CURRENTS Vol. XXII, No. 1 | 2013 by Currents: Journal of International Economic Law

Advisory Board

Contents 3

SCOTT C. BILLINGS Hewlett-Packard Houston, Texas

GREGORY A. BROTHERS Senior Vice President & Chief Financial Officer South Texas College of Law Houston, Texas

JOHN P. COGAN, JR. Cogan & Partners, LLP Houston, Texas

PAUL N. KATZ

King & Spalding, LLP Houston, Texas

JOHN L. KEFFER

King & Spalding, LLP London, UK

JAY D. KELLEY Jay D. Kelley, PC Houston, Texas

E. DOUGLAS MCLEOD, L.L.M. The Moody Foundation Galveston, Texas

M.A. (TONY) NUNES Cogan & Partners, LLP Houston, Texas

An Unprecedented Change in Mexican Energy Politics Adrian L. Talamantes

T h e W o r l d T r a d e O rg a n i s at i o n O b l i g at i o n s a n d Legislative Polcy: Choices in Developing Countries for Biotechnology Ramesh Karky and Mark Perry

26 AUSFTA, Korus FTA and Now TPP: Free Trade Agreements

Are Now Reaching Further than Ever Before Laura Chung

38 E ye

of the

Domestic Health Policies

T iger : E xamining T ensions

Trade Regime Melissa Peach

55 P l e a s i n g

into

I ndonesia ’ s

H e l p f u l t o N o n e : S o f t wa r e L i c e n s i n g f r o m t h e B e r n e C o n v e n t i o n t o t h e Strange Case of UsedSoft v. Oracle Taylor Roznovsky to

All

and

Corruption in the World Bank’s Integrity Vice Presidency: Seven Years Later Kevin Tipton

DORIS RODRIGUEZ Andrews Kurth LLP Houston, Texas

JAMES W. SKELTON, JR. The Stinemetz Law Firm Houston, Texas

Currents Winter 2013

Letter From The Editor

Currents

Dear Reader, On behalf of the Editorial Board and Members of CURRENTS: International Trade Law Journal, it is my pleasure to present to you the Volume 22, Number 1 Edition. CURRENTS is a student-run scholarly journal committed to emphasizing timely and practice-oriented articles on international trade and economic issues. To this end, this edition features a diverse selection of works from domestic and international scholars and law students. This publication begins with an in-depth discussion of Mexico’s passage of sweeping and historic Constitutional energy reform that allows the participation of private capital in its upstream, midstream and downstream oil and gas businesses. Then we turn our focus to a critical analysis of the potential policy issues facing developing and least-developed countries in the creation of comprehensive biotechnology regulatory systems and touch upon problems with agricultural biotechnology and intellectual property obligation under the TRIPS agreement. After that, we highlight the dichotomy between the provisions in recent U.S. free trade agreements that directly relate to cost saving pharmaceutical-reimbursement formularies and the U.S. industry-led countermovement pushing for the expansion of intellectual property protection. Following that discussion, we shift our attention to the current Indonesian trade regime and examine how Indonesian law addresses the tension between local and foreign interests. We then consider the impact of the WIPO Copyright Treaty and learn how it actually polarizes, instead of harmonizes, existing national and international copyright doctrines. Finally, we close with a critical assessment of the scope and application of procedures implemented to combat corruption within the World Bank’s Integrity Vice Presidency and contemplate what additional measures must be considered. On behalf of the Editorial Board and Members, I would like to thank the authors who continue to provide CURRENTS with material that furthers the academic discourse and improves the work of practitioners. I would also like to thank the South Texas College of Law administration, faculty, and staff members who continue to be a source of support and advice to the Journal—in particular our Academic Advisors Associate Dean Elizabeth Dennis and Professor Cherie Taylor. We appreciate your patronage and hope you enjoy this edition of CURRENTS. Sincerely,

CURRENTS is published Summer and Winter by South Texas College of Law.

Please cite CURRENTS as CURRENTS: INT’L TRADE L.J., Winter 2013. Please direct inquiries and correspondence to: Editorial Board

CURRENTS South Texas College of Law 1303 San Jacinto Street, Suite 219 Houston, Texas 77002-7006 E-mail: currents@stcl.edu

Editorial Board Fall 2013 Editor-in-Chief Jason Klein Managing Editor Joshua Woods Information Editor Sean Wilson

Spring 2014 Editor-in-Chief Alejandra Hamilton Managing Editor Kevin Tipton Co-Managing Editor Andres Rejas

Articles/Notes Editors Logan Hastings Michael Hodge Taylor Roznovsky Kevin Tipton

Articles/Notes Editors Ambreen Dharani Karen Wood

Members Adam Aldrete Anthony Cacciatore Joseph Collins Ambreen Dharani Susan Fickert A. Madison Freeman Alejandra Hamilton Sterling Jones Ben Rothchild Matthew Steinfeld Jennifer Whittington Karen Wood Paul Wyatt

Members Adam Aldrete Anthony Cacciatore Joseph Collins Susan Fickert Samin Hessami Sterling Jones Matthew Steinfeld Jennifer Whittington

Faculty Advisors Assistant Dean Elizabeth A. Dennis Professor C. O’Neal Taylor Publications Coordinator Sammy Miles

Credits Publication Services Sammy Miles

Alejandra Hamilton Editor-in-Chief

Currents Winter 2013

Cover Art

iStockphoto

An Unprecedented Change in Mexican Energy Politics A D R I A N

L .

TA L A M A N T E S

In an unprecedented change in Mexican

host government instrument the State creates Adrian L. Talamantes is Counsel in the Global Transactions practice group of King & Spalding. His practice focuses on a wide variety of domestic and international business transactions, including project development and energy projects, mergers, acquisitions, divestitures and joint ventures, with particular emphasis on matters relating to investments in Latin America.

and implements, except for concessions.7

Gortari privatized the banking industry, sold

President sought a contractual regime purely

and pipeline distribution of crude oil, natural

the State’s majority equity stake in Teléfonos

based on profit-sharing, maintaining for

gas, petroleum products and petrochemicals,

de México (then the only terrestrial telephone

all practical purposes the use of Pemex as

and the first-hand sales of such resources and

service provider in Mexico), and signed the

the most significant source of government

by-products, all subject to the issuance of a

North American Free Trade Agreement

revenue.

permit by the Comisión Reguladora de Energía

energ y politics, the government has amended its Political Constitution to allow the participation of private capital in its upstream, midstream and downstream oil and gas businesses. 1 The extraordinary step continues a liberalization trend that commenced more than twenty years ago, when then President Carlos Salinas de

These companies may also engage in the treatment and refining of petroleum and the processing of natural gas, subject to the issuance of a permit by the Secretaría de Energía, the federal government’s department of energy.8 Furthermore, companies may also participate in the storage, transportation

(NAFTA) with the United States and

With the two sides at odds on the best

(CRE), the midstream and downstream

Canada, creating one of the largest trading

policy solution, a congressional debate

regulator.9

blocs in the world.2

ensued. By mid-December 2013, the generally

—————————————————

The amendments reflect an uncommon,

antagonistic congressional forces had unified

E&P Regime

joint effort between Partido Acción Nacional

their views, resulting in a new energy policy

—————————————————

(PAN) and Partido Revolucionario Institucional

that is nothing short of remarkable for a

The State will now conduct oil and gas E&P

(PRI), the latter being the political party

country which has traditionally considered

through two specific legal schemes: it may

with which current President Enrique Peña

the use and exploitation of its natural

assign a state company, including Pemex, its

Nieto is affiliated and PAN´s traditional

resources as a prerogative reserved exclusively

right to explore for, develop, and produce

adversary on most any political matter. Each

to the sovereign.

hydrocarbons in specific areas;10 alternatively,

party had advanced a proposal for a bill to

Under the amended Constitution, all

it may enter into a contractual arrangement

amend the Constitution. PAN, with its free-

types of hydrocarbons under the soil

(other than a concession) granting such rights

market view, advocated the implementation

continue to be owned by the Nation, but

to a state, domestic or foreign contractor,

of a concession regime; one that would

state and privately-owned domestic and

each of which may, upon government

maximize hydrocarbons revenues to the State

foreign companies may now compete for

consent, in turn fulfill its obligations under

and gradually wean it from its well-known

and directly engage in the exploration and

the assignment or contract by subcontracting

dependence on the cash generated by Petróleos

production (E&P) of liquid, solid and

with another party.11

Mexicanos (Pemex), to date the country’s

gaseous hydrocarbons, conventional or

Once implementing legislation is enacted,

sole national oil company. In contrast, the

unconventional, pursuant to any type of

the Secretaría de Energía will establish,

Currents Winter 2013

conduct, and coordinate energy policy, select

under the premise that such interests are

or licensee acquires the exclusive right to

assignment and contracting areas, adjudicate

exclusively owned by the State.

explore for hydrocarbons in a contract area,

assignments, and design the technical aspects

The Comisión Nacional de Hidrocarburos

to develop any discovery made therein, to

of all E&P contracts. The Secretaría de

(CNH), the upstream regulator, will award

acquire ownership of most or all the oil and

Energía will also have sole discretion to

and enter into contracts with private parties

gas ultimately produced and to freely dispose

choose the type of contract it will implement

and state companies through a tender

of such production.

in each of its projects, including, but not

process in which the most important award

Some members of Partido de la Revolución

limited to:

criterion will be the percentage of profit or

Democrática (PRD), Mexico’s major leftist

• a service contract, under which the

production share the contractor proposes

political party and the energy reform’s main

contractor may be paid a fee for its

in its bid (in the case of a profit-sharing

detractor, share the view that licenses are for

services;

or production-sharing arrangement), 17

all practical purposes concessions in disguise,

• a production-sharing or profit-

the amount of bonus, royalty or other

calling them a “simulation” that should not

sharing contract, under which the

—————————————————

be tolerated by the Mexican people.19 Why,

contractor may be paid with a

if not for the sake of political correctness,

Fondo Mexicano del Petróleo (FMP), a

But while Mexican legislation is indeed imprecise, well settled Mexican legal doctrine does differentiate licenses and concessions in terms of both the nature of the administrative act and the nature of the rights granted to the licensee and concessionaire.

Mexican trust that will be formed

—————————————————

implementing legislation that contemplates

to administer all revenues generated

consideration payable to the State (in the case

licenses as a host government instrument.20

from E&P activities.13

of a license) and the amount of the tariff

But while Mexican legislation is indeed

As allowed by most other hydrocarbon-

payable to the contractor per barrel of crude

imprecise, well settled Mexican legal doctrine

producing nations, the contractor under

oil equivalent produced from a contract area

does differentiate licenses and concessions in

a profit-sharing contract will be able to

(in the case of a service contract).

terms of both the nature of the administrative

book for accounting and financial purposes

—————————————————

act and the nature of the rights granted to

share of the production or its monetization, respectively; or • a license, under which the contractor may take at the wellhead title to the hydrocarbons it produces in exchange for the payment of royalties or other consideration to

its production-related economic right or revenue stream.

The Political Issue

would PRI and PAN maintain in Article 27 the current restriction on the granting of concessions for oil and gas E&P? This animus, together with a noticeable ambiguity in Mexican legislation regarding the legal nature of both a concession and a license, may very well give PRD legal arguments to challenge the constitutionality of any

the licensee and concessionaire. Under a

Under a production-

—————————————————

license, the governmental authority merely

sharing contract, license, or other contractual

One could reasonably question the

removes a legal restriction to the exercise

arrangement under which it has a right

legislature’s wisdom in expressly prohibiting

of a preexisting right.21 Under a concession,

in and to production, the contractor will

the granting of hydrocarbon concessions

the governmental authority grants the

be able to book reserves, provided the

in the Constitution, while at the same time

concessionaire a right it did not previously

applicable instrument states that all forms

mandating that implementing legislation

have and would not have had but for

of hydrocarbons in situ remain the property

expressly permit the granting of licenses,

the granting of the concession.22 In this

of the Nation.15 As expected, the contractor

particularly because, in the oil patch

doctrinal light, the license described in the

will not be able to book any economic right

upstream, oil and gas concessions and

amendments seems more like a concession

or reserves under a fee-based service contract

licenses are typically regarded as the same.

than otherwise.

Under both instruments, a concessionaire 4

Currents Winter 2013

The legislators who voted in favor of

the United States.25 In essence, PRD seeks to

the required number of registered voters have

the reform will argue that the nature of

submit the energy reform to a process akin

requested the public consultation? Should

the constitutional prohibition regarding

to a national election, a popular consultation

the manner in which the State generates

the granting of concessions does not rest

under Article 35 of the Constitution and

revenue with its natural resources to finance

on an administrative act or on whether or

its implementing legislation, both of which

the expenditures budget be subject to a

not a concessionaire has a pre-existing right

expressly grant registered voters the right

popular vote?29 Further, should an adverse

to perform an act, but on the ownership

to express a binding opinion in matters that

result from a public consultation override

of the resource under the ground, which, as

are “transcendental” at the national level,

a law that has been properly legislated and

expressly stated in revised Article 27, is at

including acts of Congress that are legislative

enacted, and has created rights in the subjects

all times inalienable, not subject to adverse

in character.

being regulated? These and other questions

possession and vested in the Nation. This is

It’s unclear whether the recent energy-

will likely be asked, debated and answered by

a corollary to the views of President Lázaro

related amendments to the Constitution could

the high court if the voter number burden

Cárdenas, the architect of the celebrated

or would be subject to such a consultation.

is met, for a popular vote reverting the

1938 nationalization of the oil industry and

Though Article 35 is unambiguously clear

new regime to its former glory will surely

sponsor of the now infamous constitutional

that Congress must call for a popular

trigger claims of expropriation and fair

limitation: “a concession grants [its holder],

consultation if at least two percent of the

compensation by those who move forward

in a very limited and precarious manner,

registered voters demand it, its subject matter

and invest in Mexico once implementing

rights to directly own and exploit the subsoil,

must nevertheless be both transcendental

legislation provides the ground rules.

making the State a mere regulator and

and have a national impact. Implementing

—————————————————

policeman of an activity, a function that is

legislation does provide guidance as to what

Sink or Swim

wholly insufficient in hydrocarbons-related

is “transcendental throughout the Nation,”

—————————————————

matters as a result of the expropriation.”23

—————————————————

Colombia’s overwhelming recent success in the upstream oil and gas sector certainly

making of payment to the State, the license

In essence, PRD seeks to submit the energy reform to a process akin to a national election. . .

cannot be deemed a concession under the

—————————————————

of 830,000 bbl/day in 1999 to less than

Constitution. The issue is far from settled

but it focuses on when a matter has a national

600,000 bbl/day in 2003, mainly as a result

under Mexican law and jurisprudence, and

impact rather than on when a matter is

of the natural depletion of existing oil

will be debated at some point.

“transcendental.” Without full legislative

fields and a lack of investment.30 Facing an

—————————————————

guidance, the issue may well have to be

economic precipice, Colombia restructured

answered at trial by the Mexican Supreme

its energy sector in many significant ways,

—————————————————

Court, who will have jurisdiction over the

including by reorganizing and transforming

Last December 15, PRD’s national leader

matter.

Empresa Colombiana de Petróleos, its

It reasonably follows that if a licensee acquires ownership to the hydrocarbons at the wellhead upon their production and the

Opposing Strategy

inspired the Mexicans. Like Mexico, Colombia’s crude oil production had declined significantly, falling from a peak

vowed to cause the party’s militants to

The future of an industry that is a source

national oil company, into Ecopetrol, a

routinely engage in “actions for the defense

of national pride for many Mexicans is

public corporation in which the Colombian

of petroleum.”24 The so-called “15 to 15

unquestionably transcendental to some, but

State owns 88.49% of the total shares,

Strategy” would culminate in 2015, he

then so are many other matters that could

and domestic and foreign pension funds

said, with a popular rejection of an energy

not be reasonably and practically left to the

and banks own the remaining 11.51%.31

reform that hands over the Nation’s wealth

vote of the citizens. Does a matter become

With greater managerial autonomy and its

to foreign powers and capitalists, particularly

transcendental to the Nation simply because

regulatory and natural resource-management

Currents Winter 2013

functions stripped and given to the Agencia

power is exerted through the control of one-

The language in the amendments and their

Nacional de Hidrocarburos, the Colombian

third of the company’s board of directors,

exposition of motives clearly demonstrate

upstream regulator, Ecopetrol gained the

and its collective bargaining agreement has

that except for the preferential treatment

ability to better focus on its fundamental

historically extracted employment benefits

Pemex will be given in the assignment of

purpose: to explore and exploit hydrocarbons

that are uncommon in the international

areas, Pemex will be treated like any other

in an internationally-competitive market.32

oil and gas practice.37 The burden is so

E&P operator in Mexico.42 This means Pemex

Mexico now seeks to replicate the

great that in 2012 Pemex’s liability for

will succeed in the new regime both as a state

Colombian success, if not its precise

employee benefits represented 56.14% of

company and successful market competitor

methods. The implementation guidelines

the company’s total liabilities and 74.28%

only if the government is able to change its

in the amendments indicate the CNH, a

of its total sales. It exceeded the company’s

nature from an instrument of social welfare

relatively new and formerly toothless agency,

consolidated gross income by approximately

to a true corporation with a clear business

will be granted status as a legal person,

$36,442,402 USD.

purpose and managers who seek to maximize

technical and managerial autonomy, and

Due to the company’s shortcomings, the

shareholder value. There is nothing in

the power to regulate all upstream activities,

transitional articles of the amendments

the contemplated structure of the energy

conduct tenders, and award and enter into

mandate that implementing legislation

reform suggesting the government will let

E&P contracts. The CNH will also function

grant Pemex and any other state company

Pemex fail, but by the same token nothing

as the Secretaría de Energía’s technical branch

engaged in oil and gas E&P, budgetary,

therein prevents it from allowing Pemex to

in all upstream matters, compiling geologic

technical and managerial autonomy, subject

sink, spinning-off the company’s various

and operational information, administering

only to their respective balance sheets and

upstream, midstream and downstream

the technical aspects of assignments and

a ceiling for personal services spending.

business segments into stand-alone state

contracts, and approving and supervising the

Each of them will be taxed and pay royalties

companies or creating new, competing

execution of exploration and development

and other consideration to the State as any

state companies and instrumentalities—

plans, all matters formerly under Pemex’s

other operator in the business, and be free

uncorrupted by the past—to take over or

control.

to structure its investments and enter into

complement Pemex’s activities.43

There are a number of reasons why

contracts under a special, more flexible

—————————————————

Pemex did not live up to its expectations

—————————————————

Caveat Emptor

as a profitable company and successful oil

—————————————————

regulatory environment that restricted

There are a number of reasons why Pemex did not live up to its expectations as a profitable company and successful oil and gas producer.

the manner in which it could transact,

—————————————————

its significant hydrocarbon reserves, but its

invest, explore, produce, refine and market

procurement regime for goods and services.40

ability to access and profit over the long term

hydrocarbons, and a grossly inadequate

Most importantly, Pemex will make business

from incoming private investment will be

corporate governance structure that affected

decisions through a ten-person board of

determined by its future actions; in great part

its business judgment, mostly by influence of

governmental and independent directors

by how well it treats, protects, and regulates

the oil workers union,35 are just some.

which, although ultimately controlled by the

the inbound investment.

and gas producer. A burdensome fiscal regime implemented to fund social programs and other non-economic endeavors,

By properly setting the basis for the liberalization of its energy sector, Mexico placed itself in a position to attract the risk capital and technology it needs to develop

The approximately 150,697 member-

President and Senate through appointment,

Though its treatment of foreign investment

union, which represents 72.6% of Pemex’s

removal and voting power, will no longer

at different times has not been stellar,44

workforce, has been the company’s Achilles

house the representation and interests of

Mexico has a fair track record of treating such

heel in many respects. Too much corporate

the oil workers union.

investment in a non-discriminatory manner

Currents Winter 2013

and in accordance with international private

government put in place institutions, policies

and production concessions, had until mid-

law. Its current economic and financial ties

and procedures that address issues beyond

2013 failed to attract meaningful foreign

with major world powers, other developed

the oil patch such as low income, economic

investment due to burdensome regulations

countries and strategic partners are also

inequality and corruption, all of which

and government actions negatively impacting

strong, and its laws include at least twenty-

have led to Mexico’s current insecure

such investment and investor confidence.53 In

five bilateral investment treaties and twelve

environment.

contrast, Brazil had made, until recently, all

free trade agreements, most of which contain

The crafters of legislation and the regulators

the right moves to attract big oil to its riches,

clauses for the protection of investments,

must also recognize their inexperience in

awarding much desired concessions in most

including NAFTA. Much of the Mexican

matters relating to international oil and gas

of its licensing rounds.54 Then came the late

risk, however, lies elsewhere and particularly

practice in a competitive market. They should

2010 reforms for the pre-salt reserves, which

in the country’s social instability, inexperience

also look to Colombia as a role model and

in lieu of a concession for the Libra field (an

in international oil and gas practice, and the

take into consideration the expectations and

approximately 600 square mile area expected

greed the government may experience when

suggestions of the intended target group: the

to be a find larger than Mexico’s Cantarell),

it tastes the fruits of its work.

—————————————————

implemented a production-sharing contract, one that in principle should not have been

did shut down some established regional

The crafters of legislation and the regulators must also recognize their inexperience in matters relating to international oil and gas practice in a competitive market

crime organizations, a plethora of other

—————————————————

perhaps signaling that the fiscal terms were

criminal groups emerged as stand-alone

oil patch. Just two and one half years ago,

too onerous and risky.57

crime syndicates, seeking to take hold of the

Poland, sitting on top of one of the largest

The Polish, Argentine and Brazilian

territory left behind by the former cartels.

shale gas reserves in Europe, dreamt of

experiences highlight Mexico’s need to

These groups have notably engaged in

energy independence from Russia, attracting

proceed in a carefully planned manner with

“express” kidnapping and extortion schemes

the likes of ExxonMobil, Talisman and

the implementation of its energy reform, as

to finance part of their activities, targeting

Marathon Oil to their “shale revolution.”

interested investors will be watching with a

in many cases oil and gas workers, including

Today, all such companies have abandoned

critical eye. While the increase of oil and gas

those laboring in the State of Tamaulipas,

their once-promising Polish projects

revenue sought by the reform is important

home of Mexico’s largest dry gas reserves.

officially citing unsuccessful attempts to

and undoubtedly the most significant motive

To exacerbate matters, last December

find commercial levels of hydrocarbons,51

behind it, regulations should mainly focus

15th, the Fuerzas Armadas Revolucionarias

but mostly deemed by observers to be due

on preventing waste of natural resources,

Liberación del Pueblo, a newly formed and

as a result of delays in the enactment of

protecting third party rights, preventing

self-denominated guerrilla-type organization

meaningful fiscal and regulatory reform,

the contamination of the environment and

whose scope of influence and range of

inadequate contractual terms and an overly

ensuring the safe conduction of all energy-

action is unknown at this time, publicly

bureaucratic regulatory process.52

related activities. In sum, regulations should

In 2006, former President Felipe Calderon sought to fight organized crime in an unprecedented manner, declaring war for all practical purposes on a drug trade that to such date presumably had been controlled by a few hands. But while the noble effort 46

unappealing to the patch. 55 The round, however, attracted only one serious bidder, a consortium of Petrobras (40%), Total (20%), Shell (20%), CNPC (10%) and CNOOC (10%).56 Key players ExxonMobil, Chevron, BP, BG and Statoil stayed away,

declared itself against the energy reform

In the Americas, Argentina, whose

and announced that oil companies would

fundamental E&P regime has been in place

be deemed military objectives.

These

since 1967 and provides for the granting

circumstances demand that the Mexican

of contractor-friendly exploratory licenses

let the free market play out.

Currents Winter 2013

be advisable to design a progressive fiscal

to subcontract with third parties for the

system which can adjust to the recurring

provision of oil field services under a more

—————————————————

volatility of crude oil markets and a project’s

flexible procurement regime and enter into

The Mexican government must now draft

increase in profitability. True contractual

joint venture, operating or other government

and enact implementing legislation—a tall

stabilization in Mexico is rare, but if it were

approved upstream agreements under arm’s-

order and no easy task considering more than

to be implemented, it would have to be

length terms to further explore, develop

25 secondary laws will have to be created

carefully conceived and tailored to protect

or increase production from such areas.

or amended. The mandatory guidelines set

the investor against changes in government

These transactions could represent the first

forth for such laws in the transitional articles

administration and political goals and views,

opportunity for IOCs to enter Mexico under

of the amendments do provide a solid basis

and to curb future government greed in the

the new oil and gas E&P regime.

upon which the legislator will elaborate, but

light of an IOC’s E&P success.

—————————————————

Steps Forward

The Mexican government has taken just

Industry regulators also must strive to

one more step, albeit significant, to avoid

make all public tenders transparent and

becoming a net importer of crude oil and

To succeed, the government must find

grant everyone equal access to all material

enhance its world-wide influence as a major

a way to not unduly limit the broad and

information without preferring one investor

exporter of crude oil. There is a bright light

promising scope of the energy reform set

over another. Part of the reform’s success

at the end of the tunnel, but it is still seen

forth at the constitutional level, through

will lie not only in the ability of Mexican

from afar. As previously stated, the reform’s

new laws or host government instruments

investors and companies to benefit from

success or failure will lie in its detail.

containing provisions that discourage, rather

energy sector’s liberalization, but also in the

than entice, the international oil company

IOC’s confidence in Mexico’s institutions and

(IOC).

governmental authorities. The IOC will be

they are not all-encompassing and there is much to be done.

In the eyes of an IOC, the government

part of Mexico’s success only to the extent it

take (whether in the form of up-front or

is treated fairly and is able to bargain at arm’s-

back-end bonuses, royalties, taxes, profits

length with all industry participants. To ensure

or production share or carry) must be

this, regulators must be subject to internal

reasonable and balanced in light of oil price,

and external controls and reporting, and

cost (capital and operating) and risk (prospect

be appropriately and effectively supervised

size and probability of success) estimates,

and audited on a continuous basis in the

and the IOC’s expected internal rate of

areas of accounting and discipline. Citizens

return. The legal regime must also assure

and market participants must also have an

the IOC that the fiscal and other terms to

effective mechanism to express opinions and

which it has agreed up front will remain in

file grievances.

place over the duration of its agreement.

Pemex has now requested the assignment

In other words, that the IOC will have legal

of some of the areas it currently explores

stability in the context of a long-term, capital

or exploits, and the Secretaría de Energía

intensive investment in which returns may

will grant such request if the former

not materialize for many years.

demonstrates it possesses the technical,

Public pressure and the resulting

financial and operational capacities to explore

temptation to coerce the renegotiation of

and exploit hydrocarbons from such areas in

a deal or assert windfall taxes as a result

an efficient and competitive manner.60 Once

of high oil prices will be great, so it may

such areas are assigned, Pemex will be able 8

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End Notes 1. See Constitución Política de los Estados Unidos Mexicanos [C.P.], arts. 25, 27 and 28, Diario Oficial de la Federación [DO], 20 de Diciembre de 2013 (Mex.), available at http://www.diputados.gob.mx/ LeyesBiblio/votos/20131211_ energia/dof_20dic13.pdf. 2. Alina Rocha Menocal, The Myth of the Infallible Technocrat: PolicyMaking in Mexico under the Salinas Administration, 9 J. P ub . & I nt ’ l A ff . 167, 169-70 (Spring 1998), available at https://www.princeton. edu/jpia/past-issues-1/1998/9. pdf. 3. Clare Ribando Seelke et a l ., C o n g . R e s e a r c h S e rv ., R43313, M exico ’ s O il and G as S ector : B ackground , R eform E fforts , and I mplications for the U nited S tates 1 (2014) [hereinafter M exico ’ s O il and G as ]. 4. See Iniciativa con Proyecto de Decreto que Reforma, Adiciona y Deroga Diversas Disposiciones a Los Artículos 25, 27 y 28 de la Constitución Política de los Estados Unidos Mexicanos [Draft Decree Initiative Amending, Supplementing and Repealing Various Provisions of Articles 25, 27 and 28 of the Political Constitution of the United Mexican States], Gaceta del Senado, 31 de Julio de 2013 (Mex.), available at http://www.senado.gob.mx/ sgsp/gaceta/62/1/2013-07-31-1/ assets/documentos/Inic_PAN_ art.25-27-y-28-Const.pdf; see also Iniciativa de Decreto por el que se reforman los artículos 27 y 28 de la Constitución Política de los Estado Unidos Mexicanos [Decree Initiative Amending Articles 27 and 28 of the Political Constitution of the United Mexican States], Gaceta del Senado, 14 de Agosto de 2013 (Mex.), available at http:// w w w. s e n a d o. g o b. m x / s g s p / g aceta/62/1/2013-08-14-1/ assets/documentos/ INICIATIVA_PRESIDENTE_ A R T S _ 2 7 _ Y _ 2 8 _ CONSTITUCIONALES.pdf. 5. Mexico’s Oil and Gas, supra note 3, at 3. 6. Id. at 4. See also Decreto por el que se Reforman y Adicionan Diversas Disposiciones de la Constitución Política de los Estados Unidos M e x i c a n o s, e n M a t e r i a d e Energía [Decree Amending and Supplementing Various Provisions of the Political Constitution of the

United Mexican States, on Energy], Diario Oficial de la Federación [DO], 20 de Diciembre de 2013 (Mex.), available at http://www. sener.gob.mx/res/Resumen_ Refor ma_Constitucional_ Energetica_2013.pdf, and see Votaciones del Senado de la República, and see Dictamen de las Comisiones Unidas de Puntos Constitucionales, de Energía, y de Estudios Legislativos Primera, con Proyecto de Decreto por el que se Reforman y Adicionan Diversas Disposiciones de la Constitución Política de Los Estados Unidos Mexicanos, en Materia Energetica [Opinion of the Joint Commission on Constitutional Issues, on Energy, and First Legislative Studies, with the Decree Project Amending and Supplementing Various Provisions of the Political Constitution of the United Mexican States, on Energy], Diario Oficial de la Federación [DO], 10 de Diciembre de 2013 (Mex.), available at http://www.senado. gob.mx/libreria/impresiones/ imprime_votaciones_2.php?a no=2&tp=O&np=1&lg=62& id=1949. 7. See Constitución Política de los Estados Unidos Mexicanos [C.P.], art. 27, Diario Oficial de la Federación [DO], 20 de Diciembre de 2013 (Mex.), available at http://www.diputados.gob.mx/ LeyesBiblio/votos/20131211_ energia/dof_20dic13.pdf. 8. S ee Decr eto por el q u e s e Reforman y Adicionan Diversas Disposiciones de la Constitución Política de los Estados Unidos M e x i c a n o s, e n M a t e r i a d e Energía [Decree Amending and Supplementing Various Provisions of the Political Constitution of the United Mexican States, on Energy], transitorios Décimo (a), Diario Oficial de la Federación [DO], 20 de Diciembre de 2013 (Mex.), available at http://www. diputados.gob.mx/LeyesBiblio/ votos/20131211_energia/ dof_20dic13.pdf. 9. S ee Decr eto por el q u e s e Reforman y Adicionan Diversas Disposiciones de la Constitución Política de los Estados Unidos M e x i c a n o s, e n M a t e r i a d e Energía [Decree Amending and Supplementing Various Provisions of the Political Constitution of the United Mexican States, on Energy], transitorios Décimo (c),

Diario Oficial de la Federación [DO], 20 de Diciembre de 2013 (Mex.), available at http://www. diputados.gob.mx/LeyesBiblio/ votos/20131211_energia/ dof_20dic13.pdf. 10. See Constitución Política de los Estados Unidos Mexicanos [C.P.], art. 27, Diario Oficial de la Federación [DO], 20 de Diciembre de 2013 (Mex.), available at http://www.diputados.gob.mx/ LeyesBiblio/votos/20131211_ energia/dof_20dic13.pdf. 11. See id.; see also David L. Goldwyn, Atlantic Council, Mexico Rising: Comprehensive Reform at Last? 10 (2013), available at http:// www.atlanticcouncil.org/images/ publications/Mexico_Rising.pdf. 12. S ee D ecr eto p o r el q u e s e Reforman y Adicionan Diversas Disposiciones de la Constitución Política de los Estados Unidos M e x i c a n o s, e n M a t e r i a d e Energía [Decree Amending and Supplementing Various Provisions of the Political Constitution of the United Mexican States, on Energy], transitorios Décimo (a), Diario Oficial de la Federación [DO], 20 de Diciembre de 2013 (Mex.), available at http://www. diputados.gob.mx/LeyesBiblio/ votos/20131211_energia/ dof_20dic13.pdf. 13. S ee D ecr eto p o r el q u e s e Reforman y Adicionan Diversas Disposiciones de la Constitución Política de los Estados Unidos M e x i c a n o s, e n M a t e r i a d e Energía [Decree Amending and Supplementing Various Provisions of the Political Constitution of the United Mexican States, on Energy], transitorios Cuarto, Diario Oficial de la Federación [DO], 20 de Diciembre de 2013 (Mex.), available at http://www.diputados.gob.mx/ LeyesBiblio/votos/20131211_ energia/dof_20dic13.pdf (the instrument may also provide for a mixed form of compensation (i.e., a combination of two or more of the described forms of payment)). 14. S ee D ecr eto p o r el q u e s e Reforman y Adicionan Diversas Disposiciones de la Constitución Política de los Estados Unidos M e x i c a n o s, e n M a t e r i a d e Energía [Decree Amending and Supplementing Various Provisions of the Political Constitution of the United Mexican States, on Energy], transitorios Quinto, Diario Oficial de la Federación [DO], 20 de

Diciembre de 2013 (Mex.), available at http://www.diputados.gob.mx/ LeyesBiblio/votos/20131211_ energia/dof_20dic13.pdf. 15. Id.; see also Goldwyn, supra note 11, at 10, 17-18, 24 n.9. 16. See Dictamen de las Comisiones Unidas de Puntos Constitucionales, d e E n er gí a, y de Estudios Legislativos, Primera, con Proyecto de Decreto por el que se Reforman y Adicionan los Artículos 25, 27 y 28 de la Constitución Política de Los Estados Unidos Mexicanos en Materia Energía [Opinion of the Joint Commission on Constitutional Issues, on Energy, and Legislative Studies, First, with the Decree Project Amending and Supplementing Articles 25, 27, and 28 of the Political Constitution of the United Mexican States on Energy] 211-12, Diario Oficial de la Federación [DO], 10 de Diciembre de 2013 (Mex.), available at http://comunicacion.senado. gob.mx/pdf/2013/dic/RefEne. pdf. 17. A contractor usually enters into a production-sharing contract with a national oil company, which by its nature is able to use and sell production, and share production or its monetization with contractors. Though the CNH could eng ag e a state company to participate in such a contract, it remains unclear from the constitutional reform how the former will share profits or production with a contractor. See Kristen Bindemann, ProductionSharing Agreements: An Economic Analysis, Oxford Inst. for Energy Stud. 1 (1999), available at http:// www.oxfordenergy.org/wpcms/ wp-content/uploads/2010/11/ WPM25-ProductionSharingAg reementsAnEconomicAnalysisKBindemann-1999.pdf. 18. S ee D ecr eto por el q u e s e Reforman y Adicionan Diversas Disposiciones de la Constitución Política de los Estados Unidos M e x i c a n o s, e n M a t e r i a d e Energía [Decree Amending and Supplementing Various Provisions of the Political Constitution of the United Mexican States, on Energy], transitorios Décimo (b), Diario Oficial de la Federación [DO], 20 de diciembre de 2013 (Mex.), available at http://www. diputados.gob.mx/LeyesBiblio/ votos/20131211_energia/ dof_20dic13.pdf; see also Dictamen

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de las Comisiones Unidas de Puntos Constitucionales, de Energía, y de Estudios Legislativos, P r i m e r a , c o n P r oy e c t o d e Decreto por el que se Reforman y Adicionan los Artículos 25, 27 y 28 de la Constitución Política de Los Estados Unidos Mexicanos en Materia Energía [Opinion of the Joint Commission on Constitutional Issues, on Energy, and Legislative Studies, First, with the Decree Project Amending and Supplementing Articles 25, 27, and 28 of the Political Constitution of the United Mexican States on Energy] 211-13, Diario Oficial de la Federación [DO], 10 de Diciembre de 2013 (Mex.), available at http://comunicacion.senado. gob.mx/pdf/2013/dic/RefEne. pdf. 19. Luis Sánchez Jiménez, Las Licencias son los Nombres que la Industria Petrolera Inter nacional da a las Concesiones Modernas [Licenses are the Names that the International Oil Industry gives Modern Concessions], Grupo Parlamentario PRD, LXII Legislatura (11 de Diciembre de 2013), http://prd.senado.gob.mx/ wp/?p=12250; Mauricio Torres, El Senado Aprueba la Reforma Energética [The Senate Passes Energy Reform], CNNExpansión (Martes, 10 de Diciembre de 2013 a las 00:16), http://www.cnnexpansion. com/economia/2013/12/10/ refor ma-energ etica-senadopemex-petroleo; Dave Graham et. al., Mexico Energy Reform Eyes Big Opening for Private Capital, R euters (Sun., Dec. 8, 2013, 4:04 PM EST), http://www. reuters.com/article/2013/12/08/ us-mexico-refor ms-energ yidUSBRE9B70C120131208; Juan Montes et. al., Mexico Congress Passes Historic Energy Bill, Wall St. J. (Dec. 12, 2013, 12:39 PM ET), http://online.wsj.com/news/ articles/SB100014240527023039 32504579254013051981266. 20. For example, the Ley General de Bienes Nacionales, which defines the types of property owned by the Nation, including hydrocarbons, indistinctly refers to “concessions, permits and authorizations” for the use, enjoyment and exploitation of property owned by the Nation (the term “license” is referenced only once, specifically as the instrument to be granted for the construction on or improvement of federal lands used for religious purposes). See Ley General de Bienes Nacionales [General Law of National Assets], as amended, arts. 16 y 83, Diario Oficial de la Federación [DO], 20 de Mayo de 2004 (Mex.), available

at http://www.diputados.gob.mx/ LeyesBiblio/pdf/267.pdf. The Ley General de Pesca y Acuacultura Sustentables, which authorizes fishing and hunting activities, defines each of “concession” and a “permit” as a type of document rather than by its intrinsic legal nature (the term “license,” though used twice, is not defined). See Ley General de Pesca y Acuacultura S u s tenta bl es [ Ge n e r a l L aw of Sustainable Fisheries and Aquaculture], as amended, arts. 4(XII), 4(XXVI) y 63, Diario Oficial de la Federación [DO], 23 de Enero de 2007 (Mex.). Still, the Ley Minera, which establishes a mining concession regime, authorizes the industry regulator to grant third parties “authorizations” to perform work for the E&P of coal on lands that have been assigned for crude oil exploitation (asignaciones petroleras). See Ley Minera [Mining Law], as amended, art. 20, Diario Oficial de la Federación [DO], 26 de Junio de 1992 (Mex.), available at http://www.diputados.gob.mx/ LeyesBiblio/pdf/151.pdf. For a further discusison over the legal nature of licenses, concessions and permits see Jorge E. Calafel, Teoría General de la Concesión [General Theory of the Concession], I nstituto de I nvestigaciones Jurídicas, Universidad Nacional Autónoma de México, http:// www.juridicas.unam.mx/publica/ librev/rev/jurid/cont/26/pr/ pr19.pdf (access by searching for the Titulo, Teoría General de la Concesión, in the Consulta de Artículos, http://biblio.juridicas. unam.mx/revistas/). 21. A c o n s t r u c t i o n p e r m i t i s representative of a license, for the licensee landowner, as part of its bundle of ownership rights, has the preexisting right to make improvements on his or her land, though the exercise is restricted for public policy and revenuerelated reasons. See Andrés Serra Rojas, Der echo Administrativo [Administrative Law], Editorial Porrúa, S.A., 272-273 (México 1985) and Calafel, supra note 20, at 220. 22. U n d e r a M e x i c a n m i n i n g concession the Nation originally owns all the minerals under the ground and only grants the concessionaire the right to use, enjoy and exploit them on a going forward basis. See Rojas, supra note 21, at 220, 300. 23. See Iniciativa con Proyecto de Decreto que Reforma, Adiciona y Deroga Diversas Disposiciones

a Los Artículos 25, 27 y 28 de la Constitución Política de los Estados Unidos Mexicanos [Draft Decree Initiative Amending, Supplementing and Repealing Various Provisions of Articles 25, 27 and 28 of the Political Constitution of the United Mexican States], Gaceta del Senado, 31 de Julio de 2013 (Mex.), at 6, available at http://www.senado.gob.mx/ sgsp/gaceta/62/1/2013-07-31-1/ assets/documentos/Inic_PAN_ art.25-27-y-28-Const.pdf; see also Constitución Política de los Estados Unidos Mexicanos [C.P.], art. 27, Diario Oficial de la Federación [DO], 20 de Diciembre de 2013 (Mex.), available at http://www.diputados.gob.mx/ LeyesBiblio/votos/20131211_ energia/dof_20dic13.pdf. 24. See Senate Passes Draft Energy Bill, The News (Dec. 11, 2013), http:// thenews.com.mx/index.php/ mexico-articulos/16778-senatepasses-draft-energy-bill. 25. See Anuncian Estrategia 15-15 Contra Aprobación de Reforma Energética [Announcement of 15-15 Strategy Against Approval of Energy Reform], E l E conomista (Dec. 12, 2013), http://eleconomista. com.mx/sociedad/2013/12/11/ anuncian-estrategia-15-15contra-aprobacion-refor maenergetica; Estrategia 15-15 en defensa del petróleo [15-15 Strategy in Defense of Oil], Informador. com.mx (Dec. 12, 2013), http://www.infor mador.com. mx/mexico/2013/502214/6/ estrategia-15-15-en-defensa-delpetroleo.htm. 26. See Constitución Política de los Estados Unidos Mexicanos [C.P.], art. 35, Diario Oficial de la Federación [DO], 20 de Diciembre de 2013 (Mex.), available at http://www.diputados.gob.mx/ LeyesBiblio/votos/20131211_ energia/dof_20dic13.pdf (The results of such a consultation will be binding on the federal executive and legislative branches of government if at least 40% of the registered voters cast their vote in the same way). 27. See Ley Federal de Consulta Popular [Federal Law on Popular Consultation], art. 6, Diario Oficial de la Federación [DO], 14 de Marzo de 2014 (Mex.), available at http://www.diputados.gob.mx/ LeyesBiblio/pdf/LFCPo.pdf. 28. See Ley Federal de Consulta Popular [Federal Law on Popular Consultation], art. 5, Diario Oficial de la Federación [DO], 14 de Marzo de 2014 (Mex.), available at http://www.diputados.gob.mx/ 10

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LeyesBiblio/pdf/LFCPo.pdf. 29. According to Article 11 of the law implementing article 35 of the Mexican constitution, matters relating to the State’s income and expenditures are not within the scope of a referendum. See Ley Federal de Consulta Popular [Federal Law on Popular Consultation], art. 11, Diario Oficial de la Federación [DO], 14 de Marzo de 2014 (Mex.), available at http://www.diputados.gob.mx/ LeyesBiblio/pdf/LFCPo.pdf. 30. Colombia, U.S. E n e rg y I n fo . Admin., U.S. Dep’t of Energy, EIA. gov , http://www.eia.gov/ countries/cab.cfm?fips=CO (last updated Jan. 7, 2014)[hereinafter Colombia]. 31. Composición Accionaria [Shareholder Composition], EcoPetrol, http:// www.ecopetrol.com.co/contenido. aspx?catID=542&conID=39684 (last updated July 31, 2014). 32. Colombia, supra note 30; see also LT 500: Latin America’s Largest Companies, Latin Trade, Jul.-Aug. 2009, at 20 (Today, Ecopetrol is the largest oil and gas company in Colombia and the second largest public oil and gas company in Latin America), available at http:// latintrade.com/rsrch/2009_ LT_500.pdf. 33. Considering all burdens, Pemex paid up to 70% of its gross revenue to the federal government during the last 10 years. Adrian Talamantes & Ken Culotta, Mexican Congress to Consider Constitutional Oil and Gas Reforms: Bold Stride Forward or Half-Step?, King & Spalding Energy Newsletter (Oct. 2013), available at http://www. kslaw.com/library/newsletters/ EnergyNewsletter/2013/ October/article1.html (last visited April 6, 2014). 34. Before the amendments, Article 27 of the Mexican Constitution and its regulation effectively banned Pemex from entering into “risk contracts” in the form of concessions or licenses, production-sharing agreements a n d r i s k - s e r v i c e c o n t r a c ts. Secondary laws, in turn, placed significant limitations to its procurement process, seeking in principle to prevent its officers from engaging in corr uptive practices. See Constitución Política de los Estados Unidos Mexicanos [C.P.], art. 27, Diario Oficial de la Federación [DO], 5 de Febrero 1917 (Mex.). 35. The oil workers union (Sindicato de Trabajadores Petroleros), accused of repeated misuse of funds and shady business dealings, controls

five out of the fifteen positions in Pemex’s board of directors. Once the amendments are fully implemented, the union will have no board positions. See Reforms in Mexico: Oil’s Well that Ends Well, The Economist, Dec. 14, 2013, available at http://www.economist. com/news/americas/21591579bumpy-year-ends-high-note-oilswell-ends-well. 36. See Petróleos Mexicanos, Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the Fiscal Year Ended December 31, 2012 (Form 20-F), 159 (Apr. 30, 2013) [hereinafter Petróleos Mexicanos], http://www.ri.pemex. com/files/content/Pemex_2012_ Form_20-F_130913.pdf (filed with the U.S. Sec. & Exch. Comm’n); Imelda García, Reforma Energética: ¿Golpea el Poder del Sindicato de Pemex? [Energy Reform: Did You Hit the Power of the Union of Pemex?], ADN Político (Dec. 26, 2013, 7:38 PM), http://www.adnpolitico. com/gobierno/2013/12/24/ reforma-energetica-inicia-el-findel-sindicato-petrolero. 37. Under the collective bargaining agreement, a union member may form a company and participate in Pemex’s public bids and tenders or assignments of work, transportation and ser vices, potentially entitling him or her, for all practical purposes, to a salar y and the profits generated by such a company. Se e P e t r ó l e o s M e x i c a n o s , Contrato Colectivo de Trabajo celebrado entre el S indicato de T rabajadores P etroleros de la R epública M exicana y P etróleos M exicanos , art. 34 (2013), available at http://www. pemex.com/acerca/informes_ publicaciones/Documents/ contrato_colectivo/cct_20132 0 1 5 . p d f . Re p r e s e n t a t i v e s who negotiated the 2013-2015 collective bargaining agreement received 105 million pesos (roughly 8 million dollars) as compensation for costs incurred in negotiating the agreement, plus travel expenses for those representing each of the 36 sections of the organization. Imelda García, Contrato de Sindicato Petr oler o Cubr e Hasta Cirugía Plástica [The Oil Union Contract Even Covers Plastic Surgery], ADN Político, (Sept. 26, 2013, 3:54 PM), http://www.adnpolitico. com/gobierno/2013/08/27/ contrato-de-pemex-y-petroleroscubre-hasta-cirugia-plastica. 38. See Petróleos Mexicanos, supra note 37, at 127 (filed with the U.S.

