Dr Birgit ClarkBased in Baker McKenzie's London Office, Dr Birgit Clark is a Professional Support lawyer focussing on European IP law. Birgit originally qualified as Attorney-at-Law (Rechtsanwalt) in Germany and subsequently also as UK solicitor and Chartered UK and European trade mark attorney. Birgit is an extensively published legal author, blogger and commentator with a particular focus on how modern technology interlinks with IP law principles.
Ruth Burstall is a Senior Associate in the Intellectual Property Team of Baker McKenzie, London. She frequently advises clients in the pharmaceutical industry on IP-focused transactions and commercial arrangements as well as IP enforcement both offline and online. She has gained experience and insight into the healthcare sector having competed secondments at the research and development arm of a UK cancer charity and a global pharmaceutical company. She has a particular interest in the use of cutting-edge technologies, such as blockchain, in business.
Blockchain and other distributed ledger technologies (DLT) are said to have a major impact on intellectual property (IP) protection and management. A concept often cited in this context is that of “smart contracts”. Could you briefly explain what smart contracts are, and how they may be applied in the future?
Even though the term "smart contracts" itself isn't new and was already coined in the mid 1990s, smart contracts appear to have become one of the buzzwords in the context of blockchain technology.
However, there is currently a complete lack of uniform or legal definition of the term. Instead, there are two diverging views: an optimistic view of smart contracts is that they could do away with lawyers altogether and be self-enforcing. John Alber of the International Legal Technology Association argued, back in 2015, that smart contracts do not need page after page of small print, nor do they need the lawyers who write the small print or the courts that enforce them.
This does sound attractive, but we feel that this is a somewhat oversimplified definition which does not reflect real-life human and business interaction, where contractual disputes often centre on the quality of a contractual performance. Even though binary responses to predictably occurring smaller disputes can be coded, such as through micropayments, the idea of entirely self-executing contracts struggles where there is the need for a subjective judgment and evidence of facts.
In our view, a perhaps more realistic definition sees smart contracts as a type of coded instruction, which execute on the occurrence of an event, usually, but not always, by the use of blockchain technology which records and also executes transactions. This definition sees smart contracts as computerised transaction protocols that execute contract terms (such as the payment of a periodic milestone payment or a fixed licence fee) automatically without the need for third parties; in other words, a counterpart performance is triggered automatically by a relevant act. Smart contract performance can be used to implement a contract without human involvement once the underlying binding contract has been coded.
With global standards for self-executing contracts now being discussed by various organizations and academics, it may only be a question of time until we arrive at more reliable definition of the term.
Whether smart contract performance will be able to accurately execute more complex contractual terms or legal concepts, such as public domain and multi-territorial licensing information, will have to be seen. With many of the underlying terms and conditions and contracts being drafted by companies, other concerns, such as consumer protection laws and public interest considerations, will also come into play and shape the concept of smart contracts beyond the ambit of IP law. One issue that is not discussed often enough is whether it will be possible to find reliable "oracles", i.e. an agent that retrieves and verifies real-world occurrences and submits this information to a blockchain in order for smart contracts to self-execute.
In the context of IP rights, smart contracts could be used to establish and enforce IP agreements, such as licences, and allow the transmission of payments in real time to IP owners; for example, smart information about an IP right of protected content, e.g. a song, could be encoded in digital form, e.g. in a music file. Such smart information could also include rights management information, such as ownership, use permissions and payment terms. That these ideas are fast becoming mainstream is evidenced by Kodak’s recent launch of a blockchain-based image rights management platform and its own token, as well as the existence of a large number of startups. In addition, the Accord Project, a non-profit organization that builds open source code and documentation for smart legal contracts, is working on specifications and open source tools to improve the production, distribution, licensing and management of IP with smart legal contracts. While it's still too early to say whether smart contracts are the future of digital rights management, blockchain could redefine how creators are remunerated - often instantly by so-called micropayments - by acting as a platform for creators and distributors of IP.
IP-intensive industries such as the pharmaceutical sector are expected to be significantly affected by these new technologies. Sticking to the pharma industry as a sample industry branch: What are major challenges this industry currently faces, and how could blockchain help tackle these?
Counterfeit pharmaceuticals are a great concern. An EUIPO report from 2016 showed that fake medicines cost the EU pharmaceutical sector €10.2 billion each year, which translates into 37,700 jobs directly lost across the pharmaceutical sector in the EU. Similarly, a 2017 study by PWC reports that the counterfeit pharmaceuticals market is a €188 billion (US $200 billion) annual business: the largest of all counterfeit goods. Fake or counterfeit pharmaceuticals are highly dangerous and can risk the lives of consumers either because they lack in active ingredients or because they contain harmful ingredients.
