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Chapter 5
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Contemporary Challenges
to Property Rights
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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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