Sec. & Exch. Comm’n). 39. See Constitución Política de los Estados Unidos Mexicanos [C.P.], transitorios Vigésimo, Diario Oficial de la Federación [DO], 20 de Diciembre de 2013 (Mex.), available at http://www.diputados.gob.mx/ LeyesBiblio/votos/20131211_ energia/dof_20dic13.pdf. 40. Id. If Pemex is to compete efficiently in the market, this regime should have no unreasonable limitations as to process, form or substance other than those inherent to international best practices and anti-corruption laws. Juan Montes, Mexico Energy Bill to End Pemex’s Monopoly on Oil, Wall St. J. (Dec. 7, 2013, 4:38 PM ET), http://online.wsj.com/news/ articles/SB100014240527023034 97804579244503254132812. 41. See Constitución Política de los Estados Unidos Mexicanos [C.P.], transitorios Vigésimo, Diario Oficial de la Federación [DO], 20 de Diciembre de 2013 (Mex.), available at http://www.diputados.gob.mx/ LeyesBiblio/votos/20131211_ energia/dof_20dic13.pdf. 42. Pemex’s failure to fulfill its commitments on an exploration plan, for example, will trigger a reversion of the areas to the State. See Constitución Política de los Estados Unidos Mexicanos [C.P.], transitorios Sexto, Diario Oficial de la Federación [DO], 20 de Diciembre de 2013 (Mex.), available at http://www.diputados.gob.mx/ LeyesBiblio/votos/20131211_ energia/dof_20dic13.pdf. 43. The decree requires that, following 12 months after the enactment of the new Law Regulating Article 27 of the Mexican Constitution in Petroleum Matters, the executive branch submit to Congress a bill to create the Centro Nacional de Control de Gas Natural, a public instrumentality that will operate the national natural gas pipeline and storage systems, which are currently owned and operated by Pemex. See Constitución Política de los Estados Unidos Mexicanos [C.P.], transitorios Décimo Sexto, Diario Oficial de la Federación [DO], 20 de Diciembre de 2013 (Mex.), available at http://www. diputados.gob.mx/LeyesBiblio/ votos/20131211_energia/ dof_20dic13.pdf. 44. In a 2011 decision, the Mexican 11th circuit court (Tribunal Colegiado de Circuito) annulled an I.C.C. $300 million dollar award in favor of Commisa, a Mexican subsidiary of Kellogg, Brown and Root, holding that Pemex, as a State instrumentality, could

not be subject to arbitration and could only be sued through administrative proceedings in Mexico. A New York federal court upheld the ICC award in late 2013, stating the circuit court violated all basic notions of justice in its ruling. Corporation Mexicana de Mantenimiento Integral, S. de R.L. de C.V. v. Pemex-Exploracion y Prod., 962 F. Supp. 2d 642 (S.D.N.Y. 2013). 45. Mexico is also a party to several OECD agreements covering foreign investment, notably the Codes of Liberalization of Capital Movements and the National Treatment Instrument. P a t r i c k W. N e e , H o w t o Get Rich Doing Business in M exico : M exico B usiness G uide and C ontracts , Ch. 6 (Internationalist Publ’g Co., 2014), available at books.google.com/ books?id=imwmAwAAQBAJ. 46. See CNN Library, Mexico Drug War Fast Facts, CNN World, http:// www.cnn.com/2013/09/02/ world/americas/mexico-drugwar-fast-facts/index.html (last updated Mar. 15, 2014). 47. Id. 48. J. Reyes, Confirma Pemex Secuestro de 16 de sus Trabajadores [Pemex Confirms the Kidnapping of 16 of its Workers], El Economista (Jan. 13, 2011), http://eleconomista.com.mx/ seguridad-publica/2011/01/13/ confirma-pemex-secuestro-16sus-trabajadores; See also Tracy Wilkinson, Mexican Drug Cartels Cripple Pemex Operations in Basin, L.A. Times (Sep. 6, 2010), http:// a r t i c l e s. l a t i m e s. c o m / 2 0 1 0 / sep/06/world/la-fg-mexicopemex-20100ninety; Secuestran y Extorsionan a Empleados de Pemex [The Kidnapping and Extortion of Pemex Employees], 24-Horas (Oct. 18, 2013, 2:14 AM), http:// www.24-horas.mx/secuestrany-extorsionan-a-empleados-depemex/. 49. See Petroleras Extranjeras Que se Instalen en México Serán Atacadas: Guerrilla FAR-LP [Foreign Oil to be Installed will be Attacked: Guerilla FAR-LP], A ristegui N oticias (Dec. 17, 2013, 8:14 AM), http:// aristeguinoticias.com/1712/ mexico/empresas-petrolerasextranjeras-que-se-instalen-enmexico-seran-atacadas-guerrillafar-lp/. 50. A.E., Mad and Messy Regulation, The E conomist (Jul. 10, 2013, 17:00), http://www.economist. com/node/21581678. 51. Id. North American Firms Quit Shale Gas Fracking in Poland, BBC News Bus. (May 8, 2013),

http://www.bbc.com/news/ business-22459629. ExxonMobil Dr ops Shale Plans in Poland, Market Watch (June 18, 2012, 12:16 PM ET), http://www. marketwatch.com/story/exxonmobil-drops-shale-plans-inpoland-2012-06-18-124851613. 52. Id. Exit by Two Foreign Firms Leaves Polish Shale Gas Under Cloud, Reuters (May 8, 2013, 11:12 AM EDT), http://www.reuters.com/ article/2013/05/08/poland-shaleidUSL6N0DP2WH20130508. ExxonMobil Leaves Poland Guessing, N at u r a l G a s E u ro p e (June 20, 2012, 12:00 AM), http:// www.naturalg aseurope.com/ exxonmobil-leaves-poland-shalegas. 53. These included restrictions on an investors ability to import and export funds from Argentina, hold money in offshore accounts, repatriate capital and profits, and export production without g overnment consent. US oil Companies Interested in Investing in YPF, but have Their Conditions…, MercoPress (Jul. 19, 2012, 7:58 UTC), http://en.mercopress. com/2012/07/19/us-oilcompanies-interested-in-investingin-ypf-but-have-their-conditions. Argentina, O ffice of the U.S. Trade Representative, USTR. Gov, http://www.ustr.gov/sites/ default/files/2013%20NTE%20 Argentina%20Final.pdf. 54. See Areas Under Concession, Agencia N acional D o P etróleo , G ás N atural E B iocombustíveis ANP (2014), http://www.brasilrounds.gov.br/arquivos/mapas/ Julho_2014/Mapa_Brasil_Areas_ Sob_Concessao_11072014.pdf. 55. Id. President Dilma Rousseff proposed a production sharing arrangement because the overall exploration risk to the contractors would be significantly lower than for other fields in Brazil. Susana Moreira, Dilma Rousseff and Brazil’s Oil Sector, AS-COA. org (March 2011), http://www. as-coa.org/sites/default/files/ DilmaRousseff_BrazilsOilSector. pdf. 56. Shell Announces Successful Bid for Giant Field in Deep Water Brazil, S hell G lobal (Oct. 21 2013), http://www.shell.com/global/ aboutshell/media/news-andmedia-releases/2013/brazildeepwater-bid.html. 57. Among them are those requiring the payment a 6.8 billion dollar signing bonus, giving operatorship to Petrobras and a 41.65% share of profit oil to the government. According to some sources,

Currents Winter 2013

Raymond James stated that with the hefty signing bonus and other commitments, investment returns on Libra will range between 9% and 15%, depending on the price of crude oil and the daily production rate, which under a traditional concession, would yield a 23% return, assuming a 12,000 bbl/day production rate. See Post-2003 Blackout Rules Lead to Millions in Fines, Fuelfix.com (Aug. 13, 2013, 7:02 AM), http:// fuelfix.com/blog/2013/10/28/ analysts-criticize-economics-ofbrazils-libra-field/ and http:// seeking alpha.com/cur rents/ post/1361842. Other sources state that the 35-year term of the contract will not allow the parties to full amortize their capital investment, estimated by some at 160 billion dollars. Emily Pickrell, Analysts Criticize Economics of Brazil’s Libra Field Bid, L atin A merica (Oct. 28, 2013, 5:00 PM), http:// fuelfix.com/blog/2013/10/28/ analysts-criticize-economics-ofbrazils-libra-field/. See also Libra Journey Begins for the Petrobras / Shell / Total / CNOCC / CNPC Consor tium, E r n s t &Y o u n g (2013), http://www.ey.com/ P u b l i c a t i o n / v w L UA s s e t s / Estudo_Libra_pos_leilao/$FILE/ Estudo_Libra_P%C3%B3s_ Leil%C3%A3o_23_10_2013_b. pdf. 58. Daniel Johnston & James Bush, I nternational O il C ompany Financial Management I n N ontechnical L anguage 155 (1998), available at http:// b o o k s. g o o g l e . c o m / b o o k s / about/International_Oil_ Company_Financial_Mana. html?id=sYIqxibXy1kC. 59. Peter D. Cameron, Stabilization in Investment Contracts and Changes of Rules in Host Countries: Tools for Oil and Gas Investors 12 (Research Paper), AIPN.org (July 6, 2006), available at http://www.rmmlf.org/ Istanbul/4-Stabilisation-Paper.pdf. 60. See Constitución Política de los Estados Unidos Mexicanos [C.P.], transitorios Sexto, Diario Oficial de la Federación [DO], 20 de Diciembre de 2013 (Mex.), available at https://www.aipn.org/ mcvisitors.aspx?type=v; Adrian Talamantes, Pemex Requests Mexico E&P Areas from SENER, King & Spalding Energy Law Exchange (Mar. 26, 2014), http://www. energylawexchange.com/pemexrequests-ep-areas-sener/.

Currents Winter 2013

The World Trade Organisation Obligations and Legislative Polcy: Choices in Developing Countries for Biotechnology R A M E S H

K A R K Y

A N D

M A R K

Many developing and least-developed nations are exporters of conventional agricultural products, and such products have traditionally been free of genetically modified (GM) material in the international

P E R RY *

Organization Agreement on Trade Related Ramesh Karky is a Postdoctoral Fellow in Law at the University of Western Ontario, Canada, and Mark Perry is Professor of Law at the University of New England, Armidale, Australia.

market.1 Now the scenario has changed, and

Aspects of Intellectual Property obligations related to biotechnology and offers policy choices relating to the patentability of innovation that utilizes: biotechnology; genetically modified organisms;

they are facing issues for international market

European Parliament adopted the Directive

commercialization and risk assessment of

access. These countries have had genetically

on the Legal Protection of Biotechnological

genetically modified plants, crops, foods and

modified products introduced into their

Inventions in 1998, and many EU Members

other products; co-existence of genetically

markets without their consent or knowledge.

have incorporated the provisions of this

modified, conventional and organic farming;

For example, it has been reported that

Directive into their domestic law by

and some basic principles of the law relating

soybean farmers in Argentina have used

enacting specific biotechnology laws or

to biotechnology.

unlicensed (“brown bagged” in GM crop

amending existing intellectual property

—————————————————

parlance) genetically engineered seed from

law. The European Patent Convention

I. Concepts

Brazil, and that Bt cotton was in the fields

of 1973 has been amended to include the

—————————————————

in India before any governmental approval.2

provisions of the Directive and it introduced

A few words on biotechnology would be a

Research on seeds smuggled in from other

specific provisions to address the field of

useful introduction to the issues discussed

countries indicates that a regulated seed

biotechnology. Even amongst the countries

in this paper. There is no single specific

market would be safer than the current illegal

that have biotechnology laws, there is

definition of biotechnology, but a broad

market. When people adopt GM crops in

little harmonization either at the policy or

generic meaning would be “[u]sing living

a free-for-all atmosphere, it holds potential

regulatory level.

organisms, or their products, for human

This paper explores the potential policy

benefit, to make a product or solve a

Many developing and least-developed

choices in the process of developing

problem.”11 Biotechnology, as defined by the

nations still lack or are in the process of

comprehensive biotechnology regulatory

Convention on Biological Diversity,12 is “any

developing comprehensive regulatory

systems in developing and least-developed

technological application that uses biological

systems to address the challenges brought by

countries. This paper also critically examines

systems, living organisms, or derivatives

agricultural biotechnology.5 Some developed

the potential problems of agricultural

thereof, to make or modify products or

nations, such as the U.S. and Canada, do

biotechnology and offers measures to solve

processes for specific use.”13 Genetically

not have specific biotechnology laws.6 The

it. It further discusses the World Trade

modified organism (GMO) is the term

dangers.4

Currents Winter 2013

commonly used for a life-form that has been

of biotechnology, and at the same time

Agreement.28 “Members may, but shall not

altered using recombinant DNA techniques.14

provides options to minimize the risks

be obliged to, implement in their law more

Although Hungarian engineer Karl Ereky

posed by biotechnology. Although it would

extensive protection than is required by this

coined the term “biotechnology” in 1919,

be misleading to suggest that law alone

Agreement . . .”29 Article 16.4 of the WTO

it was the discovery of the DNA structure

is sufficient to address all GMOs-related

Agreement only requires conformity of

in 1953 by James Watson, Francis Crick,

concerns,23 there is no doubt that addressing

laws with its obligations as provided in the

Maurice Wilkins, and Rosalind Franklin,

these issues with a regulatory perspective will

annexed Agreements.30 It does not require

which was followed by the development

help to provide better use and understanding

the conformity of Members’ laws with the

of recombinant DNA technologies in the

of their deployment.

provisions of the WTO Agreements.

1970s, that forms the cornerstone of modern

—————————————————

In the context of

the conformity

obligation, it is relevant to mention here

agriculture sector in favor of the use of GM

II. Issue of Compliance with WTO/TRIPS Biotech Obligation

biotechnology include: high yield of crops,

—————————————————

of an actor, whether a nation or industry,

high quality of crops, and a decrease in the

The

Trade-Related

and a specified rule.31 In the international

cost of farming,17 i.e., traits being introduced

Aspects of Intellectual Property24 (TRIPS

context, compliance is often specified as

to improve output for a given input. At the

Agreement) is one of the major agreements

a “[nation’s] behavior that conforms to a

same time, some serious concerns have been

of the World Trade Organization (WTO)

treaty’s explicit rule.”32 Compliance with an

expressed about introducing genetically

Agreement.25

international obligation and the effectiveness

modified crops, which include: the possible

prescribes

its

of that obligation are two different things;

risks to human health of food products

—————————————————

compliance may be high but effectiveness

derived from genetically-modified crops;18

low. There is a presumption that a state

regulation of genetically modified plants,

[Biotechnology Law] deals with biotechnological innovations, GMOs, commercialization and risk assessment/regulation of genetically modified plants, crops, foods and other products, and the co-existence of genetically modified, conventional and organic farming.

crops, foods and other products, and

—————————————————

inventions, whether products or processes,

the co-existence of genetically modified,

members. One of the obligations is to

in all fields of technology, provided that

conventional and organic far ming. 21

bring national legislation into conformity

they are new, involve an inventive step and

Different jurisdictions have been practicing

with the WTO Agreement.

The WTO

are capable of industrial application.” 36

biotechnological law in varied forms, such

Agreement requires that “[e]ach Member

According to the TRIPS Agreement, patents

as patent law, seed law, plant protection

shall ensure the conformity of its laws,

must be available for inventions, and

law, pesticide law, food and safety law, and

regulations and administrative procedures

patent rights must be enjoyable without

environment law. 22 Biotechnology Law

with its obligations as provided in the

discrimination as to the place of invention

brings a social dimension to the field of

annexed

TRIPS

and whether products are imported or

biotechnology. Biotechnology Law may

Agreement further states that Members

locally produced.37 The TRIPS Agreement

offer opportunities to harness the benefits

shall give effect to the provisions of this

furthermore states that “[m]embers may

biotechnology.16 Some of the particular arguments from the

the possible production of toxic compounds resulting from genetic modification; and, 19

the uncertain impact on the environment.20 Laws regulating biotechnology may be thought of as “Biotechnology Law.” It deals with biotechnological innovations, GMOs, commercialization and risk assessment/

Agreement

The

certain

WTO

obligations

Agreements.”

Currents Winter 2013

Agreement

The

that compliance generally refers to a state of conformity or identity between the behavior

would perform its international obligations in good faith.33 However, international law generally is indifferent as to how states meet their international obligations.34 The TRIPS Agreement gives patentees the right to prevent any commercial use of the materials.35 The TRIPS Agreement states, “[p]atents shall be available for any

provide limited exceptions to the exclusive

other than micro-organisms and

innovations, which are necessar y to

rights conferred by a patent, provided that

essentially biological processes

protect ordre public or morality, including

such exceptions do not unreasonably conflict

for the production of plants or

protecting human, animal or plant life or

with a normal exploitation of the patent and

animals other than non-biological

health or avoiding serious prejudice to

do not unreasonably prejudice the legitimate

and microbiological processes.45

the environment.50 This provision of the

interests of the patent owner, taking account

However, any Member country

TRIPS Agreement certainly covers the scope

of the legitimate interests of third parties.”

excluding plant varieties from

of genetically modified plants or foods

This provision for patent exceptions provides

patent protection must provide

and the freedom of the Member State to

members with some flexibility in drafting

an effective sui generis system of

allow or not to allow genetically modified

patent legislation and may allow exemptions

protection.

products to be brought into its market or

for research purposes.39 “WTO members

According to Article 27 of the TRIPS

environment if the said situation exists.51

are also free to determine what ‘invention’

Agreement, a Member State may deny

Furthermore, the general principle of the

means, how novelty and inventive steps are

—————————————————

TRIPS Agreement allows Member countries

interpreted, and the scope of claims that will

to adopt measures necessary to protect

This includes inventions dangerous

[Art. 27.2] of the TRIPS Agreement certainly covers the scope of genetically modified plants or foods and the freedom of the Member State to allow or not to allow genetically modified products to be brought into it’s market or environment if the said situation exists.

to human, animal or plant life or

—————————————————

their sustainable development objectives

health or seriously prejudicial to the

patentability for some biotechnological

. . . In addition, many developing countries

environment. This is subject to

innovations, like plants or animals, and

find themselves in circumstances that

the condition that the commercial

essentially biological processes for their

make it difficult to plan for the future and

exploitation of the invention must

production. However, Article 27 of the

therefore to tailor their policies to specific

also be prevented and that this

TRIPS Agreement requires Members to have

development goals.”54

prevention must be necessary for

a patentability provision for micro-organisms

It can be inferred from Article 16.4 of

the protection of ordre public or

and non-biological and microbiological

the WTO Agreement and Article 1.1 of

morality.43

processes.48 Also, Article 27 of the TRIPS

the TRIPS Agreement that WTO Member

(ii) Diagnostic, therapeutic and

Agreement states that Member States are

States are required to fulfill the obligation

surgical methods: Diagnostic,

free to deny patentability to any kind of

prescribed by Article 27 of the TRIPS

therapeutic and surgical methods

biological innovations which are contrary

Agreement in their domestic law. 55 In

for the treatment of humans or

to public morality (ordre public), including

another words, all 159 WTO Member States,

animals may be excluded from

human, animal or plant life or health and/

including developing and least-developed

patentability.44

or environment.49

countries, are obligated to enact some form

be admitted.”

Furthermore, the TRIPS Agreement provides for specific exclusion from patentability. The permissible TRIPS Agreement exclusions are: (i) Ordre public or morality: Inventions contrary to ordre public or morality are excluded from patentability.41

public health and nutrition, and to promote the public interest.52 Article 27.3(b) is the most contentious provision of the TRIPS Agreement. 53 Since Article 27.3(b) covers the fields of biotechnology, it is extremely important for developing and least-developed countries. “What is less clear is how they can take advantage of its provisions to further

(iii) Plants and animals other than

The TRIPS Agreement also highlights

of biotechnology law or to incorporate

micro-organisms: Members

a Member State’s ability to prevent the

provisions of biotechnology law into their

may exclude plants and animals

commercial exploitation of patentable

domestic law sooner or later.56

Currents Winter 2013

law and policy to promote welfare-enhancing

the Southern District of New York denied

biotechnological innovation. Moreover,

patent protection for isolated human genes

many of these countries have no biological

and associated diagnostic methods in the

industries to speak of, and they may have

Myriad case.67 In June 2011, on appeal, the

—————————————————

reason to be highly skeptical that such

U.S. Court of Appeals for the Federal Circuit

“Regulating biotechnology, a new, complex,

businesses will spring up just because life-

(“Federal Circuit”) partially reversed the

expensive, research-intensive and rapidly

forms, micro-biological, and non-biological

District Court decision, and stated that genes

advancing field, presents particular challenges

processes can be patented.

can be patented because the isolated DNA

—————————————————

III. Biotech Legislative Polcy Choices

for developing country policymakers.” For

Article 27 of the TRIPS Agreement allows

developing and least-developed countries,

WTO Member States to deny patentability of

developing a biotech regulatory framework

any kind of biological innovations which are

On March 20, 2012, the U.S. Supreme

is a costly and lengthy process. Of course,

contrary to ordre public or morality, as well as

Court, after Prometheus v. Mayo, 69 issued

countries need to choose their biotech

those that protect human, animal or plant life

a “grant-vacate-remand order” (“GVR

policy in accordance with their needs and

or health and/or environment. European

Order”) for the Myriad case. It granted

situation and people’s aspiration. Generally,

patent laws have provisions denying patents

certiorari, vacated the Federal Circuit

the regulatory framework needs to address

to any inventions that are contrary to ordre

decision, and remanded the case back to

the following areas of biotech:

public or morality, whereas the U.S. and

the Federal Circuit for further review in

Canada have no such provisions.

light of the new Supreme Court decision

(i) Scope of patentability of biotech

has a “markedly different chemical structure” from DNA within the body.68

After 30 years of patenting human genes,

in Prometheus.70 On August 16, 2012, the

(ii) Commercialization of GM plants,

there is again some debate in the U.S. as

Federal Circuit again upheld its previous

crops, foods and other products

to whether an isolated DNA molecule is

decision, and concluded that isolated genes

and scientific risk assessment; and,

—————————————————

are markedly different from native genes and

After 30 years of patenting human genes, there is again some debate in the U.S. as to whether an isolated DNA molecule is patentable subject matter.

are patentable.71 On November 30, 2012,

—————————————————

nature and not patent eligible merely because

patentable subject matter. This issue has been

it has been isolated, but cDNA is patent

under consideration by the courts in the U.S.

eligible because it is not naturally occurring.”72

innovations;

(iii) Co-existence of GM, conventional and organic farming.59 A. THE SCOPE OF PATENTABILITY OF BIOTECH INNOVATIONS

Legislative policymakers first face a question as to whether or not patenting of all kinds of biotechnological innovations should be permitted in their jurisdiction.60 Regarding the patenting of biotechnological innovations, “[m]any developing countries are unclear about how to tailor their patent regulations to promote their interests in the acquisition, development and application of biotechnology.”61 If developing countries lack a clear vision of how—and whether— biotechnology can benefit their economies and improve the lives of their citizens, they may not be in a position to design a patent

and Australia.

on the question of whether human genes are patentable, and on June 13, 2013, the U.S. Supreme Court held that, “[a] naturally occurring DNA segment is a product of

The same issue is under consideration

In the U.S., the U.S. Patent and Trademark

before the Supreme Court of Australia.

Office (USPTO) granted patents for the

In 2010, Cancer Voices Australia filed a

human genes BRCA 1 and 2 to Myriad

lawsuit to stop Myriad Genetics and Genetic

Genetics, Inc. and the University of Utah

Technologies from patenting genes BRCA

Research Foundation.65 The Public Patent

1 and 2.73 The Federal Court of Australia

Foundation and the American Civil Liberties

(Sydney) in its decision in Cancer Voices

Union filed suit in the U.S. District Court

Australia v. Myriad Genetics Inc.74 dismissed

for the Southern District of New York.66

the case and upheld the patents for BRCA

On March 29, 2010, the District Court for

1 and 2. The Court found that the patented

Currents Winter 2013

the U.S. Supreme Court granted a certiorari

nucleic acid sequences for BRCA1 and 2

plants may have on the environment: (1)

occurring to man or the environment

are independent and isolated from native

within the agricultural system and (2) the

following exposure under defined conditions

DNA, and that the sequences could not exist

natural one, which is outside the agriculture

to a risk source(s).”88

in isolation without human intervention.

system. “Within the agriculture system, the

Biotechnological innovations, including

Thus, the patented matter consists of

potential risks include the transgenic plant

patented ones, are generally subject to

“an artificially created state of affairs,” a

becoming a weed, the spread of the trait

health and environmental controls under the

necessary condition for invention under

to weeds within the crop, possible effects

regulatory frameworks that a government

the Australian legislation. Cancer Voices

on non-target organisms, the spread of the

may put in place. Countries may decide

Australia appealed the decision of the

transgene to non-GM crops, and the impact

whether to allow genetically modified

Federal Court, and the issue is now under

of any changes in agricultural practices.”

products into the market/environment with

consideration before the Federal Court of

In “nature, system concerns include the

or without satisfactory results of scientific

Australia. Judges of the Full Federal Court

spreading of the trait could adversely affect

risk assessment.89 The EU has provisions

partially heard this case on August 7 and 8

—————————————————

regarding health safety risk assessments

of 2013. The U.S. Supreme Court judgment

of genetically modified products before

this case, but the cases are about the same

Both sides—pro-GMO and anti-GMO—have strong arguments in their favor.

patents held by the same owner.78

—————————————————

invoke a safeguard provision and temporarily

that ecosystem or that the transgenic trait

ban a GMO product if it is possibly harmful

can spread into wild relatives of the crop in

to human health or the environment. 91

centres of origin and diversity.”82

Also, EU Member States may declare a

does not have a direct precedential effect on

B. COMMERCIALIZATION OF GM PLANTS, CROPS, FOODS AND OTHER PRODUCTS AND SCIENTIFIC RISK ASSESSMENT

their introduction into the market or environment.90 The EU Member States may

There is serious debate about the risks of

GMO-free zone under certain conditions.92

genetically modified products on human,

Even the U.S. has such provisions in cases

question: whether or not genetically modified

animal and plant health and life.

Both

where GMO products have potential health

plants, crops, foods and other products

sides—pro-GMO and anti-GMO—have

risks. 93 Additionally, Canada has safety

should be allowed to be brought freely

strong arguments in their favor.84 There is

assessment provisions for all kinds of

into the environment or commercialized.

no clear and undisputed scientific evidence

genetically modified products (plants with

A possible risk to the health of humans

that GMO products are good or bad for

novel traits, in Canadian terminology).94

and other animals, possible risk to the

human, animal and plant health and life.85

“There are concerns about the impact of

environment, and socio-economic and

But certain types of risks, as mentioned

biotechnology on many areas including

ethical issues are the main three areas of

above, though small have scientific basis.

health, the environment, biodiversity, access

concern regarding the release of GM crops

Hence, “[i]n many parts of the world, the

to genetic resources, ethics, indigenous and

or plants or products.79 “Concerns about

application of transgenic technologies

local communities, and farmers’ rights. It is

human and other animal health revolve

in agriculture triggered new regulations

therefore appropriate that these issues be

around the possibility the introduction

requiring the safety assessment of genetically

considered by the relevant regulatory frame

of one or more genes from completely

modified organisms (GMOs) and derivative

works.”95 Given these concerns, a nation

unrelated organisms might produce toxins

products prior to their environmental

should have a safety assessment legislative

or allergens in the product. These effects

release and commercialization.”87 “A formal

provision for genetically modified products

might be directly from the gene itself or

definition of risk assessment is the “process

in cases where a country wishes to allow

indirectly from the process of insertion of

of evaluation including the identification of

production and access to GMO products.96

the genes.”80 There are two possible negative

the attendant uncertainties, of the likelihood

As an example concerning developing

environmental impacts that transgenic

and severity of an adverse effect(s)/event(s)

nations, Thailand has extended bans on

The legislative policymakers face another

Currents Winter 2013

GMOs and decided to maintain the ban

to have labeling requirement.103 “Farmers’

of GMOs in conventional fields below

until national biosafety regulations are

rights” are another area policymakers need

minimum level.109 Co-existence rules also

developed. 97 In India, there has been a

to consider.104 The farmers’ rights in question

provide for compensation to farmers

heated public debate over the cultivation

are the right to save seeds and the right to

who suffer economic losses due to cross-

of the GM crop.98 In fact, India has limited

replant seeds, which are considered natural

contamination.110

cultivation of GM cotton seeds since 2002.

and customary rights of which they should

The Indian seed company Mahyco, which is

not be deprived.

Co-existence law covers the economic aspect of GMO and non-GMO cultivation.

105

a partner of the U.S. company Monsanto,

Co-existence law does not cover health

developed BT eggplant. It has undergone

C. CO-EXISTENCE OF GM, CONVENTIONAL

or environment risks.111 For the first time,

field trials since 2008 and has received

AND ORGANIC FARMING

the EU Commission on July 23, 2003

commercial cultivation approval from the government in 2009. However, because of the serious health concerns raised by the public, in addition to worries over threats to many non-mainstream eggplant varieties, the Government of India postponed BT eggplant cultivation until it is proved safe for human health and the environment. The 99

next important question is: will developing countries be able to examine scientifically such GMO products and analyze their contents (traits) and the possible risks to the environment or health? Clearly many developing countries lack modern equipment and qualified scientists; accordingly, there is doubt as to these developing countries’ ability to conduct risks assessments of GMO products. In respect of GM products, policies also need to determine whether the public has a right to know about genetically modified products. The EU has mandatory labeling requirements for GMO products.100 Canada has no mandatory GMO labeling requirement. The U.S. also has no provisions 101

for mandatory labeling requirements, unless such GMO products pose risks to health.102 Labeling requirements for GMO products give consumers knowledge on genetically modified products and the ability to choose. In the U.S. and Canada, there is public pressure

Legislative policymakers need to address whether to allow the co-existence of genetically modified, conventional and organic farming in their jurisdiction, i.e., “co-existence” laws. ————————————————— organic crops, or conventional crops. 106 There are certain implications from the cultivation of genetically modified crops or plants over non-GMO crops or plants. The main implication is the unintended and unavoidable presence of genetically modified genes in non-GM crops/plants through cross-pollination. 107 The adventitious presence of GMOs affects the identity and economic value of the non-GMO crops/ plants, and it can result in income loss to the non-GMO farmers. 108 Co-existence requirements and rules prescribe basic measures aimed at keeping the presence 18

Currents Winter 2013

adopted a Recommendation on guidelines for the development of national strategies and best practices to per mit the coexistence of genetically modified crops with conventional and organic farming.112 The EU Commission on July 13, 2010, adopted a new Recommendation on guidelines for the development of national co-existence measures to avoid the unintended presence of GMOs in conventional and organic crops.113 It is a non-binding recommendation, and it states, “Member states may take appropriate measures to avoid the unintended presence of genetically modified organisms in other products or crops, such as conventional or organic.”114 It further states, “[t]he objective of co-existence measures . . . is to avoid unintended presence of GMOs in other products, preventing the potential economic loss and impact of the admixture of GM and non-GM crops (including organic crops).”115 It also has a provision declaring GM-free zones.116 In some cases it may be necessary to exclude GMO cultivation from large areas if measures are not sufficient to prevent the unintended presence of GMOs in conventional or organic crops.117 Sixteen EU Member States have already adopted coexistence guidelines and enacted co-existence laws.118 Co-existence requirements and rules in Europe are aimed at keeping the presence

of GMOs in conventional fields below a

the Precautionary Principle.128 The 1992

health. Other people claim that genetic

0.9% threshold. The adventitious presence

Rio Declaration on Environment and

modification will have significant health

of GMOs above the tolerance threshold on

Development contains the Precautionary

benefits.”137

non-GMO crops requires it to be labeled as

Approach. 129 T he 1998 Wingspread

The Precautionary Principle is enshrined

containing GMOs.120

Statement on the Precautionary Principle

in EU treaties and legal decisions. Article 174

states, “[w]hen an activity raises threats of

of the EC Treaty states,

119

Canada and the U.S. have no co-existence laws.

There are no provisions or measures

harm to human health or the environment,

“[c]ommunity policy on the

minimizing the threat of gene transfer, nor

precautionary measures should be taken

environment . . . shall be based

are there provisions for compensation to

even if some cause and effect relationships

on the precautionary principle and

farmers who lose income due to cross-

are not established scientifically.”

The

on the principles that preventive

contamination.122 It is noteworthy to mention

—————————————————

action should be taken. When

that cross-contamination genes may be

However, the Precautionary Principle is not without criticism, and countries such as the U.S. have not adopted this principle in their regulation and policy.

there are reasonable grounds for

—————————————————

the precautionary principle has

—————————————————

2000 Cartagena Protocol on Biosafety to

been politically accepted as a risk

Although the Precautionary Principle’s

the Convention on Biological Diversity also

management strategy in several

applicability is debatable, it is principally

contains an expression of the Precautionary

fields.”138

applied to biotechnology regulation that

Principle.131

121

protected here as patented genes, and the patented gene owner is not responsible for any losses caused by cross-contamination.

123

—————————————————

IV. Biotech Legislation and the Precautionary Principle

130

concern that potential hazards may affect the environment or human, animal or plant health, and when at the same time the available data preclude a detailed risk evaluation,

The European Court of Justice (ECJ)

policymakers in developing countries should

However, the Precautionary Principle is

in Monsanto v. Italy (2003)139 has interpreted

be familiar with. In the EU, protection of

not without criticism, and countries such

Article 12 of Regulation 258/97,140 as well

human, animal and plant life and health and

as the U.S. have not adopted this principle

as the Precautionary Principle. On the issue

the precautionary principle are the major

in their regulation and policy.

Some

of GMO foodstuff and bans made by

foundation of policy and regulation.124 This

writers have viewed the Precautionary

Italy pursuant to the measures of Article

policy is influenced by the popular anti-

Principle as “wholly arbitrary”

and

12 of Regulation 258/97, the Court ruled

biotechnology sentiments in Europe and

“literally incoherent,”

and it has been

“it is apparent that, in the light of the

the basic overriding concern that consumers

characterized as an anti-scientific, simplistic,

precautionary principle, the implementation

should not be expected to bear all of the risk

and irrational shortcut.

Professor Cass

of such measures is necessary in order to

with little benefit.125 EU policy fundamentally

Sunstein states, “[t]he most serious problem

ensure that novel foods do not present a

differs with the U.S. policy in respect of its

with the Precautionary Principle is that it

danger for the consumer.“141 Article 12 of

application of the Precautionary Principle.126

offers no guidance—not that it is wrong,

Regulation 258/97 is a codified version

“In the fields of food safety, plant and

but that it forbids all courses of action,

of the Precautionary Principle, and it

animal health protection, the need for

including inaction.”

He further writes, “[g]

allows member states to temporarily ban

taking precautionary actions in the face

enetic modification of food has become a

products if there are “detailed grounds for

of scientific uncertainty has long been

widespread practice. But the risks involved

considering that the use of a food or a food

widely accepted.”

In 1982, the United

are not known precision. Some people fear

ingredient . . . endangers human health or

Nations World Charter for Nature for the

that genetic modification will result in serious

the environment.“142

first time gave international recognition to

ecological harm and large risks to human

127

136

134

135

132

133

Currents Winter 2013

—————————————————

take into account the views and concerns

according to their needs. Perhaps

of the public.

In the EU, the Deliberate

biotechnology regulation may change the

Release Directive states that Member States

existing situation in developing countries

—————————————————

shall consult the public when introducing

where GMO products are already in the

In addition to the agreements discussed

GMOs into the environment.153 In New

market without consumer knowledge, and it

above, participatory approaches are another

Zealand, a participatory approach has

may facilitate the benefits of biotechnology

area of biotechnology where policymakers

been adopted.

In 1999, the Independent

by reducing the risks posed by biotechnology.

in developing countries need to recognize

Biotechnology Advisory Council was

Biotechnology law aims to bring a regulatory

the importance of information, transparency

established to inform and consult the

safeguard to protect human, animal and plant

and public participation in the process of

public on matters of biotechnology.

health through scientific risk assessment

law and decision-making. Public input into

the United Kingdom, the public is engaged

processes. If a GM product has a negative

the regulation of biotechnology, particularly

extensively in consultation.

It is important

effect to health or the environment, such

GMOs, is significant as is the demand for

to incorporate the participatory approach in

a product should not be allowed to be

enough time.

It is the public who eats

GMO regulation, and to have provisions for

brought into the market or escape into

GMO products and assumes potential

access to information, public participation in

the environment. Policies should provide

risk. In many countries, the public has

decision-making, and access to justice.

consumers and farmers the freedom to

already expressed their concerns over the

—————————————————

choose between GM, conventional and

V. Biotech Legislation and Participatory Approach

143

151

152

154

156

155

regulation of biotechnology, particularly

VI. Conclusion

GMOs food or crops, and its risk on health

—————————————————

level of GMO adventitious presence. Any

and the environment.

The Convention on

In the context of biotechnology or GMOs

policy needs to provide mechanisms that can

Biological Diversity145 obligates Contracting

crops/plants, the foremost challenges

protect the identity of non-GMO crops/

Parties to have a provision permitting public

faced by developing and least-developed

plants. In respect of GM products, the policy

participation in its relevant laws.

The

countries are how to protect their farmers

also needs to determine the extent to which

requires that parties

from the potential monopoly of big biotech

the public has a right to know how a product

shall consult the public in the decision-making

companies. This problem may not have

is being deployed. Labeling provisions for

process regarding living modified organisms

appeared in many developing and least-

GMO products allow consumers to know

and shall make the result of such decisions

developed countries yet, but it will appear

that they are buying a GMO product, and

available to the public.

The Aarhus

soon. The farmer’s right is another area that

they give consumers the potential freedom to

Convention on Access to Information,

policymakers need to address. Proper biotech

choose what they want to eat, in spite of the

Public Participation in Decision-making and

policy should address these problems. In

fact that determining the levels that trigger

Access to Justice in Environmental Matters

developing countries, more than 60% of the

labeling or other regulatory mechanisms is

1998 emphasizes public concern about the

labor force is based in rural areas dependent

difficult.158

deliberate release of genetically modified

on agriculture as the dominant sector of

It is essential that policymakers give prime

organisms into the environment and the

occupation, whereas in developed countries,

consideration to the participation of citizens

need for increased transparency and greater

the labor force involved in agriculture is less

in the process of making laws pertaining

public participation in decision-making in

than 3%.

This shows the importance of

to biotechnology and any biotech related

this field.149 Article 5.2–5.4 of the African

agricultural biotechnology in developing

decision-making process. Naturally, this

Model Law on Safety in Biotechnology150

countries.

includes informed voices from all sectors of

144

Cartagena Protocol

147

148

146

157

organic farming, and help minimize the

provides that the public should participate in

Developing and least-developed countries

society, from scientists that understand the

decision-making by means of both a notice-

are free to choose their biotech legislative

field to those with visceral reactions to the

and-comment. National authorities are to

policy and to adopt regulatory frameworks

idea of GM. Sometimes public participation

Currents Winter 2013

may not produce outcomes that are favorable to governments, but such participation will ultimately be in the greater interest of society and lead to long-term policy stability.

End Notes * The authors thank Catherine McCorquodale, Natasha Zervoudakis and Sarah Nguyen for their research assistance and funding by the Government of Canada through Genome Canada and the Ontario Genomics Institute (OGI-046). 1. United Nations Conference on Trade and Development, Policy Issues in International Trade and Commodities, Study Series No. 29, International Trade in GMOs and GM Products: National and Multilateral Legal Frameworks, at 7, U.N. Doc. UNCTAD/ITCD/TAB/30, U.N. Sales No. E.04.II.D.41 (2005) [hereinafter UN Conference on Trade and Development] (by Simonetta Zarrilli). 2. G ay a t h r i Va i d y a n a t h a n , A Search for Regulators and a Road Map to Deliver GM Cr ops to Third World Farmers, N.Y. Times, March 31, 2010, at 2, available at http://www.nytimes.com/ cwire/2010/03/31/31climate wire-a-search-for-regulatorsand-a-road-map-to-de-53658. html?pagewanted=all. 3. Id. 4. Id. 5. UN Conference on Trade and Development, supra note 1, at 6. 6. See Coordinated Framework for Regulation of Biotechnology, 51 Fed. Reg. 23, 302 (June 26, 1986) (discussing the U.S. government’s 1986 announcement of its Biotechnology Policy); see also Regulation of Biotechnology— Second Report, C an . H ouse of C o mm o n s —S ta n d i n g C o mm . on E nv ’ t & S ustainable D ev . (June 1996), http://www.parl. gc.ca/Content/HOC/Archives/ Committee/352/sust/minutes/ sust_issue-03_19-29/report-e. html [hereinafter The Regulatory Framework]. 7. Directive 98/44/EC, of the European Parliament and of the Council of 6 July 1998 on the Legal Protection of Biotechnological Inventions, 1998 O.J. (L 213) 13, 21 & art. 17.

