contemporary challenges to property rights

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ed h and Chapter 5 p those ose who aids by the in- istance, Contemporary Challenges to Property Rights men of eryone where erlook. viduals con- Sanx- even Case Study svice W.R. Grace & Co. and the Neemix Patent (A) accu- KRISTI SEVERANCE • LISA SHAPIRO O PATRICIA H. WERHANE 1 will usted but have evel- dis- "[Neem) seems to be one of the most promising of all plants and may eventually benefit every person on the planet. -National Research Council Report on Neem, 1992 into This the om efly Ons vay he ict ce Derived from the seeds of the Indian neem tree and touted as a safe, natural biopesticide, Neemix seemed to be a benevolent product that promised W.R. Grace & Company (WRG) profits and farmers a sustainable means of fighting pests. Three years earlier, Grace researchers had been granted a patent on the pesticide, and since that time Neemix had become far more than just another product in the company's line. Grace, the world's largest manufacturer of specialty chemicals, had never expected Neemix to be a major source of income for the company, but steady sales since its intro- duction to market supported the prediction that consumers were interested in purchasing completely natural, environmentally friendly pesticides, rather than chemical ones. The active ingredient in Neemix, azadirachtin, is a com- pound that occurs naturally in neem seeds and possesses the ideal charac- teristic of being fatally harmful to more than 200 species of insect pests, while remaining non-toxic to other plants and beneficial animals. By early 1995, sales of Neemix brought in about $60 million annually out of Grace's total of $5 billion in annual sales, and references in the press to the effectiveness of Neemix were becoming frequent. де This case was prepared by Kristi Severance and revised by Lisa Spiro under the supervision of Patricia H. Werhane, Ruffin Professor of Business Ethics. Copyright 1997 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. 177 178 • PART2 PROPERTE, P 2 X By late summer of 1995, however, the product's success became clouded pesticides for thousands crushing neem seeds and soaking them in water, as to a patent on a neem-based pesticide. There were voices of protest in the of years, and for that reason many Indians believed that Grace had no right the United States, India, and other countries, filed a petition with the US. Patent and Trademark Office to reexamine the Neemix patent in hopes of having it revoked. They charged Grace with committing what they called 1995, the FET, together with more than 200 supporting organizations from knowledge of natural resources that rightfully belonged to the indigenous "biopiracy," saving that the company had appropriated and W.R. GRACE COMPANY BACKGROUND profited Chap. 5 Contemporary Challenges to Property Rights • the success of chemical companies in the United States, and under his direction the company began its foray into the chemical industry. He initi- ated a plan to reduce South American investments from 100 percent to 5 percent, by expanding into the U.S. chemical industry, and, in order to raise the money to do so, the company went public in 1953. In 1952, Grace purchased its first U.S. chemical manufacturing plant in Memphis, Ten- nessee. In 1954 it purchased Davison Chemical and then Dewey and Almy Chemical, which provided the foundation from which Grace grew to be the world's largest specialty chemical company. The transfer to primarily when Grace sold Grace National Bank, Panagra, and the Grace Line. During the next 11 years, Grace acquired 23 additional chemical companies for 4 million shares of stock. In the 1960s and 1970s Grace expanded into the food and sporting goods industries, a diversification that lasted only until the mid-1980s. Later Grace expanded into the water treatment, food-service packaging, and health-care products industries. By 1988, Grace was prepared to begin research and development of a natural pesticide. Although soft pesti- cides would probably not knock synthetic insecticides out of the market, Grace nonetheless realized that a neem-based pesticide had the potential cide market that was, according to a National Research Council expected to increase from $450 million in 1993 to $813 million annu- from peoples in India. to provide the company with some of the profits from a natural pesti- survey, ally in 1998. After investigating several avenues, Grace joined a growing number of Western scientists and companies who saw neem as the source with the most potential. NEEM resource products. In 1854 William Russell Grace traveled from Ireland to From its inception Grace was a company defined by its interests in natural Callao, Peru, hoping to rebuild the family fortune, which had been depleted by the potato famine. He first became a clerk and later a partner in a trad- ing firm that specialized in shipping guano (bird dung) and nitrate of soda moved to New York City, where he established W.R. Grace & Company company grew to be the largest of its kind in the country. In 1865, William (WRG). The company established three-way shipping routes from South America to North America and to Europe for trading fertilizer, agricultural products, and U.S.