The response of business to paradigmatic changes in legal systems

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Noel Cox*


Technology, and technological changes, affects the legal system. These effects are partly direct, and partly indirect, via changes to the economy and to society. Technological changes are altering the relationship of governed and government, and between government and government. Legal systems also affect the development of technology, and changes in legal systems, whether wrought by technological changes, or otherwise, can have significant effects upon business. This paper considers how business responds to major changes in legal systems, and attempts to identify some common elements which might serve to guide business during times of profound legal change.
Technological advances in many fields (not least the Internet) challenge the boundaries of law, science, public policy, and ethics.1 Biological research, and in particular genetic research, is especially significant in this respect. Embryonic stem cell research2 and therapeutic cloning,3 challenge perceptions of personality and society.4 Genetic engineering5 also has serious implications for the medical and health insurance field,6 since illness and diseases could potentially be significantly reduced in frequency or severity by human genetic engineering. In this paper we shall examine some ways in which business responds to changes in law and technology. Although the focus is on the response of business to legal changes, in reality technology and law cannot be readily separated. What is important is the controls on technology – what may be done and what may not be done. The protection accorded intellectual property is as important as the restrictions on certain types of work, for they protect the investment which is required to undertaken further research and development work. Fundamental changes in technology necessitate, or cause, significant changes in legal systems.
Genetic engineering for agricultural purposes also has major legal implications – not least of which in that it is promoted as a solution to ongoing food production problems in the Third World.7 Biotechnicians have altered plants and animals for improved nutritional value. They have produced potatoes with more starch8 and pigs with an increased protein-to-fat ratio.9 Researchers are also attempting to produce larger, faster growing, and more productive agricultural animals that require less feed.10 Biotechnicians are already altering plants to withstand pests and disease, and those that fix their own nitrogen and resist drought and cold.11 The first genetically-altered whole food-product to appear on supermarket shelves was a tomato that spoiled less quickly than unaltered tomatoes.12 These developments raise hopes for an increase in the world’s food supply and a decrease in the use of chemicals in agriculture.13 Each of these potential developments – agricultural and human – also involves considerable investment and potentially large profits for businesses.

Biotechnology itself is a relatively old technology. The use of living organisms to make bread, wine, and cheese is a longstanding human practice. Humanity has “genetically-engineered” plants and animals, including humans, by selective breeding for desirable characteristics for thousands of years.14 From the time people first began cultivating and harvesting cereal grains, plants and their products have been a necessary component of the material foundations upon which human societies are formed.15

However, because seeds are not easily commodified, until the latter part of the twentieth century the genetics of most major crop plants have been regarded as common heritage, and comparatively little private investment has been made in plant and crop improvement.16 That is not to say there were not laws concerning intellectual property in plants and animals, but their scope and application was limited.17
The high-technology genetic engineering revolution – as distinct from breeding and cultivation – began at least by 1952 with the discovery by James Watson and Sir Francis Crick of the structure of the deoxyribonucleic acid (DNA) molecule – the molecule that contains our genetic information.18 But the pace of the revolution has accellerated most rapidly in the last ten years.19 The search for new pharmaceutical, biotechnological or agricultural applications has led to a growing interest both from the public and from the private sector in genetic resources.20
The biotechnological revolution of the 1980s and 1990s enabled scientists to isolate the genetic materials of living organisms and induce precise modifications so that organisms manifest and carry desired genetic traits.21 Biotechnology is beginning to revolutionise agriculture by developing genetically superior plants and animals,22 and therefore has profound economic consequences. It is also offered as a solution to difficult environmental problems and challenges.23
It is sometimes suggested that the new biotechnologies24 are not radical departures from these historical practices. One defender of biotechnology claimed that “centuries of selective breeding have altered domestic animals far more than the next several decades of transgenic modifications are expected to alter them.”25 Another of biotechnology’s defenders argued that nature routinely reshuffles genetic material by combining genes in new ways during sexual reproduction, by altering genes through mutations, and by transferring foreign genes into already existing organisms.26 However, other commentators suggested that the changes in the planet resulting from the creation, use, and release of biotechnical products could dwarf the changes that have resulted from the use of petrochemical products.27 The World Resources Institute, for instance, sees genetic material as the “oil of the Information Age.”28
Whichever view is correct, a new legal regime has evolved, to respond to what is a paradigmatic change in technology. Partly this is because of ethical, moral and religious concerns, but economic factors have also been important, for example concerns that previous laws meant that developed countries were advantaged over Third World countries which were the source of much of the raw genetic material.29 Knowledge of itself becomes valuable, as the building blocks of organisms have economic value. Therefore business seizes the opportunity offered.