8. See, e.g., Report of the European Commission to the Council and European Parliament on the Development and Implications of Patent Law in the Field of Biotechnology and Genetic Engineering, at 6–7, COM (2002) 545 final (July 10, 2002), available at http://eur-lex.europa.eu/ LexUriServ/LexUriServ.do?uri= CELEX:52002DC0545:EN:NOT (discussing the 1973 EPC and the EPO’s adoption of the relevant aspects of the Directive through enacting “The Implementing Regulation to the Convention on the Grant of European Patents Rule” (1973, as amended in 2004)); see also Case T 1191/01, ICOS Corp. v. SmithKline Beecham & Duphar Int’l Res. B.V., 2002 O.J. Eur. Patent Office (06/02), p.293, available at http://www.epo.org/ law-practice/case-law-appeals/ recent/t011191eu1.html. 9. Convention on the Grant of European Patents, Oct. 5, 1973, 1065 U.N.T.S. 199. 10. See, e.g., Thomas Margoni, The Roles of Material Transfer Agreements in Genetics Databases and BioBanks, in Comparative Issues in the G overnance of R esearch Biobanks (Giovanni Pascuzzi et al. eds., Springer-Verlag Berlin Heidelberg 2013), available at http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=2228696; Ramesh Karky & Mark Perry, Disharmonization in the Regulation of Transgenic Plants In Europe, in Biotechnology Law (Mark Perry et al. eds.) (forthcoming 2014) [hereinafter Karky & Perry— Disharmonization]. 11. W. J. Thiemann & M.A. Palladina, Introduction to Biotechnology 2 (Beth Wilbur et al. eds., 2d ed., Pearson Edu., 2010). 12. United Nations Convention on Biological Diversity, art. 3, June 5, 1992, 31 U.N.T.S. 818 [hereinafter C o n ve n t i o n o n B i o l o g i c a l Diversity]. 13. Id. 14. Mark Per r y, Fr om Pasteur to Monsanto: Approaches to Patenting

Life in Canada, in An Emerging I n t e l l e c t ua l P r o p e r t y P aradigm —P erspectives from C anada 69 (Ysolde Gendreau ed., Edward Elgar Publ’g 2008), available at http://ssrn.com/ abstract=1291344. 15. U.N. Secretary General, Policy Brief: Modern Biotechnology and the OECD 1 (June 1999), http://www.oecd.org/science/ biotech/1890904.pdf. 16. Leslie G. Restaino et al., Patenting DNA-Related Inventions in the European Union, United States and Japan: A Trilateral Approach or a Study in Contrast?, 2 UCLA J.L. & Tech. 1, 1 (2003). 17. United Nations Conference on Trade and Development, Key Issues in Biotechnology, at 5, U.N. Doc. UNCTAD/ITE/TEB/10 (2002). 18. Id. at 6. 19. Id. 20. Id. 21. S e e g e n e r a l l y C o o r d i n a t e d Framework for Regulation of Biotechnology Products, 51 Fed. Reg. 23, 302 (June 26, 1986); The Regulatory Framework, supra note 6; P e w I n i t i a t i v e o n Food and Biotechnology, Guide to U. S. Regulation of Genetically Modified Food and A gricultural B iotechnology Products ii n.2 (2001) [hereinafter Pew 2001], available at http://www. pewtrusts.org/uploadedFiles/ www pewtr ustsorg/Repor ts/ Fo o d _ a n d _ B i o t e ch n o l o g y / hhs_biotech_0901.pdf; L u c Bodiguel et al., The Regulation of Genetically Modified O r g a n i s m s : C o m pa r a t i v e A pproaches (Luc Bodiguel & Michael Cardwell eds., Oxford Univ. Press 2010); G eorge T. T zotzos et al ., G enetically M odified P lants : A ssessing S a f e t y a n d M a n ag i n g R i s k (Academic Press 2009). 22. See Pew 2001, supra note 21; The Regulatory Framework, supra note 6. 23. Karen Morrow, Genetically Modified Or ganisms and Risk, in T h e R egulation of G enetically

Modified Organisms: Comparative Approaches 54, 75 (Luc Bodiguel & Michael Cardwell eds., Oxford Univ. Press 2010). 24. TRIPS: Agreement on TradeRelated Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C (1999), 1869 U.N.T.S. 299, 33 I.L.M. 1197 [hereinafter TRIPS Agreement]. 25. Marrakesh Agreement Establishing the World Trade Organization, Apr. 15, 1994, 1867 U.N.T.S. 187, 33 I.L.M. 1144 [hereinafter Marrakesh Agreement]. 26. Id. art. 16.4. 27. Id. 28. TRIPS Agreement, supra note 24, art. 1.1. 29. Id.; see also Appellate Body Report, India—Patent Protection for Pharmaceutical and Agricultural Chemical Products, ¶ 59, WT/DS50/ AB/R (Sept. 5, 1997) (“‘Members are free to determine how best to meet their obligations under the TRIPS Agreement within the context of their own legal system . . .’ [a]nd, as a Member, India is ‘free to determine the appropriate method of implementing’ its obligations under the TRIPS Agreement within the context of its own legal system.”). 30. Marrakesh Agreement, supra note 25, art. 16.4. 31. See also Benedict Kingsbury, The Concept of Compliance as a Function of Competing Conceptions of International Law, 19 M ich . J. I nt ’ l L. 345, 346 (1998) (noting that some compliance theorists argue that concepts of compliance vary given different theories of international law). 32. R o n a l d B . M i t c h e l l , I nternational O il P ollution at Sea: Environmental Policy a n d T r e at y C o m p l i a n c e 30 (MIT Press 1994); see generally R oger D. F isher , I mproving Compliance with International Law (Univ. of Va. Press 1981); Jose E. Alvarez, Why Nations Behave,

Currents Winter 2013

19 Mich. J. Int’l L. 303 (1998); Beth A. Simmons, Compliance with International Agreements, 1 A nn . Rev. Pol. Sci. 75 (1998); Harold Hongju Koh, Why Do Nations Obey International Law?, 106 Yale L.J. 2599 (1997). 33. Kwan K. Sim, Rethinking the Mandatory/Discretionary Legislation Distinction in WTO Jurisprudence, 2 World Trade Rev. 33, 59 (2003); see also Vienna Convention on the Law of Treaties, art. 26, May 23, 1969, 1155 U.N.T.S. 331. 34. Oppenheim’s International Law § 21, at 83 (Robert Jennings & Arthur Watts eds., Oxford Univ. Press 9th ed. 1992). 35. TRIPS Agreement, supra note 24, art. 28.1. 36. Id. art. 27.1. 37. Id.; see also Panel Report, Canada— Pharmaceutical Patents, ¶ 7.94, WT/ DS114/R (Apr. 7, 2000) (explains the meaning of the term “without d i s c r i m i n a t i o n ,” i n T R I P S Agreement art. 27, and notes “[t]he ordinary meaning of the word ‘discriminate’ is potentially broader than these more specific definitions . . . Discrimination may arise from explicitly different treatment, sometimes called ‘de jure discrimination,’ but it may also arise from ostensibly identical treatment, which, due to differences in circumstances, produces differentially disadvantageous effects, sometimes called ‘de facto discrimination’ . . . ‘Discrimination’ is a term to be avoided whenever more precise standards are available, and when employed, it is a term to be interpreted with caution, and with care to add no more precision than the concept contains.”). 38. TRIPS Agreement, supra note 24, art. 30. 39. Mywish K. Maredia, Application of Intellectual Property Rights in Developing Countries: Implications for Public Policy and A gricultural R esearch Institutes 16 (2001), available at http://www.wipo.int/export/ sites/www/about-ip/en/studies/ pdf/study_k_maredia.pdf. 40. Id. 41. TRIPS Agreement, supra note 24, art. 27.2. 42. Id. 43. Id. 44. Id. art. 27.3(a). 45. Id. art. 27.3(b). 46. Id. 47. Id. (finding that plants or animals are known as higher life forms); see Perry, supra note 14, at 79; Harvard Coll. v. Canada (Comm’r of Patents), [2002] 4 S.C.R. 45,

Currents Winter 2013

and practices. See Council Directive 98/44/EC, of the European Parliament and of the Council of 6 July 1998 on the Legal Protection of Biotechnological Inventions, 1998 O.J. (L 213) 1, 13–21 [hereinafter 1998 Council Directive], available at http:// eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=OJ:L:1998:2 13:0013:0021:en:PDF (covering the topic of patentability of biotech innovations); see Directive 2001/18 of the European Parliament and of the Council of 12 March 2001 on the Deliberate Release into the Environment of Genetically Modified Organisms and Repealing Council Directive 90/220/EEC, 2001 O.J. (L 106) 1 [hereinafter 2001 Council Directive], available at http:// eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=OJ:L:2001:1 06:0001:0001:EN:PDF (covering the topic of risk assessment and commercialization); Commission Recommendation, of 13 July 2010 on Guidelines for the Development of National CoExistence Measures to Avoid the Unintended Presence of GMSs in Conventional and Organic Crops, 2010/C, 2010 O.J., (C200) 1 [hereinafter 2010 Co-existence Recommendation], available at http://eur-lex.europa.eu/ LexUriServ/LexUriServ.do?uri= OJ:C:2010:200:FULL:EN:PDF (covering the topic of coexistence). The U.S. and Canadian Courts have established case law in the area of patentability of biotech innovations, and there are rules governing risk assessment, but there are no co-existence rules or regulations in the U.S. and Canada. 60. See TRIPS Agreement, supra note 24, art. 27.1; Harvard Coll., [2002] 4 S.C.R. 45; Diamond v. Chakrabarty, 447 U.S. 303, 316 (1980); Ass’n for Molecular Pathology v. Myriad Genetics, Inc., 133 S. Ct. 2107, 2111 (2013); Convention on the Grant of European Patents art. 52, Oct. 5, 1973, 1065 U.N.T.S 199; 1998 Council Directive, supra note 59, art. 23. 61. Dutfield et al., supra note 54, at 2–3. 62. Id. at 65. 63. Id. 64. TRIPS Agreement, supra note 24, arts. 27.2, 30. 65. Ass’n for Molecular Pathology v. U.S. Patent & Trademark Office, 702 F. Supp. 2d 181, 184–85 (S.D.N.Y. 2010) aff ’d in part, rev’d in part, 653 F.3d 1329 (Fed. Cir. 2011) cert. granted, judgment vacated sub nom. Ass’n for Molecular Pathology v.

71–72 (Can.) (ruling that higher life forms are not patentable in Canada, similar to Europe. However, in the United States, higher life forms are patentable). 48. TRIPS Agreement, supra note 24, art. 27.3(b). 49. Id. art. 27.2 (addressing provisions of morality and public order under TRIPS. U.S. and Canadian patent law has no such provision); see Perry, supra note 14, at 71 (noting there is no provision of public policy/morals or exclusions or exceptions to patents in the U.S. Patent Act. However, recently the U.S. included a prohibition on patents covering human organisms); Leahy-Smith America Invents Act, Pub. L. No. 11229, § 33(a), 125 Stat. 340 (2011) (codified in scattered sections of title 35 of the United States Code) (“Notwithstanding any other provision of law, no patent may issue on a claim directed to or encompassing a human organism”). 50. TRIPS Agreement, supra note 24, art. 27.2. 51. Id. arts. 27.2, 30. 52. Id. art. 8. 53. Id. art. 27.3(b). 54. G r a h am D u t f i e l d e t a l . , E xploring the F lexibilities o f TRIPS t o P r o m o t e B i o t e c h n o l o g y C a pa c i t y Bu i l d i n g a n d A ppro pr i at e Technology Transfer 11 (2006), available at http:// www.ecologic.eu/download/ projekte/1800-1849/1802/wp7_ final_report.pdf. 55. Marrakesh Agreement, supra note 25, art. 16.4. 56. See Council for Trade-Related Aspects of Intellectual Property Rights (TRIPS), Extension of the Transition Period under Art. 66.1 for Least Developed Country Members, IP/C/64 (June 11, 2013) (providing least-developed countries an extended transitional period up to 2013 to fulfill TRIPS obligation. Now this transition period has been extended to July 1, 2021), available at http://www.wto. org/english/tratop_e/trips_e/ ta_docs_e/7_1_ipc64_e.pdf. 57. Dutfield et al., supra note 54, at 65. 58. UN Conference on Trade and Development, supra note 1, at 6. 59. No countries have drafted a single regulatory framework addressing all biotech issues. The European Union has a systematic regulatory framework under different Directives and Regulations. This biotech regulatory framework has been based on European regulation 22

Myriad Genetics, Inc., 132 S. Ct. 1794 (U.S. 2012) and opinion vacated, appeal reinstated, 467 F. App’x 890 (Fed. Cir. 2012) and aff ’d in part, rev’d in part, 689 F.3d 1303 (Fed. Cir. 2012) aff ’d in part, rev’d in part sub nom. Ass’n for Molecular Pathology v. Myriad Genetics, Inc., 133 S. Ct. 2107 (U.S. 2013). 66. Ass’n for Molecular Pathology, 702 F. Supp. 2d at 183. 67. Id. at 185–86. 68. Ass’n for Molecular Pathology v. U.S. Patent & Trademark Office, 689 F.3d 1303, 1331 (Fed. Cir. 2012). 69. Mayo Collaborative Ser vs. v. Prometheus Labs., Inc., 132 S.Ct. 1289, 1289 (2012). 70. Ass’n for Molecular Pathology v. Myriad Genetics, Inc., 132 S. Ct. 1794 (2012). 71. Ass’n for Molecular Pathology v. Myriad Genetics, Inc., 653 F.3d 1329 (Fed. Cir. 2011). 72. Ass’n for Molecular Pathology, 133 S. Ct. at 2111. 73. Cancer Voices Austl. v. Myriad Genetics, Inc. [2013] FCA 65, ¶ 2 (Austl.); see Ryan Heighton, The ‘Myriad’ with the Golden ‘Gene’: Australia Upholds Breast Cancer Gene Patents, IP Osgoode (Mar. 3, 2013), http://www. iposg oode.ca/2013/03/the%E2%80%98myriad%E2%80% 99-with-the-golden-%E2%80%98 g ene%E2%80%99-australiaupholds-breast-cancer-genepatents/. It should be noted that the Supreme Court in Australia is not the highest court of the land, but rather two steps away from such, namely the High Court of Australia. 74. Cancer Voices Austl., [2013] FCA 65, ¶ 138. 75. Id. ¶¶ 101–02. 76. Joe Schneider, Myriad Genetics Win on Gene Patent Ownership is Appealed, B loomberg (Mar. 3, 2013), http://www.bloomberg. com/news/2013-03-04/myriadgenetics-win-on-gene-patentownership-is-appealed.html. 77. Top US Court Decision Blocks Patent on Cancer Genes, TimeBase (June 15, 2013, 3:59 PM), http://www. timebase.com.au/news/2013/ AT445-article.html. 78. Id. 79. Tzotzos et al., supra note 21, at 32. 80. Id. at 31. 81. Id. at 32. 82. Id. 83. Id.; see also Convention on Biological Diversity, supra note 12, at 5–6. 84. I n t ’ l L aw A s s ’ n , R i o d e J aneiro C onference (2008): I n t e r n a t i o n a l L aw o n

Biotechnology 6 (2008), available at http://www.wipo.int/export/ sites/www/meetings/en/2009/ wipo_ls_biot_ge_09/pdf/1_ila. pdf. 85. Tzotzos et al ., supra note 21; GM S c i e n c e R e v i e w P a n e l , First Report: An Open Review of the S cience R elevant to GM Crops and Food Based on the Interests and Concerns of the P ublic 10 (2003), available at http://imag e.guardian. c o. u k / s y s - f i l e s / G u a r d i a n / documents/2003/07/21/gmscireport1-full.pdf (“To date worldwide there have been no verifiable untoward toxic or nutritionally deleterious effects resulting from the cultivation and consumption of products from GM crops.”). 86. Tzotzos et al., supra note 21, at 31; see also Ruby R. Fernandez, Monsanto and the Requirement for Real Risks in GM Food Regulation, 28 Loy. L.A. Int’l. & Comp. L. Rev. 335, 336–337 (2006). 87. Tzotzos et al., supra note 21, at 34. 88. Id. at 35. 89. Under the U.S. system, GM products can be commercialized without risk assessment if they have no distinct threat to public health or the environment. Under the EU system, every GM product has to go through the risk assessment process. Emily Marden, Risk and Regulation: U.S. Regulatory Policy on Genetically Modified Food and Agriculture, 44 B.C. L. Rev. 733, 734 (2003); A Description of the U.S. Food Safety System, U.S. Food & Drug Admin. (Mar. 3, 2000), http:// www.fsis.usda.gov/OA/codex/ system.htm. 90. 2001 Council Directive, supra note 59, at 1. This directive addresses all major aspects of the deliberate release of genetically modified plants. Id. There is a particular emphasis on the authorization procedure, scientific assessment of the risks to human and animal health and environment, experimental release into the environment (field trials), and cultivation or placing on the market. Id. However, the EU has left the issue of the co-existence between genetically modified crops, conventional crops, and organic crops to member states. Id. at 2. Under this Directive, the applicant (“the notifier”) needs to submit an application (“the notification”) for authorization to the competent authority of the Member State where such experimental release will take place. Id. at 3. The notification

needs to contain an environmental risk evaluation carried out by the notifier. Id. Then, the competent national authority examines the contents of the application and risk evaluation, and if it thinks that the application meets the requirements prescribed by Directive 2001/18/EC, it delivers a decision and authorizes the field trial. Id. In Europe, the European Food Safety Authority (EFSA), composed of highly qualified scientists, conducts the environmental risks assessment of GM plants. Id.; see also Commission Regulation 258/97/EC, of the European Parliament and of the Council of 27 January, 1997, Concerning Novel Foods and Novel Food Ingredients, 1997 O.J. (L 043) 1 [hereinafter Commission Regulation 258/97]. Regarding genetically modified foods, an application is submitted to the competent member state authority where the GMO would be marketed, along with the required information and documents. Id. The competent member state authority forwards the application to the EFSA, and then the EFSA conducts risk assessments. Id. 91. See Commission Regulation 258/97, supra note 90, at 8 (“Article 12 of Regulation 258/97 allows member states to temporarily ban products if there are “detailed grounds for considering that the use of a food or a food ingredient . . . endangers human health or the environment.”); see also Case 236/01, Monsanto Agricoltura It. SpA v. Presidenza del Consiglio dei Ministri [Presidency of the Council of Ministers of Italy], 2003 E.C.R. I-8111, I-8140 to I-8142 (2003) [hereinafter Monsanto Case], available at http://curia.europa.eu/ juris/showPdf.jsf;jsessionid=9ea7 d2dc30db6e64463da6e14a358edd badf28c610c4.e34KaxiLc3qMb40 Rch0SaxuMahj0?text=&docid=48 138&pageIndex=0&doclang=EN &mode=lst&dir=&occ=first&par t=1&cid=193381 (demonstrating support of the Article 12 provision by the ECJ). Many EU member states have invoked the safeguard provision and banned GM foods. Id. For example, Italy invoked the safeguard clause (Article 12) under Regulation 258/97 on novel foods in August 2000; France banned the cultivation of the GM maize variety MON810 on February 7, 2008. Id. at I-8119. 92. 2 0 1 0 Co-existence Recommendation, supra note 59, at 1. Recommendation Number 1 states, “Member states may

take appropriate measures to avoid the unintended presence of genetically modified organisms . . . in other products . . . [or] crops, such as conventional or organic.” Id. Recommendation Number 4 states, “The objective of coexistence measures . . . is to avoid unintended presence of GMOs in other products, preventing the potential economic loss and impact of the admixture of GM and non-GM crops (including organic crops).” Id. Recommendation Number 5 has a provision declaring GM-free zones. Id. “In some cases . . . it may be necessary to exclude GMO cultivation from large areas . . . [if] other measures are not sufficient to prevent the unintended presence of GMOs in conventional or organic crops.” Id. 93. The U.S. has a provision for issuing a “determination of non-regulated status” to new GM plants, that is, only to non-plant pests. See Terence P. Stewart & David S. Johanson, Policy in Flux: The European Union’s Laws on Agricultural Biotechnology and Their Effects on International Trade, 4 Drake J. Agric. L. 243, 249–250 (1999). Developers of a new GM plant submit an application to the Animal and Plant Health Inspection Service (APHIS) of the United States Department of Agriculture. Id. Then, APHIS conducts an environmental risk assessment and determines the plant’s possible effects on human health and the environment. Id. 94. The Canadian Environmental Protection Act of 1999 (CEPA) requires that all products of biotechnology new to Canada be subject to an assessment for their potential “toxicity” before they can be manufactured, imported or sold in Canada. Canadian Environmental Protection Act, of 1999, S.C. 1999, c. 33 (Can.), available at http://laws-lois. justice.gc.ca/eng/acts/C-15.31/. Various directives provide the environmental safety requirements. See Directive 94-08: Assessment Criteria for Determining Environmental Safety of Plants with Novel Traits (2012); Directive 2000-07: Conducting Confined Research Field Trials of Plants with Novel Traits in Canada (2007); Directive 2009-09: Plants with novel traits regulated under Part V of the Seeds Regulations: Guidelines for determining when to notify the CFIA (2009). Health Canada has also Guidelines for the Safety Assessment of Novel Foods. Guidelines for Safety Assessment of Novel Foods, Health

Can. (June 2006), http://www.hcsc.gc.ca/fn-an/alt_formats/hpfbdgpsa/pdf/gmf-agm/guidelineslignesdirectrices-eng.pdf. 95. A n d r e w B l a t t ma n e t a l . , Austl. Dep’t of Foreign Aff., I n t e l l e c t ua l P ro p e rt y a n d B iotechnology : A T raining H andbook 2–33 (Spruson & Ferguson publ., 2001), available at http://www.spruson.com/au/ pdf/Biotechnology_IP_Manual. pdf. 96. See, e.g., id. 97. Int’l Ctr. For Trade & Sustainable Dev., GMO Update: US-EU Biotech Dispute; EU Regulations; Thailand, B ridges T rade B io R es , Sept. 10, 2004, available at http://ictsd. org/i/news/biores/9482/. 98. India Puts on Hold First GM Food Crop on Safety Grounds, BBC News (Feb. 9 2010, 2:48 PM), http:// news.bbc.co.uk/2/hi/south_ asia/8506047.stm. 99. Id. 100. See Commission Regulation 1830/2003, Concer ning the Traceability and Labeling of Genetically Modified Organisms and the Traceability of Food and Feed Products Produced from Genetically Modified Organisms, 2003 O.J. (L 268) 1; Commission Regulation 1829/2003, Genetically Modified Food and Feed, 2003 O.J. (L 268) [hereinafter 2003 Commission Regulation (1829)]; see also UN Conference on Trade and Development, supra note 1, at 4. 101. In February 2011, the Canadian Parliament defeated a bill requiring mandatory labeling or disclosure of GM content. See James Bradshaw, Ottawa Rejects Stronger Export Regulations for Genetically Modified Crops, The Globe & Mail (Feb. 9, 2011, 11:04 PM), http:// www.theglobeandmail.com/news/ politics/ottawa-rejects-strongerexport-regulations-for-geneticallymodified-crops/article566642/. 102. The Genetically Engineered Foods Right to Know Act, H.R. 3377, 106th Cong. (1999) (requiring mandatory labeling but never passed by U.S. Legislatures); see also Intl. Dairy Foods Ass’n v. Amestoy, 92 F.3d 67, 71–72 (2d Cir. 1996). 103. In the U.S., the Genetically Engineered Food Right-to-Know Act was submitted to Congress in 1999, but it was never successful. See The Genetically Engineered Foods Right to Know Act, supra note 102. In Canada, C-287, a private member’s bill requiring mandator y labelling of GM foods, was defeated in Parliament on October 17, 2001. Canada

Currents Winter 2013

Agricultural Products Act, C.R.C., c. 287 (Can.). Again, in February 2011, a bill that required labelling or disclosure of GM content was defeated in Parliament. See Bradshaw, supra note 101. 104. See Craig Borowiak, Farmers’ Rights: Intellectual Property Regimes and the Struggle over Seeds, 32 Pol. & S oc ’ y 511, 511–543 (2004), available at http://pas.sagepub. com/content/32/4/511; Robert Schubert, Farming’s New Feudalism: Percy Schmeiser and Other Casualties of Industrial Agriculture’s Drive to Own It All, 18 World Watch Mag. 10 (2005), available at http://www. worldwatch.org/system/files/ EP183A.pdf. 105. FAO, International Treaty on Plant Genetic Resources for Food and Agriculture art. 9, Nov. 3, 2001, 31 I.L.M. 818; see also Regine Andersen et al., Crop Genetic Diversity and Farmers’ Rights, in R ealising F armers ’ R ights to Crop Genetic Resources: Success S tories and B est P ractices 7 (Regine Andersen & Tone Winge eds., 2013). 106. Mark Perry & Ramesh Karky, Agriculture Under Threat—A Crisis of Confidence? The Solution: Redefine Adventitious Presence Maximum Levels from Zero to Zero++, 11 Can. J. L. & Tech. 25 (June 2013) [hereinafter Per r y & K ark y—Agricultur e Under Threat]; 2010 Co-existence Recommendation, supra note 59, at 3 (promulgating guidelines for the development of national coexistence measures to avoid the unintended presence of GMOs in conventional and organic crops). 107. Perry & Karky—Agriculture Under Threat, supra note 106, at 25–26; see also A.M. Timmons et al., Risks from Transgenic Crops, 380 Nature 487, 487 (1996). 108. Per r y & K ark y—Agricultur e Under Threat, supra note 106, at 25–47; Drew L. Kershen & Alan McHughen, Commentary, Adventitious Presence: Inadvertent Commingling and Co-existence Among Farming Methods, 1 Council for A gric . S ci . & T ech . 4 (2005); see generally Chidi Oguamanam, Tension on the Farm Fields: The Death of Traditional Agriculture?, 27 Bull. Sci. Tech. & Soc. 260 (2007); C.G. Gonzalez, Trade Liberalization, Food Security, and the Environment: The Neoliberal Threat to Sustainable Rural Development, 14 Trans. L. & Contemp. Prob. 419 (2004); Richard A. Repp, Biotech Pollution: Assessing Liability for Genetically Modified Crop Production and Genetic Drift, 36 I daho L. Rev. 585, 593 (2000); Norman

Currents Winter 2013

C. Ellstrand et al., Gene Flow and Introgression from Domesticated Plants into their Wild Relatives, 30 Ann. Rev. Ecology & Systematics 539, 541 (1999); David S. Bullock & Marion Desquilbet, The Economics of Non-GMO Segregation and Identity Preservation, 27 F ood P ol . 81, 83 (2002); Katie Black & James Wishart, Containing the GMO Genie: Cattle Trespass and the Rights and Responsibilities of Biotechnology Owners, 46 Osgoode Hall L. J. 397, 404–405 (2008). 109. See generally Karky & Perry— Disharmonization, supra note 10; 2010 Co-existence Recommendation, supra note 59. Sixteen European countries have co-existence laws. See, e.g ., G e n t e c h n i kg e s e t z [German Genetic Engineering A ct ] (amended 1993) (Ger.); Decreto-Lei n.o 160/2005 de 21 de Setembro [Decree-Law No. 160/2005 Ruling on Genetically M o d i f i e d P l a n t V a r i e t i e s .] (Port.). 110. Perry & Karky—Agriculture Under Threat, supra note 106, at 44. 111. 2 0 1 0 Co-existence Recommendation, supra note 59, at 1, ¶ 4 (“The objective of coexistence measures . . . is to avoid unintended presence of GMOs in other products, preventing the potential economic loss and impact of the admixture of GM and non-GM crops (including organic crops).”). Health and environment risks are covered. 2001 Council Directive, supra note 59, at 1. 112. S e e g e n e r a l l y C o m m i s s i o n Recommendation 2003/556 of 23 July 2003 on Guidelines for the Development of National Strategies and Best practices to Ensure Co-existence of Genetically Modified Crops with Conventional and Organic Farming, 2003 O.J. (L 189) 36 (promulgating guidelines for the development of national strategies and best practices to endure and the co-existence of genetically modified crops with conventional and organic farming). 113. 2 0 1 0 Co-existence Recommendation, supra note 59. 114. Id. at 4, ¶ 1.4. 115. Id. at 1, ¶ 4. 116. 2 0 1 0 Co-existence Recommendation, supra note 59, at 1, ¶ 5 (providing a provision declaring GM-free zones, stating: “In some cases . . . it may be necessar y to exclude GMO cultivation from large areas . . . [if] other measures are not sufficient to prevent the unintended presence of GMOs in conventional or organic crops”). Many regions of the EU have declared “GM-

free Zones.” See generally Karky & Perry—Disharmonization, supra note 10. 117. 2 0 1 0 Co-existence Recommendation, supra note 59, at 1, ¶ 5. 118. Karky & Perry—Disharmonization, supra note 10. 119. 2 0 1 0 Co-existence Recommendation, supra note 59, at 5, ¶ 2.3.1. The minimum threshold is. 0.9%. 2003 Commission Regulation (1829), supra note 100, at 1. 120. 2 0 1 0 Co-existence Recommendation, supra note 59, at 5, ¶ 2.3.3. 121. See Nataliya Dormann, Regulatory Fr a m e w o r k f o r B i o t e c h n o l og y Derived Crops with Specific Focus on New Plant Breeding Techniques in Canada, Can. Food Inspection A g e n c y , h t t p : / / i p t s. j r c. ec.europa.eu/presentations/ documents/07Canada.pdf (last visited Oct. 20, 2013); The U.S. Coordinated Framework for Regulation of Biotechnology Products of 1986, 51 Fed. Reg. 23302 (June 26, 1986), available at http://www.aphis.usda.gov/ brs/fedregister/coordinated_ framework.pdf; see also Perry & Karky—Agriculture Under Threat, supra note 106. 122. See Perry & Karky—Agriculture Under Threat, supra note 106, at 44. 123. Ja n e M a t t h e w s G l e n n , T h e Coexistence of Genetically Modified and Non-genetically Modified Agriculture in Canada: A Courtroom Drama, in The Regulation Of Genetically Modified Organisms: C omparative A pproaches 255, 257–258 (Luc Bodiguel & Michael Cardwell eds., 2010). 124. European Union, Consolidated Ve r s i o n o f t h e Tr e a t y o n European Union and of the Treaty Establishing the European Community art. 174, 16 Apr. 2003, 2003 O.J. (C 321) 123 (stating: “Community policy on the environment . . . shall be based on the [P]recautionary [P] rinciple and on the principles that preventive action should be taken”); see also Communication from the Commission on the Precautionary Principle, at 3, 14, 22, COM (2000) 1 final (Feb. 2, 2000) [hereinafter Precautionar y Principle]; see also Diahanna Lynch & David Vogel, T he R egulation of GMO s in Europe and the United States: A Case-Study of Contemporary European Regulatory Politics (Council on Foreign Relations pub. 2001), http://www.cfr.org/ agricultural-policy/regulationgmos-europe-united-states-case24

study-contemporary-europeanregulatory-politics/p8688; see also Ramesh Karky & Mark Perry, P olicy C hoices for B iotech Legislative Enactments: Genetic Modifications in the Food Chain, (forthcoming 2013) (manuscript at 15) (on file with authors). 125. Ian Sheldon, Europe’s Regulation of Agricultural Biotechnology: Precaution or Trade Distortion?, J. Agric. & Food Ind. Org., 2004, at 6. 126. Precautionary Principle, supra note 124, at 14; see also Monsanto Case, supra note 91; Douglas A. Kysar, It Might Have Been: Risk, Precaution and Opportunity Costs, 22 J. Land Use & Envtl. L. 1, 3 (2006); Cass R. Sunstein, Laws of Fear: Beyond the P recautionary P rinciple 13 (Cambridge Univ. Press pub., 2005); Lawrence A. Kogan, The Precautionary Principle and WTO Law: Divergent Views Toward the Role of Science in Assessing and Managing Risk, Seton Hall J. Dip. & Int’l Rel. 77, 79 (2004); Carl F. Cranor, Some Legal Implications of the Precautionary Principle: Improving Information-Generation and Legal Protections, 17 Int’l. J. Occup. Med. & Env. Health 1, 21 (2004). 127. Sanitary & Psytosanitary Measures (“SPS”) Agreement Training Module: Chapter 8.2—The “Precautionary Principle”, WTO, http://www. wto.org/english/tratop_e/sps_e/ sps_agreement_cbt_e/c8s2p1_e. htm (last visited Oct. 20, 2013). 128. World Charter for Nature, G.A. Res. 37/7, U.N. GAOR, 37th Sess., Supp. No. 51, U.N. Doc. A/ RES/37/7 (Oct. 28, 1982). 129. T h e R i o D e c l a r a t i o n o n Environment and Development, 14 June 1992, 31 I.L.M. 874, 879 (1992). 130. W i n g s p r e a d S t a t e m e n t o n t h e Precautionary Principles, WHO (Jan. 20, 1998), http://www.who.int/ ifcs/documents/forums/forum5/ precaution/wingspread/en/ (click download link at the bottom of the page). 131. The Car tagena Protocol on Biosafety to the Convention on Biological Diversity, Jan. 29, 2000, 39 I.L.M. 1027, 1027 (2000) [hereinafter Cartagena Protocol], available at http://www.cbd.int/ doc/legal/cartagena-protocol-en. pdf; see also Lesley K. McAllister, Comment, Judging GMOs: Judicial Application of the Precautionar y Principle in Brazil, 32 Eco. L. Q. 149, 154 n.20 (2005). 132. Jonathan H Adler, The Problems with Precaution: A Principle without Principle, The American (May 25, 2011), http://www.american.com/

archive/2011/may/the-problemswith-precaution-a-principlewithout-principle; Sunstein, supra note 126, at 4; Giandomenico Majone, What Price Safety? The Precautionary Principle and its Policy Implications, 40 J. Common Mkt. Stud. 89, 95 (2002). 133. Adler, supra note 132. 134. Sunstein, supra note 126, at 4. 135. Majone, supra note 132, at 101; Adler, supra note 132. 136. Cass R. Sunstein, The Paralyzing Principle: Does the Precautionary Principle Point us in any Helpful Direction?, R egulation , Winter 2002–2003, at 33. 137. Id. at 33–34. 138. Jesse Male, The State of Genetically Engineered Crops in the European Union Following Monsanto v. Italy and the Adoption of a New Regulatory Framework for Genetically Modified Food and Feed, 9 Drake J. Agric. L. 439, 444 (2004). 139. See Monsanto Case, supra note 91, at I-8105. 140. Commission Regulation 258/97, supra note 90; see also Fernandez, supra note 86, at 335. 141. See Monsanto Case, supra note 91, at I-8144. 142. Commission Regulation 258/97, supra note 90. 143. Luc Bodiguel & Michael Cardwell, Genetically Modified Organisms and the Public Participation, Preferences, and Protests, in The Regulation of Genetically Modified O r g a n i s m s : C o m pa r a t i v e A p p roac h e s 1 6 ( O x f o r d Univ. Press 2010) [hereinafter Bodiguel & Cardwell—Genetically Modified Or ganisms]; see, e.g ., Cartagena Protocol, supra note 131, art. 23(2); Convention on Biological Diversity, supra note 12; Convention on Access to Information, Public Participation in Decision-Making and Access to Justice in Environmental Matters, 25 June 1998, 2161 U.N.T.S. 447 (entered into force Oct. 30, 2001). 144. Bodiguel & Cardwell—Genetically Modified Organism, supra note 143. 145. Convention on Biological Diversity, supra note 12. 146. Id. at 14(1). 147. Cartagena Protocol, supra note 131. 148. Id. art. 23. 149. Aarhus Convention on Access to Information, Public Participation in Decision–making and Access to Justice in Environmental Matters, 1998, concluded under the auspices of the United Nations Economic Commission for Europe. Aarhus C o n ve n t i o n o n A c c e s s t o Information, Public Participation in Decision-making and Access to Justice in Environmental

Matters, June 25, 1998, 38 I.L.M. 517 (entered into force Oct. 30, 2001), available at http://www. unece.org/fileadmin/DAM/env/ pp/documents/cep43e.pdf. The European Community ratified the Convention in 2005. See Council Decision 2005/370/ EC, of 17 February 2007 on the Conclusion, on Behalf of the European Community, of the Convention on Access to Information, Public Participation in Decision-making and Access to Justice in Environmental Matters, 2005 O.J. (L 124) 1 (2005), available at http://eur-lex.europa. eu/LexUriServ/LexUriServ.do ?uri=OJ:L:2005:124:0001:0003 :EN:PDF; see also Commission Regulation 1367/2006/EC, of The European Parliament and of the Council of 6 September 2006, on the Application of the Provisions of the Aarhus C o n ve n t i o n o n A c c e s s t o Information, Public Participation in Decision-Making and Access to Justice in Environmental Matters to Community Institutions and Bodies, 2006 O.J. (L 264) 13 (2006), available at http://eur-lex.europa. eu/LexUriServ/LexUriServ.do?u ri=OJ:L:2006:264:0013:0019:EN: PDF. 150. African Model Law on Safety in Biotechnology, Annexes for the Draft African Model Biosafety Law, African Union (Apr. 2001), http://www. africaunion.org/root/AU/AUC/ Departments/HRST/biosafety/ DOC/level2/African%20 Model%20Law%20with%20 Annexes-EN.pdf. 151. Bodiguel & Cardwell—Genetically Modified Organisms, supra note 143, at 16. 152. 2001 Council Directive, supra note 59. 153. Id. art. 9. 154. Bodiguel & Cardwell—Genetically Modified Organisms, supra note 143, at 18. 155. Id. at 18. 156. Id. 157. Labor Force—By Occupation, Cent. Intel. Agency, https://www.cia. gov/library/publications/theworld-factbook/fields/2048.html (last visited Oct. 20, 2013). 158. Perry & Karky—Agriculture Under Threat, supra note 106.

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AUSFTA, Korus FTA and Now TPP: Free Trade Agreements Are Now Reaching Further into Domestic Health Policies than Ever Before LA U R A

—————————————————

I. Introduction

————————————————— Free trade agreements signed by the U.S. during the last two decades are characterized by their unique intellectual property agenda. Since the implementation of the North American Free Trade Agreement (“NAFTA”)

C H U N G *

Laura S. Chung is a skilled patent attorney with extensive experience in preparing and prosecuting U.S. patent applications in a wide range of technologies, including fuel and solar cells, wireless power technology, and chemical reaction control and method of manufacturing raw materials for lithium-ion batteries.

—————————————————

II. Ever-Increasing Reach of International Trade Regime

————————————————— The reach of the international trade regime into traditionally domestic affairs such as food-safety regulation, domestic-patent law, and public health policy has continued

in 1994, all free trade agreements that the

countries. Public awareness for the potential

to increase since the establishment of the

U.S. signed include provisions regarding

impact of these new provisions is necessary

World Trade Organization (“WTO”) and

intellectual property (“IP”) protection. 1

to protect the cost-saving formularies found

the adoption of the Agreement on Trade-

These provisions restrict the use of parallel

in many national healthcare systems.

Related Aspects of Intellectual Property

importation of patented medications,

The United States currently lacks a

Rights (“TRIPS”) in 1995. Aside from the

extend patent terms for delays in regulatory

centralized healthcare system, but whether

TRIPS that required all WTO member

approval process, and exclude the use of

such a system will benefit the public is

countries to provide product patents for

clinical data submitted by the brand-name

hotly debated, as seen with respect to the

pharmaceutical products, approximately

pharmaceutical companies for years.2

Affordable Care Act. However, outside of

300 free trade agreements have been signed

Two recent free trade agreements—the U.S.-

the United States, the debate is already over.

among countries.7 Many of these free trade

Australia free trade agreement (“AUSFTA”)

Currently about fifty countries worldwide

agreements include IP provisions that go

of 2004 and the South Korea-U.S. free trade

are providing some form of universal

further than the requirements found in the

agreement (“Korus FTA”) of 2011—include

healthcare for their population, and many

TRIPS agreement, including patent term

the aforementioned provisions, and also

more countries are gearing their national

extensions, patent linkage to the regulatory

include new provisions that directly relate

resources to expand healthcare coverage. So

approval process of medications, and data

to national healthcare systems and their

great is the movement to achieve universal

exclusivity, which have proven to result

pharmaceutical reimbursement formularies.

healthcare coverage that the World Health

in a noticeable increase in the price of

Similar provisions regarding pharmaceutical-

Organization (“WHO”) noted “universal

medications in several contracting states.8

reimbursement formularies are also expected

coverage” to be “a widely shared political

to appear in the Trans-Pacific Strategic

aim of most countries.”

The expansion of trade regime into intellectual property protection was

Economic Partnership Agreement (“TPP”)

engineered by industry leaders in the

that is being negotiated among the U.S.,

U.S., especially multinational business

Chile, Peru, Mexico, Vietnam, Singapore,

entities, such as IBM, General Motors,

Brunei, New Zealand, and other trans-pacific

General Electric, DuPont, and Monsanto, 26

Currents Winter 2013

as well as the pharmaceutical manufacturing

roughly 95% of the global pharmaceutical

at the request of an applicant directly

association of the U.S., now known as

market is comprised of the top industrialized

affected by a recommendation or

Pharmaceutical Research and Manufacturers

economies, whereas the small remainder of

determination.21

of America (“PhRMA”).9 However, in 1996,

the market is spread across all other global

These provisions require the national

the inclusion of intellectual property issues

populations.17 With a per capita GDP of less

government of both nations to provide

into NAFTA and WTO has been described

than $100018, medications that cost $10,000

an independent administrative court for

as “one of the great ironies of the recent

to $15,000 per year per patient were clearly

drug producers to challenge the exclusion

drive to global free trade,” because, “by

out of reach for this sector of the market.

of their medications from the national

definition, protecting intellectual property

Nevertheless, the practice of including IP

formulary, provided the nation’s “federal

is about restricting trade in certain goods.”

provisions in free trade agreements is far

healthcare authorities” operate or maintain

from waning.

a phar maceutical for mular y or set

—————————————————

reimbursement amounts for a “federal

Nevertheless, the practice of trading heightened intellectual property protection

Trade Representative since the NAFTA

III. International Trade Regime and Regional Healthcare Systems

negotiations to the present time.11 A rationale

—————————————————

November of 2011, and entered into effect

proposed at the time was the argument that

The U.S.-Australia free trade agreement

in spring of 2012.23 During the Korus FTA

insufficient IP protection of pharmaceuticals

ratified in 2004 proved that free trade

negotiation, which began in June 2006,

in other countries was costing the industry

agreements can reach farther into domestic

based on the PhRMA’s recommendation,

billions in trade per year. According to a

policies than ever imagined before. Based

the U.S. Trade Representative argued that

1988 study published by the United States

on the assertion of the U.S. pharmaceutical

South Korea’s national health insurance

International Trade Commission (“ITC”),

industries that national healthcare systems

drug-formulary is a potential barrier to

many of these countries did not have any

are making it difficult for brand-name

trade.24 Thus, Korus FTA similarly includes

patent protection for pharmaceuticals.13

drug producers to recoup the cost of

provisions regarding an independent review

The study alleged that, if equivalent patent

innovation, the U.S. Trade Representative

process by which pharmaceutical companies

protection systems existed in these countries,

conditioned the trade free agreement

may challenge the exclusion of drugs from

and if these countries could sustain the

negotiation on agreements regarding

the national drug formulary. For instance,

volume of patented-medication use at the

Australia’s pharmaceutical reimbursement

Article 5.3 of Korus FTA states that

price demanded by the U.S. pharmaceutical

mechanism. For instance, Annex 2-C of

[t]o the extent that health care

companies, the top ten U.S. pharmaceutical

AUSFTA states that

authorities at a [nation] Party’s

for market access to the United States has been fully supported by the U.S.

healthcare program.”22 The free trade agreement between South Korea and the United States was ratified in

companies might have made approximately

[t]o the extent that a [nation] Party’s

central level of g overnment

$2 billion more in sales.14

federal healthcare authorities

operate or maintain procedures

However, the HIV epidemic of late

operate or maintain procedures

for listing pharmaceutical products,

1990s illustrated the flaws of the ITC

for listing new pharmaceuticals

medical devices, or indications

study.

During the HIV e pidemic,

or indications for reimbursement

for reimbursement, or setting

millions of the world population perished

purposes, or for setting the

the amount of reimbursement

without the ability to afford anti-retroviral

amount of reimbursement for

for pharmaceutical products or

medications, demonstrating that many

pharmaceuticals, under its federal

medical devices, under health

living in the developing world simply did

healthcare programs, it shall . . .

care programs operated by its

not have sufficient resources to pay for

make available an independent

central level of government, a

the patented medications. The fact is that

review process that may be invoked

[nation] Party shall . . . make

Currents Winter 2013

available an independent review

of the individual medication, and whether

process that may be invoked at the

the product is under a patent protection.

The process by which the Korean government evaluates whether to include a

request of an applicant directly

However, as explained later, the South

drug in its formulary is reproduced in Figure

affected by a recommendation or

Korean and Australian governments

1 from the European Observatory on Health

determination.25

determine the reimbursement amount

Systems and Policies.31 The National Health

based on “cost-effectiveness analysis,”

Insurance Corporation of Korea determines

not based on whether a product is under

whether to include a drug in its drug

[u]nder health care programs

a patent protection. The South Korean

formulary based on efficacy, safety, cost-

operated by its central level of

dr ug for mulary system was modeled

effectiveness analysis, reference pricing, sales

government, the [nation] Party

after the Australian system, which applies

volume, and whether the drug is essential

shall . . .ensure that the Party’s

health economics to determine the optimal

to life, through a price negotiation process

determination, if any, of the

allocation of its ational budget.

with the drug producer that can last several

In addition, Article 5.2 of Korus FTA states that

reimbursement amount for a

Further, the national health authorities of

years.32 Thus, the extra layer of independent

pharmaceutical product or medical

Australia and South Korea in fact already

review may not be necessary. Rather, the

device, once approved by the

provide the pharmaceutical companies with

independent review process is based on a

appropriate regulatory authority

an extensive negotiation process for the

premise that the pharmaceutical companies

as safe and effective, is based on

pricing and inclusion of a medication in the

are entitled to governmental reimbursements

competitive market-derived prices;

national drug formulary.

for their drugs, and concerns exist that the

or if its determination is not based

review process may allow the pharmaceutical

on competitive market-derived

companies to disrupt the formulary one drug

prices, then that Party shall: (i)

at a time, making it difficult for the national

appropriately recognize the value

government to provide an efficient coverage

of the patented pharmaceutical

system for the entire population.33

product or medical device in the

—————————————————

of the pharmaceutical product

IV. World Healthcare Systems and Drug Price Regulation

or medical device to apply, based

—————————————————

on evidence of safety or efficacy,

A drug formulary is used by many nations

for an increased amount of

of the world.34 With respect to providing

reimbursement over that provided

medications for the national population,

for comparator products, if any,

national health authorities are taking on

used to determine the amount of

increasingly important roles of setting

reimbursement.

formularies, determining reimbursement

amount of reimbursement it provides; (ii) permit a manufacturer

Article 5.2 of Korus FTA emphasizes that the price of the medication should be set at the “competitive market-derived prices” or that the pharmaceutical companies should be provided with an administrative court to request an increase in the reimbursement

rates, setting prices or making bulk Figure 1. Korean Government Forumlary for Evaluating the Inclusion of a Drug Source: Chang Bae Chun et al., Health Systems in Transition: Republic of Korea Health System Review, 11 Eur. Observatory On Health Sys. and Pol’y, no. 7, at 124 fig. 6.4. (2009), available at http://www. euro.who.int/__data/assets/pdf_file/0019/101476/ E93762.pdf.

amount based on safety and efficacy data

See Figure 2. 36 According to Schoonveld, the author of Price of Global Health, the global pharmaceutical market can be segmented into four major payer systems, including:

Currents Winter 2013

purchases.35

some de facto regulation occurs through several competitive private insurance companies, and federal- and state healthcare programs.45 With relatively high medication prices, the size of the U.S. market in terms of dollars is similar to the combined market size of countries using the therapeutic referencing systems. Currently, private health insurance companies, the managed healthcare organizations, and approximately forty state Medicaid programs, maintain drug Source: Ed Schoonveld, The Price of Global Health: Drug Pricing Strategies to Balance Patient Access and the Funding of Innovation (2011).

formularies. 46 Some public healthcare

therapeutic referencing systems, health

rather than setting reimbursement rates. For

companies de facto perform price controls

economics nations, competitive insurance

instance, France directly sets pharmaceutical

similar to those performed by national

system, and emerging cash markets.37

prices on detailed five-year renewable

healthcare systems of other countries,

Therapeutic referencing systems are most

contracts with pharmaceutical companies,

such as classifying drugs in different tiers,

common in Europe. Used as early as the

detailing different prices based on various

applying co-payments, and even negotiating

1990s in Germany and Netherlands, it is now

volumes used by the population.42 Other

reimbursement rates of ser vices and

also used in France, Italy, Spain, Japan, and

countries that set the price include Italy,

medications.47

other European countries.38 The therapeutic

Spain, and Japan.43

Figure 2. Segmentation of the Four Major Payer Systems

programs and private health insurance

In addition, several developed countries,

referencing system is also used in the United

In the United States, approximately

including aforementioned South Korea,

States in approximately forty states as part

58% of the population are covered by

Australia, Canada, and the UK, use health

of its Medicaid programs.39 Therapeutic

one or more private health insurances or

economics to determine drug reimbursement

referencing is based on the natural concept

managed care organizations, while public

rates.48 A health economics system tries

of how a consumer makes purchase choices

healthcare programs, such as Medicare and

to determine the tangible and intangible

regarding a new product. For instance, when

Medicaid, cover another

a new product is introduced into the market,

27%. About 15% of the

the price of the new product is determined

population is uninsured.

based on the price of a comparable product

When the Affordable Care

that has similar indications.40 Currently, the

Act is fully implemented,

Anatomical Therapeutic Chemical (â&#x20AC;&#x153;ATCâ&#x20AC;?)

the coverage is expected

system is influential for drug reimbursement

to expand to the entire

or price determination in many European

population, and certain

countries. The system classifies medications

aspects of the care may also

based on the organ system on which

become centralized.44

they act or their therapeutic and chemical characteristics.

While the national g o ve r n m e n t d o e s n o t

In addition, some therapeutic referencing

directly control drug prices

countries actually set the price of medications,

for the entire population,

Figure 3. Healthcare Coverage in the United States Source: Ed Schoonveld, The Price of Global Health: Drug Pricing Strategies to Balance Patient Access and the Funding of Innovation (2011).