Fragmented supply chains, in which data doesn't not flow automatically, have been identified as one of the core causes and legislators are now taking action to flush counterfeits out of the legitimate supply chain. The EU Falsified Medicines Directive 2011/62/EU (FMD) will introduce an EU-wide system which aims to secure the supply chain between pharmaceutical manufacturers and patients against counterfeits. By February 2019, the manufacturers of all prescription and certain non-prescription medicines will need to add specific safety features to their packaging which will mean that legitimate medicines can be tracked at each point of the supply chain and, when the medicine is dispensed to a patient, a pharmacist will be able to scan a unique identifier to verify that the product is genuine.
It seems to us that blockchain lends itself to achieving the aims of the FMD since it creates a trustworthy and transparent record by allowing multiple parties to a transaction to verify what will be entered onto a ledger in advance, without any single party being able to later change any ledger entries independently. In addition, blockchain can also help with monitoring a pharmaceutical product's progress through various stages, from sourcing the raw materials to manufacturing and supply chain. And, blockchain could be used to monitor and control leaks from selective distribution networks and thus assist in enforcing such agreements.
Another issue for the pharma industry are parallel imports. Blockchain allows manufacturers of pharmaceutical goods to record where goods are placed on the market, allowing them to distinguish grey goods in cases of parallel imports and identify where they left the supply chain, e.g. where a drug shipment has gone missing.
Blockchain technology can also support the pharmaceutical companies’ own anti-counterfeiting and enforcement efforts. Its traceability features could be used to increase effectiveness of customs programmes to prevent global trade in counterfeits. If a brand owner is able to tell customs about the security features that its genuine products should have, then the absence of such features is an easy way for customs to check whether a product is counterfeit. Customs authorities could potentially benefit from using the same scanning technology as is envisaged under the FMD.
Could you give us some additional examples of how blockchain and DLT may be applied and potentially transform business and IP management in the pharma sector?
In the context of pharmaceutical and other intellectual property heavy industries, blockchain and other distributed ledger technologies offer obvious possibilities for both IP protection/registration and evidence, either at the registry stage or in court. These include evidence of creatorship and provenance authentication, registering and clearing IP rights, controlling and tracking the distribution of (un)registered IP, providing evidence of genuine and/or first use in trade (and/or commerce). It could be particularly helpful in the pharmaceutical industry for protecting trade secrets such as manufacturing know-how by recording evidence of their existence and ownership and keepung them secret (using a process called 'hashing'). In the context of the pharmaceutical sector, it can also be used to comply with the control and monitoring of the authenticity of the active pharmaceutical ingredients during all stages of production: raw material sourcing, manufacturing of the active pharmaceutical ingredients and manufacturing of the final products as well as monitoring the conditions of their storage. This could be helpful in regulatory compliance investigations.
Despite the possibilities blockchain technology offers, what are potential hurdles and challenges with regard to large-scale legal application?
The large-scale adoption of blockchain technology faces a number of obstacles: technical hurdles, such as scalability and interoperability standards and protocols; legal hurdles, such as questions of governing laws and jurisdictions; enforceability of smart rights, data security and privacy concerns and resistance, not least since some still associate Bitcoin and blockchain with media reports of criminal activities on the dark web and cycnics who regard blockchain as a solution in search of a problem.
On the other hand, blockchain technology is slowly but surely becoming mainstream: various governmental agencies and IP registries such as the European Union Intellectual Property Office (EUIPO), are actively looking into the capabilities of blockchain; the EU Commission has launched the blockchain observatory and the US Congress created a Congressional Blockchain Caucus. The fact that the law is catching up can be seen by the Chinese Supreme Court's recent decision which held that blockchain can legally authenticate evidence, if it meets certain requirements.
To what extent, do you think, has blockchain technology arrived in practice already? Is it accepted by pharmaceutical companies?
This is still a new technology which has not been widely adopted in the pharmaceutical industry. Despite lending itself well to meeting the requirements under the FMD described above, the majority of pharmaceutical companies have been working on their compliance with these legal requirements as a long term project and therefore have not used blockchain technology in implementing solutions. However, as there is a global trend in legislation towards supply chain transparency and because there are obvious benefits for not only pharmaceutical companies but also other players in the supply chain such as logistics companies and customs authorities, we think that there will continue to be uptake of the technology. Many blockchain start-ups are specifically targeting the pharmaceutical industry and working to develop solutions tailored to the above problems.
Thank you for the interview, Birgit and Ruth!