In recent years, advances in biotechnology have allowed for increased commodification of seeds not only by relying on utility patent protection for bioengineered varieties, but also by taking a new route to commodification – through biotechnical processes that, among other things, render seeds sterile or insert easily recognisable “marker” genes that identify plants’ DNA strains as the intellectual property of various biotech firms.30 It thus becomes possible to identify crops as the intellectual property of a particular company or individual. The translation of these innovations into the international realm of global trade and property protection has been awkward and at times controversial.31 Genetic engineering has business, ethical, religious, and legal ramifications.32 Thus as the investment increases so does the demand for legal protection of the associated intellectual property rights.
Business-wise, biotechnology has stimulated the creation and growth of small (and some medium and large) businesses, generated new jobs, and encouraged agricultural and industrial innovation.33 It is one of the most research-intensive and innovative industries in the scientific fields.34 But it is also carefully regulated by law – and there are detailed limits on the types of research which may be conducted, and the commercial exploitation of genetically modified organisms. So far as it is able business funds genetic research, because of its potential returns. But little research would occur – beyond the most fundamental – if no protection was accorded the results of the research. Basic research is rarely undertaken by private enterprise without some expectation of a return.
Since the 1970s much attention has been paid to the patentability of biotechnology.35 In the US, the patent system played a critical role in the growth of the biotechnology industry. In the course of the 1990s biotechnology grew into a US$13 billion industry, and the number of biotechnology patent applications exceeded 14,000 annually.36 Patent protection is vital to the biotechnology industry, particularly because small biotechnology companies invest enormous sums of money in research and development. Often, intellectual property is the only product that a young company can show its potential investors; and patents are ideally suited to protect technology-based intellectual property.37
Proponents of biotechnology patenting suggest that the new biotechnology patents, or “biopatents,” are minor and logical extensions from past practice, not radical revisions.38 Thus they rely upon the pre-existing legal processes, such as intellectual property laws – specifically patent laws.
Genetic engineering is not, of course, limited to the vegetable kingdom. Harvard University received the first patent on animal life. Its patent was for a mouse genetically altered to be susceptible to breast cancer.39 As the project’s major sponsor, Du Pont possesses commercial rights and the chemical company is selling the patented research animals.40 It is in the animal kingdom that the legal response may have been most significant, because of the ethical issues which it raises.
In the 1990s, J. Craig Venter, a biologist at the National Institutes of Health (“NIH”), in Bethesda, Maryland, proposed the wholesale patenting of human gene fragments. Venter’s lab, using automated machines, had sequenced not whole genes but random fragments of cDNA derived from part of the brain.41 Such a fragment was called an “expressed sequence tag,” or EST.42 Although just 150 to 400 DNA coding pairs long, each was unique and served to identify the gene of which it was a part.43 In June 1991, Venter and NIH filed for patents on 315 ESTs and the human genes from which they came.44
Venter’s laboratory could produce EST sequences so quickly that NIH planned to file patent applications for 1,000 of them a month.45 Indeed, by 1994 the number of ESTs covered by the Venter/NIH application had multiplied to almost 7,000.46
A number of patent experts, however, insisted that ESTs were not patentable47 – not because there was anything inherently unpatentable about genetic engineering, but because they failed to show sufficient legal grounds. Venter’s initiative also provoked denunciations from scientists anxious that EST patents, if issued, would restrict research by others on human genes. The prospect of EST patenting was of serious concern to the biotechnology industry. The Association of Biotechnology Companies in Washington, DC, which represented 280 companies and institutions, endorsed EST patenting by NIH so long as it did not favour any one company over another, for example by granting an exclusive license.48 In addition, many of the opponents of EST patenting were concerned at the prospect that the government – through NIH – would own those patents.49 It would be beyond the capacity of private enterprise to co-ordinate and regulate the field – and a monopoly would be too restrictive.