Currents Winter 2013

benefits of a medication to the patient

the growth of out-of-pocket healthcare

pay out-of-pocket for their medications, the

and society, and sets reimbursement rates

expenditures.

patients no longer care whether a more cost-

based on these benefits. For instance, if a

—————————————————

efficient alternative exists.63 However, once

a wheelchair after using a medication or an

V. Effect of Formularies on Pharmaceutical Market

HIV patient can enjoy twenty additional

—————————————————

This demonstrates that, while the

years without hospitalization, the medication

In general, the drug formularies and

reimbursement mechanism is a powerful

confers a benefit to the patient that may

reimbursement schemes devised by the

tool for controlling price, it may also be one

be quantified into a numerical value using

national healthcare authorities are quite

of the few available mechanisms that can

measurements such as quality of life scales.50

powerful in influencing consumer decisions.

be used for price control when the national

rheumatoid arthritis patient can walk without

the drug price exceeds the reimbursement amount, demand drops significantly.64

For instance, the standard measurement for

government decides to shoulder the cost

determining the cost effectiveness of a drug

of medications. If the national government

is “cost-per-quality-adjusted-life-year-saved,”

could not place a limit on the reimbursement

or cost/QALY.

amount, the pharmaceutical companies

By quantifying the benefit to a numerical

could theoretically indefinitely increase the

value, health economics allow policy makers

price without lowering the demand for their

to allocate the limited resources in such a

product.

way that the most benefit is delivered to the entire population. In these countries, 52

a cost-effectiveness analysis generally

Figure 4 Elasticity Under Multiple Indications Source: Ed Schoonveld, The Price of Global Health: Drug Pricing Strategies to Balance Patient Access and the Funding of Innovation (2011).

—————————————————

VI. How Pharmaceutical Companies Set Price

becomes a part of a formula for determining

For instance, Germany uses the WHO’s

—————————————————

pharmaceutical reimbursement rates.53 As

ATC classification system for its therapeutic

While in the generic drug market, competition

a result, the use of a patented medication

referencing system to deter mine the

with other generic drug producers tends to

is naturally discouraged when a lower-cost

reimbursement rate for medications in

lower the medication cost, the innovator

alternative exists.

its formulary. In 2003, a generic version

pharmaceutical producers are often the

Lastly, approximately 90% of the world

of Merck’s Zocor, a statin medication for

single supplier of a patented medication.65

population lives in countries that do not

controlling cholesterol, became available,

As such, provided the patented medication

yet have a sufficient regulatory framework

while Pfizer’s Lipitor was still covered under

is far superior to other available products in

to control drug prices. In these countries,

a patent. As a result, the reimbursement rate

the market, the innovator company is often

patients generally pay for medication as

for Lipitor decreased substantially. By 2005,

in a position of setting its price irrespective

an out-of-pocket expense, and are often

Pfizer lost approximately 75% of Lipitor

of the cost of production,66 especially in a

deprived of access to expensive innovative

sales in Germany,61 indicating a majority of

products such as antiretroviral therapies

patients switched over to the generic version

for HIV/AIDS, and new treatments for

of Zocor.

cancer, cardiovascular disease, and other non-communicable diseases.

According to Schoonveld, in a reimbursed

These

market, the demand for a medication has

countries make up less than 9% of the global

a fixed volume substantially equal to the

pharmaceutical market.56 Many developing

number of patients who benefit from the

countries are currently in transition to

medication, unless the actual price of the

establish a regulatory framework to increase

medication exceeds the reimbursement

coverage for their population and to control

amount.62 When patients do not need to

Figure 5 Economic Effects of Profit-Maximizing Behavior by the Patentee of a New Plant Variety Source: Ed Schoonveld, The Price of Global Health: Drug Pricing Strategies to Balance Patient Access and the Funding of Innovation (2011).

Currents Winter 2013

country without price regulation such as the

wide range of financial resources that are

For instance, in Europe, any act that tries

United States. The optimal price for a market

available for each country. Accordingly,

to prevent the parallel importation of

is the price that produces the largest profit,

patients in developing countries can better

medications within Europe is a violation

represented by block 1 in Figure 5.67

afford the necessary medications if they are

of European anti-cartel regulation. 73

priced differently in each country. In fact,

Additionally, in Germany, pharmacists are

As shown in Figure 5, the profit above

the cost of product, or the monopoly profit

obligated by law to dispense the parallel

for the pharmaceutical company, displaces

traded product when the price of the drug

consumer surplus. In addition, a number

is at least 15% below the German equivalent

of patients, represented by H-F, cannot

or the price difference is greater than €15

afford the medication. For example, it may

(approximately $20).74

cost $200 to produce an annual supply of certain medication, while the monopoly price is $10,000. The medication may have the potential to save a patient $20,000 in

Figure 6 Economic Impact of Partial Price Discrimination Source: Ed Schoonveld, The Price of Global Health: Drug Pricing Strategies to Balance Patient Access and the Funding of Innovation (2011).

terms of hospitalization cost and may also

With tariffs being virtually eliminated between countries of the European Union and with the low transaction cost in transport given the small size of medications, parallel importation is difficult to prevent. For

confer intangible benefit of prolonged life

the WHO supports price differentiation

example, when Spain and France set the

and health. When the medication is under

to a limited degree because it ensures a

price of Bayer’s cardiovascular drug Adalat

a patent protection, the patient may pay the

wider access to essential medications for

at approximately 40% below the UK price,

monopoly price ($10,000) to preserve his

those living in developing countries. From

the wholesalers in Spain and France started

or her health but may have to face certain

the perspective of the pharmaceutical

exporting Adalat to the UK.75 In an anti-

financial hardships, depending on the patient’s

companies, segmenting the market can

cartel lawsuit that ensued when Bayer tried

economic situation. Of course, even in this

substantially increase its profit by capturing

to limit its supply to Spain and France, Bayer

situation, the medication confers significant

additional consumer surplus—if such

alleged a loss of approximately €118 million

benefit to the patient, represented by block 2.

segmentations of market were in fact

($149.5 million) in sales between 1989 and

On the other hand, if the patient has an

possible. However, a perfect segmentation

1993 through the arbitrage sales.76

access to a health insurance or has access

of the global pharmaceutical market is not

In the United States, on the other hand,

to the generic version of the medication at

possible for numerous reasons, including (1)

parallel importation of patented medication

a price of $200, the patient can be spared

the availability of parallel importation and (2)

on a commercial scale is illegal. 77 For

the financial hardship. In fact, this type of

international price referencing.71

instance, a medication imported from

dilemma is not uncommon for patients who

—————————————————

Canada can be seized at the border if the

are faced with catastrophic illnesses in the

VII. Parallel Importation

United States, such as HIV or cancer. Some

—————————————————

patient.78 This allows the U.S. pharmaceutical

patients may end up spending a majority of

The possibility of parallel importation causes

companies to maintain a high domestic

their assets until they qualify for government

a medication to move from a low-cost region

price for a medication even when generic

benefits, such as Medicaid, Medicare or Ryan

to a high-cost region, provided the price

versions are available in other countries.79

White Fund, which now cover approximately

difference is substantial and the transaction

This being the United States practice, the U.S.

two-thirds of HIV patients in the United

cost of importation is low. In fact, trade

Trade Representative’s position in free trade

States.

liberalization facilitates parallel importation

agreements has been to request a prohibition

by removing trade barriers.

on parallel importations of pharmaceuticals

On the international scale, however,

there are different optimal prices for a

In many countries, parallel importation of

given medication in each country due to the

medication is not only legal, but encouraged.

Currents Winter 2013

medication is not for the personal use of a

in other countries.80

in the United States because the U.S.

and Japan—so called “A-7 pricing”—despite

market is much bigger than the Canadian

their argument that the average income

market.

If price discrimination cannot

of Koreans, approximately $16,000, was

—————————————————

be achieved, it would be possible for the

less than half of those living in the A-7

In addition, pharmaceutical companies

pharmaceutical companies to maximize its

countries.89 To balance the budget, the South

have noted that providing a medication at a

profit by foregoing the Canadian market.86 In

Korean government subsequently excluded

reduced price in one country tends to reduce

extreme circumstances, the pharmaceutical

certain medications, including Roche’s

its bargaining power to charge a higher rate

companies have delayed launching expensive

Fuzeon, a second line treatment for HIV

in another country. In fact, many countries

medications in a smaller market to maintain

from the national formulary.90

apply international price referencing systems

the high price in more lucrative markets.87

—————————————————

to calculate the reimbursement rates or to

The HIV/AIDS epidemic in African

directly set the price of medications. The

countries during the late 1990s and early

Canadian Patented Medicine Prices Review

2000s is an example of the pricing dilemma.

IX. Necessity of Price Regulation Under Universal Healthcare Coverage

Board (“PMPRB”), for instance, uses the

While the vast majority of HIV patients

—————————————————

median price of a medication in the United

were located in African countries, they were

The PhRMA proposal to submit national

States, the UK, France, Germany, Sweden,

left out of the pricing equation because the

dr ug for mularies under independent

Italy, and Switzerland as a reference. As a

healthcare systems of developed countries

review has raised concerns from the U.S.

result, pharmaceutical companies sometimes

could bare the burden of much higher prices

Food and Drug Administration ("FDA"),

set the local price of a medication above the

for the antiretroviral medications.

Hospital for Special Surgery (“HSS”), and

—————————————————

VIII. International Price Referencing

optimal price for the market, to the detriment

I n a d d i t i o n , b a cke d by t h e U. S.

certain congressmen during the Korus FTA

of their population.83 Patients in countries

government, the pharmaceutical industries

negotiation.91 The provisions in Korus FTA

with small market sizes are especially

have even pressured countries to increase the

and AUSFTA are not the first attempts by

vulnerable to being left out from the price

reimbursement rate or price of medications.

the pharmaceutical industries to resist the

setting equation.

In 1999, the Korean government was

use of a preferred drug list. For instance, the

For instance, in Figure 7 below, the

pressured to price certain medications at

PhRMA filed lawsuits against several state

price of a medication in Canada is set

the average price used in the United States,

Medicaid programs, including that of Maine,

at the optimal price of the medication

the UK, Germany, France, Italy, Switzerland

Michigan, and Florida, to prevent the use of

preferred drug lists in 2002.92 At the time, Michigan officials noted that the preferred drug list was saving the state approximately $1.1 million a week in prescription drug costs.93 PhRMA subsequently lost the cases against these states, and approximately forty states are now using preferred drug lists.94 By using the international trade regime, the pharmaceutical industry may have obtained leverage in its price negotiations with the government that they failed to obtain through its lawsuit against states. Figure 7 Simplified Example of Global Pricing Trade-Offs

Source: Ed Schoonveld, The Price of Global Health: Drug Pricing Strategies to Balance Patient Access and the Funding of Innovation (2011).

Governmental mechanisms for controlling price are vitality important. For instance,

Currents Winter 2013

generic and low-price alternatives through

opposition.106 This time period is generally

preauthorization procedures and co-pays.99

thought to be when the level of healthcare

In addition, the United States has exhibited

spending is around 5% of the GDP, and the

poor health outcomes in comparison to other developed countries, contrary to the

China and India are currently in the

belief of many U.S. citizens regarding the

optimal window of opportunity, with enough

superiority of the U.S. health system.

The

resources in the economy for the government

WHO recently ranked the world’s healthcare

to implement a national healthcare system.108

systems, and the U.S. healthcare system ranked

If appropriate regulations for controlling the

37th, while France ranked 1st.101 The ranking

out-of-pocket spending are not provided

was based on cost efficiency, healthy living,

within the window of opportunity, the out-

and life expectancy.

of-pocket spending will eventually increase

100

Figure 8 Per Capita Total Health Expenditures in Selected Countries, as a Function of GDP Per Capita Source: Rockefeller Found., Catalyzing Change: The System Reform Cost of Universal Health Coverage 52 fig.25 (2010)

GDP around $10,000.107

102

A comparison study

for amendable mortality rate consistently

faster than the economic growth.109

indicated that the amendable mortality

Initially, the out-of-pocket costs are largely

the monthly retail price of the leukemia

rates fell by an average of 16% in fourteen

pharmaceutical costs.110 The increase in the

drug, Gleevic, exceeds $54,000 per one-year

Western European countries, Canada,

out-of-pocket spending is likely to lead to an

supply in the United States if no insurance

Australia, New Zealand, and Japan between

inefficient allocation of resources because

is used. The U.S. Veterans Administration

1997–98 and 2002–03, while it fell by only

individuals often lack the knowledge or

currently pays approximately $28,000 per

4% in the United States, indicating the most

resources to make sound decisions regarding

patient per year. In developed countries,

sluggish improvement in health outcomes

the quality of care, efficiency, or the impact

the pharmaceutical companies can demand

among the nineteen developed countries.103

on health outcomes.111 Further, once an

prohibitively high prices for life-preserving

The importance of having a regional strategy

entire industry is built around the out-of-

medications such as Gleevic and HIV

for controlling healthcare expenditure while

pocket expenditure, it becomes politically

medications, because the government will

improving health outcomes cannot be

expensive to try to control healthcare

absorb the cost of the medication if patients

overstated in view of these findings.

spending.112

cannot afford them.97 In other words, to

In addition, the regulation of out-of-

In fact, the optimal window of opportunity

preserve lives, the governments can end up

pocket healthcare spending is extremely

passed long ago for the United States.

subsidizing the pharmaceutical companies

important for the developing countries.

104

William Baumol, the author of Cost Disease,

to the detriment of other industries and

According to Pablos-Mendez of USAID,

suggests that this may be the very reason that

the public in general. The U.S. healthcare

the percentage of GDP spent on healthcare

establishing a centralized healthcare system

expenditure would be prohibitively expensive

ranges from 2–3% in the least developed

would be met with political resistance in

if a strong price control mechanism is not

countries to around 15% in developed

the United States.113 According to Figure

in place.

countries.105 Based on comparative studies

8, the healthcare expenditure grew much

Based on statistics, the United States spent

of several developing countries and their

faster in the United States than in Canada,

17.4% of its GDP on healthcare in 2010,

economic development over decades,

Germany, Japan, and the Netherlands

while France spent 11.8%. The high cost

Pablos-Mendez and other scholars noted

between 1960 and 2010.114 As of 2008, the

under the present system occurs despite the

that there is often a window of opportunity

healthcare expenditure of the United States

fact that private insurance companies place

in which the country can obtain the essential

is approximately 16% of the national GDP,

control on healthcare spending, including

package of healthcare services for its

while the respective healthcare expenditures

their own formularies, setting reimbursement

population to prevent the growth of out-

of Canada, Germany, France, and Japan are

limitations, and encouraging the use of

of-pocket spending without strong political

10.4%, 10.5%, 11.2%, and 8.1%.115

Currents Winter 2013

With approximately 17.8% of the national

as well as by national healthcare systems

medication when they have to pay for it. A

economy built around the healthcare industry,

of other countries. In fact, it is a central

product meriting an innovator premium will nevertheless be rewarded for the benefit it confers to the society above and beyond the already available alternatives. As the United States transitions into a more centralized framework to provide a universal healthcare coverage, it may one day also adopt a centralized federal drug formulary. If so, the pharmaceutical reimbursement clauses found in AUSFTA, Korus FTA, and probably in in TPP will

Figure 9. Why Health-Care Costs Keep Rising. Source: William J. Baumol, The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t 11 fig.1.5 (2012).

definitely apply equally to the national formularies of Australia, South Korea, and TPP member countries.117 With the ever-increasing reach of the

any attempt to regulate the industry may

piece of regulating healthcare expenditure.

international trade regime into traditional

result in threatened livelihood or reduced

A successful national healthcare system

domestic affairs such as public health

income for a substantial portion of the

removes the burden of considering the

policy, a greater awareness on the part of

U.S. economy; thus, political resistance

price of medications from patients who

citizens is necessary to ensure that a limited

is inevitable. However, the healthcare

are suffering grievous illnesses and instead

number of interest groups’ agendas do

expenditure will continue to grow without

place that burden on the national health

not negatively impact in the interest of the

strong regulatory mechanism.

authorities. This eliminates the competitive

entire population during treaty negotiations.

market system for pharmaceutical products,

The continual inclusion of public health

because patients no longer need to consider

policies in free trade agreements based on

the price to make purchase decisions. Health

pharmaceutical industry perspectives can

economics and therapeutic referencing

result in a substantial policy space reduction

—————————————————

systems found in national healthcare systems

for the U.S. policy makers in implementing

The ultimate goal of private industries is

try to simulate the decision making process

a public health strategy that would best

profit generation. In fact, the goal of profit

that a patient would have performed if

serve the entire population. As citizens of

generation by pharmaceutical companies

the patient had to consider the price of

the world, the United States owes it to the

is not to be looked down upon, and the

his or her medication. A rational patient

rest of the world to encourage international

innovative medications that they developed

with full knowledge and information

trade policies that do not negatively impact

have conferred significant benefits to

would have considered any lower-cost

the healthcare systems of other countries,

the society. However, the goal of the

alternatives for a medication before making

which would be feasible if not for the U.S.’s

government is to strike a balance between

a purchase decision. Indeed, the fact that

own self-interest.

competing interests of the governed for the

most national healthcare systems do not

benefit of the entire population.

consider an innovator premium in setting the

116

—————————————————

X. Conclusion: Need for Inspection of the Political Process

Drug formularies are widely used by the

reimbursement amounts should not come as

U.S. private health insurance companies

surprise; as illustrated by the Lipitor example

and governmental healthcare programs,

in Germany, patients choose a low-cost 34

Currents Winter 2013

End Notes

* With Peter Vogel and Anacorlina Estaba, and research and editing assistance of Anthony Lauriello. 1. Robert Weissman, A Long, Strange TRIPS: The Pharmaceutical Industry Drive to Harmonize Global Intellectual Property Rules, and the Remaining WTO Legal Alternatives Available to Third World Countries, 17 U. Pa. J. Int’l Econ. L. 1069, 1077 (1996) (“[I]ntellectual property protection became a central component of the NAFTA, and promises to be included in any additional regional free trade agreement involving the United States.”). 2. Keith Eugene Maskus & Yongmin Chen, Ver tical Price Contr ol and Parallel Imports: Theory and Evidence 31 (The World Bank Dev. Research Grp., Working Paper Series No. 2461, Oct. 2000); see generally Issue Brief, Doctors Without Borders/Médecins Sans Frontières, Trading Away Health: How the U.S.’s Intellectual Property Demands for the TransPacific Partnership Agreement Threaten Access to Medicines 3 (Aug. 2012) [hereinafter MSF Issue Brief], available at http:// aids2012.msf.org/wp-content/ uploads/2012/07/TPP-IssueBrief-IAC-July2012.pdf. 3. Sean Flynn & Rep. Sharon Treat, A Drug Deal Gone Bad, Maine.gov (Mar. 30, 2007), http://www.maine. gov/tools/whatsnew/index.php ?topic=HouseDems+News&id =36220&v=Article [hereinafter Flynn, Maine]; Sean Flynn, TPP Negotiators Turn to Pharmaceutical Reimbursement, I nfojustice . org (Mar. 4, 2012), http://infojustice. org/archives/8694 [hereinafter Flynn, TPP]. 4. See I an F. F ergusson , C ong . R e s e a rc h S e rv ., RL 7-5700, The Trans-Pacific Partnership N egotiations and I ssues for Congress ii (2013); Flynn, TPP, supra note 3. 5. Max Fisher, Here’s a Map of the Countries That Provide Universal Health Care (America’s Still Not on It), The Atlantic (June 28, 2012), http://www.theatlantic.com/ international/archive/2012/06/ heres-a-map-of-the-countriesthat-provide-universal-health-careamericas-still-not-on-it/259153; Madison Park, Where in the world can you get universal health care?, CNN Health (June 29, 2012), http:// www.cnn.com/2012/06/28/ health/countries-health-care/

index.html; List of Countries with Universal Healthcare, T rue Cost Blog (Aug. 9, 2009, 9:25 P M ) , h t t p : / / t r u e c o s t b l o g. com/2009/08/09/countries-withuniversal-healthcare-by-date. 6. S u s t a i n i n g U n i v e r s a l H e a l t h Coverage, Sharing Experiences and Promoting Progress, World Health O rg ., http://www.who.int/ healthsystems/topics/financing/ hsf_uc_mexicodeclaration/en/ index.html (last visited Sept. 16, 2013) (discussing the Mexico International Forum on Universal Health Coverage in Mexico City in April 2012). 7. Fact Sheet, World Trade Org. [WTO], TRIPS and Pharmaceutical Patents 2–3 (Sept. 2006), available at http://www.wto.org/english/ tratop_e/trips_e/tripsfactsheet_ pharma_2006_e.pdf; Regional Trade Agreements: Facts and Figures, WTO, http://www.wto.org/english/ tratop_e/region_e/regfac_e. htm (last visited Oct. 14, 20143) (noting that over 600 regional trade agreements have been reported to the GATT and its predecessor the WTO). 8. Andrew D. Mitchell & Tania Voon, Patents and Public Health in the WTO, FTAs and Beyond: Tension and Conflict in International Law, 43 J. World Trade 571, 574 (2009); Weissman, supra note 1, at 1080–81; MSF Issue Brief, supra note 2, at 3, 8, 11–12. 9. Weissman, supra note 1, at 1075–76, 1082. 10. Id. at 1069. 11. Id. at 1078–80. 12. Id. at 1085. 13. M a r k D. E s t e s e t a l ., U.S. I nt ’ l T rade C omm ’ n , F oreign P rotection of I ntellectual Property Rights and the Effect on U.S. Industry & Trade, USITC Pub. 2065 1-5 to 1-9 (Feb. 1988), available at http://www.usitc.gov/ publications/332/pub2065.pdf. 14. Id. at 4-2; Weissman, supra note 1, at 1072. 15. H olger H estermeyer , H uman R i g h t s a n d t h e WTO: T h e Case of Patents and Access to Medicines 11–15 (2007). 16. Id. at 11-12, 11-14. 17. See Ed Schoonveld, The Price of Global Health: Drug Pricing Strategies to Balance Patient A ccess and the F unding of I n n ovat i o n 192–93, 206–07 (2011) (documenting how top developed economies comprise 95% of global pharmaceutical

market, with the United States and Japan together comprising over 62% of the global market). 18. I nteragency C oal . on AIDS & Dev., Access to HIV/AIDS Treatment in Developing Countries 1 (2001), available at http://www.icad-cisd.com/index. php?option=com_jotloader&se ction=files&task=download&c id=29_b634c8eece9cd639a1e734c 793f7051c&Itemid=260&lang=en (describing the contrast between the per capita GDP in high income countries (approximately $25,730 in 1999) with sub-Saharan Africa and south-Asia ($500 and $400 respectively)). 19. Id. at 1-2 (noting the inability of those in developing countries to obtain the medicines that ranged in cost from $10,000–-$15,000). 20. Press Release, U.S. Trade Rep., STR Releases 2004 Inventory of Foreign Trade Barriers (Apr. 4, 2004), available at http://www.ustr. gov/archive/Document_Library/ Press_Releases/2004/April/ USTR_Releases_2004_Inventory_ of_Foreign_Trade_Barriers.html. 21. Australia-United States Free Trade Agreement, U.S.-Austl., table annex 2-C, May 18, 2004, 43 I.L.M. 1248, available at https:// www.dfat.gov.au/fta/ausfta/finaltext/chapter_2.html. 22. Id. 23. William H. Cooper et al., Cong. Research Serv., RL34330, The U.S.-South Korea Free Trade A g r e e m e n t (KORUS FTA): Provisions and Implications ii (2013). 24. Flynn, Maine, supra note 3. 25. United States-Korea Free Trade Agreement, U.S.-S. Korea, art. 5.3, June 30, 2007, 46 I.L.M. 642, available at http://www.ustr. gov/sites/default/files/uploads/ agreements/fta/korus/asset_ upload_file899_12703.pdf. 26. Id. art. 5.2. 27. Id. 28. See Chang Bae Chun et al., Health Systems in Transition: Republic of Korea Health System Review, 11 E ur . O bservatory on H ealth Sys. and Pol’y, no. 7, 2009, at 124 fig.6.4, available at http:// www.euro.who.int/__data/assets/ pdf_file/0019/101476/E93762. pdf. 29. Sean Flynn, “Annex 2C-plus” provisions in the Korea-US FTA Pharmaceuticals Chapter, at 1-2 (2d ed., 2007)

30. Kees van Gool, Pricing Reform of Pharmaceuticals, H ealth P olicy M onitor (O ct . 2005), http:// hpm.org/au/a6/2.pdf (noting that pharmaceutical manufacturers may set their own prices on the Australian formulary, the Pharmaceutical Benefit Scheme); Soonman Kwon, Pricing Reform of Pharmaceuticals, Health Policy Monitor (Apr. 2007), http://hpm. org/kr/a9/1.pdf (“To contain pharmaceutical expenditure [sic], government [sic] decided to change the pricing of pharmaceuticals. Instead of a for mula-based pricing, National Health Insurance Corporation [sic] as a purchaser will [negotiate] [sic] prices with pharmaceutical [manufacturers] [sic].”). 31. Chun et al., supra note 28, at 124 fig.6.4. 32. Id. at 121–25. 33. Surachat Ngorsuraches et al., Drug Reimbursement DecisionM aking in T hailand , C hina , and South Korea S125 (2012), available at http://www.ispor.org/ consortiums/asia/ViH/3rdIssue/ Drug-Reimbursement-DecisionMaking-in-Thailand-China-andSouth-Korea.pdf. 34. E.g., Schoonveld, supra note 17, at 92. 35. Id. 36. Id. at 120 fig.8.1. 37. Id. 38. Id. at 65, 125; see Patricia M. Danzon & Jonathan D. Ketcham, Reference Pricing of Pharmaceuticals for Medicare: Evidence from Germany, the Netherlands, and New Zealand, in 7 Frontiers in Health Policy Research 1, 1 (David M. Cutler & Alan M. Garber eds., 2004), available at http://www.nber.org/ chapters/c9868.pdf. 39. See Flynn, Maine, supra note 3 (noting that “Korea’s drug formulary is substantially similar to the ‘preferred drug lists’ used by at least 40 American states for Medicaid purchases”). 40. S choonveld , supra note 17, at 125–27. 41. Id. at 63–64. 42. Id. at 276. 43. Id. at 295, 302, 312. Japan is one of few countries that provide an increase in reimbursement rate for an innovative product. Id. 44. Id. at 256 fig.16.1. 45. Id. at 121-24. 46. Flynn, Maine, supra note 3; see generally C ommon P ractices in

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Formulary Management Systems: A R e p o r t P r e pa r e d b y t h e A cademy of M anaged C are P harmacy (2000) [hereinafter Common Practices]. 47. See generally Common Practices, supra note 46. 48. Schoonveld, supra note 17, at 128. 49. Id. at 128–31. 50. Id. at 76–77. 51. Id. at 77–78. 52. Id. at 74. 53. Id. at 77–80. 54. See id. at 207 fig.12.7 (noting that 91% of prescription drug sales are made in the United States, Canada, Mexico, Germany, France, Italy, the United Kingdom, Spain, Japan, Brazil, and the rest of Europe, with the other 9% to all other countries). 55. Id. at 131–32. 56. See id. at 207 fig.12.7 (noting that 91% of prescription drug sales are made in the United States, Canada, Mexico, Germany, France, Italy, the United Kingdom, Spain, Japan, Brazil, and the rest of Europe, with the other 9% to all other countries). 57. Jolita Butkeviciene et al., Services Performance in Developing Countries: Elements of the Assessment ¶ 55 (WTO Mar. 12-14, 2002), available at http://www.wto.org/english/ tratop_e/serv_e/symp_mar02_ unctad_e.doc. 58. Schoonveld, supra note 17, at 6365. 59. Id. at 65. 60. Id. 61. Id. 62. Id. at 56. 63. See id. at 57 (noting that government control of the pharmaceutical market “leaves the physician and patient indifferent of actual price as long as the drug is reimbursed”). 64. Id. at 56–57. 65. Generic Drug Costs, News Medical, http://www.news-medical.net/ health/Generic-Drug-Cost.aspx (last visited Oct. 14, 2013). 66. See Schoonveld, supra note 17, at 196 (noting “an example of a[n] . . . innovative drug, that to some extent can set a new price reference on the basis of its inherent value and is less limited by historical evolution of existing price levels”). 67. William W. Fisher III, The Impact of “Terminator Gene” Technologies on Developing Countries, in Costs and B enefits to the L ivelihoods of the Rural and Urban Poor Arising from the Application of So-Called “Terminator Genes” and S imilar T echnologies in Developing Countries 137, 140 fig.1 (U.K. Dep’’t for Int’l ’Dev. ed. 1999), available at http://www.

law.harvard.edu/faculty/tfisher/ terminator.html. 68. White House Off. of Nat’l AIDS P olicy , N ational HIV/AIDS Strategy for the United States 41 fig.5 (2010), available at http:// aids.g ov/federal-resources/ national-hiv-aids-strategy/nhas. pdf. 69. E.g., S choonveld , supra note 17, at 194 (noting that Canadian companies will vary their prices a ccor d i ng to U.S. p o l i ti ca l concerns). 70. Id. at 215. 71. Id. at 193, 197, 202–03, 217. 72. See id. at 202–03 (noting that “companies may reduce price in higher priced markets to limit the flow of parallel trade product”). 73. Id. at 200–01. 74. Id. at 291. At the time of publication, the exchange rate of euros to the United States dollar was 1.3566. US dollar (USD), Eur. Cent. Bank (Oct. 11, 2013), http://www.ecb.europa.eu/ stats/exchange/eurofxref/html/ eurofxref-graph-usd.en.html. 75. Bayer defeats EU in parallel imports case, The Pharma Letter (Jan. 5, 2004), http://www.thephar maletter. com/file/52981/bayer-defeatseu-in-parallel-imports-case.html. 76. Id. (Bayer’s $3.8 million fine was annulled by the courts); see also Russell Ong, Bayer welcomes ECJ ruling on ‘Adalat’ parallel imports, ICIS.com (Jan. 6, 2004, 1:16 PM), http://www.icis.com/ Articles/2004/01/06/547289/ba yer+welcomes+ecj+ruling+on+a dalat+parallel+imports.html. 77. N i c h o l a s d e l a To r r e & Jennifer Theis, United States, in P harmaceutical T rademarks 2013/2014: A Global Guide 84 (Joff Wild ed., 4th ed. 2013), available at http://www.brinksgilson.com/ files/pharma_2013_article.pdf. 78. See Prohibited and Restricted Items, U.S. Customs and Border Prot. (Mar. 3, 2013), http://www.cbp. gov/xp/cgov/travel/id_visa/ kbyg/prohibited_restricted. xml#Medication. Although the website does not name Canada explicitly, mention of the country as included in calculations of referencing systems implies their participation in import of prescription drugs on the U.S. border. 79. See Weissman, supra note 1, at 1080 (border protection against unwanted import competition allows for domestic price control by the United States). 80. Id. at 1087 (discussing the United States Trade Representative’’s numerous avenues for compelling

U.S. trade partners to make parallel imports illegal). 81. S choonveld , supra note 17, at 207–08. 82. Id. at 197. 83. E.g., id. at 194. 84. Id. at 193. 85. Hagop M. Kantarjian et al., Cancer Drugs in the United States: Justum Pretium—The Just Price, Am. Soc’y of Clinical Oncology (May 6, 2013), http://jco.ascopubs.org/ content/31/28/3600.full. 86. Schoonveld, supra note 17, at 195. 87. Id. at 207–08 (noting that “[global price differences] ha[ve] frequently caused pharmaceutical companies to be ver y hesitant to make patented drugs available at lower prices in developing countries”). 88. See generally W illiam W. Fisher III & Dr. Cyrill P. Rigamonti, T h e S o u t h A f r i c a A IDS Controversy: A Case Study in Patent Law and Policy (2005); Donald G. McNeil, Jr., Companies to Cut Cost of AIDS Drugs for Poor Nations, N.Y. T imes , May 12, 2000, available at http:// www.nytimes.com/2000/05/12/ world/companies-to-cut-costof-aids-drugs-for-poor-nations. html?pagewanted=all&src=pm (noting that “drug companies have been portrayed as racking up record profits by concentrating on drugs to cure relatively minor problems like obesity, baldness and impotence among rich Americans, Western Europeans and Japanese, who make up 80 percent of the world drug market, while ignoring dire suffering in places like Africa, which buys 1 percent of the world’s drugs”). 89. Flynn, Maine, supra note 3. 90. First International Consensus Guidelines Published for HIV Tr eatment Fuzeon (Enfuvirtide), Doc Guide (May 18, 2004), http://www. docguide.com/first-internationalconsensus-guidelines-publishedhiv-treatment-fuzeon-enfuvirtide; Kim Tong-hyung, Patients Given No Say in AIDS Drug Dispute, T h e K o r e a T i m e s (June 19, 2009,6:38 PM), http://www. koreatimes.co.kr/www/news/ biz/2009/06/123_47153.html (“The Korean government wants to put Fuzeon in the National Health Insurance system, but had failed to reach an agreement with Roche on price. The Ministry of Health, Welfare and Family Affairs wants to provide Fuzeon at 25,000 won per pill, but Roche isn’t willing to go below 30,000 won.”). 91. Flynn, Maine, supra note 3. 92. M i ke P a lm e d o , F r e e T r a d e A g r e e m e n t s M ay T h r e at e n 36

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States’ Right to Control Drug Costs Through Preferred Drug Lists 2 (2006), available at http:// www.wcl.american.edu/pijip/ documents/FTAsandPDLs.pdf. 93. See id. at 1 (noting that “Michigan officials estimated that their preferred drug list saved $60.5 million in its first year of operation”). 94. Id. at 2; Flynn, Maine, supra note 3. 95. Robin K. Kelley & Alan P. Venook, Non-Adherence to Imatinib During an Economic Downtur n, 363 New Eng. J. Med. 596, 597 (2010), available at http://www. nejm.org/doi/pdf/10.1056/ NEJMc1004656Imatnib. Imatinib Mesylate is known as Gleevec in the United States. Cancer Drug Information–Imatinib Mesylate, Nat’l Cancer Inst., http://www.cancer. g ov/cancertopics/dr uginfo/ imatinibmesylate (last updated Sept. 9, 2013). 96. See Flynn, Maine, supra note 3 (noting that “Gleevic . . . costs . . . $28,000 to the U.S. Veterans Administration”). 97. Small Market Drugs, Big Price Tags: Are Drug Companies Exploiting People With Rare Disease?: Hearing Before Joint Econ. Comm., 110th Cong. 5 (2008) (statement of Minn. Amy Klobuchar, U.S. Senator, Member, Joint Econ. Comm.), available at http://www.gpo.gov/fdsys/ pkg/CHRG-110shrg44974/pdf/ CHRG-110shrg44974.pdf. 98. Adam Taylor, Yes, The US Could Probably Learn A Lot From The French Health Care System, B us . Insider (July 2, 2012, 6:31 PM), http://www.businessinsider.com/ french-healthcare-system-2012-7. 99. Rockefeller Found., Catalyzing Change: The System Reform Cost of Universal Health Coverage 52 fig.25 (2010), available at http:// www.rockefellerfoundation.org/ uploads/files/ebafb89b-2d6845c0-885e-74d40e8c55d9.pdf. 100. Ellen Nolte & C. Martin McKee, Measuring the Health of Nations: Updating an Earlier Analysis, 27 H ealth A ff ., Jan. 2008, at 58, 61–64, available at http:// c o n t e n t . h e a l t h a f f a i r s. o r g / content/27/1/58.full.pdf+html. 101. Taylor, supra note 98. 102. Id. 103. Nolte & McKee, supra note 100, at 65 ex.5. 104. See WHO, H e a lt h S y s t e m s Financing: The Path to U niversal C overage 5 (2012) [hereinafter H ealth S ystems Financing ], available at http:// www.who.int/health_financing/ Health_Systems_Financing_Plan_ Action.pdf (“While all countries,

rich and poor, constantly seek to improve their health financing systems, the problems are much more daunting in poorer countries. Accordingly, the [World Health Report] 2010 also outlined areas in which the global community could assist lower income countries to develop their financing systems so as to move closer to UC.”). 105. Ariel Pablos-Mendez, The New World Health: Economic Transition of Health and Health Systems Strengthening, O’N e i l l I n s t . f o r N at ’ l & Global Health Law (Oct. 4, 2012, 1:20 PM) [hereinafter PablosMendez], available at http://apps. law.georgetown.edu/webcasts/ eventDetail.cfm?eventID=1834. 106. Id. 107. Rockefeller Found., supra note 99, at 71–75; Pablos-Mendez, supra note 105. 108. Rockefeller Found., supra note 99, at 26–28; Pablos-Mendez, supra note 105. 109. H e a lt h S y s t e m s F i n a n c i n g , supra note 104, at 5; Rockefeller Found., supra note 99, at 71–75; Pablos-Mendez, supra note 105. 110. Pablos-Mendez, supra note 105. 111. Health Systems Financing, supra note 104, at xvi–xviii. 112. W illiam J. B aumol , T he C ost D isease : W hy C omputers G et C h e a p e r a n d H e a lt h C a r e Doesn’t 11 fig.1.5 (2012), available at http://books.google.com/ books?isbn=0300179286. 113. Id. 114. Id. 115. Snapshots: Health Care Spending in the United States & Selected OECD Countries, The Henry J. Kaiser Family Found. (Apr. 12, 2012), http://kff.org/health-costs/ issue-brief/snapshots-health-carespending-in-the-united-statesselected-oecd-countries. 116. Baumol, supra note 112, at 178. 117. United States-Korea Free Trade Agreement, supra note 25, arts. 5.25.3; Australia-United States Free Trade Agreement, supra note 18, tbl. annex 2-C; Flynn, TPP, supra note 3.

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Eye of the Tiger: Examining Tensions in Indonesia’s Trade Regime MELISSA PEACH

—————————————————

I. Introduction

———————————————— International trading relations are inevitably accompanied by tensions between traders and host countries. Host countries want to control trade activity and ensure fair competition with local businesses while traders desire freedom and legal protection for their investments. This paper explores the current Indonesian trade regime; focusing on how Indonesian law addresses tensions between local and foreign interests. International trade is important for the economic growth of developing countries,1 and international trade law serves to avoid conflicts of law that arise between foreign traders and host countries. To examine 2

how countries successfully enable trade, taken into account are border barriers such as tariff and non-tariff barriers that affect market access at home, as well as opportunities given to exporters through agreements and preferential agreements with others.3 Additionally, broader sets of policies including border administration, infrastructure and telecommunications, and regulatory and security regimes that secure property rights and reduce transaction costs are evaluated. Market access, border 4

Melissa Peach is a 3rd year J.D. Candidate at the University of Melbourne and is the Melbourne Branch Director of the Asia-Pacific Youth Organisation. She holds a B.S. in International Relations from Florida State University, and speaks Indonesian, Malay, French, Arabic, and Russian. administration, infrastructure, and business environment are pillars that can be used by countries to benchmark various aspects of their trade policies.5 The highest-ranking economies promote trade by opening their markets and providing world-class infrastructure, administrative and regulatory systems. 6 Developed countries, which generally have low tariffs, also have low trade costs because economic development is intimately associated with enhanced capabilities in administration, infrastructure, and regulation.7 Likewise, the success of smaller developed countries stems from having simple tariff structures and good business environments. The adoption of broader sets of trade enabling policies are also increasingly important to enhance economic development in individual countries as well as to generate prosperity in their trading partners, as demonstrated by the solid gains the Association of Southeast Asian Nations (ASEAN) countries experienced as a result 38

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of the ASEAN Trade in Goods Agreement.8 Thus, to evaluate Indonesia’s trade regime, these factors for success in enabling trade must be considered to evaluate its strengths and weaknesses. Indonesia’s considerable growth in the past decade makes it an attractive destination for trade and foreign investment.9 A strong demand for commodities, buoyant domestic consumption, and pickup in manufacturing activity piqued the interest of investors despite Indonesia’s recent slowdown in economic growth.10 However, events surrounding the Global Financial Crisis (GFC) have prompted Indonesia to lean towards protectionism and impose protectionist policies by way of tariffs and quotas.11 Growing protectionism, along with: infrastructure concerns, corruption, onerous import policies, and confusing government regulations, are all barriers to trade that may dissuade traders from investing in Indonesia.12 Despite the obstacles inherent in their domestic legal system, Indonesia has an open trade regime that has liberalized substantially and undergone myriad reforms since the 1997-98 Asian Financial Crisis (AFC). Furthermore, its membership in the United Nations Commission on International Trade Law (UNCITRAL) and

ASEAN signify a strong political will to settle

the reforms be implemented23 as part of

in inter national markets. Domestic

relations with foreign investors by reference

conditions for Indonesia to receive monetary

institutions are important because they are

to the rule of law.

support after the AFC. This IMF supported

the final option to enforce claims in the event

—————————————————

program was critical for the maintenance of

of contractual breach, and the mechanism

a coherent economic agenda, especially since

by which winning parties seek enforcement

the political climate during the Crisis was

against the assets of the losing party, which

————————————————

tumultuous, ending with the fall of Suharto

are primarily located in the losing party’s

The history of Indonesia’s trade policy is

in 1998.

home jurisdiction.31

II. History of Indonesian Trade Policy

significant because it illustrates the evolution

From 2000 onward, Indonesia continued

Good institutions attract trade and are

from a closed and protected regime to an

to move towards a liberal trade regime.

particularly important for host countries,

increasingly open and liberalized trade regime

The Megawati administration succeeded in

because corruption becomes a greater

that accompanied its substantial economic

maintaining and improving macroeconomic

risk in weak institutional environments.32

reforms in the aftermath of the AFC.14

stability, but the investment climate in

Furthermore, in transnational relations,

Indonesia deteriorated during her presidency.

domestic enforcement of international

administration, Indonesia’s economic policy

Following her administration, Susilo

rulings is a vulnerable point, and compliance

was primarily a socialist one.15 From 1966

Bambang Yudhoyono’s (SBY) administration

with final rulings is not always ensured.

during Suharto’s reign, the economic

prioritized improving the investment

If the losing party ignores the ruling, the

policy shifted to a more market based

climate. In doing so, the SBY administration

winning party must use execution organs

approach

and progressively began to

proposed several ambitious policy reform

where the losing party has assets, which

liberalize thereafter. However, Indonesia still

—————————————————

tends to be in their home jurisdiction.33 Thus,

adopted protectionist trade and industrial

From 2000 onward, Indonesia continued to move towards a liberal trade regime.

the institutions there ultimately determine

In 1985, the first major trade reform

—————————————————

is also important as it lends greater credibility

occurred, and Indonesia significantly lowered

initiatives and had the opportunity to bring

to host countries by way of signaling

its trade barriers, resulting in a manufacturing

high growth to the economy. However, the

effects, which increase the perception of

boom that lasted over a decade.18 Indonesia’s

implementation of these initiatives has not

host countries as being reliable trading

exports expanded rapidly, and Indonesia was

been met with complete success due to

partners by outside parties.35 Since domestic

then able to join the ranks of the Southeast

fragmentation and lack of a clear, common

institutions are the final option for effective

Asian tiger economies.

vision resulting from recent political and

contract enforcement, uncertainty about

The 1997 AFC marked yet another turning

economic changes. Furthermore, political

the reliability of those institutions affects

point in Indonesia’s trade policy. The AFC

and economic uncertainty surrounding the

traders’ willingness to trade with the host

led to substantive liberalization reforms20

July 2014 general election may result in

country.36 Thus, signaling a favorable trading

and refocused attention on institution

backsliding from the progress that the SBY

environment and commitment to abide by

building to further economic liberalization.

administration has achieved.

international law gives the host country

In its response to the AFC, the Indonesian

—————————————————

greater credibility and positively affects their

Prior to 1966 during the Sukarno

licensing policies until the mid-1980s in an effort to promote industrialization.

whether or not the winning party’s claim can be enforced.34 Domestic institutional change

reform by eliminating non-tariff barriers in

III. Indonesia’s Domestic Legal Institution

certain industries. Further contributing to

————————————————

trade policy reforms was the International

Domestic legal institutions have strong

Indonesia’s first major trade reform in the

Monetary Fund’s (IMF) insistence that

explanatory power for a country’s integration

mid-1980s consisted of signaling devices,

government accelerated its trade regime 22

trading patterns with foreign entrepreneurs, who respond to the signaling by collectively changing their trading behavior.37

Currents Winter 2013

institution building, and policy changes in

anticipated, the adoption or enactment

that the country is a reliable trading partner in

trade and investment and related regulatory

of new laws are only a weak indicator

signaling their willingness to play by a set of

intervention, such as the lowering of import

for real institutional change. It follows

rules.54 However, while ratifying international

and export duties.38 Regulatory reforms

that weak implementation capacities and

legal instruments may send a strong signal,

were also adopted, including easing foreign

mechanisms to ensure action on policy

actions that undermine signaling such as

investment and capital markets rules, as well

decisions by governmental agencies are

failing to comply with its rules can weaken

as new banking regulations. The importance

major impediments to sustaining reforms.

a host country’s credibility and may require

of these reforms was to open Indonesia to

Despite the issues in statutory reform,

the country to go beyond signaling, such

trade and investment, and to signal to the

Indonesia also began a judicial overhaul

as by implementing and enforcing tangible

rest of the world their willingness to play by

in its reform efforts and fired corrupt

reforms.55

certain rules.40 Policy reforms and signaling

—————————————————

not only affected Indonesia’s trading patterns,

streamlining its licensing system and re-

Despite Indonesia’s reform efforts, investors remain skeptical about corruption and political stability.

liberalizing imports and exports, Indonesia

—————————————————

economies like Indonesia by gaining

shifted towards a more open trade and

judges, placing non-career judges drawn

market access to foreign services markets,

investment policy regime. The reform not

from academia and the legal profession in

which enables them to increase economic

only had a measurable impact on the flow

the courts. However, the effects of these

efficiency.56 This permits a more efficient

of goods across borders, it demonstrated

reforms remain to be seen.

allocation of resources, which improves

it also affected the perception of Indonesia’s institutions by the outside world. 41 By

IV. Market Liberalisation and Trade Reform

———————————————— Trade liberalization benefits developing

the Indonesian government’s willingness to

Despite Indonesia’s reform efforts,

overall economic capacity and, in turn,

fight corruption and improve its institutions,

investors remain skeptical about corruption

trade.57 An efficient financial services sector

thus enhancing Indonesia’s overall credibility

and political stability.50 Since perception

is central to building economic capacity and

as an attractive business destination.

is important for signaling purposes, the

progressing development.58

However, the role of Indonesia’s formal

problem for Indonesia since its credibility as a

Trade liberalization involves reducing

legal system has created problems for

trading partner or investment destination has

discrimination against foreign traders by

foreign parties because of its minor role

been undermined, is that signaling devices are

eliminating quotas, reducing average tariffs,

in the Indonesian economy.