-manufactured goods, and remained connected with the Peruvian government as its agent for the sale of nitrate of soda. After William died in 1904, his brother Michael took control of the company and was succeeded in 1909 by William's son Joseph. With Joseph at the helm, the company underwent a period of rapid growth. He purchased cotton mills, sugar plantations, sugar refineries in Peru, and nitrate production facilities in Chile. During this time the company expanded its shipping interests, and in 1914 Grace Lines sent the first ship through the Panamá Canal. Grace also moved into the banking industry with the establishment of Grace National Bank. Another new area of interest for Grace was aviation, and together with Pan American Airways, they established Panagra Airlines, which offered the first international air service down the west coast of South America, The neem tree (Azadirachta indica) is a member of the mahagony family and is native to numerous countries with subtropical climates. It is particularly prevalent in India, where an estimated 18 million trees flourish. Resembling an oak in stature, it is tall, with wide spreading branches bearing masses of white honey-scented flowers and bitter fruit similar in appearance to olives. The neem is a rapidly growing tree that only loses its leaves in cases of extreme drought and in general thrives in hot, arid conditions. Its extensive root system allows it to extract nutrients from even the poorest soils. The combination of these characteristics makes it ideal for growing in the areas most in need of its benefits. In many villages in the hottest parts of India, the only available relief from the heat is the substantial shade that the neem tree provides. Pilgrims to the holy Islamic site of the Plains of Arafat in Saudi Arabia are protected from the sun by 50 thousand neem trees planted by a Saudi philanthropist. In Ghana and several other African countries where a need for fuel has led to problems with deforestation, a campaign to introduce the neem, which requires little maintenance and is non-invasive, helped counter the effects of massive soil erosion. The neem tree has provided a double benefit in these countries: in addition to stabilizing the soil, the tree provided an invaluable, renewable source of timber because it could mature in only 5-7 years. In 1945, after his father's retirement, Joseph R. Grace's son, J. Peter Grace, was elected president of the company at age 32. At the time, W.R. Grace had $93 million in assets and J. Peter wanted to both protect and increase them. The company's primary interests were in Grace Lines , Grace National Bank, Panagra, and agricultural products. Concerned with politi cal and economic instability in South America, J. Peter began to look for Chap. 5 Contemporary Challenges to Property Rights . NEEMS ROLE IN INDIA NEEM DEVELOPMENT 6 essentials 3. part of annual purposes date back on the study of neem's pesticidal properties began in India in the 1920s. At that In addition to the substantial body of traditional knowledge, formal scientific of ground neem seeds in water repelled the desert locust when it was applied time two Indian scientists conducted tests and found that a dilute suspension mal recognition of this work was scarce, despite important findings that to plants. Neem continued to be a topic of scientific study in India, but for- demonstrated the effectiveness of spraying a neem seed and water suspension on several crops to prevent insects from feeding on them and in 1965 a chemist at the National Chemical Laboratory in Pune identified the structure of nimbin, a compound in neem with anti-viral properties,8 Despite the results of research conducted in India, neem's attributes Heinrich Schmutterer observed its natural pesticidal properties in the Sudan remained largely unrecognized in the West until German entomologist in 1959. During a locust invasion, Schmutterer noticed that the entire landscape was defoliated except for the neem trees. Although the insects landed on the neem trees, they quickly flew off without feeding on them. Curious, he began to study neem in an attempt to understand how it worked as a pesticide. His interest in the tree subsequently became the focal point of his career and initiated an era of neem research in the West. twigs, fraying the end Neem has plaved an integral role in Indian culture for thousands of year, New Jear celebrations, when its leaves are eaten to ensure good health Rerered br Hindus, neem has always been an important thousands of rears. Ayurvedic doctors, who practice medicine based through the year: Accounts of its usefulness for medical variety of illnesses that it is used throughout India to prevent and treat a afford either toothbrushes or toothpaste, millions of Indians have had commonly referred to as "the village pharmacy. Despite being and using them to clean teeth and gums. Compounds within the twigs have dental health because they chewed daily on neem made into creams and poultices for application to skin disorders from acne frices. Neem is also used to treat skin ailments. Ground neem leaves result, neem can now be found in numerous commercially available denti to leprost; and neem oil is a common ingredient in soaps valued for their antiseptic qualities. Neem has traditionally been believed to be effective Tarious neem components have been used as contraceptives, and tests promising avenue for development of new birth-control methods, and have indicated that the oil is a strong spermicide. It has been considered a researchers in several countries have been working to develop this aspect of neem. In New Delhi scientists at the Defense Institute of Physiology and Allied Sciences isolated a substance from neem oil that kills sperm on contact. They because neem's status as an important part