France, Italy, and Japan announced their opposition to NIH’s EST patents, fearing the patents would competitively disadvantage their budding biotechnology enterprises.50 The French Academy of Sciences condemned “any measure which, answering purely to a logic of industrial competition, strove to obtain the legal property of genetic information data, without even having taken care to characterise the genes considered.”51 However, the British Minister of Science Alan Howarth chose to join the competition, announcing in March 1992 that the Medical Research Council would also seek complementary DNA (cDNA) patents.52 Howarth explained that “a decision … not to seek patents when researchers funded by public bodies in other countries have or may do so could place the UK at a relative disadvantage.”53 The role of privately funded researchers was less in the UK and elsewhere than in the US, where private business and research laboratories conducted much of the research.
However, initial fears of a monopoly were ended in August 1992; the US Patent Office rejected the Venter/NIH claims, calling them “vague, indefinite, misdescriptive, inaccurate and incomprehensible.”54
Patent laws were not necessarily unavailable however to businesses engaged in genetic engineering, provided there are properly submitted. However, they may not necessarily be the same as for other patentable inventions, due to the political and ethical considerations – including international.55
In the summer of 1997, the European Parliament reconsidered the question of patenting biological inventions.56 In the spring of 1998, it approved a wide-ranging directive on biotechnology designed to encourage patents while adopting explicit ethical restrictions – for the first time anywhere – on what can be patented.57 Holding that biotechnology patents must safeguard the dignity and integrity of the person, the directive prohibits patents on human parts, human embryos, and the products of human cloning.58 The directive also prohibits patents on animals if what they suffer by being modified exceeds the benefits that the modification would yield.59
Meanwhile basis and applied research continued, as there was no doubt that, though genetic research is expensive, great potential exists for long-term profit – provided the investment is legally protected.
The Human Genome Project (HGP), funded by the US Government, was projected to be completed in fifteen years at a cost of US$3 billion.60 The purpose of the HGP is to decipher the human genome, which is the master control program of human biological life.61 With knowledge gained from the HGP, diagnostic tests for genetic defects are now available,62 and it is hoped that cures for diseases caused by these genetic defects will follow.63 This project proceeded despite uncertainties regarding patents, as the work itself would not produce patentable outputs – bit would rather facilitate subject genetic work.
The difficulty for patenting the “codes of life” – and their potential risk – led to government intervention, and new laws. Indeed, for human DNA, some people question whether there should be any property rights at all.64 Such a position would seriously inhibit privately-funded research, since little or no protection would be accorded to its findings.
The intellectual property law regime has for more than two centuries struggled to keep up with rapid technological change, yet it seems always to have managed to do so in the end. The biotechnology revolution, however, will create unprecedented challenges to our intellectual property rights system, perhaps especially in the allocation of rights to balance the interests of scientists, investors and those from whom valuable genetic material is obtained.
Intellectual property law, which includes patent law, is designed to advance knowledge and to stimulate innovation for the benefit of society.65 To encourage this goal, a patent grants to an inventor a limited monopoly with which to profit from his or her invention.66 But the details of patent laws vary from country to country.
Australia and the UK, as well as most other countries (the US being a notable exception), adopt the “first-to-file” principle of patent law. This means that the person entitled to the patent is the first to file the application, even if he or she was not also the first person to have conceived the invention. The date at which the invention is assessed for both novelty and inventive step (“priority date”) is the date on which the application was filed.67 The principle of national treatment under the Paris Convention for the Protection of Industrial Property68 establishes the date of first filing in a member country as the priority date for subsequent filings in other states, provided that these occur within 12 months from the original filing.69 The effect was to encourage developers to file patents as soon as possible, but it also potentially discouraged fundamental research, the economic benefits of which – if any – might be lost simply through delayed filing. In this respect biotechnology laws may have limited the potential for further research and development.70
Existing intellectual property protection laws have been modified, and the only major legal shift has been with respect to human gene research. Research is now allowed, but with restrictions.71 For agricultural research political issues have caused even more difficulties, because in addition to ethical concerns there are differences between regions, a north-south divide, and so on.