Although

becoming less effective for attracting foreign

and strengthening trade related institutions.59

administrative acts are used to regulate

business.51 The perceived quality of a host

Similarly, liberalization of services sectors

economic activities when required, relations

country’s domestic institutions is paramount

involves reducing or eliminating barriers in

among non-state actors are primarily resolved

for their participation in international trade,

the form of prohibitions, restrictions, and

on an informal basis, the overall effect of

as they reduce international transaction

regulations.60 Such restrictions in trade and

which is one of lawlessness as a result of

costs and high quality institutions indicate

services may be prohibitive to foreign traders

the legal system’s lack of clear, consistent,

reasonable assurance to foreign investors

and entrepreneurs by limiting the share of

and binding standards. The informality

of the likelihood of contract enforcement

foreign firms in certain sectors, limiting the

which dominates formal legal arrangements

using the host country’s legal institutions.

number of expatriates that can be employed,

facilitates contradiction in the law by lower-

Involvement in international institutions

or restricting imports and services.61 For

level regulations and the daily actions of

is also meaningful, as this suggests that

trade in goods, reducing tariffs is central to

administrators.

international law may substitute for weak

improving market access, while improving

Furthermore, because formal laws may

legal institutions. Ratifying international

market access for trade in services requires

be ignored or implemented differently than

legal instruments influences the perception

reducing government policy interventions.62

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A good trade policy involves predictability,

overall business climate, and reforming the

Developing countries thus need a clear vision

transparency, and uniformity. Benchmarks

tax and custom administrations are key policy

for their trade policies,77 which can be done

to judge these policies and provide guidance

areas which are critical for legal reform.73

via trade agreements. A major incentive

for reform include: limited licensing; low

A primary concern from opponents

for developing countries to enter into

and uniform tariffs; an efficient customs

of Indonesian market liberalization is

trade agreements is to open up markets for

clearance process with little red tape; and

that Indonesian small and medium sized

certain products by removing tariffs or non-

measures to ensure competition prevails,

enterprises (SMEs) will not sur vive.

tariff barriers.78 In a complex and evolving

and that there is no discrimination against

However, there is no evidence to suggest

trade environment, developing countries

foreign suppliers. Additionally, factors such

that they have been negatively impacted by

must be able to negotiate and participate

as macroeconomic stability, a competitive

—————————————————

in trade agreements in order to promote

exchange rate, flexible labor markets,

A primary concern from opponents of Indonesian market liberalization is that Indonesian small and medium sized enterprises (SMEs) will not survive.

their interests and obtain benefits.79 Such

or multilaterally. Unilateral liberalization

—————————————————

and the ASEAN Free Trade Area (AFTA).

occurs where governments liberalize trade

the shift towards trade liberalization. On

By participating in multilateral and regional

independently, regardless of the efforts of

the contrary, a free trade regime is likely to

arrangements in addition to its unilateral

other economies. Multilateral liberalization

generate more long-term benefits for SMEs.

liberalization, Indonesia has undergone

complements unilateral liberalization through

Furthermore, reliance on protectionist

comprehensive trade liberalization.80 Further,

trade agreements and negotiations, which

policies that restricted some of the activities

Indonesia’s participation in multilateral

operate within internationally enforceable

of domestic SMEs was a factor which helped

trade groupings, including the WTO,

rules. However, the effectiveness of trade

contribute to the abuse of local market

AFTA, GATT, and APEC, has influenced

agreements depends on the extent to which

power in Indonesia.

the pace of its trade liberalization81 and

parties have committed themselves to

—————————————————

competitive product markets, and policies that do not discriminate against foreigners in investment complement successful trade reform.

Market liberalization can occur unilaterally

liberalization.69 When non-tariff barriers are in place for reasons other than health or safety, they

V. Impact of Trade Agreements

————————————————

are detrimental to economic growth since they lack transparency and encourage rentseeking behavior, which wastes valuable resources.70 Tariff escalation discourages the

agreements generally stem from involvement in international institutions such as the World Trade Organization (WTO), the Association of Southeast Asian Nations (ASEAN), the Asia Pacific Economic Cooperation (APEC),

spurred the opening of trade in services and liberalization of foreign direct investment.82 In its 1999 individual action plan, Indonesia committed itself to further liberalize trade and investment by progressively reducing

A. THE NEED FOR AND BENEFITS OF TRADE AGREEMENTS

tariffs, non-tariff barriers, simplifying import licensing, and harmonizing customs

Developing countries face complex

and other procedures in order to facilitate

challenges in managing and adapting to

trade.83 These developments have also been

Red tape, which describes burdensome and

a rapidly changing trading environment.

in part advanced by the SBY administration’s

redundant procedures, is often associated

Responding to the challenges inherent

willingness to move ahead on forming

with rent seeking and corruption, and it can

in the effective management of national

bilateral trade agreements.84 Indonesia will

give rise to substantial uncertainty, which

development objectives, regional initiatives,

also have more opportunities to ship to its

makes customs clearance efficiency and

and the overall trading environment requires

neighbors in the future as ASEAN has set

transparency all the more important.

developing countries to integrate domestic

the goal of regional economic integration

development with external commitments.76

by 2015 via the ASEAN Economic

development of intermediate industries.

Thus, improvement of the investment and

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Community—which will further open trade

By not participating in trade agreements,

contractual documents can be a source of

among member countries.

Indonesia runs the risk of trade being

confusion for some parties. The Indonesian

diverted elsewhere, which will be highly

Civil Code has an implied "good faith"

detrimental since Indonesia’s trade policy

performance concept that implies a general

depends in large part on multilateral and

duty for parties to a contract to perform

regional trade agreements.94 Its role in the

in good faith.97 Additionally, laws can be

WTO, APEC, ASEAN, and AFTA, as well

difficult to understand because they are vague

as its engagement with other countries in

and subject to different interpretations.98

the form of preferential trade agreements,

Finally, coordination problems across

indicate that much reliance is placed on

governmental agencies and ministries, which

trade agreements for trade liberalization,

have been exacerbated by changes in political

especially in an environment of creeping

architecture, have led to slow progress in

protectionism.

policy implementation.99

B. CHALLENGES

Although trade negotiations are an economically sound route to take, political will amongst parties to the negotiation is needed. The absence of such may lead to other options that do not involve a multilateral trade agreement.86 Additionally, the scope for added trade reforms must be considered in the context of Indonesia’s existing trade commitments, and the room it has to move depends on its commitments under ASEAN, APEC, and the WTO.87 Other challenges include various political security and general political challenges, which have discouraged and delayed greater economic integration.88 Indonesia also suffers from poor infrastructure and credibility problems resulting in vague and opaque rules that are not legally binding and cannot be enforced.89 Corruption is pervasive in Indonesia and this has led to an erosion of Indonesia’s competitiveness. This will in turn increase the demand for more protectionist policies.90 Furthermore, ASEAN and AFTA consist of dozens of agreements that often overlap or conflict, and there is sometimes reluctance to make firm commitments to binding legal rules.91 Indonesia’s commitment to the provisions of the WTO and to regional trade agreements, such as AFTA, suggest that it is unlikely

—————————————————

VI. Trading Concerns

———————————————— Traders have general concerns about the

One important constraint for delivering

Indonesian trade regime such as legal

a successful reform in Indonesia after the

uncertainty, economic nationalism and

AFC was nationalistic ideology, which

—————————————————

strongly opposed moving towards market

In Indonesia, economic nationalism and protectionism are illustrated by the recent trade and investment regulations that have been implemented.

liberalization. 100 Considerable difficulty exists in achieving economic reforms where wide public and nationalistic interests are involved. 101 In Indonesia, economic nationalism and protectionism are illustrated by the recent trade and investment regulations

—————————————————

that have been implemented. These changes

protectionism, infrastructure challenges,

include import licensing requirements,

corruption, and anti-privatization sentiments.

trading rights limitations, foreign equity

If unaddressed, these concerns will likely

restrictions, and domestic manufacturing

decrease Indonesia’s attractiveness as a

requirements.102

trading destination.

While the trend in Indonesia has been

A. LEGAL UNCERTAINTY

to back away from trade reform, and it

The uncertainty of Indonesia’s legal

is in Indonesia’s best interests to accept

system manifests in a lack of transparency

competitive liberalization and the advantages

and contradictory policies, as well as

it confers.92 Further, Indonesia’s commitment

confusion within the law. Collectively, all

to the WTO, AFTA, and ASEAN could

tend to dissuade investors from coming

counterbalance protectionist pressures.93

to Indonesia.96 The legal effect of some 42

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B. ECONOMIC NATIONALISM AND PROTECTIONISM

one of increasing liberalization, recently some areas have seen an increase in protection through highly distortionary and opaque non-tariff measures.103 Although Indonesia continues to move forward and meet international commitments, some Indonesians argue for increased protection while others insist that further liberalization is the ideal path to take.104 Despite this

tension, the trade reforms in the last decade

levels of the bureaucracy in providing

have successfully created many proponents

infrastructure.

of an open trade regime for Indonesia.

In the aftermath of the AFC, the IMF denied Indonesia $660 million in loans until

116

The challenges in infrastructure include

it made progress against corruption.127 As

Protectionism occurs through trade

water and sanitation, telecommunications,

a result, Indonesia increased its efforts to

policy backsliding, enacting restrictive trade

power, roads, and road transport.117 The

combat corruption and has set up special

related policies, or allowing anticompetitive

success of the government in addressing

investigatory teams to tackle corruption in

practices.

Beginning in 2001, there

these challenges depends on their ability

the government, civil service, and judiciary,128

have been continuing signs of increasing

to attract private investors to invest in

and, in 2002, created the Corruption

protectionism in Indonesia. These signs are

infrastructure, which in turn requires a

Eradication Commission (KPK), which

demonstrated by the issuance of various ad

clearer overall strategy and greater certainty

serves as the main government agency

hoc trade policies and protectionist measures

in the regulatory framework.118

established to combat corruption.129

106

105

in a number of sectors, and increases in tariffs, trade regulations, and licensing.107 Despite signs of increasing protectionism, Indonesia’s level of protection is still low compared to other Asian countries,108 and it is unlikely that Indonesia will return to high trade protection in the future.109 Indeed, much of the trade protection was phased out after the AFC.110 But while the AFC caused Indonesia to liberalize its economy, some have blamed liberalization as being the main source of the crisis.111 The protectionist groups resistant to market reform are prevalent, and cannot be underestimated; it

D. CORRUPTION

E. ANTI-PRIVATIZATION SENTIMENTS

Corruption is one of the most significant

Another concern for traders and investors

concerns that traders have in pursuing

is the slow progress of privatization in

business in Indonesia

and is exacerbated

Indonesia. 130 Contributing to the slow

by poor government coordination, the

progress is ambivalence in the government

uncertain legal framework, and lack of

to privatization, as well as anti-privatization

transparency. However, Indonesia has also

sentiment and unfriendly policies. 131

—————————————————

This sentiment seems to have further

Another concern for traders and investors is the slow progress of privatization in Indonesia.

stymied economic recovery by weakening

119

120

international market confidence in the Indonesian economy.132 —————————————————

—————————————————

VII. Trade Barriers

been recognized through empirical evidence

————————————————

as a country achieving high economic growth

In 2011, the Indonesian government began

despite high levels of corruption.121 This

planning to expand trade barriers that limit

is also within the context of corruption

unnecessary imports in response to concerns

The quality of Indonesia’s infrastructure

so entrenched in some cultures that one

of a surge in overseas products thought to

is poor, and inadequate infrastructure

had to overcome it in order to do business

hurt local businesses.133 The result has been

serves to further hinder investment. 113

with those cultures.122 It has been estimated

the introduction in 2012 of a range of new

The AFC dramatically reduced Indonesia’s

that the cost of bribes account for over 20

trade inhibiting policies.134 These include new

financial capacity to maintain and make

percent of Indonesia’s economy,123 which is

regulations on horticultural imports, imports

new investments in infrastructure.

in turn regarded as one of the most corrupt

of finished goods, mining commodities,

countries in the world.

limits on ownership of banks and mines,

would be hasty to conclude that pressures for trade protection will subside.112 C. INFRASTRUCTURE CHALLENGES

114

But

even before the crisis, poor institutional

124

regulatory frameworks and corruption

Corruption carries with it a number of

export taxes, and bans on raw materials and

stunted infrastructure development.115 Local

additional problems. For one, pervasive

food-import restrictions.135 Non-tariff trade

governments are not provided with adequate

corruption can bring a country to its

barriers have flourished, and Indonesia has

funds for infrastructure development, and

"economic knees," as demonstrated by the

created opaque and complex import licensing

there are overlaps between the various

downfall of President Suharto.

requirements, which restrict imports.136

125

126

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non-automatic import licensing procedures

and has fueled action from the United States

about their restrictive nature and may shut

on a range of products.

According to the

in the WTO.151 These requirements are said

off certain sectors like mining to new

U.S. Trade Representative, “Indonesia has

to be opaque, complex, and prohibitive.152

inward investment.137 The WTO has urged

informally limited application of the decree

Other import licensing requirements cover

Indonesia to reevaluate these trade-restrictive

to final consumer goods” and “appears to

goods such as textiles, which limit market

measures, which aside from import licensing

be exempting select registered importers

access for many products because only

and permit requirements, include restrictions

from certain requirements of this decree.”

146

approved local producers are authorized to

on import entry points, pre-shipment

However, concerns abound that “approval

import products, which are permitted for

138

inspection requirements, and export taxes.

to qualify as a registered importer is opaque,

use only as inputs in domestic production.153

Furthermore, there are a number of policy

ill-defined, and potentially discriminatory.”147

Also affected by import restrictions are cell

and administrative barriers including price

Other restrictive regulation include

control, exclusive licensing, and lack of

Ministry of Trade Regulation No.45/M-

Quantitative restrictions are also

legal assurance that the law will prevent

DAG/PER/9/2009, Decree 59/MDAG/

maintained, particularly on imports of

government action to create new barriers to

PER/9/2012, and import licensing for

agricultural products, and annual import

competition.139

agricultural products. Ministry of Trade

quantities are determined by Indonesian

Regulation No.45/M-DAG/PER/9/2009

agencies through nontransparent

—————————————————

processes.155 The Ministry of Agriculture

Quantitative restrictions are also maintained, particularly on imports of agricultural products, and annual import quantities are determined by Indonesian agencies through nontransparent processes.

sets the quantities of animal products that

—————————————————

importation of any chicken, turkey, and duck

requires that companies can only import

products.157 The Ministry of Agriculture

goods for further distribution or their

Regulation 60 establishes a mechanism that

own manufacturing, but not for both.

148

allows Indonesia the discretion to apply

Thus, companies are permitted only one

quantitative restrictions on imports of fresh

kind of license, forcing companies that

and processed fruits and vegetables.158 This

need both types of license to separate into

regulation stipulates that the quantity of

manufacturing and trading businesses.149

imports allowed by Indonesia will be based

Under Decree 59/MDAG/PER/9/2012,

on domestic production and demand.159

The new policies have raised concerns

A. IMPORT POLICIES

T he recent expansion in impor t regulations has increased burdens for foreign exporters.140 According to the Office of the U.S. Trade Representative, regulations include “tariffs, import licensing procedures, permit requirements, product labeling requirements, pre-shipment inspection requirements, local content and domestic manufacturing requirements, and quantitative import restrictions.”141 Also, measures such as a new food law and new trade law contribute to limiting foreign imports.142 The concern surrounding tariffs is that combined with unexpected changes in applied rates, high bound tariff rates create uncertainty for foreign companies looking to enter the Indonesian market.143 In import licensing procedures, exporters to Indonesia must comply with numerous, and sometimes overlapping, requirements that impede access to the Indonesian market.144 In 2009, a measure known as Decree 56 was implemented, which imposed

phones, laptops, and tablets.154

may be imported into Indonesia, and the Ministry of Trade issues permits for the import of these products after receiving approval from the Directorate General of Livestock and Animal Health Service.156 The relevant regulations effectively ban the

companies are again limited to one kind

Product registration has become

of license and are required to demonstrate

increasingly burdensome for foreign

a special relationship with the foreign

companies, since the process of reviewing

company, which must be authenticated by

applications for the registration of certain

the Indonesian Embassy in the country

products has been slowed since 2008.160 This

where the foreign company is located.150

burden is enhanced by additional onerous

Import licensing for agricultural products has

Bahasa language-labeling requirements.161

significant trade restrictive effects on imports, 44

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145

B. WTO DISPUTE

In January 2013, the United States (U.S.) brought a complaint to the WTO regarding Indonesia’s restrictive import measures.162 The major issue raised by the U.S. concerned the subjection of horticultural and animal product imports to restricting non-automatic import licenses and quotas. 163 The U.S. claimed that the licensing regime had significant trade restrictive effects on imports and were inconsistent with Indonesia’s WTO obligations.164 In particular, the multistep license processing procedure seemed to be more administratively burdensome than necessary; since Indonesian licensing measures do not inform traders of the basis for granting licenses and are applied inconsistently and unpredictably, the license issuance appeared to be delayed or refused by Indonesian authorities on nontransparent grounds that do not appear to be administrated uniformly, impartially, or reasonably.

165

C. RESTRICTIONS

Common restrictions on market access generally include those on foreign direct investment, licensing requirements, and restrictions on the form of establishment or type of legal entity.166 Indonesia is one of the most restrictive markets for banking services, distribution services, maritime services, and professional services.167 These economies are characterized by tight entry controls and restrictions on business operations.168 Foreign firms are granted a limited number of import licenses and are subject to limits and performance requirements.169 There are onerous nationality and residency

requirements in place for some sectors.170

worst.179 Because Indonesia’s exports are

Some foreign firms are also required to enter

the “engine of its economy,”180 mortgaging

the market through joint ventures with local

Indonesia’s trade competitiveness to ease

firms,

as is the case with foreign law firms.

budgetary pressure could jeopardize future

Foreign firms are also subjected to economic

growth. 181 Despite the best intentions

needs tests and have limited establishment

behind protectionism, the reality is that

and investment capabilities in local firms.

it benefits special interests at the expense

171

172

of consumers. 182 Additionally, imposing D. WHY IS INDONESIA MOVING TOWARDS A MORE INWARD TRADE POLICY?

protectionist measures such as export tariffs

The global market’s bleak outlook has

exploitation of natural resources since it

prompted Indonesia to safeguard its trade

will lower the domestic price relative to the

balance, which they expect will be the result

international price.183

of a more restrictive import regime. 173 Major incentives for Indonesia to move towards increased protection are a boost in government revenue, the preservation of Indonesia’s natural resources, 174 and to help domestic industries.175 Indonesia cites domestic production, moving the economy to a higher level of development, and agricultural self-sufficiency as the primary —————————————————

Because Indonesia’s exports are the “engine of its economy,” mortgaging Indonesia’s trade competitiveness to ease budgetary pressure could jeopardize future growth. ————————————————— reasons that the forward momentum of liberalization has been replaced by increasing economic nationalism and protectionism.176 The appeal of protectionism is that sensitive industries can be temporarily sheltered from foreign competition,177 with the hope that these industries will become competitive in time.178 However, this recent shift appears to be misguided at best, and dangerous for Indonesia’s long-term growth prospects at

or export bans is likely to encourage further

E. RECOMMENDATIONS

While introducing increasingly protectionist policies may give the government the impression that it is supporting domestic investors, these measures could have deleterious consequences for Indonesia’s long-term growth prospects. 184 Instead, measures better suited to achieve the goals Indonesia desires include more infrastructure, streamlined investment regulations, and a more competitive exchange rate.185 Furthermore, in order to increase economic growth through trade, Indonesia should focus on boosting its supply-side economy rather than falling into further protectionism.186 This can be achieved by Indonesia renewing its commitment to liberalization and enacting complementary sustainable policies,187 such as infrastructure development, investment in education, improvements to industrial technological capabilities, deepening sources of industrial finance, and enhancing g overnment capacities. 188 Additionally, Indonesia must implement trade and investment measures consistent with its international commitments and global trading rules, which

Currents Winter 2013

will better reflect Indonesia’s ambition to play

or multilateral conventions governing the

approvals for investments and oversees the

a leading role in global trade. These positive

operation of FDI or prescribing binding,

foreign investment regime.209 It takes into

measures would include lower tariff rates

substantive rules. 201 As a result, certain

account a “Negative List” which is meant to

and encouragement for greater investment

FDI measures can have restrictive effects

summarize all foreign investment restrictions,

flows, because lowering trade barriers is

on free trade, and in order to compensate

meaning that if a sector is not referred to, it

indispensable for continued economic

for FDI’s potentially negative impact, host

is open.210 However, in practice it is not so

growth.190 Other measures Indonesia should

countries may impose conditions on FDI that

clear-cut. Before foreign investors can acquire

take in order to create a contestable market

require investors to make use of domestic

shares in private Indonesian companies,

include enforcement of competition policy,

products.

Through its various investment

it must be converted into a foreign capital

preventing restrictive practices,191 developing

policies, Indonesia has done just that in an

investment company (PM company) and be

a clear vision of its services sector,192 as well

attempt to exert maximum possible FDI

regulated by BKPM as it moves forward.211

as various domestic adjustments193 such as

control to ensure compliance with domestic

Bapepam-LK is the Indonesian capital

bureaucratic reform.

interests.

This has been in response to

markets regulator, and regulates investment

—————————————————

increasing nationalistic sentiments and fear

activity in the capital markets.212 However, the

—————————————————

body is based mostly on bureaucratic practice and does not have clear statutory footing.213

has occurred, FDI has been associated

While Indonesia has an open foreign investment regime, it is subject to restrictions, limits, and conditions in certain sectors, and some sectors are closed to foreign investment altogether.

with rapid industrialization and improved

—————————————————

trade performance, thus enhancing the

of foreign domination within the country.204

competitiveness of domestic firms in world

Nevertheless, Indonesia is characterized

markets.196 FDI has a significant role to play

by an open foreign investment regime205

in the economic development of developing

and foreign investors continue to invest in

countries and represents a source of long-

Indonesia despite the inherent uncertainties

term capital, employment, and technology.197

of the Indonesian legal landscape.206 While

In environments characterized by open

Indonesia has an open foreign investment

trade and investment, the benefits of FDI

regime, it is subject to restrictions, limits,

are enhanced as FDI plays a crucial role

and conditions in certain sectors, and some

in improving the host economy’s capacity

sectors are closed to foreign investment

to respond to the opportunities presented

altogether. 207 Investments by foreign

by global economic integration. 198 The

investors in shares of private Indonesian

main benefits of FDI are in contributing

companies need prior regulatory approval,

growth, productivity, employment, and

and the foreign investment limit determines

development in the host country,199 and as

whether total acquisition is possible or

such, FDI has become an essential means

whether a local partner is required.208

189

194

VIII. Foreign Direct Investment

———————————————— Developing economies like Indonesia have been very successful in pursuing development strategies based on foreign direct investment (FDI). 195 Where this

202

203

of international trade.200 However, there

The Capital Investment Coordinating

are no settled international legal principles

Board (BKPM) is the body that grants 46

Currents Winter 2013

Thus, proposed transactions for larger stakes in public companies are considered on a case-by-case basis where the company is in a closed sector.214 A. FDI CONCERNS

There are some doubts attributed to FDI. Firstly, it involves an outflow of capital that is detrimental to the host country’s balance of payments in the long term.215 Secondly, FDI may result in the transfer of outdated technology, which creates technological dependence and hinders the development of local technology.216 Thirdly, most FDI occurs in industries where there are few market competitors and is managed by multinational corporations with greater resources than potential domestic competitors, so they can overcome domestic regulatory regimes.217 Fourth, FDI can damage local cultural values and national pride by introducing foreign values and bringing in alien influence on the economy.218 These doubts cause valid concerns regarding unfair practices of investors in host countries.219

In its 2013 National Trade Estimate Report

and transparent investment regimes, which

for a quick fix to the abundant structural

on Indonesia, the U.S. Trade Representative

has been realized by an accelerated pace of

problems, including lack of transparency.234

outlined concerns of the continuing legal

industrialization and economic growth via

Afterwards, Indonesia agreed to reform

uncertainty, economic nationalism, and

foreign investment. ASEAN countries, like

its political and economic structures in

disproportionate influence of local business

Indonesia, benefit from having progressive

order to receive IMF funding and win back

interests which typify Indonesia’s investment

domestic investment regimes, and due to the

FDI.235 The regulations implemented were

climate, as demonstrated by government

diversity of ASEAN countries, each must

intended to stimulate the financial sectors to

requirements which often compel foreign

be mindful of their assets and the needs

allow capital inflows from FDI to revive the

companies to conduct business with and

of potential investors.

Although FDI is

economy.236 Although much remains to be

purchase goods from local partners.220 Despite

the largest source of private investment in

done, there is still high potential for foreign

a 2007 investment law that was intended to

ASEAN, since the AFC, it has fallen by as

investment related growth in Indonesia,

improve transparency and protections for

much as 41 percent in the five largest ASEAN

and its ratification of the AIA Framework

foreign investors, the law restricted more

economies.

As a result of the changing

Agreement will provide uniformity with

sectors to foreign investment as well as

Asian investment landscape, a number of

other ASEAN countries and may stimulate

increased foreign equity limitations.

investors have left for opportunities in

further foreign investment in the country.237

Eastern Europe and Latin America.230

—————————————————

221

Furthermore, in transferring investment

227

229

228

decisions from the central government

Indonesia is a pivotal state in Asia,

to district governments, inconsistencies

and prior to the AFC, was a foremost

IX. Dispute Resolution Mechanisms

between national and regional laws have

—————————————————

————————————————

arisen.

There is always a question as to which

promote the inflow of FDI and instituted

Because the AIA Framework Agreement is aimed at enhancing investor confidence, investors have greater market access and enjoy national treatment, benefiting from lower costs related to investment procedures and operations.

legal regulations promoting transparency, as

—————————————————

in which a host country’s courts deal with

well as a dispute settlement mechanism.224

investment destination due in part to global

arbitration agreements.240 It is also a problem

This was done to halt the departure of

confidence in its overall stability, and its

when a party refuses to abide by the arbitral

foreign capital and to attract investment

growth encouraged foreign investment.231

ruling, uses the domestic court system

from wealthy countries, and, as such, is

However, once the financial crisis hit,

despite an arbitration clause,241 or simply

loaded with incentives to foreign investors.225

foreign investment disappeared and the

refuses to arbitrate.242 Furthermore, because

Because the AIA Framework Agreement

Indonesian banking and financial sectors

international commercial transactions

is aimed at enhancing investor confidence,

plunged into chaos.

As White describes,

involve traders from different legal regimes,

investors have greater market access and

“what once was a prosperous region, quickly

a conflict of law may occur.243 To remedy

enjoy national treatment, benefiting from

became a desolate vortex of malnourished

this, parties to a transaction may specify

lower costs related to investment procedures

economies.”

International investors

which substantive law to use, or whether

and operations.226 Members continue to

withdrew over $1.4 billion from the ASEAN

to follow an established set of contract

assume measures to promote progressive

region, and Indonesia turned to the IMF

principles.244 Additionally, foreign traders

222

B. INDONESIA AND THE ASEAN INVESTMENT AREA

Indonesia is one of the five original member countries of ASEAN 223 and ratified the ASEAN Investment Area (AIA) Framework Agreement, which sets to

233

232

procedural and substantive rules apply to international transactions, which is significant - especially in light of the legal risks inherent in international trade.238 By giving regard to party autonomy, arbitration is a dispute resolution mechanism that addresses these legal issues most efficiently and equitably.239 However, a persistent problem is the manner

Currents Winter 2013

from diverse legal systems may feel that a

Indonesia are complicated where corruption

Asian average.259 As Indonesia continues

host country will not treat them equally to

is concerned, since no uniform standard of

to grow, trade with other countries could

domestic parties, which makes arbitration an

proof has been established.

In Himpurna

grow by billions of dollars.260 Indonesia is

attractive option.245

v. PLN, higher standards for corruption

also aiming to expend hundreds of billions

All of these dispute resolution concerns

and contractual invalidity for corruption

of dollars to upgrade its infrastructure

arise in the Indonesian context, and because

were applied. 255 Discrimination against

over the coming years, for failing to keep

foreign court judgments cannot be enforced

foreigners also remains a substantial issue

pace with modernization could seriously

in Indonesia, foreign investors will almost

for parties wishing to commence legal

inhibit Indonesia’s growth. 261 Despite

always choose to be subject to arbitration

action in Indonesia, as evidenced by new

various governance and bureaucratic issues,

in an internationally recognized arbitration

regulations requiring divestment of foreign

governance has improved at state owned

venue. 246 Most often, Singapore is the

majority interests in mining investments.256

enterprises, thus facilitating deal making for

preferred venue for arbitration in these

Furthermore, provisions in investment

foreign companies.262 However, Indonesia still

cases, adopting the Singapore International

—————————————————

needs to take more steps to facilitate business

Arbitration Centre’s international arbitration

transactions for international companies,

investors, with a panel of arbitrators that

Indonesia still needs to take more steps to facilitate business transactions for international companies, namely by imposing fewer restrictions, quickly processing imports, and by combating the perennial problem of corruption.

includes a number of foreign practitioners.249

—————————————————

government insisted that it would continue

But even if a foreign party successfully

treaties concluded by Indonesia often

to prioritize the interests of domestic

obtains an offshore arbitration award, it

contain onerous provisions with confusing

businesses. 265 However, Indonesia has

is not always practically straightforward

definitions, and these complex laws and

recently agreed to abandon import quantity

to enforce it against an Indonesian party

policies affect the admission and operation

limits on horticultural products, to revise

in Indonesia, since enforcement requires

of foreign investment.257 However, if such

regulations on horticulture importation,

registration and enforcement through

preliminary hurdles can be overcome,

and to not impose quantity restrictions on

Indonesian courts.

Particularly, it is very

investors seeking legal action may then argue

imports anymore.266

difficult to obtain specific performance

for protection under international treaty law.258

against Indonesian parties in Indonesia.251

—————————————————

rules.247 It is atypical for foreign parties to agree to Indonesian courts as the venue for dispute resolution, and it is strongly cautioned against.248 The Indonesian National Arbitration Board (BANI) is another dispute resolution mechanism available to foreign

250

254

It is generally accepted that foreign parties

X. Current Trade Regime

should only expect damages against an

————————————————

Indonesian party if action is taken through

The tariff restrictions removed after the AFC

Indonesian courts, a well-recognized country

included restrictions on trade, investment,

risk for Indonesian related transactions that

and production, in combination with

all foreign investors ultimately face.252

streamlining procedures at the border,

Arbitration cases against the Indonesian government are relatively rare.

resulting in increased efficiency that allowed

While

Indonesia to reduce its tariff to an average

facing similar issues as private arbitration

of less than 10 percent, making it lower

cases, investor-state arbitration cases in

than several countries in Asia and the East

253

Currents Winter 2013

namely by imposing fewer restrictions, quickly processing imports, and by combating the perennial problem of corruption. 263 In 2012, Indonesia’s growth slowed, prompting the introduction of new restrictive trade and investment measures.264 Following a WTO dispute with the U.S., the Indonesian

A. CURRENT LAW

Indonesia has undergone vast political and economic changes since the AFC and the fall of Suharto.267 Greater authority has shifted from the President to Parliament, and decentralization has shifted more responsibility to the regions.268 However, this has resulted in increasingly fragmented policy decision-making with lack of a common vision.269 Nevertheless, trade reforms have driven rapid trade growth, with exports

growing and significantly contributing to

The State Finance Law No.17/2003 was

While Indonesia maintains that their new

also enacted, which required an establishment

policies will strengthen domestic business,

It is well established that Indonesia moved

of a more effective and transparent treasury

they have caused foreign traders to question

towards a liberal trade regime since the onset

management and stipulated that budget

the security of their investments. Successfully

of the Crisis.271 Fair competition laws were

execution must be done in a clear and

maintaining growth boosts confidence

enacted in Indonesia in response to the

transparent manner.279

and trust among investors, 287 which is

Indonesian GDP growth.

270

IMF’s requirements for the bailout, leading

In 2006, a policy reform package to

essential amid a bleak global economy.288

to the enactment of Law No.5 of 1999,

improve the investment climate was issued,

However, new protectionist measures have

the Competition Law.

signaling a more systematic approach to

tainted Indonesia’s standing as one of the

monopolistic practices, restricts M&A

reform

as well as a more streamlined

world’s most attractive emerging markets.289

transactions that would increase market

and transparent investment procedure.281

Increasing protectionism, alongside a dip in

concentration, and prohibits exploitation

It focused on general investment policies,

growth, have caused foreign investment to

by firms with market control.

However,

customs, excise and duties policies, taxation,

decrease.290

this law is subject to interpretation and

labor, and SMEs.282 The investment package

Indonesian economic growth slowed

the objectives are written loosely to allow

included a new capital investment law, new

in 2013, and worries about the economy

a variety of interpretations.274 The general

—————————————————

were accompanied by a dip in the stock

objective of the law is to improve economic

exchange and fall in foreign investment. The

business competition practices, and

Increasing protectionism, alongside a dip in growth, have caused foreign investment to decrease.

encourage effectiveness and efficiency in

—————————————————

been strengthened by a U.S. $50 million trade

business practices.275 But because it is open

tax law, an amendment to customs and excise

surplus in October 2013.291 The economy

to such a variety of different interpretations,

law, and revisions to the manpower law.283

experienced its lowest growth rate in four

the basic thrust of the law is to maintain and

But because of the political sensitivity of

years, as it slowed to 5.62 percent growth in

promote competition as a means to achieving

the issues, increased nationalistic sentiments,

the third quarter of 2013.292 This fell below

economic efficiency has been lost.276

vested interests, and maneuvering by political

both Indonesian Finance Minister Chatib

factions in Parliament, the process was

Basri’s earlier prediction of 5.8 percent

No.5/2003 on the Economic Policy Package

turbulent.

Moreover, lack of capacity and

growth and the 6.3 percent forecast in the

in Conjunction with the Completion of

coordination between departments resulted

nation’s budget.293 And since easy global

the Government’s Program with the IMF

in the slow progress of its implementation.285

credit and large exports of commodities

was issued, aiming to increase investments,

These chronic coordination problems have

to China have decreased, Indonesia is left

exports, and employment, thus creating

reduced the effectiveness of the reforms.286

looking at lower growth for the near future.294

a climate conducive to the private sector

—————————————————

Indonesia’s sources of trade revenue

272

The law prohibits

273

efficiency, regulate the business climate to ensure competition, prevent unhealthy

In 2003, the Presidential instruction

280

284

Indonesian rupiah fell more than 19 percent against the dollar in 2013 over worries about a widening current-account deficit, but has

from natural resources are under pressure

include improving investment policy and

XI. Economic and Political Tensions

trade, decreasing legal uncertainty, bringing

————————————————

exports295 and lower prices for many of

through good institutions.

277

Key policies

regional regulations into line with higher regulations, improving infrastructure, increasing the transparency of public services, implementing programs for job creation, and to eradicate poverty.278

due to decreasing global demand for the natural resources it sells to the rest of

A. CURRENT ECONOMIC OUTLOOK

The deceleration of Indonesian economic growth creates a significant tension between Indonesian policymakers and foreigners.

the world.296 In addition to weaker external demand, protectionist government policies introduced in 2011-2012,297 such as the ban of raw and semi-processed rattan exports,

Currents Winter 2013

export tax on 65 minerals and enactment of

coordination having leaned towards

flavor about them. 318 For instance, the

restrictive import policies, have contributed

protectionism309 and uncertainty surrounding

mining sectors have been directed to install

to weak export growth.

Another factor

the 2014 general election, politicians have

smelters and process their resources before

complicating reform is the appreciation of

negatively impacted the economy by

export, a directive which is expected to be

Indonesia’s real exchange rate, thus putting

focusing on populist issues instead of

implemented regardless of whether or not

pressure on these tradable sectors.299

effective regulation. 310 With corruption

the additional processing is profitable.319 This

scandals engulfing SBY’s Democratic Party,

and other directives, appear to have stymied

conservatives in government have pushed

the expansion of exports while increasing

the confidence of foreign investors. This

economic modernizers to the sidelines.

the national import bill.320

could have costly ramifications, as foreign

There are also many political pressures to

Populist domestic politics and weakening

capital is needed to finance much needed

implement protectionist policies rather

leadership ahead of the 2014 election, and

domestic development.

than improve economic efficiency,

and

uncertainty afterwards, may blunt Indonesia’s

the implementation of these measures is

the leading presidential candidates have

economy.321 Overall, while the Indonesian

troubling as they lack prior consultation and

adopted populist rhetoric in order to garner

economy has made significant progress

have a retroactive impact.302

support.313 An enduring remnant from the

under SBY, increasing protectionism poses a

Although Indonesia’s 2013 growth rate

Suharto era is the nationalistic tone, which

threat to the sustainability of past success.322

decreased, maintaining growth at 5.6 percent

defined his tenure, and is popular among

is not bad and will likely continue to attract

voters.314 Inward-looking measures such as

foreign investors.303 And despite slowing

ownership caps appear to be part of a trend

growth, high inflation, and poor performance

—————————————————

of the rupiah and markets, the Finance

continue to cloud investment in the near

Populist domestic politics and weakening leadership ahead of the 2014 election, and uncertainty afterwards, may blunt Indonesia’s economy.

future as more investors have pulled out of

—————————————————

risky emerging markets.

While long-term

towards greater protectionism that goes

growth prospects have not deteriorated, the

beyond mere politicking.315 It is possible

confidence that Indonesia would continue

that this populist rhetoric is largely political

to grow at 6 to 7 percent annually has been

posturing, but if it becomes entrenched

undermined, showing that long-term growth

in future government policies after the

prospects were not as good as previously

election, Indonesia’s appeal as an investment

anticipated. Further economic reforms and

destination could be jeopardized.

298

Given weak external demand, protectionist policies are unwise

300

and threaten to shake

301

Furthermore,

Ministry has projected that Indonesia could achieve a 6 percent growth rate in 2014.304 However, current economic woes will

305

306

improving infrastructure will be required to sustain investor interest.307

312

311

316

Senior policy makers have denied that these new measures are protectionist, and claim that they will strengthen the Indonesian

B. POLITICAL PRESSURES

Political pressures constitute one of the biggest barriers to the Indonesian economy.308 With the most recent g overnment’s

economy by providing greater economic security.

317

While there is much to be said for

building up domestic industries to strengthen the economy, a number of the policies have had an interventionist and protectionist 50

Currents Winter 2013

C. RECOMMENDATIONS

Despite careful optimism for Indonesia’s economy, its position is tenuous and further government interference could cause more harm than good. Backing away from protectionist trade policies could help fix Indonesia’s structural issues, as they pose a large threat to the country’s financial stability.323 Tightening political control may stave off the trade effects of the Global Financial Crisis ahead of the 2014 election, but orienting the economy outward and enacting complementary policies are more likely to sustain long-term growth. 324 As a commodity-dependent economy, it would be pragmatic to pursue diversification and structural changes in Indonesia to reduce economic vulnerability and foster internationally competitive industrialization.325 In order to reach more rapid levels of economic growth, Indonesia must open up further to foreign investment and make headway on plans to revitalize its feeble infrastructure.326 Progress on these

fronts will require strong leadership after

still not ideal, as Indonesia ranks poorly

SBY’s term ends in order to ease tensions

in terms of trade supporting institutions

between traders and the current state of

and infrastructure, which will need to

affairs in the government and economy.

be developed in order to implement the

327

—————————————————

XII. Implications and Conclusions

desirable economic policies and will require the government to have the strength to respond to a liberalized environment.337

————————————————

Implementing reforms is difficult when

In sum, Indonesia has achieved major trade

strong public or nationalistic interest is

reforms since the AFC, and its liberalization

involved, and the process of Parliament’s

efforts have not been without merit328 as it

law deliberation and coordination problems

is still recovering from a multidimensional

indicate that significant reforms are unlikely

crisis that fundamentally changed its political

to occur unless an agreement between the

and economic frameworks.

government and Parliament is reached.338

329

The reforms

Indonesia has undertaken will greatly assist

Thus, while protectionist policies have

growth, and liberalization will improve

recently increased in the Indonesian trade

market access for foreign traders.330 However,

regime, the country’s historic progress

despite its remarkable progress, recently

towards liberalization should increase

increased protectionism as resistance to

investor confidence. Protectionist measures

reform has emerged.

seem unlikely to achieve the results the

331

Within the current framework, the

government desires, and as such, are expected

parameters for trade have moved.332 Indonesia

to be reformed in the future. Because of

is committed to regional liberalization within

the current economic uncertainty, the

AFTA, the exchange rate is largely market

government will likely experience opposition

determined, and the government has moved

to further liberalization, but if the results

to a rules-based market system.

However,

of the WTO dispute indicate anything, it is

the difficult economic environment has

that Indonesia will ultimately honor its trade

led to uncertainty on the future direction

agreements and act to improve the overall

of trade policy.

Although support for

business climate. Although there are legal and

further liberalization is low, trade openness,

regulatory challenges to traders who choose

confidence to invest, stable macroeconomic

to invest in Indonesia, the remarkable growth

policy, and minimal political uncertainty

it has experienced and potential for future

are needed, along with a clear trade policy

growth indicate the likelihood of further

that is credible with investors.

trade and investment in the country.

333

334

335

To achieve

this, Indonesia must reduce tariffs, remove opaque non-tariff measures, and move towards a regime that encourages investment and competition, and economic policies that encourage stable prices and competitive exchange rates. 336 While Indonesia has made progress, the investment climate is 51

Currents Winter 2013

End Notes 1. Kiki Verico, Trade Challenges and Indonesia’s Ideal Response, T he Jakarta Post (Feb. 15, 2013, 9:25 AM), http://www.thejakartapost. com/news/2013/02/15/tradechallenges-and-indonesia-s-idealresponse.html. 2. Clive Maximilian Schmithoff, C live M S chmittoff ’ s S elect Essays on International Trade L aw 54 (1988) [hereinafter Schmitoff]. 3. Id. at 426. 4. See id. passim. 5. See id. 6. See id. 7. See id. 8. Robert Lawrence & Margareta Drzeniek, Enabling Trade in a Changing World, T he J akarta Post (May 30, 2012, 7:54 AM), http://www.thejakartapost.com/ news/2012/05/30/enablingtrade-a-changing-world.html. 9. Dessy Sagita & Gabriel Kereh, Indonesia Must Undertake Major Changes and Take Risks, The Jakarta Globe (May 8, 2013, 9:22 AM), http://www.thejakartaglobe.com/ news/indonesia-must-undertakemajor-changes-and-take-risks-gitawirjawan-says/. 10. Ganeshan Wignaraja, Growth Dynamics and Policy Choices Facing Indonesia, V ox (Feb. 21, 2013), http://www.voxeu.org/article/ growth-dynamics-and-policychoices-facing-indonesia. 11. See Verico, supra note 1. 12. Id. 13. Schmithoff, supra note 2, at 225. 14. David Vanzetti et al., Trade Policy at the Crossroads—The Indonesian Story 6 (2005). 15. The Bloodbath, Workers World (1998), http://www.workers.org/ indonesia/chap1.html. 16. Daniel Berkowitz et al., Legal Institutions and International Trade Flows, 26 Mich. J. Int’l L. 163, 181–82 (2004). 17. Vikram Nehru, Indonesia’s New Trade Policy Risks Repeating Past Mistakes, East Asia Forum (Sept. 4, 2012), http://www.eastasiaforum. org/2012/09/04/indonesias-newtrade-policy-risks-repeating-pastmistakes/. 18. Id. 19. Id. 20. Vanzetti, supra note 14, at 3. 21. Id. at 2. 22. See D epartment of F oreign Affairs and Trade, Indonesia: Facing the Challenge 61 (2000) [hereinafter DFAT].

60. Id. at 25. 61. Id. at 26. 62. McGuire, supra note 56, at 3–4. 63. Hoekman et al., supra note 59, at 32. 64. See generally id. (noting exceptions to limited licensing benchmark include health, safety, and environmental reasons). 65. Id. 66. See generally id. (describing institutional policies affecting trade reform). 67. McGuire, supra note 56, at 31. 68. Id. 69. Id. 70. Hoekman et al., supra note 59, at 6. 71. Id. at 7. 72. Id. at 11. 73. Soesastro & Basri, supra note 23, at 8–9. 74. Tulus Tambunan, The Impacts of Trade Liberalization on Indonesian Small and Medium-sized Enterprises 15 (Trade Knowledge Network Policy Paper), Int’l Institute for Sustainable Dev. (2011), www. iisd.org/tkn/pdf/impact_trade_ lib_indonesia.pdf. 75. Id. at 14–15. 76. Luis Abugattas Maljuf, Swimming I n T h e S pa g h e t t i B ow l : C hallenges for D eveloping C ountries U nder the “N ew Regionalism” 15 (2005). 77. Id. 78. Lucian Cernat & Sam Laird, North, South, East, West: What’s best? Modern RTAs and Their Implications for the Stability of Trade Policy 12 (CREDIT Working Paper No. 03/11, 2003). 79. Maljuf, supra note 76, at 16. 80. Lawrence & Drzeniek, supra note 8. 81. Tubagus Feridhanusetyawan & Mari Pangestu, Indonesian Trade Liberalization: Estimating the Gains, 39 B ulletin of I ndon . E co . Studies 51, 51–74 (2003)(Indon.). 82. See DFAT supra note 22, at 64. 83. Id. at 68. 84. Soesastro et al., supra note 25, at 20–21. 85. Sagita & Kereh, supra note 9. 86. David Gantz, World Trade Law after Doha: Multilateral, Regional and National Approaches, 40 Denv. J. Int’l L. & Pol’y 321, 367 (2011). 87. Vanzetti et al., supra note 14 at 12. 88. Gantz, supra note 86, at 348. 89. Id. at 349. 90. Soesastro et al., supra note 25, at 20–21. 91. Gantz, supra note 86, at 348.

