professor of International Health

Boston, MA

Context : A long historical record, but few pharma/biotech pools have been created

• What should be the function of an ARV/FDC patent pool?

• Increase market share?, incentivize innovation? increase competition? lower price?, improve generic penetration?

From the industry’s side of the table: Some cautionary lessons(I)

• Recent patent pools in the electronics industry were established in order to promote a standard or a technology and, as these have led to a substantially larger market for patent owners, they have succeeded.

• Patent pools whose main driver is price control, not promotion and larger market size, are not very likely to be successful as far as industry is concerned. There will be too many IPR owners who will conclude that joining a pool will not satisfy their expectation for licensing income.

Some cautionary lessons (II)

• If industry patent owners protecting a valuable market advantage are to offer non-exclusive licences to all-comers, they need some economic incentives.

• If a firm looks at their own profit and determines that the cost of the pool is high ( i.e., lowered royalties on individual products, high transaction costs, placing their IP at risk from challenge by others in the pool) then they may start to contemplate other alternatives.

Pharma/Biotech Pools have had Several Objectives

1. Primary Objective: Clearing Patent “Thickets”– Golden Rice Pool – 2001: 70 different patents held by 40 different

organizations (http://www.goldenrice.org/Content2-How/how9_IP.html)

– GFP ‘Pool’ (Green Florescent Protein: 2001) (http://www.gehealthcare.com)

2. Primary Objective: Collective IP Management and Licensing

– stART Licensing, Inc. (2005)- patent portfolio related to animal reproductive technologies (http://www.geron.com/pressview.asp?id=709)

Proposed Pharma/Biotech Pools1. The SARS IP Working Group – proposed 2005

• make SARS vaccines and treatments readily available in case of a pandemic.

2. Essential Medical Inventions Licensing Agency (EMILA) – proposed 2006

• manage patent pools or licensing programs that increase generic competition and access to patented medical products and vaccines

3. UNITAID pool for AIDS medications – proposed 2006• pool patents on fixed dose combination AIDS drugs

Proposed Pharma/Biotech Pools4. Applera Corp: molecular diagnostics

• Building a standard involving hardware, operating system, microprocessor and content

5. Fred Hutchinson Cancer Research Center: (Goldstein, 2005)• ID breast cancer markers

6. Proposed pool for rDNA tools for Diagnostics (IP and Technology Law Journal, Jan. 2005- Goldstein et al.)

Operational Rules about Pools

Where can one find ‘rules’ about pools? – Survey existing pool administrators- to the extent

they can divulge

– Review consultations by court/administrative agencies in U.S. and EU• rulings by U.S. Department of Justice and letters to patent

owners who ask for advice– DOJ “Letters” all post-1990– All related to creation of pools for telecommunication industry

1. Pool only includes “essential”patents— e.g., those without “substitutes”

2. Pool members retain right to license separately

3. A “fair and reasonable”royalty rate.

Are these the right rules for an ARV/FDC pool?

Are these the right rules for a pool based on compulsory licenses?

Department of Justice has focused primarily on three ‘pro-competitive” operational

rules

Forcing a Patent Pool

• Market: Industry unlikely to join ARV pool if they think CL will be used

• Public health: CL are required to back-stop voluntary license negotiations

• How to induce industry to voluntarily license?– Offer ‘push/pull’ incentives?

• Patent extensions, APCs, create fund for R&D, prize for specific FDC, tax break etc. etc…

First order question: Who owns what, where?

• Much due diligence required (specific dosages, formulations, methods of mfg., APIs, and so on). All this IP will have to be identified as a first step

• Patentees may have in-licensed “enabling technology” with restrictions placed on further licensing

• Joint ownership of patents could be a headache…

• Figuring this out takes time… and, if not pro bono, it takes money

Patents must be ‘essential’

• Who decides which IP is essential? • Use agreed-upon clinical/pharmacological or treatment

guideline standard to set “essentiality”?• What result if potential licensee already has license to a

pooled patent?- they should not be forced to pay twice• Menu” of licensible IP, rather than ‘take them all’?

– What are operational costs to having ‘menus’?

‘Patentees allowed to license outside pool’

• In virtually all patent pools, patent owners grant a nonexclusive licence to the pool and retain the right to licence its patents outside the pool. – members of the pool can take their technology in directions

unrelated to the pool and market the outcome: In principle, encourages new innovations

– Probably a big selling point for industry– If patent owner wants to compete with her own ‘pooled’ product,

isn’t that their business? – Maintaining freedom to operate outside pool may facilitate price

discrimination

– Same issues for a CL-driven pool?

Fair and reasonable’ royalties collected from licensees

• Changing market conditions may render licence terms reasonable at the outset of the pools, unreasonable years later.

• Licensors (i.e. particularly biomedical patent holders), let their investors think that their IP is extremely valuable and this cuts against the idea of zero, or low priced royalties.

Fair and reasonable’ royalties collected from licensees:

No royalty discrimination (MFN)

• Royalty discrimination between countries is actually preferred from a public health viewpoint

• Why can’t ARV/FDC pools dispense with MFN clauses?– Different royalties for FDCs, vs. blister packs vs. loose

pills? – The more complexity is built into a pool, the costlier and

less desirable it might be.

• Royalty discrimination within countries may even be attractive for industry (public sector v. private sector?)

Royalty allocations back to patent owners from licensees…

• How does royalty “rent” change when new patents are added?

• With numerical proportion rules, new IP dilutes the share that other parties get.

• Patent counts do not reflect the value of the underlying IP

• “Value” proportional allocation rules are too complex…

• ALL THESE ISSUES ARE NEGOTIABLE..

Confidentiality and ‘know how’

• DOJ: Procedures and auditing features cannot disseminate competitively sensitive proprietary information among owners of pooled patents

• Separate ‘know how’ licenses may need to be negotiated

• Difficult to operationalize but, in the end, ALL IS NEGOTIABLE… AT A PRICE– Transaction and opportunity costs

About those ‘grant backs’…

• Grantbacks can promote competition within patent pools by enabling licensors to practice improvements that licencees make to the licenced technology.

• Royalty-free grantbacks discourage “holding up” the pool

• Non-exclusive grantbacks allow licensees who made the improvement to exploit IP outside the pool

• What to do with improvements made by original patent owner?

Patent validity etc..

• Licensees need to have a mechanism to bring relevant information regarding the validity and ‘essentiality’ of patents in the pool to the attention of the independent experts

• No royalties on patent applications- too much uncertainty

• Procedures for removing IP from pool

Although outside the scope of this meeting, there are other

alternatives…• Cross-licensing agreements • Standard-setting bodies may achieve many of same goals• Mutual covenants not to sue (multiple non-suit agreements)

• NOTE: Over-regulation of one form could just lead to substitution of other forms

Need a “functional perspective”- don’t worry about the form, make sure the function works to a public health advantage…

Recommended Reading

• Preliminary Legal Review of Proposed Medicines Patent Pool for UNITAID

IPDS Intellectual Property Design Solutions

E. Richard Gold, Tina Piper, Jean-Frédéric Morin, L. Karen Durell, Julia Carbone and Elisa Henry , July 26, 2007

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