of India's folklore may make it a were particularly optimistic about the possibility of a viable neem contraceptive more socially acceptable form of contraception than commercial birth-control methods. Some scientists both in the United States and India have also cited good are studies in labs in numerous Western countries confirmed that neem was a against viruses like chicken pox. available for the lay person in the United States was published by an ad hoc and others who could play a role in developing agant neem as a potential weapon against the human immunodeficiency virus (HIV). In addition to its medicinal uses, neem is one of the primary means of controlling insect pests in India. Planting neem trees in village centers is common practice because they help ward off biting insects. Neem leaves scattered in closets and food and grain bins keep pests away for up to ser- eral months. Farmers soak neem seeds overnight in water and apply the re- sulting emulsion to crops to keep pests away, and neem cake, the residue left once the oil has been removed from the seeds, is used to combat soil borne pests. Neem cake also assists plants with nitrogen take-up. Use of neem products is not restricted to only those farmers too poor to have acces to commercially produced insecticides: many wealthy growers of cardamom , an Indian spice and valuable export, use neem cake to protect their crom against invasion by pests in the soil. It was these numerous pesticida qualities of neem that first attracted the attention of the West. In the years since Schmutterer first observed the neem phenomenon, panel of the Board on Science and Technology for International Develop ment, a division of the National Research Council . In an effort to promote neem's potential, the publication was designed not for specialists in the field, but for government officials, voluntary organizations, entrepreneurs, iad uses. Authors said they hoped the reports would help overcome igno- rance of the tree in the West. Noel Vietmeyer, director of the study, said that the biggest obstacle to neem's acceptance in the West was that Western scientists were simply unfamiliar with the tree and were skeptical of extrav- claims about its potential. The report's claims for the neem tree were substantial and confirmed, according to Eugene Schulz, chair of the study." According to the report, Probably no other plant yields as many strange and varied products or has as many exploitable by-products as the neem.... This plant may usher in a new era in pest control, provide millions with inexpensive medicines, cut down the rate of human population growth, and perhaps even reduce erosion, deforestation, and the excessive temperature of an overheated globe.10 Current neem research confirmed that the NRC report's optimistic claims were not exaggerated. Neem is currently the only viable candidate for development of a method to combat Chagas disease, an incapacitating disease caused by a parasite and affecting millions in Latin America. Chagas is trans- mitted by an insect known as the kissing bug, which acts as a host for the developing parasite. Research teams in Brazil determined that blood treated Nu favus, Chap. 5 Contemporary Challenges to Property Rights • 183 The azadirachtin molecule, however, has one drawback. It is inherently unstable, breaking down easily in sunlight and heat, and it can degrade in a solution within days. For farmers in India who produced only enough solution to apply to their corps at any given time, this instability was not a amounts to sell, the problem was significant. Several scientists, including some from India, have asserted that the instability of the azadirachtin mol- ecule has been the biggest obstacle to widespread neem use. con- with them and ted to parasite wtested kissing bugs caused the parasitesi ataus Autos pose a serious health hazard, particularly in areas compelling, it is its effective och grows on loods and produces highly carcinogenic chemicals called roer go and food storage is dificult due to weather conditions. while een man potential uses are mes as a pencide that continues to motivate much of Western research on the tree. The NRC report concluded that in field tests neem proved rebno highly toxic chemical pesticides to control them. In IPM, every cope of magrated pest management (IPM). Integrated pest management mediod of operation was compatible with the increasingly popular pesticide is a natural and efficient way to deal with the problem: "To employ arent i per control is to take advantage of the plant kingdom's 400 million wears of apenende at trving to frustrate the animal kingdom."11 PM has attracted interest primarily because of concerns about two ance to sathetic insecticides. The World Health Organization rates the for- no other animals including humans, and insects' capability to major problems facing the agriculture industry: synthetic pesticide toxicity pesticides fatally mer problem a serious one, estimating that synthetic paison 20.000 people per vear 12 Most chemical pesticides attack insects' central nervous systems, killing them outright. Neem's compounds work against them indirectly, but ultimately provide the same result. Neem on pese insects. Instead of killing pest insects on contact, neem either deters ains several compounds that have both behavioral and physiological effects uration process so that thev eventually die. This capability allows neem to NEEM DEVELOPMENT AT GRACE James Walter, one of Grace's primary researchers and a member of the NRC report panel, described