23. Hadi Soesastro & M. Chatib Basri, The Political Economy of Trade Policy in Indonesia 3 (Center for Strategic and International Studies, Working Paper Series 092, Mar. 2005), available at http://www.csis.or.id/ papers/wpe092.pdf. 24. Vanzetti, supra note 14, at 4. 25. Hadi Soesastro et al., Economic Reforms in Indonesia After the 1997/98 Economic Crisis 3 (EABER, Working Paper No. 18, 2006). 26. Id. 27. Vanzetti et al., supra note 14, at 25. 28. Id. at 24. 29. Id. 30. Id. 31. Berkowitz et al., supra note 16, at 164–65. 32. Id. at 166. 33. Id. at 167. 34. Id. at 167. 35. Id. at 165. 36. Id. at 168. 37. Id. at 177. 38. Berkowitz et al., supra note 16, at 182. 39. Id. at 189. 40. Id. at 182. 41. Id. at 182–83. 42. Id. at 183. 43. Id. 44. Id. at 186–87. 45. Id. at 187. 46. Id. 47. Id. at 190. 48. See Vanzetti et al., supra note 14, at 11–31. 49. Berkowitz et al., supra note 16, at 190. 50. Id. at 191. 51. Id. 52. Id. at 197. 53. Id. 54. Id. 55. Id. 56. G r e g M c G u i r e , T r a d e i n S e rv i c e s : M a r k e t A c c e s s Opportunities and The Benefits of Liberalization for Developing Economies 1 (2003), available at http://unctad.org/en/ Docs/icdtab20_en.pdf. 57. Id. 58. Id. 59. Bernard Hoekman et al., Trade Policy Reform and Poverty Alleviation 14 (World Bank, Policy Research Working Paper No. 2733, 2001), available at http://www-wds. worldbank.org/external/default/ WDSContentServer/WDSP/IB /2002/01/18/000094946_020 10804031951/Rendered/PDF/ multi0page.pdf.

92. M. Chatib Basri & Arianto A. Patunru, Keeping Indonesia’s Trade Open, East Asia Forum (Oct. 18, 2012), http://www.eastasiaforum. org/2012/10/18/keepingindonesias-trade-open/. 93. Soesastro et al., supra note 25, at 20–21. 94. Basri & Patunru, supra note 92. 95. Id. 96. Sagita & Kereh, supra note 9. 97. Herbert Smith, Indonesia M&A Transactions: A Survival Guide 3 (2012), available at http://www. herbertsmithfreehills.com/-/ media/HS/J-160812-7.pdf. 98. John Malcolm Dowling, Competition Policy in Indonesia 9 (SMU Econ. & Statistics Working Paper Series, Research Paper 08-2006, 2006), available at http://ink.library. smu.edu.sg/cgi/viewcontent. cgi?article=1870&context=soe_ research. 99. Soesastro & Basri, supra note 23, at 2. 100. Id. at 21. 101. Id. at 22. 102. Linda Yulisman, Revise and Improvise Trade Policies, WTO tells Indonesia, The Jakarta Post (Apr. 15, 2013), http://www.thejakartapost.com/ news/2013/04/15/revise-andimprove-trade-policies-wto-tellsindonesia.html (quoting U.S. WTO Ambassador Michael Punke). 103. Vanzetti et al., supra note 14. 104. Id. at 7. 105. Soesastro et al., supra note 25, at 12. 106. Cernat & Laird, supra note 78, at 8. 107. Soesastro et al., supra note 25, at 7. 108. Id. 109. Id. at 12. 110. Id. 111. Id. 112. Id. 113. Sagita & Kereh, supra note 9. 114. Soesastro & Basri, supra note 23, at 3. 115. Id. at 19. 116. Id. at 4. 117. Soesastro et al., supra note 25, at 7. 118. Id. at 28. 119. U.S. Trade Rep., Indonesia (2013), available at http://www.ustr.gov/ sites/default/files/2013%20 NTE%20Indonesia%20Final.pdf [hereinafter USTR Indonesia]. 120. Id. 121. Nii Lante Wallace-Bruce, Corruption and Competitiveness in Global Business, 24 Melb. U. L. Rev. 349, 350–51 (2000). 122. Id. at 349. 123. Id. at 356. 124. Id. at 366.

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125. Id. at 358. 126. Id. at 359. 127. Id. at 374. 128. Id. 129. Profiles: Indonesia, Anti-Corruption A u t h o r i t i e s , h t t p : / / w w w. acauthorities.org/country/id (last updated July 2010). 130. Soesastro et al., supra note 25, at 17. 131. Id. 132. Id. 133. Linda Yulisman, Great Wall of Trade Barriers Planned, The Jakarta Post (Dec. 7, 2011, 8:06 AM), http://www.thejakartapost.com/ news/2011/12/07/great-walltrade-barriers-planned.html. 134. Titik Anas, Indonesia’s New Protectionist Trade Policies: A Blast From the Past, East Asia Forum (June 18, 2012), http://www. eastasiaforum.org/2012/06/18/ indonesia-s-new-protectionisttrade-policies-a-blast-from-thepast/. 135. Id. 136. U.S. Challenges Indonesian Import Restrictions, Farm Futures (Jan. 18, 2013), http://farmfutures. com/story-challenges-indonesianimport-restrictions-0-93794. 137. Ganeshan Wignaraja, Indonesia: Faltering Growth and a Hint of Protectionism?, East Asia Forum (Feb. 27, 2013), http://www. eastasiaforum.org/2013/02/27/ indonesia-faltering-growth-and-ahint-of-protectionism/. 138. Yulisman, supra note 102. 139. Dowling, supra note 98, at 5. 140. USTR Indonesia, supra note 119. 141. Id. 142. Id. 143. Id. 144. Id. at 2. 145. Id. 146. Id. 147. Id. 148. Id. 149. Id. 150. Id. at 2-3. 151. Id. at 3. 152. Id. 153. Id. at 4. 154. Id. 155. Id. 156. Id. 157. Id. at 5. 158. Id. 159. Id. 160. Id. at 5-6. 161. Id. 162. The Office of the U.S. Trade Representative, WTO Dispute Settlement Proceeding Regarding Indonesia Importation of Horticultural Products, Animals and Animal Products 78 Fed. Reg. 11725, 11725 (Feb. 19, 2013), available at http:// www.gpo.gov/fdsys/pkg/FR2013-02-19/pdf/2013-03667.pdf.

163. Id. at 11726. 164. Id. 165. Id. 166. McGuire, supra note 56, at 26. 167. Id. at 16–18. 168. Id. at 16. 169. Id. at 17. 170. Id. at 18. 171. Id. 172. Id. 173. Anas, supra note 134. 174. Id. 175. Nehru, supra note 17. 176. Ambassador Michael Punke, U.S. Permanent Representative to the WTO, U.S. Opening Statement on the Trade Policy Review of Indonesia (Apr.10, 2013). 177. See Dep’t of Foreign Affairs and Trade, Indonesia: Facing the Challenge 69 (Ann Duffy, ed., Dec. 12, 2000), available at http:// www.dfat.gov.au/publications/ indonesia/ind_challenge.pdf. 178. Vanzetti et al., supra note 14, at 2. 179. Anas, supra note 134. 180. Id. 181. Id. 182. Soesastro & Basri, supra note 23, at 12. 183. Nehru, supra note 17. 184. Id. 185. Id. 186. Verico, supra note 1. 187. Wignaraja, supra note 10. 188. Id. 189. Yulisman, supra note 102. 190. Editorial: For Trade to Work, Reforms Are a Must, The Jakarta Globe (May 7, 2013), http://www. thejakartaglobe.com/opinion/ editorial-for-trade-to-workreforms-are-a-must/. 191. Soesastro et al., supra note 25, at 4. 192. Soesastro & Basri, supra note 23, at 18. 193. Id. at 25 194. Soesastro et al., supra note 25, at 14. 195. Vanzetti et al., supra note 14, at 30. 196. Id. at 29. 197. Id. 198. Id. 199. M i c h a e l P r y l e s e t a l . , I n t e r n at i o n a l T r a d e L aw : Commentary and Materials 56 (2d ed. 2004). 200. Id. 201. Id. at 1047. 202. Id. at 1049. 203. Sarita Sambijantoro, Nationalist Sentiment Thwarts FDI Plan, The J akarta P ost (Dec. 2, 2013), http://www.thejakartapost.com/ news/2013/12/02/nationalistsentiment-thwarts-fdi-plan.html. 204. Id. 205. Smith, supra note 97. 206. Id. 207. Id.

208. Id. 209. Id. 210. Id. 211. Id. 212. Id. 213. Id. 214. Id. 215. See Pryles et al., supra note 199, at 56. 216. Id. at 1046; see also Vietnam Economists Warn Against Addiction to Foreign Investment, ThanhnienNews. com (Mar. 25, 2014), http:// thanhniennews.com/business/ vietnam-economists-war nagainst-addiction-to-foreigninvestment-24860.html. 217. See Pryles et al., supra note 199, at 1045. 218. See id. at 1047 (discussing that during neg otiations of FDI parameters countries recognized the impor tance of cultural sovereignty and values). 219. See generally id. at 1045–46 (discussing impact of foreign direct investment on host country). 220. USTR Indonesia, supra note 119, at 198. 221. Id. at 199. 222. Id. 223. George O. White III, Foreigners Beware? Investing in a Jungle with Many Predators: The ASEAN Investement Area, 37 Tex. Int’l L.J. 157, 159 (2002). 224. Id. at 170. 225. Id. 226. Id. at 171. 227. Id. at 172. 228. Id. 229. Id. at 168–69. 230. Id. at 169. 231. Id. at 172. 232. Id. 233. Id. at 175. 234. Id. at 164. 235. Id. at 172–73. 236. Id. at 173. 237. Id. at 176. 238. R i c h a r d G a r n e t t e t a l . , A Practical Guide to I n t e r n at i o n a l C o mm e r c i a l Arbitration 2 (2d ed., 2000). 239. Id. at 3. 240. Id. 241. Id. at 4. 242. Id. at 12. 243. Id. at 5. 244. Id. 245. Id. at 14. 246. Smith, supra note 97, at 11. 247. Id. 248. Id. 249. Id. 250. Id. 251. Id. 252. Id. 253. 7th Annual Forum of Developing Country Investment Negotiators, Jakarta, Indon. Nov. 4–6, 2013, 53

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Investment Treaties and Investor-State Dispute Settlement: Reform or Reject?, 5, available at http://www.iisd.org/ pdf/2013/7th_annual_forum_ report.pdf. 254. Florian Haugeneder, Corruption in Investor-State Arbitration, 10 J. World Investment & Trade 323, 338 (2009). 255. Id. at 335. 256. Luke Nottage, Treaty-Based InvestorState Dispute Settlement Mechanisms Not All Bad, East Asia Forum (Aug. 17, 2012) http://www. eastasiaforum.org/2012/08/17/ treaty-based-investor-statedispute-settlement-mechanismsnot-all-bad/. 257. Simon Butt, Luke Nottage & Brett Williams, Japanese Law and the Asia-Pacific, Renegotiating Indonesian Investments in the Shadow of International Treaty Law, Univ. of Sydney Blogs, http://blogs.usyd. edu.au/japaneselaw/2012/04/ renegotiating_indonesian_inves. html (last updated Apr. 18, 2012). 258. Id. 259. B i j i t B o r a & I n g e N o r a Neufeld, Tariffs and the East Asian Financial Crisis, at 8, 12, UNCTAD/ITCD/TAB/14, U.N. Sales No. E.01.II.D.27 (2001). 260. Eric Bellman, U.S. Looks to Indonesia for Big Trade Boost, W all S t . J. (Nov. 13, 2012), http://webcache. googleusercontent.com/search? q=cache:r0qoIWQAAL0J:online. wsj.com/news/articles/SB1000 14241278873245563045781166 11245293072+&cd=1&hl=en& ct=clnk&gl=us (This is a cached article. It can also be found via a search engine or accessed through a subscription). 261. Id. 262. Id. 263. Id. 264. Wignaraja, supra note 137. 265. Yulisman, supra note 133. 266. M i c h a e l Ta y l o r, U P DA T E 1-Indonesia Scraps Horticultural Import Quotas to Head Off U.S. Spat, R euters (Apr. 12, 2013), h t t p : / / w w w. r e u t e r s . c o m / article/2013/04/12/indonesiausa-idUSL3N0CZ90A20130412. 267. Soesastro et al., supra note 25, at 24–25. 268. Id. 269. Id. at 25. 270. DFAT, supra note 22, at 69. 271. Id. at 57. 272. Dowling, supra note 98, at 3. 273. Id. 274. Id. 275. Id. at 4. 276. Id. 277. Soesastro et al., supra note 25, at 7. 278. Id. 279. Id. at 15.

280. Id. at 10. 281. Id. at 32. 282. Id. at 29. 283. Id. at 10. 284. Id. 285. Id. at 32. 286. Id. 287. Positive Economic Outlook in 2014, T he J aka r t a P o s t (Oct. 11, 2013), http://www.thejakartapost. com/news/2013/10/11/positiveeconomic-outlook-2014.html. 288. Id. 289. Ben Bland, Protectionism Hits Indonesia’s Reputation, F inancial T i m e s (June 12, 2012), http:// webcache.googleusercontent. com/search?q=cache:Rsv1ReHV L e E J : w w w. f t . c o m / c m s / s/0/4f1ae262-b46e-11e1-bb2e00144feabdc0.html+&cd=1&hl= en&ct=clnk&gl=us#axzz31YCsV NpY (This is a cached article. It can also be found via a search engine or accessed through a subscription). 290. Id. 291. Nilufar Rizki & Rieka Rahadiana, Indonesia Trade Sur plus A Relief For Rupiah, But Economy Worries Linger, R e u t e r s (Dec. 2, 2013), http://uk.reuters. com/article/2013/12/02/ukindonesia-economy-inflationtrade-idUKBRE9B103T20131202. 292. Joana Taborda, Indonesian GDP Growth Slows to 5.62% YOY in Q3, T r a d i n g E c o n o m i c s (Nov. 6, 2013), http://www. trading economics.com/ articles/11062013095209.htm. 293. B e n O t t o & To m Wr i g h t , Indonesia Finance Chief Basri Cuts 2013 Gr owth For ecast, W a l l S t . J. (Oct. 31, 2013), http:// webcache.googleusercontent. com/search?q=cache:kkn8V_n0rMJ:online.wsj.com/news/articles/ SB100014240527023038431045 79168861081992566+&cd=1&h l=en&ct=clnk&gl=us (This is a cached article. It can also be found via a search engine or accessed through a subscription). 294. Id. 295. Peter McCawley, Is The Indonesian Economy In Trouble?, E ast A sia Forum (Sept. 1, 2013), http://www. eastasiaforum.org/2013/09/01/ is-the-indonesian-economy-introuble/. 296. Indonesia’s Economy: Tipping the Balance, T h e E c o n o m i s t (Feb. 23, 2013), http://www.economist. com/news/asia/21572245gloomy-politics-so-how-longcan-bright-economics-last-tippingbalance. 297. Wignaraja, supra note 10. 298. Maria Monica Wihardja, Indonesia: W here Bad Politics Threatens a Good Economy, East Asia Forum

319. Id. 320. Id. 321. Wihardja, supra note 298. 322. Stiftung, supra note 313, at 32. 323. Wihardja, supra note 298. 324. Wignaraja, supra note 10. 325. Id. 326. Ben Bland, Indonesia vows to turn crisis into opportunity, F inancial Times (Sept. 11, 2013), http:// webcache.googleusercontent. com/search?q=cache:t-b38XJBKsJ:www.ft.com/cms/ s/0/207f8336-19da-11e3-93e800144feab7de.html+&cd=1&hl=e n&ct=clnk&gl=us#axzz31SZQM tO0 (This is a cached article. It can also be found via a search engine or accessed through a subscription). 327. Indonesia’s Economy: Tipping the Balance, supra note 296. 328. Vanzetti et al., supra note 14, at 6; see also DFAT, supra note 22, at 38, 61, 68. 329. Vanzetti et al., supra note 14, at 24. 330. DFAT, supra note 22, at 74. 331. Id. 332. Vanzetti et al., supra note 14, at 24. 333. Id. 334. Id. 335. Id. 336. Id. at 24–25. 337. Vanzetti et al., supra note 14, at 25. 338. Soesastro et al., supra note 25, at 34.

(Aug. 15, 2013), http://www. eastasiaforum.org/2013/08/15/ indonesia-bad-politics-meets-agood-economy/. 299. M. Chatib Basri & Hal Hill, Indonesian Growth Dynamics 25 (The Australian Nat’l Univ., Working Paper No. 2010/10, 2010). 300. Wihardja, supra note 298. 301. Indonesia’s Economy: Tipping the Balance, supra note 296. 302. Aditya Suhar moko & Rachel Armstrong, Analysis: Indonesia’s “Hatta-nomics” makes foreign investors nervous, Chi. Trib. (May 29, 2010), http://articles.chicagotribune. com/2012-05-29/business/snsrt-us-indonesia-investmentbre 84s1em-20120529_1_golkar-partyforeign-investors-coordinatingminister. 303. Positive Economic Outlook in 2014, supra note 287. 304. Id. 305. Ben Bland, Foreign direct investment falters in Indonesia, F inancial T imes (Oct. 23, 2013), http:// webcache.googleusercontent. com/search?q=cache:hMf2Oza G 1 g I J : w w w. f t . c o m / c m s / s/0/472f1d14-3bbf-11e3-b85f00144feab7de.html+&cd=1&hl=e n&ct=clnk&gl=us#axzz31SZQM tO0 (This is a cached article. It can also be found via a search engine or accessed through a subscription). 306. Id. 307. Andreas Ismar & Linda Silaen, Indonesia FDI Hits Record, But Growth Pace Slows, W all S t . J. (July 23, 2013), http://webcache. googleusercontent.com/search? q=cache:JfTC2vUPWSUJ:online. wsj.com/news/articles/SB1000 14241278873238291045786235 43755917964+&cd=1&hl=en& ct=clnk&gl=us (This is a cached article. It can also be found via a search engine or accessed through a subscription). 308. Ayu Purwaningsih, ‘Asian tiger’ Indonesia treads warily, DW (Aug. 30, 2013), http://dw.de/p/19Yux. 309. Suharmoko & Armstrong, supra note 302. 310. Purwaningsih, supra note 307. 311. Indonesia’s Economy: Tipping the Balance, supra note 295. 312. Purwaningsih, supra note 307. 313. Bertelsmann Stiftung, BTI 2014: I ndonesia C ountry R eport 2 (2014), available at http://www. bti-project.org/fileadmin/Inhalte/ r e p o r ts / 2 0 14 / p d f / B T I % 2 0 2014%20Indonesia.pdf. 314. Suharmoko & Armstrong, supra note 302. 315. Id. 316. Stiftung, supra note 313, at 2. 317. McCawley, supra note 295. 318. Id. 54

Currents Winter 2013

Pleasing to All and Helpful to None: Software Licensing from the Berne Convention to the Strange Case of UsedSoft v. Oracle TAYLOR ROZNOVSKY*

The European Court of Justice (ECJ) recently ruled that the first-sale doctrine applies to software licenses, even for software not contained on a physical medium like a compact disc.1 This ruling is exactly contrary to U.S. case law, which is surprising given that both jurisdictions are enforcing statutes passed pursuant to the same international agreement—the World Intellectual Property Organization Copyright Treaty (WIPO Copyright Treaty).2 This article proposes that while the initial objective of the WIPO Copyright Treaty was to harmonize copyright law, the ultimate effect of those codifications has been to sanctify existing national copyright doctrines, further reinforcing the very climate the WIPO Copyright Treaty aimed to change. Furthermore, for a meaningful harmonization to occur, the WIPO Copyright Treaty must clearly articulate the underlying public policy it was intended to put into practice. —————————————————

I. Introduction

those licenses without interference from the

————————————————

original seller; those subsequent purchasers

To the author’s knowledge, this decision is

In July of 2012, the ECJ defined a new

will receive all rights entitled to the original

the first time that the ownership and licensing

doctrine that limited the rights of copyright

purchaser, such as software updates. The

rights have cross-pollinated while maintaining

owners by granting new rights to copyright

right diminished is the right of distribution,

their separate characters. Moreover, the

licensees. The landmark ruling allows for

while the right augmented is the first-sale

decision handed down by ECJ runs exactly

purchasers of software licenses to resell

doctrine (or “exhaustion doctrine” in the

contrary to U.S. case law, which consistently

Currents Winter 2013

European Union).5

holds that software licensees may not sell

very least will increase production costs for

[sic] in non-traditional contexts involving

their licenses to subsequent purchasers. The

software companies hoping to service both

emerging computer technologies.”13 What

very purpose of a license, says the United

markets.

follows are broad outlines of the various

States, is that it is not a sale, leaving nothing

This article will examine the copyright

legal areas implicated in the convergence of

for the purchaser to alienate (as they do not

regimes of the United States and the

IP and computer programs. The author has

“own” it in the first place).7 Curiously these

European Union, analyze their reactions

tried to frame these doctrines in as general

two jurisdictions reached their diametrically

after signing the WIPO Copyright Treaty,

and pan-jurisdictional a fashion as possible.

opposing positions from statutes codifying

and chart the trajectory of the resulting

obligations imposed by the same treaty—the

legal principles. Part II of this article gives a

WIPO Copyright Treaty.8 Both copyright

broad overview of the various legal doctrines

regimes (i.e., the United States and the

discussed and analyzed throughout this

It may be said that most (if not all) existing

European Union) are also signatories to the

article. Part III looks at the leading treaties.

treaty’s predecessor, the Berne Convention,

Parts IV and V examine the history behind

authors and consumers in implicit terms of

which has been in effect for over a century.

these doctrines in the United States and

statutory or natural rights. Statutory rights are

The principal aim of the WIPO Copyright

the Eropean Union, respectively. Part VI

those that are wholly created by constitution

Treaty is to har monize and stabilize

analyzes (1) the development of those

or statute and do not exist beyond them,

—————————————————

encountered in the digital era, including

harmonize copyright law, the ultimate effect

The principal aim of the WIPO Copyright Treaty is to harmonize and stabilize copyright regimes regarding new challenges encountered in the digital era, including those posed by computer programs lacking attendant physical media.

while natural rights flow from the inherent

of those codifications has been to polarize

—————————————————

the notion of “moral rights,” which are

existing national copyright doctrines, further

doctrines to reveal the underlying policies

those rights that are personal to the author

reinforcing the very climate the WIPO

regarding copyright in those countries and

alone and cannot be waived.16 Droit de suite,

(2) the failure of the WIPO Copyright

a French doctrine, guarantees authors of

Producers of computer programs now

Treaty to synchronize them. Lastly Part VII

original artworks a royalty from subsequent

face totally different legal climates in the

will conclude with a proposal to remedy the

purchasers (essentially a percentage of the

U.S. and EU. While the long-term effects

WIPO Copyright Treaty’s striking failure.

purchase price);17 the EU has since mandated

are unclear, some commentators note

—————————————————

that all member states recognize it.18 Droit de

those posed by computer programs lacking attendant physical media.10 If that is the case, how could the implementing statutes have such radically divergent holdings? This article proposes that while the initial objective of the WIPO Copyright Treaty was to

A. NATURAL RIGHTS IN COPYRIGHT REGIMES

dignity of the human person and exist even without formal codification.14 Natural law existed at the inception of European copyright regimes in the 19th century, initially defined as protecting authors through the Lockean principle that “property rights result from one’s labor.”15 An early policy articulation came through

that the decision has the power to create

II. Doctrinal Overview

an entirely new market for secondhand

————————————————

This is not to say, however, that society-

licenses for software lacking attendant

The similarities in substance and differences

at-large is not also vested with natural

physical media, such as smartphone apps—a

in form between computer programs and

rights, even though those rights flow from

market that could not exist under present

traditionally protected forms of intellectual

a different wellspring. The natural rights

U.S. law. The short term, though, is likely

property (IP) have led to “[c]ourts taking

of individuals revolve around the protection

to see a restructuring of the way software

doctrines developed in the traditional context

of a property interest, while the natural

manufacturers draft licenses, which at the

of writings and applying them forceably

rights of society revolve around the moral

suite is inalienable and cannot be waived.19

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imperative to make use of that individual’s

“common sense” rule and only an “informal”

of an individual copy of the work from a

property.

Although consumers’ natural

part of legal reasoning, as a “technique[]

seller to a buyer.29 The exclusive right to

rights are sometimes defined in terms of

which directs the attention of decision-

distribute, coupled with the implicit right to

the individual,

makers to a more appropriate regulation.”

prohibit others from distributing, is generally

them collectively as “social” rights, in that

It is considered a widespread (yet largely

referred to as the distribution right or right

they are the rights of everyone else except

unacknowledged) legal test that rarely finds

of distribution.30

the creator of the work or holder of the

its way into formal jurisprudence.26

this article will refer to

Complimentary to the right of distribution

Modern European legal scholars are

is the right of reproduction. This right allows

access and social utility, those rights serve

increasingly challenging the relevance of

the copyright holder to prevent others from

as a check on the creator’s monopoly right.

lex specialis as an arbiter of conflicting

making copies of her work without her

(For a discussion of those checks, a/k/a

legal norms. One commentator, surveying

authorization.31 The U.S. Copyright Office

the “traditional safety valves,” see Part II(E)

different legal maxims that control normative

points out that a copyright is literally a “right

below).

conflicts, has noted “when applying lex

to copy;”32 thus prohibiting all others to

Statutory rights are contrary to natural

specialis within the national legal order, it often

create reproductions of the work (free or for

rights in that the former cannot exist without

becomes a technique that confirms already

profit) is the probably the most rudimentary

statutory pronouncement.22 The statutory

existing norm-relations. This is only possible

manifestation of a copyright.33

rights discussed below are entirely defined by

—————————————————

It is easy to confuse the rights of

the written word. That said, simply because

The exclusive right to distribute, coupled with the implicit right to prohibit others from distributing, is generally referred to as the distribution right or right of distribution.

distribution and reproduction, but they

—————————————————

reproducing it (e.g., by selling a book),

because the domestic legal order is based on

and one may reproduce a work without

pre-determined relations between general

distributing it (e.g., by burning a compact

and specific regulations.”27 In other words, lex

disc). Fulfilling a work’s economic potential,

specialis may be used as an interpretative tool

however, generally requires the seller to

to support an existing rule of law, and it may

make and sell copies, which involve both

be selected precisely because the arbiter has

rights. Thus, it may be said that the rights

chosen in advance which outcome to achieve.

are complementary, and are ineffectual

a copyright provision is recorded does not mean it is a statutory right. It may well be a natural right if law of the jurisdiction allows it to be expanded beyond the scope of its original codification. B. LEX SPECIALIS

We may approach the doctrine of lex specialis as a particularly European choice of law provision. A contraction of the ancient Roman maxim “in tot iure generi per speciem deorgatur et illud potissimum habetur, quod ad speciem derectum est,” the concept translates to “in the entirety of law, the species takes precedence over genus, and anything that relates species is regarded as most important.”24 More simply, when two laws regulate the same subject matter, the law that identifies that subject matter more specifically controls over the one that identifies it less specifically. The effect? Commentators in the European Union have characterized lex specialis as a

reproduction is the right to create a copy of work; the right of distribution is the right to distribute that work, e.g., sell it, lease it, rent it, etc.34 One may distribute a work without

except when used in conjunction; 35 the C. RIGHTS OF DISTRIBUTION & REPRODUCTION

WIPO has noted “the right of reproduction would be of little economic value if the

Nearly all copyright regimes the world over

owner of copyright could not authorize the

grant the creator of a work the exclusive right

distribution of the copies made with his

to distribute that work for a limited period

consent.”36

of time.28 Many statutes and common law doctrines frame the regulation of copyright as the right to “distribute,” “vend,” “sell,” or as another right allowing transmission 57

Currents Winter 2013

have important distinctions. The right of

D. FIRST-SALE DOCTRINE, OR EXHAUSTION

As common as the author’s right of distribution is, there is corresponding right afforded purchasers. Phrased generally, a copyright owner’s interest (economic, artistic, etc.) in the work she produces terminates after the first sale (or transfer) of that work.37 Stated differently, the author of a work may not limit resale of that work, and is not entitled to any profits from resale.38 This is to guarantee, as one commentator put it, that the right of distribution is “a single shot pistol and not a machine gun.”39 It is most often referred to as the exhaustion doctrine in Europe, and the first-sale doctrine in the United States.40 (This article will use the U.S. terminology.) Public policy behind the first-sale doctrine concerns the public’s right to access protected material—the “social right” of Part II(A).41 The doctrine is one of copyright’s “traditional safety valves,” balancing “the public’s interest in open access with the property interests of the copyright owners.”42 The other two safety valves are the doctrines of fair use (allowing other artists, students, journalists, etc. to use partial amounts of a copyrighted work for commentary, parody, news reports, etc.) and public domain (the aggregate of all works whose copyrights have expired or were never copyrighted).43 All the safety valves limit an author’s ability to control his work by expanding consumers’ right of access to it. Where exactly the line is drawn depends on the values and theories of the individual copyright regime; the purpose of several WIPO treaties was to make sure that line was relatively stable across regimes.44

used “to augment the protection of ideas

E. SOFTWARE & COPYRIGHT

While many IP rights may be contractually defined between creator and buyer, application of IP law to computer programs has yielded uneven and uncertain enforcement between regimes, often compelling intergovernmental bodies to weigh in.45 The right of distribution and the first-sale doctrine might seem straightforward, but their applicability to software is increasingly complicated by the modern characterization of most software transfers as license agreements and not sales.

Various countries and the WIPO define a “license” as a more limited form of the —————————————————

The right of distribution and the first-sale doctrine might seem straightforward, but their applicability to software is increasingly complicated by the modern characterization of most software transfers as license agreements and not sales. ————————————————— right of distribution,47 allowing copyright owners to retain ownership of the work while contractually authorizing third parties to carry out particular acts with it. Title 48

remains with the author and the economic rights conferred to the licensees are generally limited in time and scope, memorialized with a written agreement between the copyright owner and the subsequent user.49 While the licensing concept is not new, its application to software is an example of what Judge Newman calls “taking doctrines developed in the traditional context of writings and applying them forcably [sic] in non-traditional contexts.”50 The transmission of a license in lieu of title was historically

and expressions otherwise difficult to protect under intellectual property law.”51 In the context of computer software, licenses are used because of the perceived differences between physical forms of copyrighted media and the incorporeal digital forms; commentators claim that traditional forms of copyright protection do not adequately shelter software,52 and licenses are generally thought as a way to better “fit” copyright law to software.53 The licensing model is currently the norm of computer programs and most forms of digital media (e.g., digital music or e-books).54 Many (if not the majority of) softwarelicensing schemes involve what is termed “clickwrap” licensing.55 The term comes from the earlier practice of “shrinkwrap” licensing agreements, in which agreements were wrapped in shrinkwrap cellophane around computer software packaging and became effective by the software not being returned after a set period of time.56 Like their physical namesake, these purely electronic schemes require the acceptance and acknowledgement of a license agreement to access the software itself.57 Users could unknowingly enter into dozens, if not hundreds, of these clickwrap agreements simply by trying to access software they believe they own. But is this really the best possible treatment of software? Though the right of reproduction has existed in some form at least since the 1886 Berne Convention, it has taken on a new dimension in the era of computers.58 Programs are stored in the computer’s read-only memory (ROM) when not being used by the computer’s operator,59 and when a user boots a program, the

Currents Winter 2013

program is copied into the random-access

substantially a sale.67 The result is the rule

Article 20 of the Convention allows for

memory (RAM), where the user can interact

of licensing impacts the rule of ownership.

its subsequent amendment.74 The section

with it.60 Most modern jurisdictions do not

—————————————————

reserves to the parties the right to enter

consider such copying a triggering event for

III. The Treaties

the right of reproduction, as it would not

————————————————

same subject matter as the Convention,

be possible to interact with the software at

So far, this article has merely reviewed

provided that the agreements increase the

all without incidentally copying it into the

the relevant legal doctrines necessary

author’s rights and do not contradict

RAM.

to comprehend the copyright regimes

the Convention’s then-existing articles.75

of the United States and European

An interesting addition to the Berne

Union. The next step is to understand the

Convention was the codification of the

extrajudicial international obligations of

French legal doctrine of droit de suite, which

those jurisdictions.

grants authors or their heirs an interest in

F. THE EVOLVING STATE OF THE LAW

How do all of these areas of law intersect? From a purely theoretical and abstract perspective, they would not. Their very nature as mutually exclusive theories

re-sales of original artworks and original A. THE BERNE CONVENTION

embodying different types of interactions

The global community’s first attempt at

between people and their stuff guarantees

establishing a coordinated copyright system

it. Licensing and ownership run parallel to

occurred in 1886 in Berne, Switzerland.68

each other. To apply the law of one to the

The Berne Convention for the Protection

other would seem inappropriate to their very

—————————————————

nature.62 Oil does not mix with water; and

by analysis of whether a transaction was a

Before the Oracle ruling, the closest those doctrines came to intersection was by analysis of whether a transaction was a license or “substantially” a sale.

license or “substantially” a sale. Well-settled

—————————————————

law provides that the right of distribution

of Literary and Artistic Works grew from a

and first sale applies only to subsequent

desire to protect “as effective and uniform

owners of a literary or artistic work.63 A

a manner as possible[] the rights of authors

license, however, is only permission to

in their literary and artistic works.”69 The

use a given work, and thus would not be

subject matter governed by the convention

eligible for the first sale doctrine.64 With

included “every production in the literary,

that in mind, foreign and domestic courts

scientific and artistic domain, whatever may

have taken notice that what a contract calls

be the mode or form of its expression,”70

a “license” may substantially be a “sale.”65

which was to be protected “in all countries

The greater trend in recent years has been

[adopting the Berne Convention].”71 Authors

to look to the substance of a transfer instead

received the exclusive right of reproduction

of its form.66 Authorities championing that

of their works.72 A minor caveat was made

approach do so in order to ensure that

for “certain special cases” that permitted

software manufacturers cannot simply avoid

the reproduction beyond the control of the

the limiting consumer’s rights by declaring a

authors.73 In anticipation of new “mode[s]

transfer of a license when the transaction is

or form[s] of . . . [artistic] expression,”

licensing does not mix with software. Before the Oracle ruling, the closest those doctrines came to intersection was

Currents Winter 2013

into additional agreements concerning the

manuscripts.76 The interest is not guaranteed by the convention itself—it must be present in national legislation to be enforceable, as the Berne Convention does not mandate that signatory countries adopt it.77 However, the mere possibility of droit de suite manifested a fundamental “natural rights” perspective of copyright, different from the American experience; that conflict would not come to a head for another hundred and twenty-six years. B. THE WORLD INTELLECTUAL PROPERTY ORGANIZATION COPYRIGHT TREATY

At the beginning of the third millennium the rapid proliferation of information technology and Internet usage facilitated instantaneous copying and widespread dissemination of copyrighted works for free, which concerned authors who wanted to protect their property rights.78 Regimes, statutes and copyright enforcement were far from uniform, with the WIPO itself acknowledging the “questions raised by new economic, social, cultural and technological developments.” 79 The WIPO Copyright Treaty was drafted to put those concerns

to rest,80 reflecting “a broad international

definition of “original or a copy” in article

provides that “[t]he Congress shall have

ag reement as to how copyright and

6 to “fixed copies that can be put into

power . . . [t]o promote the progress of

related rights should be handled in today’s

circulation as tangible objects.” Copyright

science and useful arts, by securing for

environment, including the context of digital

protection would only apply to works

limited times to authors and inventors the

technologies.”81

distributed by a physical media, not a purely

exclusive right to their respective writings

By operation of law, the WIPO Copyright

electronic one. Online-only works would fall

and discoveries.”89

Treaty is a “special agreement” within

outside the ambit of the WIPO Copyright

the meaning of the term in article 20 of

Treaty’s protection.

In its first opportunity to review the socalled “Copyright Clause,” the Supreme

the Berne Convention. To that end, the

Finally, the Treaty instructed its signatories

Court explicitly held that the right is statutory

WIPO Copyright Treaty defined “computer

to provide “adequate legal remedies against

only.90 The “Copyright Clause” does not

programs” as literary works within the ambit

the circumvention” of the rights guaranteed

simply record an existing natural right, but

of the Berne Convention’s Article 2, thereby

by the WIPO Copyright Treaty.

“created the right, secured for a limited time,

worthy of copyright protection. Article 6

At this point we have reviewed global

by the provisions of that law.”91 Thus the

of the Copyright Treaty codifies the right of

efforts of IP harmonization by the two

Court held that perpetual copyrights (which

distribution, granting authors of such works

—————————————————

occupy the same metaphysical framework

“exclusive right of authorizing the making

as “moral rights”) do not exist in the United

transfer of ownership.” That right was

Despite the purely statutory basis of copyright passage, the first-sale doctrine was initially judicially created.

limited, however, as

—————————————————

initially judicially created.93 In Bobbs-Merrill

[n]othing in [the] Treaty shall affect

leading copyright treaties of the modern

Co. v. Straus, the copyright owner of a book

the freedom of [its signatories] to

era, as well as the legal obligations

sued the bookseller for selling copies of

determine the conditions, if any,

imposed by each of them. With these

appellant’s book below the retail price of

under which the exhaustion of the right

understandings in mind, we may now

one dollar.94 The appellant had attempted

in paragraph (1) applies after the first

begin to review the copyright regimes.

to restrict resale of the book by printing

sale or other transfer of ownership

—————————————————

on the copyright page, “[t]he price of this

available to the public of the original and copies of their works through sale or other 84

States.92 Despite the purely statutory basis of copyright passage, the first-sale doctrine was

of the original or a copy of the

IV. The United States

work with the authorization of

————————————————

licensed to sell it at a less price, and a sale at

the author.

“Congress, by the [Copyright Act] of 1790, instead

a less price will be treated as an infringement

Thus the Treaty left the door wide open

of sanctioning an existing perpetual right in an

of the copyright.”95 The respondents then

for the signatories to legislate their own

author in his works, created the right, secured for a

sold the book for eighty-nine cents.96 In

limitations to the rights of authors via

limited time, by the provisions of that law.”

their ruling for the respondents, the Court

the first-sale doctrine. The effects of this failure to harmonize different regimes’

—Wheaton v. Peters, 33 U.S. (8 Pet.) 591, 592 (1834).

The first-sale doctrine, however, was not

approached the question as one of statutory construction,97 ultimately concluding:

approaches to the doctrine would be most fully manifested in July 2012.

book at retail is one dollar net. No dealer is

[i]n our view the copyright statutes, A. INCEPTION OF THE FIRST-SALE DOCTRINE

while protecting the owner of the copyright in his right to multiply

the only limitation on the right of distribution

Protection of IP has been a concern of

and sell his production, do not

present in the WIPO Copyright Treaty. In

the American government since its inception.

create the right to impose, by

what this author calls the “attendant physical

Among its other grants of power to the

notice, such as is disclosed in this

media” doctrine, the treaty restricts the

United States Congress, the U.S. Constitution

case, a limitation at which the book

Currents Winter 2013

shall be sold at retail by future

the Code annotations to that section note

transmissions of copyrighted works. 106

purchasers, with whom there is no

that “[a]cquisition of an object embodying

Congress chose not to act on the bill, “based

privity of contract.

a copyrighted work by rental, lease, loan, or

on the evidence before it at that time.”107

Restated, the copyright holder’s exclusive

bailment carries with it no privilege to dispose

Instead, Congress introduced what

right to distribute (“multiply and sell”)

of the copy under section 109(a).”102 The

was to become a joint study conducted

his work does not extend to secondary

language and statutory text of the first-

by the United States Copyright Office

acquirers (“. . . do[es] not create the right to

sale doctrine clearly notes that Congress

and the National Telecommunications &

impose . . . a limitation . . . [on] subsequent

considered and specifically excluded applying

Information Administration (NTIA).108 The

purchasers”).99

licenses to the first-sale doctrine.

stated focus of the study was an evaluation

of “the impact of [the DMCA] and the

Some observers may be tempted to argue C. THE DIGITAL MILLENNIUM COPYRIGHT ACT

development of electronic commerce on

the copyright springs from a natural right

In response to the new obligations

title 17 [concerning the first-sale doctrine

understanding. However, the Court’s ruling

imposed by the WIPO Copyright Treaty, the

and a limited right to reproduce computer

reflects an attempt to limit the reach of the

United States Congress passed the Digital

programs], and the relationship between

Millennium Copyright Act (DMCA).103 The

existing and emerging technology on the

anything, under this view, the holding in

DMCA was “minimalist” in its approach,

operation of those provisions [of the

Bobbs-Merrill further limited the rights of the

because it was drafted to enforce obligations

DMCA].”109 In a moment of preemption

not already codified elsewhere in the United

over the study’s findings, the House Manager

the statutory text, the true spring from which

States Code;104 thus, the codification of

also stated:

the first-sale doctrine remained under the

The first sale doctrine does not

readily apply in the digital networked

that the judicial creation of the first-sale doctrine in the United States suggests that

B. THE COPYRIGHT ACT OF 1976

One year after the Bobbs-Merrill decision, the United States Congress codified the first-sale doctrine in the United States Code.100 That section underwent numerous changes to its current revision in the Copyright Act of 1976. The current Section 109(a) of that Act recites: [Despite the exclusive right of distribution], the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.101 Underscoring the “owner” requirement,

The existing codification, however, brought

environment because the owner of

about problems. Soon after passage, segments

a particular digital copy usually

—————————————————

does not sell or otherwise dispose

The DMCA was “minimalist” in its approach, because it was drafted to enforce obligations not already codified elsewhere in the United States Code. . .

of the possession of that copy. Rather, ‘disposition’ of a digital copy by its owner normally entails reproduction and transmission of that reproduction to another

—————————————————

person. The original copy may

of the public and members of Congress

then be retained or destroyed. The

expressed concern about the continued

appropriate application of this

application of the first-sale doctrine to the

doctrine to the digital environment

newly minted DMCA, 105 particularly to

merits further evaluation and this

sales of works lacking attendant physical

section therefore calls for such an

media. In the United States House of

evaluation and report.110

Representatives, Representatives Rick

In essence, the House Manager articulated

Boucher and Tom Campbell introduced

the concern, prevalent at that time, that

a bill that would have specifically applied

subsequent acquirers are not acquiring the

the first-sale doctrine to digital-only

original program itself, which would then

Currents Winter 2013

the operation of sections 109 and 117 of

cease to be possessed by the seller. Stated

a sale. In F.B.T. Productions, LLC v. Aftermath

its application to software licenses.119 Such a

differently, the computer program could

Records, the Ninth Circuit questioned whether

ruling only reinforces the distinction between

not be truly alienated by the original owner.

a contractual arrangement between the

license transfers and ownership transfers

Rather, subsequent acquirers would acquire

rapper Eminem and his record company

by its strong protection of the distribution

only a copy of the program, permitting the

constituted a sale or licensing agreement.114

rights of the copyright holder.

seller to retain his copy as well.

In particular, the agreement concerned

To review, the United States' copyright

the payment scheme for files purchased

regime is drawn from and largely limited

online—i.e., for files lacking attendant

by statutory authority, flowing from the

physical media.

The payment amount

U.S. Constitution into Title 17 of the

depended on whether the transmission

United States Code. The WIPO Copyright

of the files was by licensure or sale. 116

Treaty attempted to address the 21st century

The court ultimately held that the original

contract was controlling and unambiguous,

imprint on the Digital Millennium Copyright

—————————————————

Act—an act that did not realign copyright

The WIPO Copyright Treaty attempted to address the 21st century copyright challenges and nominally left its imprint on the Digital Millennium Copyright Act—an act that did not realign copyright jurisprudence behind the WIPO Copyright Treaty.

jurisprudence behind the WIPO Copyright

—————————————————

changing. The way we consume and enjoy creative

and that by those terms, the transactions in

works—music, movies, games—is changing. And,

question ought to be considered licenses.

if we want to keep the right balance, the legal

Those analyses, though, typically find

framework has to respond.”

D. SUBSEQUENT CASE LAW

To date, the Supreme Court has not explicitly addressed whether and how software licenses without an attendant physical media might interact with the first-sale doctrine; the Court has, however, idly speculated on it.111 In a surprisingly poignant line of dicta, the Court stated in Quality King Distribs. v. L’Anza Research Int’l that “because the protection afforded by [the statutory codification of the first-sale doctrine] is available only to the ‘owner’ of a lawfully made copy (or someone authorized by the owner), the first sale doctrine would not provide a defense to a § 602(a) action [concerning copyright infringement by importing gray market goods] against any non-owner such as a bailee [or] a licensee.”112 Such a holding is largely in line with the general attitude of U.S. law that title and licenses are on parallel tracks that do not intersect with, nor apply to, one another. Subsequent decisions in the circuit courts that have addressed the question of applicability of the first-sale doctrine to software licensing have used Quality King’s dicta to answer that question in the negative.113 The Supreme Court then denied certiorari to review those decisions, lending tacit approval to using and following the dicta of Quality King. A few jurisdictions have attempted to analyze the “substance” of a licensing agreement to determine whether it is actually

115

117

the contractual elements of the licensing agreement controlling and dispositive of

Treaty. Next, this article will examine the effects of the World Copyright Treaty on the other great producer of copyrighted works: the European Union. —————————————————

V. The European Union

———————————————— “Technology is changing. Business models are

—Neelie Kroes, Vice-President, European Union Commission

the issue in finding such transfers licenses.

Contrar y to the United States’ IP

Even without the dicta from Quality King,

experience, the copyright regime of the

the different circuit courts have been very

European Union is drawn from a theory

consistent in their refusal to pair licensing

of natural right that the interest of a work’s

with the first-sale doctrine. The Ninth

creator does not, and indeed cannot, truly

Circuit has explicitly ruled that the use of

ever terminate. Trying to identify major

a software license beyond its scope would

infringe the owner’s copyright—that is, that

Union as a whole (instead of as individual

the first sale doctrine would not prohibit

countries) might sound like generalizing at

the copyright holder to assert his an interest

first blush. However, commentators have

in subsequent use.

That train of thought

noted that in the 1980s the EU revamped

had first emerged in the 1970s, long before

their member’s copyright regimes to align

118

Currents Winter 2013

more closely for purely economic reasons,

of software transmission at that time—by

his consent exhausts the right to

in a process some call “europeanification”

floppy disk. Thus, the directive contemplated,

control resale of that object in the

[sic].

