Freedom to operate in the Canadian agricultural biotechnology industry

Although agricultural biotechnology research is not held up by strategic employment of IPRs, this is not necessarily the case for the commercialization of research. This holdup is for two reasons. First, IPRs in agricultural biotechnology research are tightly held. The private owners in some cases would appear to have chosen to strategically employ their most important IPRs in a manner that creates a barrier to entry, which is in contravention of the intent of an IPR regime. Second, the transaction costs for potential private entrants of assembly of the relevant IPRs can be very high and uncertain.

Most large biotechnology companies are unwilling to perform research on small crops because, for them, the market is too small to justify the expense. Further, they are unwilling to license their IPRs, ostensibly because of the potential public relations costs related to the possibility of licensees' misuse of their IPRs.4 Other private agents or public organizations are free to use patent protected intellectual property to develop genetically altered small crops but, in this manner, are prevented from commercializing their research results. Under the Canadian Patent Act, section 65 (2), abuse is deemed to have occurred:

(c) if the demand for the patented article in Canada is not being met to an adequate extent and on reasonable terms;

(d) if, by reason of the refusal of the patentee to grant a license or licenses on reasonable terms, the trade or industry of Canada or the trade of any person or class of persons trading in Canada, or the establishment of any new trade or industry in Canada, is prejudiced, and it is in the public interest that a license or licenses should be granted;

(e) if any trade or industry in Canada, or any person or class of persons engaged therein, is unfairly prejudiced by the conditions attached by the patentee, whether before or after the passing of this Act, to the purchase, hire, license or use of the patented article or to the using or working of the patented process; or

(f) if it is shown that the existence of the patent, being a patent for an invention relating to a process involving the use of materials not protected by the patent or for an invention relating to a substance produced by such a process, has been utilized by the

4 Confidential communication.

patentee so as unfairly to prejudice in Canada the manufacture, use or sale of any materials.

An IPR holder's refusal to license their patent on reasonable terms to other agents who possess the requisite relevant knowledge and abilities is an abuse of the monopoly privilege that society has bestowed upon them.

In recognition of exactly this freedom to operate problem, section 66 of the Canadian Patent Act grants powers to the Commissioner in order to rectify the situation in the best interests of the public.

Powers of Commissioner in cases of abuse

66. (1) On being satisfied that a case of abuse of the exclusive rights under a patent has been established, the Commissioner may exercise any of the following powers as he may deem expedient in the circumstances:

(a) he may order the grant to the applicant of a license on such terms as the Commissioner may think expedient, including a term precluding the licensee from importing into Canada any goods the importation of which, if made by persons other than the patentee or persons claiming under him, would be an infringement of the patent, and in that case the patentee and all licensees for the time being shall be deemed to have mutually covenanted against that importation;

(c) if the Commissioner is satisfied that the exclusive rights have been abused in the circumstances specified in paragraph 65(2)(f), he may order the grant of licenses to the applicant and to such of his customers, and containing such terms, as the Commissioner may think expedient;

(d) if the Commissioner is satisfied that the objects of this section and section 65 cannot be attained by the exercise of any of the foregoing powers, the Commissioner shall order the patent to be revoked, either forthwith or after such reasonable interval as may be specified in the order, unless in the meantime such conditions as may be specified in the order with a view to attaining the objects of this section and section 65 are fulfilled, and the Commissioner may, on reasonable cause shown in any case, by subsequent order extend the interval so specified, but the Commissioner shall not make an order for revocation which is at variance with any treaty, convention, arrangement, or engagement with any other country to which Canada is a party; or

(e) if the Commissioner is of opinion that the objects of this section and section 65 will be best attained by not making an order under the provisions of this section, he may make an order refusing the application and dispose of any question as to costs thereon as he thinks just.

These powers are broad, with the Commissioner's options ranging from doing nothing, to dictating licensing terms, to revocation of the property right. Further, section 70 establishes that if the Commissioner dictates the licensing terms, then they are to be considered as though the two parties negotiated privately in good faith. However, this provision has not been entirely successful. Vaver (1997) argues that "proceedings have been prolonged and expensive; appeals are de rigueur, patentees, when alerted, often correct the abuse and retaliate against offending applicants. Of the fifty-three applicants who persisted between 1935 and 1970, only eleven got relief ... [and] today hardly anybody bothers trying." Thus, although the writ of Canadian patent law provides for balance between public and private interests, it has arguably been ineffective due to implementation failure of the bureaucracy.

Even if a private agent attempts to perform research for commercial purposes and, therefore, decides that owners of the relevant IPRs will not refuse to sell licenses on reasonable terms or that they can be acquired under the act, a holdup may still exist for a number of reasons related t o the assembly of the tools of the trade. First, one may not know a priori which technologies will be necessary for the particular application. This could result in an unforeseen midstream requirement for an IPR that is not readily accessible. However, a public policy to counteract this potential problem is not appropriate as it is an organizational human capital management issue. Second, the legal status of any specific IPR can be in a state of flux since patent offices have been operating in a manner that grants the widest interpretation of claims and allows the courts to decide on the extent of the patent holder's rights. Both of these may result in a holdup because of the potential for post-hoc opportunism on the part of the unforeseen or unknown patent holder. A final reason for a potential investment holdup is that the transaction costs associated with the assembly of IPRs, regulatory compliance of products, and the monitoring and enforcement of IPR licenses can be very large. These high expected transaction costs, since they are a component that is factored into the initial expected sunk cost, can result in the situation depicted in Fig. 15-3 where line gh is sufficiently high to preclude private production. These transaction costs, while highly variable in the short run, should fall as the system evolves over time.

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