It has been argued that there is a clear need for an international regulation on genetic engineering,72 because the lack of clear legislation has been creating uncertainty in terms of safety and international trade; has been making it more difficult to perceive when a country is violating the principle of state responsibility, just because its obligations under international law are not clear;73 makes it more difficult for a country to observe its duty to assess environmental impacts, just because scientific findings are not absolutely conclusive in this matter, creating the possibility of discussion under World Trade Organisation/General Agreement on Tariffs and Trade (WTO/GATT) (such as the Monarch Butterfly Case74); on the other hand makes it more difficult to identify when a country is violating its obligation not to cause environmental harm. Further, the lack of specific international legislation has been causing the impairment of commerce, and one of the consequences here may be the limitation on research and development of new biotechnology products; and has been creating a tension between international trade law and international environmental law.
At the present time, intellectual property law is the mechanism that determines international protection and control over biotechnology innovations in plant varieties – and human and animal genetic material – and the genetic resources that form the basis for those innovations.75 The intellectual property paradigm that is utilised employs western definitions of property in order to provide a framework in which to allocate rights. This has resulted in serious distributive problems including western-specific ideas about property, authorship, and individual creative inventors.
From the perspective of the user of technology, the indigenous peoples who possessed many of the raw materials, the failure of the legal system to adapt itself to changed agricultural technology has been costly. The benefits – such as there have been – are to the major companies which already had sufficient market penetration to effectively introduce their new products.
At a practical and normative level the issues thus raised converge on eligibility, and on whether modern biotechnology, however conceived, is a suitable subject matter for patent protection, or whether it is truly beyond the normative and doctrinal capacities of the patent system as that system currently exists.76 This has been important at an international level, but nationally patent laws have been used by companies to protect their intellectual property – and to enhance its value. Yet without this the western companies – who do most of the research – could be discouraged.
As the laws stands, it advantages existing established companies. One example of this is through sector capture.77 For instance, Monsanto’s “private property” in specific seed genomes, possessing genetically engineered characteristics such as drought and insect resistance, has been supplanting traditional agricultural understandings of seeds, and has accordingly changed farmers from seed saving “proprietors” into mere licensees of a patented agricultural technology.78 When a farmer bought high-yield hybrid seed, the seeds from that crop wouldn’t duplicate the high yield, so the farmer had to return to the seed company the next season if he or she wanted continued high yields.79
Similarly, in the 2001 Canadian Schmeiser case patent infringement liability was found on the part of a canola80 farmer whose fields adjoined a field planted with genetically engineered and patented canola, that outcrossed with his unpatented canola variety.81 These arrangements were of economic benefit to established suppliers, but may have a restrictive effect on others.
The apparent economic failure in the genetically engineered crop market has been said to be because of asymmetry and the economic phenomena known as the “lemon problem”.82 Environmental and biological controversies have not helped either.83
There is perhaps still scope for the small research firm. Generally, however, it must be said that the response of business to the advent of generic engineering has been cautious, because of the high regulatory risks and high costs, and uncertain benefits. The major legal determinant seems to be protection of ideas. The companies work around the restrictions – but only if their ideas are safeguarded. So far this has largely been through traditional intellectual property laws. Care must also be taken to ensure that there is a proper balance between protection of intellectual property – including that of indigenous peoples – and the common pool of human knowledge. Restrictions on certain types of research, and safeguards against the escape of organisms, seem less significant. In this case the paradigm shift is yet to come.
In the case of genetic engineering, business took advantage of pre-existing legal mechanisms – predominantly patent laws – in order to safeguard their investments. They also utilised licensing to achieve market capture – as in the Monsanto example. Both of these are relatively traditional uses of legal systems. However, where the difference lies is in the scale of the utilisation of these mechanisms, and of the indirect effects – such as for indigenous peoples’ property rights.

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