That newer, more singular body

while not allowing outright, that the right

Community.132

of law is what will be addressed in this

of distribution may apply to computer

Interestingly, the European Parliament

article. Important to note is recital 29 in

programs lacking attendant physical media.

had the foresight to restrict the right of

the Information Society Directive, which

Notably, the directive introduced the

distribution, and the first-sale doctrine,

specifically excludes online-only services

European Communities to the idea of the

to those works incorporated in a tangible

from the first-sale doctrine.

first-sale doctrine. The directive recited:

article. This restriction to only tangible

“The first sale in the Community of a copy

media is reinforced by paragraph 29, where

of a program by the right-holder or with his

Parliament notes and dismisses the potential

consent shall exhaust the distribution right

application of the new first-sale doctrine

—————————————————

to online-only software and services. 133

“License-versus-ownership” came to a head in the European Union with the landmark ruling of UsedSoft v. Oracle, a case that began as a marketing dispute in Germany.

In a bizarre contradiction to UsedSoft v.

120

121

A. DIRECTIVES

The primary legislative tool of the European Parliament is a directive. Directives are legislative acts that “lay down certain end results that must be achieved by every Member State.” 122 The means of accomplishing those tasks are left to the individual states. 123 They are frequently used to harmonize differing national laws, while giving the individual nations “room to manoeuvre” (sic) in their implementation.124 Directives are “particularly common in matters affecting the operation of [the transEuropean] market.”125 Treaty obligations affecting the individual member states are often promulgated through codification in directives passed by the European Parliament. The first directive addressing computer programs was Directive 91/250, passed while the computer age was still in its infancy in 1991.126 The directive also drew on Europe’s international obligations regarding copyright, which at that time, consisted only of the Berne Convention; the directive identified “computer programs” as “literary works within the meaning of the Berne Convention[].”

127

However, it defined

computer programs as “programs in any form, including those which are incorporated into hardware;”128 presumably, “hardware” may also include the predominant mode

and unambiguously proclaims that “[t] he question of exhaustion [of a copyright holder’s right to distribution] does not arise in the case of services and on-line (sic) services in particular.”134

—————————————————

Eight years later, the European Parliament

within the Community of that copy, with

passed Directive 2009/24, which expanded

the exception of the right to control further

protection of computer programs.135 Article

rental[.]”129

10 of the directive repealed the earlier

A second directive, passed in May 2001,

Directive 91/250, while incorporating the

was subtitled “on the harmonisation (sic) of

whole text into other articles of Directive

certain aspects of copyright and related rights

2009/24.136 This unorthodox re-legislation

in the information society.”130 Paragraph 15

was to have a (probably) unintended tolling

of the directive recited that it was passed

effect in cases to come.

in part to “implement a number of [] new international obligations” imposed by the WIPO Copyright Treaty, passed five years earlier in 1996.131 Among those obligations was another codification of the largely nonEuropean first-sale doctrine: Copyright protection under this Directive includes the exclusive right to control distribution of the work incorporated in a tangible article. The first sale in the Community of the original of a work or copies thereof by the rightholder or with 63

Currents Winter 2013

Oracle, the European Parliament clearly

B. ORACLE V. USEDSOFT

“License-versus-ownership” came to a head in the European Union with the landmark ruling of UsedSoft v. Oracle, a case that began as a marketing dispute in Germany.137 Oracle, a business software manufacturer, distributed its products via group licenses that would be purchased by other companies.138 The licenses in question could be used by up to twenty-five employees. 139 The companies would then distribute the licenses to the individual employees, who could

use them to download Oracle’s business

ECJ’s interpretation of German law became

the application of the first-sale doctrine of

software directly from Oracle’s website.

140

an interpretation of European Union law,

Directive 2009/24.154

The licenses also included a maintenance

to be applied to every nation party to the

agreement, which allowed licensees to

European Parliament.

The Court selected Doctrine 2009/24 as the applicable law over Directive 2001/29 by

download patches or software upgrades

In its determination, the ECJ first asked

relying on the doctrine of lex specialis.155 It held

for a predetermined period of time. 141

whether the transfer of the computer

Directive 2001/29 “leave[s] intact and . . . in

Those licensing agreements contained

program from Oracle to its initial purchasers

no way affect[s] existing . . . provisions [of

the following language: “[w]ith the payment

constituted a “first sale” within the meaning

European Union law] relating to . . . the legal

for services you receive, exclusively for your

of Article 4(2) of Directive 2009/24.

149

protection of computer programs’ conferred

internal business purposes, for an unlimited

Citing the need for uniform commercial law

by Directive 91/250, which was subsequently

period a non-exclusive non-transferable user

across the European Union, the ECJ chose

codified by Directive 2009/24.”156 Thus, the

right free of charge for everything that Oracle

to define “sale” autonomously, divorced

provisions governing the first-sale doctrine

develops and makes available to you on the

from any regional concept of the word.

150

of Directive 91/250—passed five years

basis of this agreement.”

The licensing

It defined the noun “sale” by “a commonly

before the WIPO Copyright Treaty—end up

agreement clearly and unambiguously

accepted definition” (without any formal

being dispositive in a case determined sixteen

declared itself a license, and thus limited

citation) as “an agreement by which a person,

years after the WIPO Copyright Treaty.

the rights purchasers would receive at

—————————————————

Moreover, Directive 2009/24 specifically

purchase—not rights of ownership.

refrains from mentioning the boundaries

licenses were good for twenty-five users, a

In its determination, the ECJ first asked whether the transfer of the computer program from Oracle to its initial purchasers constituted a “first sale” within the meaning of Article 4(2) of Directive 2009/24.

company of twenty might sell UsedSoft the

—————————————————

new discussions for the application of

part of the license covering the remaining

in return for payment, transfers to another

five. Oracle discovered UsedSoft’s business

person his rights of ownership in an item of tangible

chose to circumvent all of that for a rule

model when UsedSoft advertised an “Oracle

or intangible property belonging to him.”

151

articulated when the primary mode of

Turning to the transactions in the

software transmission was the floppy disk.

142

UsedSoft “bought and resold” used software licenses.

143

Companies who

purchased Oracle’s software licenses would often sell the unused portion of the license to UsedSoft.144 For example, because all the

Special Offer,” and after a cease-and-desist letter was ineffective, Oracle filed suit.

145

instant case, the ECJ determined that “the

of the first-sale doctrine, while Directive 2001/29 specifically constrains the doctrine to only those computer works existing in a tangible media.157 Stated more succinctly, even though the WIPO Copyright Treaty imparted new standards and prompted

The Court ultimately held:

Although the case was originally filed in

downloading of a copy of a computer

[I]n the event of the resale of a

German court,146 the German statute (UrhG,

program and the conclusion of a user

user licence [sic] entailing the resale

¶ 69d(1)) is a word-for-word transposition of

license agreement for that copy form an

of a copy of a computer program

Article 5(1) of Directive 2009/24/EC. For

indivisible whole,” (i.e., that neither has

downloaded from the copyright

a definitive ruling, the Bundesgerichtshof

value except in light of the other), and must

holder’s website, . . . the second

(Federal Court of Justice), Germany’s court

be examined as a single unit to determine

acquirer of the licence [sic], as well as

of last resort certified the question of its

“its legal classification.”152 The unity of

any subsequent acquirer of it, will

interpretation to the ECJ.148 By definitely

the program plus right-to-use, in return

be able to rely on the exhaustion of the

answering the question, of course, the

for “remuneration corresponding to the

distribution right under Article 4(2)

ECJ had to give an exact interpretation of

economic value” of that unity, constitutes

of [Directive 2009/24].158

Directive 2009/24/EC; and by doing so, the

a “sale” as earlier defined,153 thus triggering

147

An interesting element of the final holding

Currents Winter 2013

is that the ECJ does not attempt a substantial

manufacturers draft licenses, 164 this is

exclusively to fixed copies that can be put

analysis of the license to find it a sale.

merely speculation at this point, and the

into circulation as tangible objects.” 167

Rather, it explicitly introduces the practice

full implications are yet to be known.165 The

That principle was enshrined in Directive

of licensing into the right of distribution

European Union’s copyright regime draws

2001/29.168 This appears to be the codification

and the first-sale doctrines—doctrines that

its roots from a natural law understanding

of a simple principle, but in application it is

everywhere else in the world may only apply

of authorship, one that statutes before or

much more complex.

to copyright owners, not licensees.

since have not been able to modify. The

When it came time to apply that rule of

A corollar y effect of the r uling,

strictures of the WIPO Copyright Treaty

law, the ECJ employed the choice-of-law

unarticulated by the ECJ, is the prospect

were ignored almost summarily by an ancient

provision of lex specialis,169 which allowed

that licensing agreement clauses that attempt

Roman maxim more appropriate for Pliny

the Court to evade the Directive passed

to restrict subsequent sales (as the Oracle

the Younger than UsedSoft GmbH.

under the WIPO Copyright Treaty and

agreement did) are void as a matter of law.

—————————————————

apply the Directive that imported law from

159

The ECJ alluded briefly to the tool of voiding

VI. Analysis

1991.170 The former directive specifically

those contractual measures as an important

————————————————

excluded computer programs without

measure to “prevent the circumvention of

S o f a r, t h i s a r t i c l e h a s r e v i e w e d

attendant physical media from the right of

the exhaustion principle” without much

the effective copyright treaties of the

distribution,171 while the latter did not address

further detail.160 The question still remains

Ber ne Convention and the WIPO,

that category of computer program at all.172

as to what the final end result will be.

—————————————————

Thus the ECJ was able to issue a holding exactly contrary to the obligations incurred

software company and downloads software

Generally speaking, European copyright law has a strong foundation of natural rights.

for its use is deemed to have “bought” it.161

—————————————————,

The consequence of this is that the purchaser

their attempted codification in the Digital

natural rights. As mentioned in Part II(A),

“owns” it. The software manufacturer loses

Millennium Copyright Act and Directives

Europe has a strong natural right foundation

its say in how the owner uses it, with the

2001/29 and 2009/24, and the case law

for its copyright regime.173

owner also being entitled to any subsequent

of each regime that has yielded holdings

What was intended to be codification of the

software support, including patches.162 Stated

perpendicular to each other on the resale

treaty into Directive 2001/29 and 2009/24

differently, the software manufacturer must

of computer programs, a topic that should

instead left loopholes that allowed for the

continue to work on and provide updates

never have been held so contrarily to

insertion of natural rights. In the largest case

to second- or third-hand buyers of their

sister signatories. Next, this article will

applying the brave new world of copyright

computer programs. Both the loss of the

explore the reasons behind these holdings.

law, Directive 2001/24, which was passed

In the European Union, one who enters into a perpetual software license with a

complete. The latter may sell it to whomever he wishes, to the complete derogation of the former.

163

happened? Generally speaking, European

pursuant to new international obligations

software manufacturer’s interest and the vesting of the software owner’s interest are

by the WIPO Copyright Treaty. What

A. EUROPEAN COPYRIGHT LAW IS BASED ON NATURAL RIGHTS

conferred by the WIPO Copyright Treaty,

As a brief review, the ultimate aim of the

2009/24, which re-codifies EU law passed

WIPO Copyright Treaty was protection of

was directly bypassed in favor of Directive years before the WIPO Copyright Treaty.

As of the date of this writing, few

computer programs, affording them the

The definition chosen of the word “sale”

commentators have written about the

traditional protections of literary works.166

itself reflects a hidden bias of the ECJ.

short- or long-term effects of the Oracle

Article 8 of that treaty notes (without

Part II notes that the right of distribution

ruling. While the short term is likely to

reservation) that “copies” and “originals

(which involves a transfer of property) and

see a restructuring of the way software

and copies” of computer programs “refer

licensing (which also involves a transfer of

Currents Winter 2013

property) both transfer ownership rights

“owner” as one who has received a valid

contends are those regimes based on

to the transferee; the right of distribution

transfer of title.

Likewise, the concept

statutory rights, and those regimes based

transfers all ownership rights, while licensing

of ownership transfer is interpreted very

on natural rights. Because of that failure,

transfers a more limited bundle of rights.

literally, generally without resort to an analysis

it is inevitable that conflict should exist

Part V notes that the definition of “sale”

looking at the substance rather than form of

regarding the copyright regimes that express

used by in the Oracle decision was as “an

a work’s distribution.179 When the Ninth

and embody those differing fundamental

agreement by which a person, in return for

Circuit even considered such an analysis, the

theories.

payment, transfers to another person his

Court ultimately held that the contract was

Prudent readers will recall that Article 6(2)

rights of ownership in an item of tangible

entirely controlling as to the substance of

of the WIPO Copyright Treaty purposely

or intangible property belonging to him.” By

—————————————————

leaves determination of the conditions of

the Court’s own reasoning and very old and

the first-sale doctrine to its signatories.181

“substantially sales,” but merely maintained

The end result is that copyright law is subject to greater restriction and narrower interpretation in the United States than the European Union.

their characterizations as licenses.

—————————————————

many. Such an intentional lacuna practically

the agreement.180 Such substantial analysis

begs individual nations to preserve their

would ultimately be anathema in a U.S. court.

existing interpretations of the first-sale

The end result is that copyright law is

doctrine, further distinguishing regimes from

subject to greater restriction and narrower

each other when they should be more clearly

interpretation in the United States than

reconciled.

expressly statutorily created by article 1,

the Eropean Union. This is not, however,

Moreover, the devastating irony of the

section 8 of the U.S. Constitution.174 The

to suggest that the United States has

WIPO Copyright Treaty is that by ordering

Supreme Court has ruled that the clause

implemented the strictures of the WIPO

that individual nations implement the

did not exist prior to its codification.

175

“new” international obligations, countries

the

faithfully than the European Union. As

essentially reaffirmed and re-codified their

implication there is that nobody may extend

noted earlier, the DMCA did nothing to

existing copyright statutes. However, because

rights beyond those authorized in the U.S.

meaningfully reshape U.S. law to codify the

of the so-called “new” statutes, courts of the

Constitution. United States courts have

U.S.’s new obligations. If the U.S. has done

EU and U.S. were prompted to reexamine

consistently found that copyright interests

anything meaningful, then it has moved on

them and rearticulate existing doctrine. The

only apply to owners of works, and that

the side of reluctance in the expansion of its

so-called “minimalist” approach of the

licensing agreements are permissible.

statutorily-created copyright regime.

DMCA failed to address software licensing at

well-settled law, a license cannot be a sale. But, as the Court tried to insist, the closing of Oracle did not identify the transactions as

B. THE UNITED STATES' COPYRIGHT LAW IS BASED ON STATUTORILY-CREATED RIGHTS

The theory animating it is statutory;

176

177

178

rights cannot exist in American natural law; hence the quick codification of the first-sale doctrine soon after its judicial creation. What this means for U.S. copyright law

It states conditions triggering the doctrine completely within the discretion of the individual nations, 182 deferring to the individual what should be mandated for the

all; and the approach of Directive 2009/24, C. THE WIPO COPYRIGHT TREATY CANNOT RECONCILE THESE OPPOSING LEGISLATIVE GOALS

while actually addressing how the firstsale doctrine may intersect with software licensing, was circumvented by Directive

is that courts are impotent to assign greater

The WIPO Copyright Treaty preamble

identifies the broad and vague goal of

The Supreme Court and circuit court cases

“harmonization” of international copyright

mentioned above were more or less restricted

regimes. However, it fails to define what

to a very narrow and specific definition of

is being harmonized, which this article

2001/29, passed years before the WIPO ever sat for the WIPO Copyright Treaty. D. THE WIPO SHOULD AMEND THE WIPO COPYRIGHT TREATY TO HARMONIZE EXISTING COPYRIGHT REGIMES BEFORE

Currents Winter 2013

ADDRESSING NEW CHALLENGES

It is simply inadequate for the WIPO Copyright Treaty to hollowly recite that it reflects consensus and a broad understanding of the IP challenges of the 21st century. Implementation of the treaty has failed to yield consistent results regarding the first big challenge that has come before it. Harmonizing copyright regimes is a lofty goal, and one worthy of pursuit. Litigation in the hundreds of millions of dollars is commonplace, in national courts and before international tribunals or other bodies. For a true reconciliation, however, there must be a substantial effort of accomplishing it rather than mere instruction. For harmonization to occur there must be reconciliation between

that sales and licensing agreements are

conference of nations looking to predict over

entirely different bodies of law that should

the next several decades. The law should be

not cross-pollinate ideas from each other.

flexible in its strictures, always ready to adopt,

The inappropriate mixing of ideas between

yet strong and well defined in its underlying

licensing and selling only leads to contrary

theories and motivating goals. Only when

holdings across regimes. Moreover, the

sister copyright regimes share the same broad

addition should identify transmission of

outlooks will they determine the narrower

software without attendant physical media

issues in fashions that align.

as either sales or licenses, so that there will

—————————————————

be uniformity in the treatment of those

VII. Conclusion

transmissions across copyright regimes.

————————————————

Which one is chosen is not as important as

Although the WIPO Copyright Treaty was

only one being chosen.

intended to prompt its signatories to pass

A crucial lesson of UsedSoft v. Oracle is

statutes in compliance with their international

that the digital environment is a rapidly-

obligations, the underlying national public

evolving landscape in upheaval, difficult to

policies in fact governed what was codified

predict moment-to-moment—much less in a

in the United States' and European Union’s

the goals and fundamental theories of different copyright regimes. The WIPO Copyright Treaty should not be concerned with offending its parties, or prospective parties, by making difficult choices. By trying to please everyone, the treaty helps no one. Before the WIPO Copyright Treaty can address new IP challenges, it must surmount old ones. Simply instructing different copyright regimes to harmonize is a fool’s errand. There must be meaningful adaptations of U.S. and EU law, either by adopting each other’s laws, or to a new model proposed by the WIPO. Otherwise, there will simply be new cases applying the same law—and the longer preserved the case law, the more firmly it will be entrenched in each regime. For true change on a small scale—that is, on the issues—there must be true change on the large scale, that is, by legislation. This article proposes a new addition to the WIPO Copyright Treaty that recognizes 67

Currents Winter 2013

respective statutes. A more expansive and

in the jurisdictional approaches to the

ensure what is legal to “buy” in the United

unarticulated natural right in the EU and a

intersection of the first-sale doctrine and

States is legal to “buy” in the Eropean Union.

narrower statutory right in the U.S. dictated

computer licenses. The WIPO Copyright

those respective countries’ statutes—not

Treaty cannot merely hope for harmonization

the hollowly mandated “harmonization”

to exist; it needs some sort of interpretive

of the WIPO Copyright Treaty. This

guidance, or identification and endorsement

fundamental difference is contextualized

of the underlying legal theories, to truly

End Notes

* J.D., 2014, South Texas College of Law, Notes & Articles Editor for Currents: International Trade Law Journal. The author wishes to express his sincere gratitude to his fiancée, Peggy K. Rensberger. 1. Case C-128/11, UsedSoft GmbH v. Oracle Int’l. Corp., 2012 EURLex CELEX 62011CJ0128, ¶ 88 (July 3, 2012). 2. For the U.S., see U.S. Copyright O ffice , DMCA S ection 104 Report: A Report of the Register of Copyrights Pursuant to §104 o f t h e D i g i ta l M i l l e n n i um Copyright Act 8–9 (Aug. 2001) [hereinafter DMCA S e c t i o n 104 R eport ]; for the EU, see Directive 2001/29/EC, of the European Parliament and of the Council of 22 May 2001 on the Harmonisation of Certain Aspects of Copyright and Related Rights in the Information Society, ¶ 15, 2001 O.J. (L 167) 10, 11 [hereinafter Directive 2001/29]. 3. See generally Directive 2001/29. 4. Id. 5. See infra Part II(C). 6. See infra Part IV(C). 7. Id. 8. See infra Parts IV, V. 9. See infra Part III(A). 10. See infra Part III(B). 11. Jennifer Baker, EU court ruling on software resale could shake up apps stores, Tech World (July 10, 2012, 11:32 AM), http://www.techworld. com.au/article/430090/eu_court_ ruling_software_resale_could_ shake_up_apps_stores/. 12. Id. In a cursory review of the ruling the same month it was issued, Squire Sanders determined that Usedsoft v. Oracle could only be applied to perpetual licenses; perpetual licensors could theoretically avoid the ruling’s strictures by switching to a term-license model. Does Oracle v. UsedSoft End Restrictions on Reselling Software Licenses?, Squire Sanders (July 2012), http://www.

squiresanders.com/does-oraclev-usedsoft-end-restrictions-onreselling-software-licenses/. 13. Jon O. Newman, New Lyrics for an Old Melody: The Idea/Expression Dichotomy in the Computer Age, 17 Cardozo Arts & Ent. L. J. 691, 692 (1999). 14. Black’s Law Dictionary 1437 (9th ed. 2009). This article will track the language for the definition of “natural right” (“[a] right that is conceived as part of natural law and is therefore thought to exist independently of rights created by government or society”) but will use the term “statutory right” instead of “legal right” (defined as “[a] right created or recognized by law”) to track the language used in Wheaten v. Peters. See 33 U.S. (8 Pet.) 591, 592 (1834). 15. Maurizio Borghi, Owning Form, S haring C ontent : N atural Right Copyright and the Digital E nvironment 205, reprinted in New Directions in Copyright Law, Vol. 5 (Fiona Macmillan ed., 2007). 16. Irma Sirvinskaite, Toward Copyright “Europeanification”: European Union Moral Rights, 3 J. Int’l Media & Ent. L. 263, 264 (2011). 17. Michael B. Reddy, The Droit De Suite: Why American Fine Artists Should Have the Right to a Resale Royalty, 15 Loy. L.A. Ent. L. Rev. 509, 509–10 (1995). 18. Directive 2001/84/EC, of the European Parliament and of the Council of 27 September 2001 on the Resale Right for the Benefit of the Author of an Original Work, art. 1(1), 2001 O.J. (L 272) 32, 34 [hereinafter Directive 2001/84/ EC]. 19. See also id. at 32–33, ¶¶ 1, 3, & 17. 20. See, e.g., Charter of Fundamental Rights of the European Union, arts. 11 & 17(1) & (2), 2000 O.J. (C 364) 1, 11–12. Article 11 provides “. . . freedom to hold opinions and

to receive and impart information and ideas without interference by public authority and regardless of frontiers.” Id. at 11, art. 11. Article 17 states “[i]ntellectual property shall be protected.” Id. at 12, art. 17(2). But, “. . . [t]he use of property may be regulated by law in so far as is necessary for the general interest.” Id. at 12, art. 17(2). 21. See generally Charter of Fundamental Rights of the European Union, supra note 20. 22. Black’s Law, supra note 14. 23. Id. 24. Anja Lindroos, Addressing Norm Conflicts in a Fragmented Legal System: The Doctrine of Lex Specialis, 74 Nordic J. of Int’l L. 27, 35 (2005). 25. Id. at 36. 26. Id. at 37–38. 27. Id. at 40 (emphasis added). 28. A ndré L ucas , I nternational Exhaustion, reprinted in Global C opyright : T hree H undred Years since the Statute of Anne, from 1709 to C yberspace 305 (Lionel Bently et al. eds., 2010). 29. Id. 30. Id. 31. Understanding Copyright and Related Rights, W o r l d I n t e l l e c t ua l P r o p . O r g . , h t t p : / / w w w. wipo.int/freepublications/en/ intproperty/909/wipo_pub_909. html (last visited Nov. 15, 2013). 32. United States Copyright Office: A Brief Introduction and History, U.S. Copyright Office, http://www. copyright.gov/circs/circ1a.html (last visited Nov. 15, 2013). 33. Understanding Copyright and Related Rights, supra note 31. Before movable type, some commentators have argued that this right didn’t exist at all, as copying a work was so inconvenient and expensive as to not be economically feasible. It took the printing press to craft the right of reproduction into something modern eyes might recognize. J u l i e n H o f ma n ,

Introducing Copyright: A Plain Language Guide to Copyright in the 21 st C entury 1 (2009), available at http://www.col.org/Site C o l l e c t i o n D o c u m e n t s / Introducing_Copyright_online_ edition.pdf. 34. Understanding Copyright and Related Rights, supra note 31. 35. Id. 36. Id. 37. Lucas, supra note 28, at 306. 38. Id. 39. Id. 40. Id. 41. Nancy Kranich, The Information C o mm o n s : A P u b l i c P o l i c y Report 7 (Marjorie Heins et al., eds., 2004), available at http://www. fepproject.org/policyreports/ InformationCommons.pdf. 42. Id. 43. Id. 44. See infra Part VI. 45. See, e.g., Directive 2009/24/EC, of the European Parliament and of the Council of 23 April 2009, on the Legal Protection of Computer Programs, ¶ 2, 2009 O.J. (L 111) 16, 16 [hereinafter Directive 2009/24/EC] (“The d e ve l o p m e n t o f c o m p u t e r programs requires the investment of considerable human, technical and financial resources while computer programs can be copied at a fraction of the cost needed to develop them independently.”). 46. John P. Uetz, Same Song and Dance: F.B.T. Productions, LLC v. Aftermath Records and the Role of Licenses in the Digital Age of Copyright Law, 57 Vill. L. Rev. 177, 189 (2012). 47. Understanding Copyright and Related Rights, supra note 31. 48. Id. 49. Id. 50. Newman, supra note 13. 51. Elizabeth I. Winston, Why Sell What You Can License? Contracting Around Statutor y Protection of

Currents Winter 2013

Intellectual Property, 14 Geo. Mason L. Rev. 93, 93 (2006). 52. Id. at 100. 53. See id. at 108. 54. Id. at 93. 55. Kranich, supra note 41, at 8. 56. Robert Lee Dickens, Finding Common Ground in the World of Electronic Contracts: The Consistency of Legal Reasoning in Clickwrap Cases, 11 Marq. Intell. Prop. L. Rev. 379, 381 (2007). 57. Kranich, supra note 41, at 8. 58. See Mihály Ficsor, The Law of C opyright and the I nternet : T h e 1996 WIPO T r e a t i e s , their Interpretation and I mplementation § 3.17 (2002) (noting that the term “right of reproduction” does not appear in the Berne Convention, but elements of it are present throughout). 59. Joseph P. Liu, Owning Digital Copies: Copyright Law and the Incidents of Copy Ownership, 42 Wm. & Mary L. Rev. 1245, 1256–57 (2013). 60. Id. 61. Id. at 1257. In 1993, however, the Ninth Circuit controversially held even this incidental copying into RAM constitutes a “reproduction” under United States copyright law. See generally MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993); Liu, supra note 59, at 1256–58. This holding was even contrary to the statute’s authors, who noted that “the definition of [‘copy’] would exclude from the concept purely evanescent or transient reproduction such as those . . . captured momentarily in the ‘memory’ of a computer.” Id. at 1259. Although the holding was eventually overturned, it reflects the sometimes-poor fit the law contorts itself into when applied to the new field of computer software. 62. See infra Part IV(D). 63. Uetz, supra note 46, at 190. 64. Id. 65. See Winston, supra note 51, at 94. 66. UsedSoft GmbH, 2012 EUR-Lex CELEX 62011CJ0128, ¶ 88. 67. Id. ¶ 32. 68. B e r n e C o nve n t i o n f o r t h e Protection of Literary and Artistic Works, at pmbl., Sept. 9, 1886, 828 U.N.T.S. 222, 1 B.D.I.E.L. 715 [hereinafter Berne Convention]. The Convention was subsequently revised in 1896, 1908, 1914, 1928, 1948, 1967, 1971, and 1979. All citations to the Berne Convention in this note are to the final 1979 revision. 69. Id. 70. Id. art. 2(1). 71. Id. art. 2(6).

72. Id. art. 9(1). 73. Berne Convention, supra note 68, art. 9(2). 74. Id. art. 20. 75. Id. 76. Id. art. 14ter(1). 77. Id. art. 14ter(2). 78. World Intellectual Proper ty Organization Copyright Treaty, at pmbl., Dec. 20, 1996, 36 I.L.M. 65 (1997) [hereinafter WCT]. 79. Id. 80. Id. 81. The Advantages of Adherence to the WIPO Copyright Treaty (WCT) and the WIPO Performances and Phonograms Treaty (WPPT), Int’l Bureau of World Intellectual Prop. Org., http://www.wipo.int/ export/sites/www/copyright/en/ activities/pdf/advantages_wct_ wppt.pdf (last visited Nov. 15, 2013). 82. WCT, supra note 78, art. 1; Berne Convention, supra note 68, art. 4 (“The works mentioned in this Article shall enjoy protection in all countries of the Union.”). 83. Id. art. 4. 84. Id. art. 6(1). 85. Id. art. 6(2) (emphasis added). 86. Id. 87. WCT, supra note 78, arts. 6 & 7. 88. Id. arts. 11, 18. 89. U.S. C onst . art. II, § 8, cl. 8. (“Copyright Clause”). 90. Wheaton v. Peters, 33 U.S. (8 Pet.) 591, 592 (1834). 91. Id. 92. Id. 93. Bobbs-Merrill Co. v. Straus, 210 U.S. 339, 343–46 (1908) (“We therefore approach the consideration of this question as a new one in this court, and one that involves the extent of the protection which is given by the copyright statutes of the United States to the owner of a copyright.”); see also DMCA Section 104 Report, supra note 2. 94. Bobbs-Merrill, 210 U.S. at 341. 95. Id. 96. Id. at 342. 97. Id. at 347–48. 98. Id. at 350. 99. Id. 100. Quality King Distribs., Inc. v. L’anza Research Int’l, Inc., 523 U.S. 135, 141–42 (1998). 101. Copyright Act of 1976, 17 U.S.C.A. §§ 106(3), 109 (West 2011). 102. H.R. R ep . N o . 94-1476, at 80 (1976) (emphasis added). 103. DMCA Section 104 Report, supra note 2, at 8–9. 104. Id. 105. Id. at 14. 106. Id. at 15. 107. Id. 108. DMCA Section 104 Report, supra note 2, at 17.

109. Id. at 17–18. 110. S ta f f o f H. C o mm . o n t h e Judiciary, 105th Cong., Sectionby-Section Analysis of H.R. 2281 as Passed by the U.S. H.R. on Aug. 4, 1998, at 24 (Comm. Print 1998) (emphasis added). 111. Quality King Distribs., Inc., 523 U.S. at 147. 112. Id. at 146–47 (emphasis added); see also Supreme Court Issues Significant Decision Regarding Importation and Sale of “Grey Market” Goods, Buchanan, Ingersoll, & Rooney PC (Mar. 22, 2013), http://www. bipc.com/supreme-court-issuessignificant-decision-regardingimportation-and-sale-of-greymarket-goods-03-21-2013/ (“Grey market goods are goods that are only authorized for sale outside of the United States, usually at lower prices than the corresponding products sold in the United States.”). 113. Vernor v. Autodesk, Inc., 621 F.3d 1102, 1107–08 (9th Cir. 2010). 114. F.B.T. Productions, LLC v. Aftermath Records, 621 F.3d 958, 965 (9th Cir. 2010). 115. Id. at 964–65. 116. Id. at 965. 117. Id. at 967. 118. Adobe Sys. Inc. v. One Stop Micro, Inc., 84 F. Supp. 2d 1086, 1092 (N.D. Cal. 2002). 119. Id. 120. Sirvinskaite, supra note 16, at 264; Neelie Kroes, Vice President, Eur. Comm’n responsible for the Digital Agenda, Speech at the 2012 Intellectual Property and Innovation Summit: Copyright and Innovation in the Creative Industries (Sept. 10, 2012). 121. Alexander Góbel, The Principle of Exhaustion and the Resale of Downloaded Software — the UsedSoft v. Oracle Case, 9 Eur. L. Rep. 226, 230 (2012), available at https:// w w w. a l e x a n d r i a . u n i s g. c h / publications/217631/L-en. 122. What Are EU Directives?, European C o mm ’ n ( J u n e 2 5 , 2 0 1 2 ) , http://ec.europa.eu/eu_law/ introduction/what_directive_ en.htm. 123. Id. 124. Id. 125. Id. 126. See Council Directive 91/250/ EEC, On the Legal Protection of Computer Programs, 1991 O.J. (L 122) 42 (EC). 127. Id. at 44, art. 1(1). 128. Id. at 42, pmbl. (emphasis added). 129. Id. art. 4(2). 130. Directive 2001/29/EC, of the European Parliament and of the Council of 22 May 2001 on the Harmonisation of Certain Aspects

of Copyright and Related Rights in the Information Society 2001 O.J. (L 167) 10 [hereinafter Directive 2001/29]. 131. Id. at 11, ¶ 15. 132. Id. at 12, ¶ 28 (emphasis added). 133. Id. at 12, ¶ 29. 134. Id. 135. Directive 2009/24/EC, supra note 45. 136. Id. 137. UsedSoft GmbH, 2012 EUR-Lex CELEX 62011CJ0128, ¶¶ 24–27. 138. Id. ¶ 21. 139. Id. ¶ 22. 140. Id. ¶ 21. 141. Id. 142. UsedSoft GmbH, 2012 EUR-Lex CELEX 62011CJ0128, ¶ 23. 143. Id. ¶ 24. 144. Id. 145. Id. ¶¶ 25, 27. 146. Id. ¶ 27. 147. UsedSoft GmbH, 2012 EUR-Lex CELEX 62011CJ0128, ¶ 29. 148. Id. ¶ 34. 149. Id. ¶¶ 40, 42. 150. Id. ¶¶ 40, 41. 151. Id. ¶ 42; see infra Part VI (providing an analysis of the Court’s definition of “sale”) (emphasis added). 152. UsedSoft GmbH, 2012 EUR-Lex CELEX 62011CH0128, ¶ 44. 153. Id. ¶¶ 45, 46. 154. Id. ¶ 51. 155. Id. 156. Id. ¶ 51. 157. Directive 2001/29, supra note 2, at 12, ¶ 28. 158. UsedSoft GmbH, 2012 EUR-Lex CELEX 62011CJ0128, ¶ 89(2) (emphasis added). 159. Góbel, supra note 121, at 231. 160. Id. at 231 161. Berry, Kathy, EU—UsedSoft v. Oracle: ECJ approves sale of ‘used’ softwar e, Linklaters (Nov. 26, 2012), http://www. linklaters.com/Publications/ Publication1403Newsletter/ TMT-News-November-2012/ Pages/EU-Used-Soft-Oracle-ECJapproves-sale-used-software.aspx. 162. Id. 163. Id. 164. Baker, supra note 11. 165. One such commentator has suggested that the decision, while a break from the “closely minded judicial path,” actually follows current trends, as downloading from the Internet as a mode of transmission is increasing, while CD-ROM sales are declining. Góbel, supra note 121, at 229, 232. 166. WCT, supra note 78, art. 4. 167. Id. art. 8 (emphasis added). 168. Directive 2001/29, supra note 2, at 12, ¶ 29. 169. Usedsoft GmbH, 2012 EUR-Lex CELEX 62011CJ0128, ¶ 51.

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170. See supra Part V. 171. Directive 2001/29/EC, supra note 2, at 12, ¶ 29. (including those computer programs without a “material medium” into “on-line [sic] services”). 172. Id. at 16, art. 4(2). 173. See supra Part II(A). 174. U.S. Const. art. II, § 8, cl. 8. 175. Wheaton, 33 U.S. at 592. 176. Black’s Law, supra note 14. 177. See supra Part IV(D). 178. See, e.g., Quality King Distribs., 523 U.S. 146–47 (providing that the protection afforded the first-sale doctrine only applies to the “owner of a lawfully made copy”). 179. F.B.T. Productions, LLC, 621 F.3d at 965. 180. Id. 181. WCT, supra note 78, art. 6(2). 182. Id.

Currents Winter 2013

Corruption in the World Bank’s Integrity Vice Presidency: Seven Years Later K E V I N

T I P TO N *

“My dream is that my staff changes their

extent, he is correct in his assessment: the

and aid from those who need it most and

orientation from thinking they are a people of power,

INT has implemented many new procedures

into the hands of the elite.6 Alternatively,

to thinking they are servants of the people.”

and rules to facilitate a steady escalation in

in developed countries, corruption can

anti-corruption efforts. Sadly, if one looks

lead to representatives who engage in

deeper than a cursory overview at the INT’s

fraud, embezzlement, and other failures in

own analysis, one would find a disease still

upholding ethical standards.7 Corruption

resting deep at the core of the institution.

acts as a catalyst, turning an organization

—————————————————

Today, the INT is certainly functioning at a

or government dedicated to serving the

In 2007, the Department of Institutional

much higher standard than in 2007, but this

interests of its people into a parasite

Integrity of the World Bank came under

standard is certainly much lower than what

that saps both money and faith from the

attack from across the globe as a result

we should, or must, demand of the premiere

people. Recognizing this, the World Bank

of corruption within the World Bank.

developmental bank in the world.

is only one entity among many countries

—Nur mahmudi, mayor of Depok, Indonesia

—————————————————

I. Introduction

Reacting to a worldwide movement against

The World Bank needs to lead the charge.

and organizations across the globe to have

corruption decades in the making, the Bank

Frank Vogl, founder of Transparency

recently ramped up the stakes in the contest

scrambled to save its international image.

International and former World Bank

against corruption. If one is to conceptualize

At the behest of an independent panel, the

employee, wrote recently that the World

why and how the World Bank must act, then

Department was immediately promoted

Bank has been more “a part of the problem

understanding the pressure on every level of

to the level of Integrity Vice Presidency

than a contributor to the solution.”3 He

society to combat corruption is important.

(“INT”). The INT responded with sweeping

recalls an economist who called the World

changes to both external and internal

Bank the Vatican of development aid: “its

investigation procedures in an attempt to

rulings are dominant, its authority enormous,

retain, or perhaps regain, the respect of

and its decisions rarely if ever questioned by

the international community. Rightfully so,

professions in the international official aid

for how can the Bank be trusted when the

community.”4 The World Bank must step out

organization endowed with the responsibility

of the darkness today, and once again stand

of protecting the virtue of the Bank is itself

as a guiding light for all to follow.

corrupt?

—————————————————

Leonard McCarthy, extolled the progress

II. Corruption Worldwide and at the World Bank

made since then in the 2012 fiscal report.2

—————————————————

The report appears to show a fundamentally

Corruption is the abuse of entrusted

new INT wholly dedicated to, and successful

power for private gain. 5 In developing

in, the pursuit of anti-corruption. To an

countries, corruption steers resources

Six years later, the head of the INT,

A. THE WORLD’S EFFORTS

For many years, the United States was the only nation fighting corruption via the Foreign Corrupt Practices Act, which penalized U.S. citizens for transnational bribery of foreign officials.8 Recently, the World Bank announced it has received and substantiated many referrals thanks to the statute—two referrals alone allowed the World Bank to eliminate fraud in contracts worth over $41.5 million.9 In today’s world, the U.S. is no longer alone—individual countries battle corruption

Currents Winter 2013

every day. In 2006, Britain attacked corruption

especially prolific organization that places a

banks to ensure effective sanctions for

directly by creating a £100 million fund to

high priority on anti-corruption. Not only

disbarred firms. 25 In a public message,

provide aid to victims of corruption in

has the UN adopted a Convention dedicated

Leonard McCarthy said that the INT was “in

developing nations.

The fund aids the

specifically to corruption, it has even

the driver’s seat,” espousing anti-corruption

media, parliamentarians, and trade unions in

established December 9th as International

as a central focus of the Bank.26

developing nations in holding their leaders

Anti-Corruption Day.19

—————————————————

accountable. Lending his support for the 11

fund, Britain’s international development secretary Hilary Benn cited corruption as one ailment to overcome in helping nations develop: “Time is running out and if we miss this opportunity we will give up for the moment probably the single most important step we can give to developing countries, which is the chance to earn and trade their way out of poverty.”12 South Korea’s Chairman for anti-corruption, Lee Jae-Oh, praised his country’s efforts in this fight. South Korea requires any public 13

organization that receives even the smallest amount of government funds to subject itself to an integrity test.14 Lee noted that the international community values a country based not on its wealth, but on its anticorruption efforts.

World organizations are committed to anti-corruption. At the 2012 G20 Summit, the participating leaders agreed corruption inhibits economic growth, attacks integrity of trade, sabotages fair trade, warps resource allocation, and undermines public trust and the law.16 The leaders urged all relevant stakeholders to play an active role in fighting corruption.17 The 2012 strategy report of the Secretary General for the Organization for Economic Co-operation and Development (“OECD”), an organization of thirty-four nations dedicated to strengthening the world economy, said the OECD needed to be at the “forefront of integrity and anti-corruption efforts.”18 The United Nations (“UN”) is an

B. THE WORLD BANK’S EFFORTS

For many years corruption was off the radar at the World Bank, which consistently encouraged an environment where corruption was ignored for over 50 years—if you can’t see it, it’s not there.20 The World Bank formally recognized the importance of anti-corruption almost two decades ago. The “cancer of corruption” was one of the focal points of then-President James Wolfensohn’s 1996 annual address.21 Wolfensohn went on to remark that we all —————————————————

World organizations are committed to anti-corruption. ————————————————— know corruption is a major barrier to sound development.22As a result of this recognition, three years thereafter, the Department of Institutional Integrity was operating in full force to prevent corruption internally and in Bank projects.23 The INT has had a rocky road since its inception. Non-governmental organizations such as the Government Accountability Project (“GAP”) have been calling the INT’s processes ineffective, or even detrimental.24 Despite this, the INT still believes it is making excellent progress toward creating a world without corruption, citing high numbers of investigations, an efficient process for complaints, and new agreements with other anti-corruption entities and developmental 72

Currents Winter 2013

III. The Process

————————————————— No one can say that the Bank does not, at least on its face, vehemently support anti-corruption efforts. The primary point of dispute is how the INT approaches this issue. From initial investigation to the sanction proceedings and beyond, critics are quick to point out flaws. The words of its leaders, while recognizing a need for improvement in many areas, paint a picture which does not match the barren landscape illustrated by their opponents. To weigh the merits of either argument one must gain an understanding of the investigative process the INT uses today. The process begins when the INT receives a complaint. A complainant will come to the INT with information that an entity has engaged in a sanctionable practice27 in a World Bank project.28 The complainant has a variety of reporting options, including e-mail, phone, and even an “Integrity App” available on iPhone.29 Upon receiving the complaint, the INT will determine whether the complaint is considered high priority and will act on it accordingly.30 The next step is the investigation of a case. Investigators have the burden of proving the alleged conduct occurred using a balance of probabilities standard—as opposed to the “beyond a reasonable doubt” standard of criminal law—to show it is more likely than not that the conduct did actually occur.31 If the claim is substantiated and the burden of

proof met, investigators will look further

beacon for anti-corruption work then these

Panel in early 2007 as an independent panel

into the actions of the guilty party and

two issues must be resolved. Of course,

of experts.40 The Bank placed control of the

determine whether it has engaged in other

the two reports delve far deeper than these

panel entirely in the hands of Paul Volcker,

corrupt practices in the past.

overarching issues and touch upon specific

citing his “longstanding career characterized

Upon completion of an investigation, a

problems, which must be met with solutions.

by integrity, leadership, and professionalism”

guilty party will be subjected to sanctions

The reviewing groups were formed as

in support of his appointment.41 Volcker was

and, hopefully, legal recourse. In 2012 alone,

a consequence of many accusations of

tasked with appointing the rest of the panel,

the World Bank debarred 83 corporations

uselessness, inferior methodology, and even

presumably to ensure its impartiality.42 The

and individuals who had substantiated

corruption in nearly all facets of the World

Bank would eventually publish the report in

claims filed against them.

Depending

Bank, which later resulted in the resignation

September of 2007.43

on the severity of the transgression, they

of Bank President Paul Wolfowitz.38 Their

The integrity of the report has often been

will be debarred for many years. Other

goal was to investigate every aspect of the

criticized since its release. The crux of the

substantiated claims saw the INT placing

INT and identify issues. One of the review

complaints center around Suzanne Folsom,

firms on conditional non-debarment and

groups, commonly called the Volcker

the then-Director of the Department of

serving them with letters of reprimand.

Panel, was commissioned by the Bank as an

Institutional Integrity. GAP believes that

Beyond sanctions, the World Bank will

independent group to determine the extent

the entire panel review was tainted by

refer the investigation materials to the

of the corruption in the Department and

Folsom’s shadow. Supposedly, she doctored

transgressor’s governing state in the hope

—————————————————

documents, altered Bank practices simply

that the state will sanction the transgressor

to fraudulently influence the Panel, and

certainly warrant recognition of its qualified

The most critical issues that impacted every aspect of the INT’s investigations were the lack of a review mechanism and the inability of the INT to affect change.

success.

—————————————————

they provided testimony.45 The Bank itself

—————————————————

to make recommendations. At the same

also confirmed that Folsom did intimidate

time the Volcker Panel was conducting its

witnesses with the help of an informant on

investigation, GAP received requests from

the panel.46

there as well. The INT claims that, on 36

average, a single credible complaint will lead to fourteen investigations in eight different countries. If substantiated, these claims 37

IV. Problems Seven Years Ago

—————————————————

Bank insiders that it make an independent

retaliated against witnesses.44 The retaliation has since been corroborated during a Bank Administrative Tribunal hearing where Panel witnesses swore they received threats that they would never be promoted if

GAP contends that the existence of

The new and revamped investigative process

review of the state of the Department.

the threats should invalidate the Panel.47

is the direct result of the negative reviews

Both reports recommended a number of

Indeed, all evidence points to the shade of

of two reports in 2007. Changing the

solutions to the myriad of issues facing

fraud upon the Volcker Panel. As a result,

investigative process was only the beginning

the World Bank’s integrity. It is essential to

a high degree of apprehension should be

of the crusade to remedy the ineffectiveness

explore their observations and suggestions

applied when analyzing the panel’s report.

of the Department of Institutional Integrity.

in order to fully realize the extent of the

This corruption should lead one to question

Together, the two reports paint a picture of

disease inside the Department in 2007.

whether all the problems facing the INT were

the bleak state within the INT. The most critical issues that impacted every aspect of the INT’s investigations were the lack of a review mechanism and the inability of the INT to affect change. If the INT is to be a

accurately illustrated. This corruption should A. VOLCKER PANEL

President Wolfowitz and the Board of Executive Directors convened the Volcker

not, however, lead one to necessarily doubt the veracity of the panel’s recommendations regarding the issues it did know about. The INT may have selectively presented issues to

Currents Winter 2013

the panel, but these issues did exist and the

the INT be impartial or else the INT

qualitative peer review program with other

recommendations by the panel were valid.

would lack the respect of the international

organizations.59

One should not take the lack of an issue in

community.