development of neem-based pesticides at Grace as "a relatively short story, owing to the great amount of work already accom- plished by researchers throughout the world."13 In 1988 Grace Horticultural Products, a unit of Grace Specialty Chemicals (USA), acquired the rights to a neem pesticide, Margosan-0, through a purchase agreement with Vikwood Botanicals of Sheboygan, WI. Robert Larson of Vikwood, a timber-importing had first heard about them on a trip to India in 1973. He began importing firm, had been interested in neem's numerous beneficial properties since he neem seeds and testing them. But while he was able to develop a neem- based pesticide, have it patented, and gain EPA registration, he ultimately faced the major stumbling block of azadirachtin's instability. to develop resis mat- them from feeding on plants they would normally eat or both destroy pests and leave non-pests unharmed. In order to produce commercial quantities of a neem pesticide he needed a much more stable solution than he was able to produce in his own laboratories. After a failed attempt to contract out the production to another firm, Larson began to look elsewhere. He approached Grace, which he knew to be looking for a viable pesticide that was not harmful to the environment. Grace purchased the rights to the formulation and process for producing Margosan-O and then also began work on a neem pesticide that would be even more storage-stable, a process that ultimately led to the development of Neemix. In March 1994, the EPA registered Neemix as the first neem product cleared in the United States for use on food crops. 14 Walter described the development of neem-based pesticides as an important step to dealing with the problem of pesticide toxicity: “This is a real significant advance in insecticides ... with all the characteristics you want and none you don't want. I don't see a down side to it." THE PATENT is azadirachtin, one of the most potent substances found in neem. It is the most active of a class of chemical compounds found in neem that are both anti-feedants and growth regulators. Many leaf-chewing pests that would nor- mally defoliate plants will starve to death rather than eat a plant that has been treated with an azadirachtin solution. Derived from the oil that is ex tracted from neem seeds, azadirachtin is structurally similar to insect hor mones that control the process of metamorphosis. Azadirachtin replicates the work of ecdysones in insects, but imperfectly, so that the process of metamorphosis is disrupted. It blocks the insect's production and release of hormones vital to metamorphosis, thus preventing it from molting and ultimately killing it Pest insects seem unable to develop resistance to neem-based pesticides because of the complex workings of compounds like azadirachtin. It is for this reason that neem is one of the few pesticides currently available with any effect on the "superbug--the so-called pest-which has devastated crops in California and proven resistant to standard synthetic pesticides. Finally, the Neemix researchers were ready to apply for a patent. According to United States patent laws, an invention has to meet three criteria in order to be patented: it has to be novel with respect to “prior art," a legal term referring to previous knowledge about a particular subject matter; it has to be non-obvious from the prior art" to someone possessing ordinary skill in the art at the time the invention was made; and it has to be useful. The sec- ond constraint narrows the first one. Even if the subject matter of a sought patent is different from what is known from prior art, a patent can be denied if the differences are not significan , being obisous to someone having an ordinary level of knowledge in that prevent them from printed publication in the United subyert arra S. patent regulations further specify that in order to qualify for a purch, an invention cannot have been known or used in the United elsewhere more than a year prior Saces or cleewhere prior to its invention; nor can the invention have been Saates or patented or described in a the discovery of a naturally occurring product: a legally significant : been modified in some war: "Patent law requires something Grace submitted an application to patent its process for making a neem of human inovation must have been involved."15 a non-toxic, natural pesticide pesticide with a shelflife of up to 2 years. The patent application stated that formulation based on an extract from neem seeds with improved storage the purpose of the invention was "to provide 1992, the patent was granted. At that point Grace became one of 22 com- abilir." The application was filed on October 31, 1990, and on panies including three in India, to hold approximately 40 patents on neem- amount Chap. 5 Contemporary Challenges to Property Rights • 185 The protest claimed that Indian researchers had published descriptions of neem seed effectiveness as a pesticide as early as 1928, and cited the stud- ies of neem in India in the 1960s and research conducted at the Indian Agricultural Research Institute on neem's potential as an insecticide and in- sect repellant, saying they had all preceded Larson and Grace's efforts by a records of prior knowledge about neem to exist in print because the accu- decade. The protesters also asserted that it was unfair to expect any other mulated knowledge is the result of many anonymous and individual efforts carried out over hundreds of years. By citing a lack of formal publications as proof of non-obviousness, the