The Bank must strive to improve the

the report as evidence it does not exist, but

There must be an external advisory

effectiveness of referrals to national law

one should equally consider as truthful the

oversight board. The panel noted that such

enforcement. There are complaints that

panel’s recommendations for the issues it

a board would help the INT to remain

the INT does not provide enough evidence

does reveal.

both independent and accountable.

to prosecute individuals under the law of

The report also addressed issues with

the Bank was the only group to oversee

member nations.60 The INT defended this as

both the external and internal investigative

the INT, those ideals might easily be

a result of confidentiality requirements.61 The

processes. While the INT follows roughly

compromised.53 Independence is necessary

INT considers the referral a success even if it

the same process at all times, different

to reinforce confidence in INT’s lack of

does nothing but notify the member country

considerations exist for each type of

political sensitivities. Accountability must

of the corruption.62 While the Panel did not

investigation, which then leads to alternate

—————————————————

make any specific suggestions to resolve this

issues and solutions. At the same time, some

conflict, it implicated that the current state of

entire report would be excessive as the panel

Oversight and transparency are necessary when investigating individuals and firms involved with Bank projects.

finds dozens of issues, but there are some

—————————————————

assisted in the training and investigations of

especially notable suggestions extended by

be maintained to relieve concerns that

national governments when the request is

the panel which deserve recognition.

the bank is a “black box beyond regular,

made to the Bank after a referral.63

problems are so far-reaching they trickle into every part of the INT’s work. To restate the

INT-wide Issues and Solutions

The current status of the INT and its director are not suitable to the department’s calling. The Panel believes the INT must

relegating the board to only an advisory role

usage.64 At the time of the Panel, fieldwork

that could provide a different perspective for

for an investigation could take up to a year.65

the president.56

The Panel recognized that this may indeed be necessary in light of the obstacles moving

ii.

The External Investigation Process

Oversight and transparency are necessary

director cannot be a “. . . counselor to the

when investigating individuals and firms

[p]resident.” The Panel views the INT as

involved with Bank projects. The INT has

a unit which should command respect as an

stated that its own work should be measured

exemplary investigative organization.49 A

in terms of impact and outcome, yet the

promotion of the director to a vice president

Bank did not subject it to such criteria.57 The

would emphasize the importance of the

2007 annual reports did mention general case

INT in Bank policy-making. The panel

statistics, but the reports exposed to peer

also believes the director’s title as counselor

review neither the INT’s total investigation

to the president only leads to confusion as

time nor its policies and procedures. The

to the role of the director and accusations

panel suggested that outcome and impact

that the director’s ability to be independent

measurements should be considered by

investigator was compromised.

groups and the INT should initiate a

It is

against investigators, but it did not accept the protracted period of six months after the fieldwork dedicated to writing a report and legal department scrutiny.66 The panel suggested that the INT set standards to expedite the report review process so the norm is less than a year for all but the most intensive cases.67 Furthermore, the panel recommended that the INT issue regular reports regarding the "aging" of the review process status of external cases.68 iii.

The Internal Investigations Process

INT’s methods must be fundamentally fair to subjects of internal allegations and

fundamentally imperative that the head of 74

Currents Winter 2013

agenda would be promoted if the Bank

The INT is simply inefficient with its time

presidency within the Bank and that its

note that the interests of the anti-corruption

disinterested review.”55 The panel suggested

be promoted from a department to a vice

the referral process is ineffective. They did

witnesses.69 The panel notes that it received

advance notice would lead to

for complainants and victims to

many complaints questioning the fairness

destruction of evidence or witness

be adequately informed of the

of the procedure but still goes on to say the

tampering.

investigations.85

existing regulations are reasonable and fair

3. Investig atees must have the

In addition to fairness concerns, the

when taken as a whole.70 Perhaps the taint

opportunity to find witnesses and

report calls for clarity in the codification

of corruption that the GAP warned of is

adequately prepare a defense. 79

of the rights of staff members.86 The INT

to blame for these two contradictory ideas.

The panel found many complaints

did publish a Staff Guide to the INT, which

Regardless, the panel did make a variety of

that the Bank enforced strict

describes the procedures but did not make

minor recommendations to provide fairer

confidentiality in the investigation,

it clear whether these descriptions were firm

investigative procedures:

which limited the ability of an

rules.87 Codification of these rights would go

1. There must be guidelines for

accused to attain witnesses on

a long way toward maintaining the integrity

investigating e-mail after INT

her behalf. The Bank defended

of the internal investigations of the INT: the

approval has been given. In 2007,

this confidentiality protection by

INT would be unable to change any of its

the INT did have guidelines which

stating it routinely made exceptions

procedures without notifying the staff and

required approval of management

for this concern.

providing them an opportunity to challenge

to access the email of a Bank

dismissed the claim and suggested

employee.72 Once approval was

that more transparency and clarity

given, investigators were not barred

was necessary in determining when

from looking well beyond the

a bank employee can approach

The GAP review, published only a week

subject of the investigation.

potential witnesses.82 Failure to

before the Volcker report, tracks many of

Though no witnesses came to the

allow this could easily undermine

the same issues Volcker found.89 GAP began

panel with complaints of abuse, the

an investigateeâ&#x20AC;&#x2122;s honest attempts

its review at the request of confidential

panel believes that restraints must

in a defense.

whistleblowers who feared that the Director,

be placed upon investigators to

The panel

any change.88 B. GAP REVIEW OF THE INT

4. Complainants and victims need

Suzanne Folsom, was inadequate to ensure

to be kept apprised of progress in

the INT could be trusted in its inquiries.90

2. Failure to give adequate notice

the investigations. At the time of

Like the Volcker Panel, GAPâ&#x20AC;&#x2122;s report lists

to staff members who are under

the report, the INT was under no

dozens of issues it wants resolved. Many of

investigation is unacceptable. The

obligation to assure complainants

these issues are substantiated and addressed

panel received many complaints

and victims that it was working

in the Volcker report as well. However,

from employees who had no idea

diligently to satisfy their claims.84

GAPâ&#x20AC;&#x2122;s access to different sources revealed

why they were being called by the

The unspoken assumption made

extensive issues the Volcker Panel either did

INT to conduct an interview. 76

by the panel was that without clear

not know of or simply disregarded due to its

The INT did provide employees

requirements that complainants

own potential corruption. Four of the issues

with 24 hours of notice before an

and victims be informed, there

GAP identified are worth specific mention.

interview, but it did not disclose the

would be a spectre of perceived

First, there is an absence of coherent

subject matter in order to ensure

corruption haunting the INT

guidelines for prioritization and pursuit

the interviews were unscripted.77

if any accused did not seem to

of investigations.91 GAP does not actually

Disagreeing, the panel notes that

be fully investigated. Of course,

elaborate on this specific problem in its

non-disclosure of the subject

the details of the investigation

report. The determination that this issue

matter should be prohibited unless

would need to be kept confidential,

exists follows implicitly from the rest of the

the INT reasonably believes that

but the panel recognized a need

report. However, it should be noted that the

protect the privacy of employees.

Currents Winter 2013

Volcker Panel supported this conclusion, as

Finally, reporting procedures within the

the World Bank ensured that not only is the

it believes the current triage procedures for

INT are wholly inadequate to allow for review

INT now a Vice Presidency, but it is also

cases to be wholly inadequate. Regardless,

by third parties.

GAP requests “formal,

significantly more independent than other

it is certainly arguable that the lack of clear

transparent procedures for reporting” to

Vice Presidencies.104 Other Vice Presidents

guidelines in prioritization of cases and in

the Bank, national governments, and the

report to a managing director under the

investigations is per se an issue. GAP does

public.102 Opening INT reports to outside

President, but the INT Vice President

firmly suggest that “[e]xplicit and transparent

organizations will go a long way toward

reports directly to the President.105 While

procedures for triaging and investigating

ensuring the INT is kept in check by an entity

this does not eliminate possible influence the

cases” must be implemented.

other than itself. External oversight would

President may have over the INT, ensuring

Second, GAP questions the integrity of

craft an environment that actively encourages

that the INT can contact and report to the

the INT directorship. The Volcker Panel

the detection and eradication of corruption.

President without using an intermediary does

touched on this issue in their discussion

—————————————————

positively impact the perception of the INT

101

of Folsom’s conflicts of interest and her

V. Successes as of 2013

position within the organization. GAP

—————————————————

T he World Bank has created an

corroborates this issue and goes a step

The INT has taken the words of these two

Independent Advisory Board ("IAB").106

further. It suggests combating these conflicts

reports to heart and over the past half-decade

The Bank created the board in September

of interest with fixed terms that include

it has made large advancements in the quality

of 2008 as an anti-corruption mechanism.107

renewals based on performance goals.94 Such

of its anti-corruption work. Progress may

The IAB is tasked with protecting the

renewals would be based on Presidential

have been slower than the Volcker Panel

independence and strength of the INT by

recommendations and subsequent Board of

and GAP would have liked, but the INT has

providing advice to the President and the

Directors authorization.95

—————————————————

Audit Committee on the performance of the INT.108 Since its creation, the board has met

who are not Bank employees, the interviews

The Independent Advisory Board is tasked with protecting the independence and strength of the INT by providing advice to the President and the Audit Committee on the performance of the INT.

they conducted with INT members will

—————————————————

posted a number of its decisions on its

not sweep the reader away with praise for

breathed life into many of the suggestions

website.110 In addition, the annual reports

the INT’s practices. Many respondents

the groups have made. The INT is not even

published by the INT now include statistics

provided anecdotal evidence that breaches

close to mending all the woes of corruption

on expenses and time spent on a case, in

of confidentiality routinely occur.98 For

the reports mention, but the solid progress

addition to the general statistics such as

instance, the report indicates that one of the

made so far is commendable.

number of cases and sanctions. 111 This

Third, the INT’s whistleblowing policy is ineffective.96 Employees within the Bank are close to the corruption and so they are often in the best position to blow the whistle on misconduct.97 While the report does not mention the opinion of whistleblowers

confidential information by an informant.

The whistleblowers must have confidence that the INT will value their confidentiality or there will be a severe risk that whistleblowers will not act at all.

100

A. THE IMPLEMENTATION OF VOLCKER PANEL SUGGESTIONS

The first Vice President, Leonard McCarthy, was appointed in May 2008.103 Immediately following the Volcker Panel, 76

Currents Winter 2013

a number of times in person and through telephone conferences, and has published annual reports for 2009, 2010, 2011, 2012, and 2013.109 The INT is more transparent. To facilitate the recommended external oversight, it has

progress ensures that skeptics can monitor

President’s counselors is often given “leaked” 99

as an independent body.

far more of the INT’s operations and more easily identify where the problems lie within the INT. Referrals to national law enforcement are more effective.112 The IAB heard evidence indicating that the referrals of the INT

have led to successful punishment under

how best to diagnose, determine, and

national law from five countries: Norway,

clean out corruption.”

Indonesia, the Philippines, Kenya, and the

actually already taken this to heart and, in

VI. Remaining Issues and Solutions

U.K.

Supporting this, the 2012 annual

2007, began working on a new procedure

—————————————————

report shows a positive trend in the number

for selecting cases for investigation. 122

While the INT has done a fair job of meeting

of cases sent for referral.114 Furthermore,

Previously, the INT would split the cases

the most prominent recommendations of

the INT is now working with other agencies,

up by region and rank them as low, medium

the Volcker Panel, it may not have gone far

such as the OECD and the European Anti-

or high priority, depending on a number of

enough. Even worse, it has done its internal

Fraud Office. Working with the OECD will

factors.

Normally, the INT could expect

investigation procedures and the GAP

allow the two groups to share information in

to investigate most of the high and some

recommendations little justice at all. In fact,

the hope of securing successful referrals.115

of the medium priority cases, depending

it appears to have ignored questions that go

The agreement between the INT and the

on the caseload in a given region.

With

to the heart of the INT’s effectiveness and

European Anti-Fraud Office will allow the

—————————————————

integrity. As it stands, the INT is merely a

two organizations’ investigators to work

shell of its full potential. It must earn the

and, therefore, in a better position to act on

While the INT has done a fair job of meeting the most prominent recommendations of the Volcker Panel, it may not have gone far enough.

a referral from the INT.

—————————————————

of the internal investigations process, shelter

Staff Rule 8.01 has been codified and

the new policies, the INT would make

and encourage whistleblowers, and pressure

now more effectively protects the integrity

sure to investigate all high priority cases,

its employees to fight corruption and

of internal investigations.117 Further, when

rather than discriminating by region.125 In

reward them for their efforts. Perhaps most

a staff member is given notice of an

fiscal year 2011, the INT further enhanced

important of all, it must be fully transparent

investigation, they are now apprised of its

the process at the suggestion of the IAB.

and work with anti-corruption organizations

specific nature.

This improvement involved refining the

to become a beacon others can look to for

have had an impact

selection process for matters going to full

hope and guidance.

on staff allegations. Furthermore, Staff Rule

investigation.126 The INT claims results of

8.02 provides for periodic updates to those

this change are clear: the number of newly

who report corruption to the World Bank.120

opened cases dropped to 73 from 194

While not all the issues the Panel identified

the year before, but 36% more cases were

have seen a remedy, it should not be quite as

substantiated.127 In addition, the percentage

unreasonable a task for the accused to mount

of cases classified as high priority increased

a proper and thorough defense.

to 68% from 18% the year before.128 In 2012,

113

together.

116

The arrangement should allow

the European Union to be significantly better informed of INT investigations in Europe

118

These, as well as some

other minor changes,

119

123

121

The INT had

124

a similar trend is represented in the statistics B. IMPLEMENTATION OF THE GAP SUGGESTIONS

The INT has implemented new procedures for triaging cases to improve efficiency. In the first annual report after the Volcker Panel, President Zoellick theorized that “the challenge for the World Bank is

of the annual report, which shows the substantiation rate and the number of cases opened each increasing by about 10%.129 If these figures are truly representative of the progress of the new method, then the GAP’s recommendation has been successfully implemented.

—————————————————

respect of the world community for the virtue of the INT Vice President, make drastic improvements in efficiency, make more effective referrals, defend the equity

A. RESPECTING THE VIRTUE OF THE VICE PRESIDENT

The Vice President must appear to be fully independent, faithful to the calling, and worthy of the title. While it is true the Vice President enjoys special access to the President, this is merely the lowest possible standard to meet the recommendations of the Volcker Panel. As it stands, the Vice Presidency is a life appointment, terminable only upon the Bank’s decision that the office holder is inadequate for the job. Such a system is wholly unarmed to protect itself against corruption. It is not difficult to

Currents Winter 2013

envision a Vice President, overzealous in the

arena as a force of anti-corruption. In

Upon a cursory glance, these statistics

eyes of the President, who is either coerced

the end, efficient investigations will be a

seem to show the INT is doing the Volcker

into submission or forcefully removed in

deterrent to future corruption since the

Panel a great honor in upholding its requests

favor of a more amenable Vice President.

INT will go through more corruption claims

for time efficiency. However, the percentage

It is the institutional equivalent of fighting

and thus increase the likelihood that each

figures have no context to compare with

a duel with one arm tied behind your back,

instance of corruption will be found and

previous years because fiscal year 2012

when your opponent is a known cheater.

punished. This chain of events means that a

was the first time the INT ever bothered

The Vice President needs to be limited

quick turnaround of investigations would be

to publish them. Furthermore, there was a

by terms, which can then be renewed. GAP

one of the most effective tools in the battle

significant increase in the average duration

recommended term limits in their report as

against corruption that the INT has to offer.

of a case from fiscal years 2010 to 2011.

a way to ensure the quality of performance

The INT is not an entity of infinite

The INT has tried to mislead the public by

Bank employees are often

resources and it cannot be expected to review

publishing an 11.5 month figure in 2012, but

measured by performance, with failure to

every plausible case in a few months. The

that number represents the median, not the

perform punished.

Of course, the type

INT made this very argument in front of the

average. In statistics, a median and an average

of punishment a normal employee receives

Volcker Panel, which summarily decided that

are two wildly different concepts that cannot

is probably not suitable for someone such

—————————————————

be used to compare different sets of data as

as a Vice President. However, this principle

the INT tries to have us do. One would do

overall performance of the INT. The Bank

The INT is quick to point to its investigation statistics as a source of pride in its newfound efficiency—sadly, these statistics are misleading and fall short of providing any workable information.

would do well to adopt these guidelines. Five

—————————————————

IAB to relate to the whole.137 They painted

years is enough time for a Vice President to

the goal should be less than 12 months

the problem quite eloquently in their report,

make effective changes. Only allowing one

with 18 months as a rare exception. 133

saying “the IAB continues to observe that

renewal will ensure no one has enough time

The INT is quick to point to its

despite the evident need, INT and other

to create ties with the Vice President that

investigation statistics as a source of pride

units within the sanctions system have yet

could be perpetually used against the INT.

in its newfound efficiency—sadly, these

to develop a standardized set of statistics

Since the Vice President has a firm control

statistics are misleading and fall short of

for reviewing and reporting their caseload:

over the INT, performance is a reasonable

providing any workable information. In fiscal

this is a problem that weakens performance

way to measure his or her effectiveness.

year 2012, the INT officially reported 52%

measurement.”138

of the position.

130

131

is applicable and supported by the Bank. According to the GAP report, the success of the Vice President should be measured every five years and the Vice President’s term should be renewable only once, based on the 132

B. EFFICIENCY IS THE KEY

Efficiency is of fundamental importance in the investigations of the INT. Efficient investigation will lead to quicker turnaround times and thus more investigations in a given length of time. This, in turn, will ultimately lead to a presence of the INT in the global

The IAB found this same issue in its 2013 report. There was a small amount of apparent progress in reducing the number of cases open for more than 18 months, but these numbers were impossible for the

of investigations were closed within one year

The solution to evaluating efficiency

of being opened and 73% were closed within

is to have the President and the IAB

18 months with a median duration of 11.5

review accurate, standardized statistics.

months. The INT had previously reported

This conforms to the suggestion of the

in fiscal year 2011 an average duration of

Volcker Panel, which suggested that the

17.1 months,135 which compared poorly to

numbers be made available for other groups

134

to monitor.139 Both the President and the the average duration in fiscal year 2010 of

Board are sensitive to the specific constraints

14.5 months.

surrounding the INT and its ability to move

136

Currents Winter 2013

better comparing apples to oranges.

cases quickly. Their opinions on the progress

As the name suggests, the graduated

of the INT in this area should hold great

response strategy asks the Bank to respond

For an anti-corruption unit, the current

weight and should spur the INT to be more

with escalating severity if referrals are not

internal regulations are grossly inadequate

diligent in its turnaround time.

taken seriously. First, INT would simply

at preventing corruption in the Bank itself.

contact local law enforcement and provide

Before the unit can earn the respect of

them with the necessary information.144 If

the nations of the world, the INT must

the response was not adequate, the INT

earn the faith of the people in the Bank.

could use the Bank’s Country Directors to go

It is very difficult to spread the word of

through diplomatic channels of the central

anti-corruption when the prophets do

government. Complete failure could result

not believe their own words. Many of the

in the Bank using force to encourage the

recommendations of the Volcker Panel were

country to participate in anti-corruption.

ignored. Staff Rule 8.01, the only reliable

For instance, lending could be suspended to

source for Bank employee rights during an

—————————————————

INT investigation, does not adequately shield

The World Bank must adopt a strategy to make referrals successful.

those who it is designed to protect.

—————————————————

information in circumstances where this

a specific sector in the country until it made

information may assist in finding a witness

a reasonable effort to pursue the referral.

146

who can support your claim. This lack of

In developed countries, which often do not

protection is outrageous. Imagine being

see the impact of the World Bank, the Bank

told by the government that you can only

could suspend all companies in a sector from

use witnesses who already know the details

bidding on any Bank project until the referral

of your criminal charges when facing a

is acknowledged.

murder charge: you would not have the

C. REFERRALS PREVENT CORRUPTION

Successful referrals have a profound impact on corruption. A referral is successful when it is received by a national government and the transgressor is punished under domestic law. Like any other crime, the fear of severe financial penalties, loss of prestige, and even prison time would act as deterrents to corruption. In its current state, it appears that the INT has had its wings clipped when it comes to making a successful referral. The IAB noted in 2011 that in the twelve years prior the INT had made 167 referrals.140 On its face, this number could please the anti-corruption community until one considers the hundreds of cases the INT has substantiated in the past few years alone. Even worse, of those 167 referrals only sixteen have seen a completed prosecution or conviction.141 This success rate is embarrassing. Today, the INT does follow-up on its referrals to see if there are any comments, but this is hardly an affirmative push toward a successful referral.142 The World Bank must adopt a strategy to make referrals successful. The INT, as an institution, does not have the influence or the funds to bully nations into fighting corruption. The World Bank, as a whole, does. The IAB has asked the Bank, to no avail, to adopt a “graduated response”

145

There is still no provision that specifically provides a right to disclose confidential

The lack of political will in a country

ability to call your best friend to testify that

should never be an excuse for a failed referral.

you were not at the scene of the crime. This

This strategy could lead to serious actions,

procedural flaw is fundamentally unfair and

but the cause is worthy of the blowback.

requires no stretch of the imagination to

Referrals are perhaps the greatest tool the

foresee the abuse implicit in confidentiality

INT has in its arsenal and at the moment

requirements, which hamstring the defense.

they are criminally underused. The Bank

A provision allowing the use of a limited

has the power to force a country to effect

disclosure of confidential information

change in its anti-corruption policy and it

when contacting potential witnesses, which

must use its influence toward this purpose.

includes an exception for cases involving

A declawed INT cannot fight for the needs

extreme circumstances where the rights of

of anti-corruption.

others would be substantially prejudiced, must be codified immediately.

strategy in every report it has made. 143 This strategy would absolutely improve the referrals process.

Restrictions must be placed on the D. INTERNAL INVESTIGATIONS MUST LIVE UP TO THE CALLING OF THE INT

investigation of e-mail. E-mail is used by

Currents Winter 2013

many people for many different purposes

to both whistleblowers in the Bank as

acceptable punishment and reinstated

beyond specific work requirements.

well as any outside individual who reports

Kim.155 Four months after his reinstatement,

Investigators should not have the freedom

an allegation. 149 The Rule provides for

the Bank forced him to retire after 26

to peruse any e-mail ever sent in search

confidentiality as to the identity of the

years of service.156 There can be no excuse

of violations of Bank policy. There have

reporter or anonymity at their request,150

for the World Bank’s vile conduct in this

been reported instances of abuse in recent

a prohibition against retaliation,151 and a

case. While Kim did leak documents, his

years, where the Bank either hacked or

temporary move to a different department

testimony shows that he did it in absolute

filtered an employee’s e-mail and found

at the discretion of the Vice President and

good faith.157 The Administrative Tribunal’s

the only evidence it needed to fire him for

Human Resources.152 The Rule also allows

order was completely disregarded and the

whistleblowing.147 Sometimes the INT will

staff members to blow the whistle on outside

Bank carried through with its retaliation

need to examine e-mail correspondence to

sources in some cases if the established

in the end. The Bank needs to establish

find evidence of wrongdoing, but the scope

internal mechanisms are inadequate.

concrete, immovable restrictions against

153

of the investigation should be narrowly

In some ways, the current whistleblowing

retaliation. Bank punishment is unjustified if

defined. For example, the scope of the

policy is commendable. Providing for

the Administrative Tribunal has found such

investigation should be limited to only

baseline confidentiality to whistleblowers

punishment to be without warrant under

allow admissible evidence that supports the

is important, as is the option to report

the Staff Rules. The Staff Rules should be

original investigation. A respect for privacy

anonymously. This policy encourages

amended to better protect whistleblowers

is of the utmost importance as it allows

—————————————————

who act incorrectly, but in good faith.

employees to act legitimately without fear

The World Bank’s current whistleblowing protection is Staff Rule 8.02.

of persecution. A climate of fear would be counterproductive in eliminating corruption.

————————————————— E. WHISTLEBLOWING MUST BE ENCOURAGED AND PROTECTED

Whistleblowing is among the most effective ways to fight corruption. Without whistleblowers, corruption will harrow Bank projects without remorse. These are the people who take a stand against corruption on their own and seek the INT’s help in fighting it. They are champions of the anticorruption initiative and the INT has a duty to stand behind them in the face of any persecution. Whistleblowers who inform the INT of corruption as well as those who inform others of corruption in the INT need to be protected.

for potential whistleblowers. In theory, the prohibition against retaliation and the remedy of a temporary move are equally important efforts to ensuring the safety and comfort of whistleblowers. The Bank would be wise to ensure these safeguards remained in place. In other respects, the current policy is grossly deficient. There is anecdotal evidence that the policy against retaliation is summarily ignored. John Kim, an IT analyst for the Bank, leaked documents to a Forbes reporter when they were sent to him via e-mail from a co-worker and was subsequently terminated for the disclosure.154 A Bank Administrative Tribunal

The World Bank’s current whistleblowing protection is Staff Rule 8.02.

whistleblowing by creating a safe haven

148

It applies

did find the exception for whistleblowing to an outside source did not apply here, but it held that termination was not an 80

Currents Winter 2013

F. THE WORLD BANK MUST REWARD ANTI-CORRUPTION EFFORTS

Altruism has no place in the current path to promotion in the World Bank. Frank Vogl wrote that a major problem in the World Bank was its officials working too closely to foreign officials. Personal success and promotions for World Bank officials are based on performance—the volume of the projects they pursue—without a focus on integrity. In this paradigm, saying no to corruption and halting a project for an INT investigation reaps no personal or professional benefits.158 The World Bank must set internal standards, which promote anti-corruption. Rewarding staff members for highlighting corruption is a must. The Bank cannot allow turning a blind eye to corruption to be the shortest ladder to professional success. Bank employees should not be punished for identifying corruption and pursuing it.

The Bank must internally recognize that

the World Bank has partnered with four of

forums would allow any interested party

the proper identification of corruption is as

the leading multilateral development banks

to make its voice heard and question the

important as a successful project and should

in a cross-debarment accord where, if a firm

policies of the INT. Making the INT the

be rewarded accordingly.

is debarred under one bank, the others will

focus of one of these panels would facilitate

follow suit.164 These improvements will each

discussion and improvement of the Bank’s

have a great impact on the efficiency and

anti-corruption strategy. The transparency

effectiveness in the battle against corruption.

would uncloak the INT’s faults and would

The World Bank should be lauded for its

encourage the INT to implement a remedy.

efforts, but they are not enough. The Bank

While the Vice President probably would not

should work to make more cross-debarment

want this exposure, it would put the INT in

agreements with any organization which

a position where it must act. In the end, the

prosecutes corruption. It should work to

world will benefit.

G. THE WORLD BANK MUST WORK WITH OTHER INTERNATIONAL ORGANIZATIONS

Working with the global community to fight corruption is of the utmost importance. Transparency is the name of the game with regard to this endeavor. Information sharing and critiques of procedure will create an environment where corruption cannot prosper. Any institution lagging behind the others in anti-corruption efforts can be pulled up with the others through transparency. Corruption will be deterred when organizations routinely punish wrongdoers after a finding of corruption. Investigators could be shared among organizations so that the most important cases were always adequately staffed. These procedural improvements can be easily realized. The World Bank has made some progress working with other organizations. In 2010 it held the first meeting of the International Corruption Hunters Alliance (“ICHA”), a gathering of more than 200 officials from every part of the world. 159 The second meeting was held in June 2012 and boasted more than 300 officials in attendance.160 The members have all agreed that improving the quality and speed of information sharing is a necessity.161 The World Bank has also partnered with the OECD to share information.162 A recent agreement with the European Union will allow the INT to share both investigators and information more freely and effectively.163 Perhaps the most prominent procedural improvement is that

create even tighter networks of information

The Bank must change its public face to

sharing. These agreements, called impossible

a more transparent one. Frank Vogl notes

—————————————————

that reports are often dense and esoteric.

Perhaps the most prominent procedural improvement is that the World Bank has partnered with four of the leading multilateral development banks in a cross-debarment accord where, if a firm is debarred under one bank, the others will follow suit.

He wishes the Bank to respond to the class

—————————————————

of the Arab Spring—to educate them on its efforts—instead of catering almost exclusively to professionals rarely touched by corruption.168 Welcoming a broad public discussion on how development aid can assist the peoples of the developing world to improve governance would further anticorruption far more efficiently.169

by some critics due to the vastly different

VII. Conclusion

political environments in which development

—————————————————

banks operate,

are fundamental to a

Current World Bank President Jim Yong Kim

strong, universal accord against corruption.

recently re-affirmed his commitment to anti-

The World Bank must work to become

corruption in the INT’s 2013 Annual Report:

more transparent and invite others to

“I want to make it abundantly clear that the

discuss the policies. Twice a year the World

World Bank Group has zero tolerance for

Bank hosts a meeting with the International

corruption.”170 He continued by stressing the

Monetary Fund.166 Thousands of individuals

importance of “setting the right tone at the

are in attendance, including Bank officials,

top.”171 The World Bank needs to stand at the

government officials from across the world,

top of the anti-corruption movement. The

journalists, businessmen, bankers and other

INT is the vehicle which will take the Bank

non-governmental organizations. 167 The

there. Crippling issues must be addressed

topic of discussion in one of these meetings

if the INT is to come to the surface as a

must be amended to include, and even focus

pre-eminent authority in anti-corruption.

on, anti-corruption. The panels and open

The INT can and will be a beacon of hope

165

Currents Winter 2013

in this world—it needs only to overcome its

Goals (“MGD”), have been closely tied to

nations, then countries and organizations

own inadequacies.

anti-corruption. Transparency International

must end corruption. The INT must set fire

Frank Vogl, the founder of Transparency

has found “ample evidence of the value

to corruption and bring a new dawn in the

International, calls the fight against

of designing MGD action plans that

movement.

corruption a long war.172 The scale of the

adequately integrate governance and anti-

problem is enormous, he says—there will

corruption mechanisms.”174 Transparency

always be corruption in the government.173

International has charted a strong positive

The goal should be to limit it to the greatest

correlation between anti-corruption and

extent possible.

success in achieving MGDs in over 46

Perhaps the most monumental ambitions

countries.175 If the MGDs truly represent

of humankind, the Millennium Development

the aspirations of the human race and our

End Notes

* J.D., 2014, South Texas College of Law, Managing Editor for Currents: International Trade Law Journal. 1. Peter Gelling, Indonesia’s Muslim Party Widens Its Appeal, N.Y. Times (Mar. 20, 2006), http://www. nytimes.com/2006/03/20/world/ asia/20iht-indo.html?_r=1&. 2. Integrity Vice Presidency, A n n ua l R e p o r t : F i s c a l Y ear 2012 26 (2012), http:// s i t e r e s o u r c e s. wo r l d b a n k . o r g / E X T D O I I / Re s o u r c e s / WBG_IntegrityReport2012.pdf [hereinafter FY’12]. 3. Frank Vogl, Waging War on Corruption 214 (2012). 4. Id. 5. This includes, but is not limited to: (1) theft of public funds by government leaders and their cronies; (2) bribes being paid to those who hold public-sector power by those seeking special favors; and (3) extortion by politicians and civil servants to obtain illicit payments from ordinary people and from businesses by threatening them with bitter consequences if they do not pay or by withholding basic services from them. Frank Vogl, Waging War on Corruption 2–3 (2012). 6. Politics and Gover nment, T ransparency I nternational , http://www.transparency.org/ topic/detail/politics_and_ government (last visited Mar. 27, 2014). 7. Cor ruption by Countr y: USA, T ransparency I nternational , h t t p : / / t r a n s p a r e n c y. o r g / country#USA (last visited Mar. 27, 2014).

8. Lucinda A. Low, Transnational Cor ruption: New Rules for Old Temptations, New Players to Combat a Perennial Evil, 92 Am. Soc’y Int’l L. Proc. 151 (1998). 9. Integrity Vice Presidency, Annual Report: Fiscal Year 2013 6 (2013), http://siteresources. worldbank.org/INTDOII/Resou rces/588889-1381352645465/ INT_Annual_Update_FY13_ WEB.pdf [hereinafter FY’13]. 10. Tania Branigan, £100M Fund to Combat Corruption Among Developing World Leaders, T he G uardian (July 13, 2006), http://www. theguardian.com/politics/2006/ jul/14/uk.internationalaidanddev elopment. 11. Id. 12. Id. 13. Lee Jae-Oh, Anti-Cor ruption and Transparency: South Korea’s Pathway to Preeminence in the AsiaPacific (May 24, 2010), http:// uskoreainstitute.org/wp-content/ uploads/2011/01/TranscriptLeeJaeOh.pdf. 14. Id. at 5. 15. Id. 16. G20 Leader’s Declaration, The White House, para.77 (June 19, 2012), http://www.whitehouse.gov/ the-press-office/2012/06/19/ g20-leaders-declaration. 17. Id. 18. OECD Secretary-General, Strategic Orientations by the Secretary-General, para. 28, OECD Council at Ministerial Level (May 23, 2012), http://www.oecd.org/about/ secretary-general/50452360.pdf. 19. Convention Against Corruption, G.A. Res. 58/4, U.N. Doc. A/ RES/58/4 (Oct. 31, 2003).

20. See James P. Wesber r y, Jr., International Financial Institutions Face The Corruption Eruption: If The IFIs Put Their Muscle And Money Where Their Mouth Is, The Corruption Eruption May Be Capped, 18 Nw. J. Int’l L. & Bus. 498, 499 (Winter 1998). 21. See Wolfensohn Outlines a New Agenda, W orld B ank , http:// web.worldbank.org/WBSITE/ EXTERNAL/NEWS/0,,conte ntMDK:20020434~pagePK:64 257043~piPK:437376~theSite PK:4607,00.html (last visited Mar. 27, 2014). 22. Id. 23. See About Integrity, World Bank, h t t p : / / g o. w o r l d b a n k . o r g / GFMUIT4D60 (last visited Mar. 27, 2014). 24. See generally The World Bank’s Integrity Vice Presidency, G ov ’ t . Accountability Project, http:// www.whistleblower.org/programareas/inter national-refor m/ world-bank/world-bank-int (last visited Mar. 27, 2014) (discussing numerous INT difficulties). 25. See FY’12, supra note 2, at 5–6. 26. World Bank, Anticorruption Strategy Puts World Bank in the Front Seat on Transparency Front, YouTube (Sept. 28, 2010), http://www.youtube. com/watch?v=VsMmxRWXiok. 27. There are five types of sanctionable practices: (1) corrupt practice, the giving of something of value to influence improperly the actions of another party; (2) fraudulent practice, an act or omission which is intended to mislead in order to obtain a financial benefit or avoid an obligation; (3) collusive practice, an arrangement between 82

Currents Winter 2013

two or more parties designed to achieve an improper purpose; (4) coercive practice, threatening to or actually impairing or harming any party in order to influence them; and (5) obstructive practice, deliberately falsifying, destroying, falsifying, altering, or concealing any evidence or making false statements to investigators in order to impede a Bank investigation, or forcing another party to do this under duress. See Guidelines, World B ank (Oct. 15, 2006), http:// siteresources.worldbank.org/ INTOFFEVASUS/Resources/ WB_Anti_Corruption_ Guidelines_10_2006.pdf. 28. The Investigative Process, W orld Bank, http://go.worldbank.org/ FBADMWYOD0 (last visited Mar. 27, 2014). 29. Report Suspected Fraud, W orld Bank, http://go.worldbank.org/ OBUOB60810 (last visited Mar. 27, 2014). 30. The Investigative Process, supra note 28. 31. Id. 32. See FY’12, supra note 2, at 33. 33. Id. at 41–43. 34. See id. at 35. 35. See id. at 45. 36. See id. at 14. 37. Id. at 10. 38. Paul Wolfowitz Scandal, G ov ’ t . Accountability Project, http:// www.whistleblower.org/programareas/international-reform/worldbank/paul-wolfowitz-scandal (last visited Mar. 27, 2014). 39. G o v ’ t . A c c o u n t a b i l i t y Project, Review of the D epartment of I nstitutional Integrity at the World Bank

(Sept. 5, 2007), http://www. whistleblower.org/sites/default/ files/ReviewoftheINT_0.pdf [hereinafter GAP Review]. 40. Ana Palacio, Volcker Panel Update, W orld B ank (June 18, 2007), h t t p : / / g o. w o r l d b a n k . o r g / SLO0GMI1B0. 41. Id. 42. See id. 43. P aul V olcker et al , W orld Bank, Independent Panel R eview of the W orld B ank G ro u p D e pa r t m e n t o f Institutional Integrity (2007), http://siteresources.worldbank. org/NEWS/Resources/Volcker_ Report_Sept._12,_for_website_ FINAL.pdf [hereinafter Volcker Panel]. 44. Beatrice Edwards, The World Bank’s Anti-Corruption Charade, G ov ’ t Accountability Project (Apr. 12, 2010), http://www.whistleblower. org/blog/31-2010/513-the-worldbanks-anti-corruption-charade. 45. AV v. Int’l Bank for Reconstr. and Dev., ICSID Case No. 419, Judgment for Applicant, para. 45 (July 21, 2009), http:// lnweb90.worldbank.org/crn/wbt/ wbtwebsite.nsf/cf688641367a3e12 852569f50001c5c8/086cd4507ec9 4a95852576c4007daf15/$FILE/ AVDecisionNo.419.pdf. 46. Id. para. 46. 47. Edwards, supra note 44. 48. Volcker Panel, supra note 43, para. 32. 49. Id. para. 31. 50. Id. para. 32. 51. Id. 52. Id. para. 34. 53. Id. 54. Id. para. 35. 55. Id. para. 36. 56. Id. paras. 37–38. 57. Id. para. 131. 58. Id. 59. Id. paras. 133–34. 60. Id. para. 85. 61. Id. 62. Id. para. 86. 63. Id. 64. Id. para. 91. 65. Id. 66. Id. 67. Id. para. 94. 68. Id. 69. Id. para. 32. 70. Id. 71. Id. para. 34. 72. Id. para. 33. 73. Id. para. 34. 74. Id. 75. Id. para. 35. 76. Id. para. 34. 77. Id. paras. 34–35. 78. Id. para. 35. 79. Id. para. 36. 80. Id.

81. Id. 82. Id. 83. Id. para. 37. 84. Id. 85. Id. 86. Id. 87. Id. 88. Id. 89. See GAP Review, supra note 39. 90. Id. at 3. 91. Id. at 4. 92. Volcker Panel, supra note 43, para. 15. 93. GAP Review, supra note 39, at 5. 94. Id. 95. Id. 96. Id. at 24–25. 97. Id. at 24. 98. Id. at 25. 99. Id. 100. Id. 101. Id. at 4. 102. Id. at 5. 103. I n d e p . A dv i s o ry B d ., 2010 A n n ua l R e p o r t 1 1 ( J a n . 2011) [hereinafter IAB 2010], available at http://siteresources. worldbank.org/PROJECTS/ Resources/40940-1244163232994 / I A B - 2 0 1 0 - A n n u a l Re p o r t finalJan31_2011.pdf. 104. Id. 105. Id. 106. Id. at 9. 107. Id. 108. T h e I n d e p e n d e n t A d v i s o r y Board, W orld B ank , http:// go.worldbank.org/S262CF3KD0 (last visited July 16, 2014). 109. Id.; see I ndep . A dvisory B d ., 2011 A nnual R eport 11 (Jan. 2011), http://siteresources. worldbank.org/PROJECTS/ Resources/40940-1244163232994 /IABAnnualReport2011-finalforweb.pdf [hereinafter IAB 2011]. 110. The Investigative Process, supra note 28. 111. See Integrity Vice Presidency, A nnual R eport : F iscal Y ear 2011 (2011) [hereinafter FY’11], a vailable at http:// siteresources.worldbank.org/ INTDOII/Resources/588889 1316720250792/INT_AR_FY11_ web.pdf. 112. IAB 2011, supra note 109, at 4. 113. Id. 114. From fiscal year 2009 through 2012, the number of referred cases increased each year: 9 in ’09, 32 in ’10, 40 in ’11, and most recently 46 in ’12. FY’12, supra note 2, at 33. 115. Id. 116. Press Release, Europa, World Bank and OLAF Step Up Efforts to Jointly Combat Fraud and Corruption in Development Aid (Nov. 2011), available at http:// europa.eu/rapid/press-release_ OLAF-11-14_en.htm.

117. World Bank Staff R. 8.01 para. 1.02 (Aug. 8, 2011), available at http://siteresources.worldbank. org/INTDOII/Resources/Staff_ Rule_801.pdf. 118. World Bank Staff R. 8.01 para. 4.03. 119. The Staff Rules were modified to ensure the staff member would receive a copy of the final investigative report so that they could respond to it and the Guide to Staff Rule 8.01 says the staff member will receive transcripts of any interviews within 10 days. Each of these was suggested by the Volcker Panel. World Bank Staff R. 8.01 para. 4.09. 120. World Bank Staff R. 8.02 para. 2.06 (June 13, 2008), available at http://siteresources.worldbank. o r g / I N T S TA F F M A N UA L / Resources/StaffManual_WB_web. pdf. 121. D epartment of I nstitutional Integrity, Improving Development Incomes: Annual I n t e g r i t y R e p o r t 4 (2007) [hereinafter FY’07], available at http://siteresources.worldbank. o r g / I N T D O I I / Re s o u r c e s / fy07report-complete.pdf. 122. Id. at 15. 123. These factors include (1) impact on development incomes; (2) impact on the Bank’s reputation and finances; (3) impact on present and future Bank engagements; (4) ability to deter future corrupt practices; (5) estimated cost of resolution; (6) likelihood of resolution; and (7) safety to bank staff and resources. FY’07, supra note 121, at 15. 124. Id. 125. Medium priority cases would be reviewed every month to determine if any new information has come about that warrants their promotion to high priority while low priority cases would be reviewed after 30 days and dismissed if no new information had surfaced (the INT blamed this state of affairs on a lack of resources to pursue all claims). Id. 126. FY’11, supra note 111, at 33. 127. Id. 128. Id. 129. FY’12, supra note 2, at 33. 130. GAP Review, supra note 39, at 5. 131. Id. at 13. 132. Id. at 5. 133. Volcker Panel, supra note 43, para. 28. 134. FY’12, supra note 2, at 34. 135. FY’11, supra note 111, at 34. 136. I n t e g r i t y V i c e P r e s i d e n c y , Annual Report: Fiscal Year 2010, at 28 (2010) [hereinafter FY‘10], available at http://siteresources.

wo r l d b a n k . o r g / I N T D O I I / Resources/588889-12863087934 20/WBG_IntegrityReport2010_ final_LO-RES.pdf. 137. I n d e p . A dv i s o ry B d ., 2013 A n n ua l R e p o r t 3 ( F e b . 2014) [hereinafter IAB 2013], available at http://siteresources. worldbank.org/PROJECTS/ Resources/40940-1244163232994 /IAB-2013-ANNUAL_REPORTFINAL-28FEB14.pdf. 138. Id. 139. Volcker Panel, supra note 43, para. 29. 140. IAB 2011, supra note 109, at 7. 141. Id. 142. IAB 2013, supra note 137, at 4. 143. Id. 144. IAB 2010, supra note 103, at 6. 145. Id. 146. Id. 147. Richard Behar, The Fate of a World Bank Whistle-Blower, Forbes (June 27, 2012, 10:53 AM), http://www.forbes.com/sites/ richardbehar/2012/06/27/thesad-fate-of-a-world-bank-whistleblower/. 148. World Bank Staff R. 8.02 para. 1.01(June 13, 2008), available at http://siteresources.worldbank. o r g / I N T S TA F F M A N UA L / Resources/StaffManual_WB_web. pdf. 149. World Bank Staff R. 8.02 para. 1.03. 150. World Bank Staff R. 8.02 paras. 2.01(a)–(b). 151. World Bank Staff R. 8.02 para. 2.04. 152. World Bank Staff R. 8.02 para. 2.05. 153. A staff member may only report to an outside entity if such reporting is “necessary to avoid (1) a significant threat to public health or safety; (2) substantive damage to Bank Group operations; or (3) a violation of national or international law.” An internal mechanism is inadequate if (1) the staff member believes all avenues within the Bank will result in retaliation; (2) the staff member believes that reporting inside the Bank will cause all evidence to be destroyed or concealed; or (3) the staff member has reported the misconduct and has no received a status notification within six months of such a report. World Bank Staff R. 8.02 para. 4.02. 154. Behar, supra note 147. 155. John Y. Kim v. International Bank for Reconstruction and Development, No. 448, paras. 80–83 (World Bank Admin. Trib. 2011) [hereinafter Decision No. 448], available at http://lnweb90. worldbank.org/cr n/wbt/ wbtwebsite.nsf/cf688641367a3e

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12852569f50001c5c8/747bfcd68 9ee1874852578b200722e5c/$FI LE/KimDecisionNo.448.pdf. 156. Behar, supra note 147. 157. Decision No. 448, supra note 155, para. 12. 158. Vogl, supra note 3, at 216. 159. International Corruption Hunters Alliance 2010, W o r l d B a n k , h t t p : / / g o. w o r l d b a n k . o r g / LF2ND3CF30 (last updated Feb. 2, 2011). 160. The World Bank’s Inter national Cor ruption Hunters Alliance W ill Attack Global Cor ruption with Technology, Partnerships and Knowledge, World Bank (June 6, 2012), http://go.worldbank.org/ USC3HMU890. 161. Id. 162. IAB 2011, supra note 109, at 4. 163. Europa, supra note 116. 164. Cross-Debarment Accord Steps Up Fight Against Corruption, World B a n k (Apr. 2010), http:// go.worldbank.org/B699B73Q00. 165. Frank A. Fariello, Jr. & Conrad C. Daly, Coordinating The Fight Against Corruption Among MDBS: The Past, Present, and Future of Sanctions, 45 Geo. Wash. Int’l L. Rev. 253, 266 (2013). 166. Annual and Spring Meetings, World Bank, http://go.worldbank.org/ M5FBN0PW90 (last updated Jan. 18, 2013). 167. Id. 168. Vogl, supra note 3, at 216. 169. Id. 170. I n t e g r i t y V i c e P r e s i d e n c y , 2013 A nnual F iscal R eport 1 (2013), http://siteresources. wo r l d b a n k . o r g / I N T D O I I / Resources/588889-1381352645 465/INT_Facts_and_Figures_ FY13_WEB.pdf. 171. Id. 172. Vogl, supra note 3, at 3. 173. Id. 174. T ransparency I nternational , The Anti-Corruption Catalyst: Realising the MDGs by 2015, 1 (Sept. 14, 2010), available at http://www.transparency-usa.org/ documents/AntiCorruptionCa talystRealisingtheMDGby2015. pdf. 175. Id.

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