company holds the villagers to a standard that is clearly unobtainable."17 In reference to the obviousness of Grace's formulation, Rifkin asserted that "any chemist worth his salt could have come up with it."18 The coalition also argued that the Indian farmers who had traditionally used neem could not have been expected to file for a patent themselves because of pragmatic and legal constraints against it: "The fact that Indian researchers failed to obtain patent protection on stabilization techniques is only does Indian law prohibit the patenting of agricultural products, but June 23 Indian citizens are ethically opposed to the patenting and ownership based products. because the tree has played such an important role within Indian culture and religion."19 THE PROTEST In addition to filing a formal petition with the PTO, the FET and its rage compensate indigenous people. On September 14, 1995, the Foundation on Economic Trends (FET), led by its president, Jeremy Rifkin, filed its request for reexamination of the Neemx patent with the U.S. Patent and Trademark Office (PTO). More than 200 organizations from 35 countries joined the FET as and Natural Resource Policy in Dehra Dun, India, headed by Dr. Vandana Shira, a scientist and outspoken advocate for indigenous peoples in India, and an Indian farmers organization. In lodging the protest, the FET and the granting of the patent within the confines of U.S. patent law and also its allies challenged the Neemix patent on two levels: they took issue with raised the question of whether the existing patent system could fairly The coalition challenged the patent on grounds (1) that two of the three criteria necessary for patent granting, novelty with respect to prior art, and obviousness, were absent in the Neemix patient application and 2) that the patent should therefore never have been granted. The groups in cluded in the protest claimed that the patent was invalid because the body of traditional knowledge about neem, including its use as a pesticide, qualified as priar art and therefore should have negated Grace's application with re spect to noveltv. "Whatever little incremental change W.R. Grace put on this is small compared to the native knowledge that has been accumulated gen- eration after generation on the use of this tree," Rifkin said. 16 More specifi- cally, the protest documents asserted that the patent should be overturned because the company's method of extracting stable compounds has been widely used prior to the patent's issuance and because the extraction methods have been previously described in printed publication." supporters claimed that, technicalities of patent law aside, patents like the one Grace held on Neemix should not be allowed to exist because they pre- sented appropriation of indigenous knowledge without compensation to the people who generated it . "What many Americans have not realized is that the anger, frustration, and resentment in the developing countries against what they regard as piracy of their heritage is every bit as intense as the out- that has been drummed up by the United States over the violation of our intellectual copyright in the developing world,” Rifkin said. He called Grace's patent "the first case of genetic colonialism," and said the neem tree was symbolic of a large debate over how developing countries and indige- nous peoples should be compensated when commercial products based on traditional knowledge were developed. One of the FET's supporters, Vandana Shiva, a vocal critic of the devel- opment of resources indigenous to third-world countries by more techno- logically advanced nations, argued that the Grace patent presented a serious economic threat to Indian farmers who used neem. The Persian name for neem means “free tree of India," and Shiva argued that patents of any kind on any neem-based product would prevent the free tree from being just that--financially accessible to the Indian farmers who have used it for centuries. She claimed that Grace's demand for the seeds would drive the price up be- yond the reach of poor farmers and would ultimately cause a general short- age of the seeds. She also expressed concern that under the requirements of the World Trade Organization, successor agreement to the General Agreement on Tariffs and Trade, India as a member nation would have to move to align its patent requirements with the West's, and indigenous users of neem would end up having to pay Grace for using it as a pesticide.
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Explanation & Answer

Attached.

Running head: PROPERTY RIGHTS

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Property Rights
Name
Institution

PROPERTY RIGHTS

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A patent is used to make sure that inventions are not used without the explicit
permission of the inventor. This protects the inventor from the theft of intellectual property.
Nonetheless, for the patent to be valid the invention must be made public.
Facts
One of the most prominent cases involving patent rights was between coalitions of
environmentalist who were suing W.R, Grace, and Company. In the case, the coalition was
suing the company for using extracts from the neem for antifungal purposes (Hellerer &
Jaramayan, 2000). The patent was awarded to W. R. Grace & Company, by the US
government. The coalition saw it a means of western exploitation of the indigenous Indian
people. This is because the neem tree has its roots in India,...


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