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Non-Violation-Based

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Non-Violation-Based

     INTERNATIONAL BANK

    FOR INNOVATION

     A Paradigm Shift

     in Global Intellectual Property Legitimacy

September, 2010

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September, 2010

    Contents

List of Abbreviations 3

Volume I

CHAPTER 1

    OVERVIEW: Summarizing Questions and a Way to Tackle them 4

     1.1. A Signal for Change 4

     1.2. Review and Model 5

     1.3. International Bank for Innovation (IBI) 5

     1.4. Patent Assurance 6

     1.5. Operation 7

     1.6. Institution 8

     1.7. Translation Waiver and Reduced Price of Official Fee 9

     1.8. Knowledge Liberalization 9

CHAPTER 2

    ECONOMIC MODEL: Knowledge Production, Allocation and Liberalization 12

     2.1. Knowledge Production:

    Statical Microeconomic Equilibrium between Private and Public Interests 12

     2.2. System Failure 14

    (a) Real Economic Market and Knowledge Allocation 14

    (b) Globalization 16

    (c) Externalities 16

    (d) Limited Variety of Escape Provisions 17

    (e) Doha Declaration and the Necessity of Financial Measure for Knowledge Allocation 18

     2.3. Knowledge Allocation: Dynamic Macroeconomics 19

     2.4. Knowledge liberalization: Financial Driver of Funding 21

     2.5. Dismal Consequences without Change 22

    (a) Medicines 22

    (b) Patent Erosion 23

    (c) Alternatives 24

    (d) Substitution of Players 25

    (e) Placing a Price on Environmental Degradation for Developed or Developing nations? 26

    (f) LDCs 27

     2.6. Concluding Remarks for This Chapter 28

CHAPTER 3

    LEGAL MODEL: A Proactive Instrument to Underpin an International Entitlement 32

     3.1. Patent Assurance 32

     3.2. Bridge between Property and Liability Rules 33

     3.3. TRIPS Agreement: A Role Model for the Property Rule 33

    (a) Property Rule 33

    (b) Inalienability 34

    (c) Liability Rule 35

     3.4. Proportionate Compensation Underpinning and Self-Compliance 36

    (a) Proportionate Compensation Underpinning for the TRIPS Agreement 36

    (b) High Rate of Compliance 38

     3.5. Self-Compliance and Assurance: Remarkable Synergy Effects 39

    (a) Accelerated Consent and Accession 39

    (b) Beyond Exceptions and Remedies 39

    (c) Beyond Retaliations and Sanctions 40

    (d) Assurance as a Proactive Countermeasure 40

     3.6. Proportional Awarding 41

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September, 2010

    (a) Assurance as a Countermeasure with Proportional Compensation 41

    (b) Investment Insurance 42

CHAPTER 4

    OPERATIONAL MODEL: Embodiment of Knowledge Allocation 45

     4.1. Revenue Phase 46

     4.2. Appraisal Phase 46

    (a) Requestor 47

    (b) Observer 47

    (c) Standing to Request the Financial Assistance 47

    (d) Protection of Capital in IBI 48

    (e) Proportionate Compensation 48

    (f) Moral Harard and Adverse Selection 49

    (g) Non-Violation-Based Request 50

    (h) Situation-Based Request 50

    (i) Criteria for Claim of Patent Assurance 51

    (j) Proof and Review 51

    (k) Flexibilities 52

    (l) Consultation 53

    (m) Rebalance Benefits 53

     4.3. Adoption and Disbursement Phases 53

CHAPTER 5

    INSTITUTIONAL MODEL 57

     5.1. Governance of the World Bank/MIGA and WTO 57

     5.2. Driving 57

     5.3. Decision Making 58

     5.4. WTO Dispute Settlement Mechanism 58

     5.5. WIPO 59

Volume II

CHAPTER 6

    TRANSLATION WAIVER AND REDUCED OFFICIAL FEE

CHAPTER 7

    ECONOMIC FEASIBILITY

CHAPTER 8

    CONCLUSION

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September, 2010

Abbreviations

     AD Agreement on Implementation of Article VI of GATT 1994 (Anti Dumping)

     BRICS Brazil, Russia, India, China and South Africa

     CBD Convention on Biological Diversity

     CVD Agreement on Subsidies and Countervailing Measures

     DSB WTO Dispute Settlement Body

     DSU Understanding on Rules and Procedures Governing the Settlement of Disputes

     EPO European Patent Office

     GATT General Agreement on Tariffs and Trade

     GEF Global Environment Facility

     HIV/AIDS Human Immunodeficiency Virus / Acquired Immune Deficiency Syndrome

     IBI International Bank for Innovation

     ICTSD International Centre for Trade and Sustainable Development

     ILC International Law Commission

     ILC Articles ILC's Articles on Responsibility of States for Internationally Wrongful Acts

     IP Intellectual Property

     JPO Japan Patent Office

     LDC Least Developed Countries

     MIGA Multilateral Investment Guarantee Agency

     MIGA Convention Convention Establishing MIGA

     NAFTA North American Free Trade Agreement

     PCT Patent Cooperation Treaty

     SG Agreement on Safeguards

     SPS Agreement on the Application of Sanitary and Phytosanitary Measures

     TBT Agreement on Technical Barriers to Trade

     TRIPS Agreement on Trade-Related Aspects of Intellectual Property Rights

     UNCSD United Nations Commission for Sustainable Development

     UNCTAD United Nations Conference on Trade and Development

     UNDP United Nations Development Program

     UNEP United Nations Environment Programme

     USPTO United States Patent and Trademark Office

     WHO World Health Organization

     WIPO World Intellectual Property Organization

     WTO World Trade Organization

     18 USC Title 18 of the United States Code (Federal Crimes and Criminal Procedure)

     35 USC Title 35 of the United States Code (Patent Law)

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    CHAPTER 1

    OVERVIEW:

    Summarizing Questions and a Way to Tackle them

    The quest for knowledge has always been an aspect of humanity, and in all likelihood, such conduct accommodates the wish of our Creator because it gifted us with the power to exploit knowledge regardless of the naturalistic fallacy (Moore, 1903) or extreme naturalism denying any exploitation by humankind. Since in reality, we cannot live in the Stone Age anymore, there is no other option for us but to develop further knowledge for the sake of building more sophisticated society with authentic prosperity. A number of difficulties facing us nowadays and arising from earlier exploitation of knowledge, e.g., pollution diseases,

    dichlorodiphenyltrichloroethane (DDT), the ozone hole made with chlorofluorocarbon (CFC), the asbestos-related lung disease, bovine spongiform encephalopathy (BSE), climate change and global warming, are not blunders but all the evidence of our progress, and such obstacles are just those to be overcome with more knowledge.

1.1. A Signal for Change

    Today, such production of knowledge expands with the highest pace in volume, scope and geographical extent over the course of human history (e.g., Wuchty, 2007). This ever-increasing production of knowledge impacts

    every way we live our lives and shape our society, e.g., knowledge in medicine, life science, genetics,

    environmental technology, hydrogen economy, space photolytic power generation, nuclear fusion energy production, space science, spacecraft, nanotechnology, computer, information technology, artificial intelligence, business model, financial engineering, education, art, and as well scientific, technological cultural, artistic, academic, social and any other creations. Some of these creations have raised serious economic and political frictions as well as security and ethical concerns, and as a result they would likely force us to question our rules and moral code to govern our production of knowledge in the foreseeable future, or even now.

    Indeed, such questioning has already emerged, or even reached almost full force for patent. It grants territorial and temporary exclusive privilege in return for public disclosure, which enables others to build on earlier innovations by their predecessors. In this way, patent has established its unique position to underpin scientific and technological advancement, and consequently to enrich society because society's practices generally depend on its affluence and level of science and technology. Today, however, we observe numerous signals indicating patent would have to change (e.g., WSJ, 2009) so that it could cope with relentless expansion of knowledge as

    long as we held out for patent as the best tool ever devised to facilitate knowledge production. Such expansion of knowledge brings with patent complex and dynamic pressures, which has already made a significant impact on the ability of the existing regime to respond to predictable, and even unpredictable future change. Change is the sole certainty in our uncertain world.

    Long before today's torrential waves of knowledge production, Abraham Lincoln once said "[t]he patent system added the fuel of interest to the fire of genius." These words are one of the best representations of a classical view over patent, which are inscribed in stone at the entrance of the US Department of Commerce, once home to the United States Patent Office. Throughout the five hundred years of patent history since the first enactment in Venice (e.g., MolĂ , 2000), people have focused on the role of patent in driving economic growth (e.g., Bugbee,

    1967; Dobyns, 1994). This economic growth-oriented policy is based on the traditional economic conviction that continuous development driven by constant economic growth makes a positive contribution to human welfare. However, air pollution, resource depletion, deforestation, overfishing, global warming, ozone depletion, bio-diversity loss, environmental hormones, genetically-modified organisms, as well as other forms of environmental degradation, have shown the negative side of economic growth. As a central connection between economic growth and environmental degradation, patent should change so that it would play a significant role in ensuring that future development is sustainable.

    Another signal for change in patent also flashes on essential medicines. To protect drug innovations, a US report, known as the Young Report in 1985 (Young, 1985), argued pro-patent policy not only in the country but also worldwide for the first time. This report cautioned that without a global standard of patent protection, America's profits in high-tech industries would be plundered by innovation pirates and it would no longer enjoy a successful modern economy. In the wake of this report, pro-patentists have gone for the tone that patent allows for the enriching our society through scientific and technological progresses accelerated by an increase in capital intensity for patentees. However, patent has also provoked a wide variety of disputes when it impeded access to

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    necessary technologies such as essential medicines (e.g., Maskus, 2000). Presumably, the fiercest attack by

    society to patent is around life sciences, e.g., extended patent over genes and living organisms, and as well the

    failure to provide affordable medicines in large numbers to vulnerable populations. In the face of growing criticism over the patent protection of medicines, and resultantly diminishing societal trust over the patent regime, the biggest challenge of patent policymaking is to address the global concerns about accessibility to patented products.

    These movements have been called the public access to knowledge, or "A2K." Formally, the A2K movement was born in 2004, Geneva around two key events: a co-proposal from the Brazilian and Argentinean governments for a development agenda in WIPO and the Geneva Declaration on the future of WIPO (Intellectual Property Watch, 2005). Since then Yale University has repeatedly hosted the A2K Conference in Geneva, and at the first meeting in April 2006: "[Our] first goal is to come up with a new analytic framework for the possibly distortive effects of public policies relying exclusively on intellectual property rights," said the organisers. "The A2K initiative seeks to support the adoption and development of alternative ways to foster greater access to knowledge in the digitally connected environment."(EPO, 2007, page 42)

    Again this summer, a crowd of patent opponents and proponents descend on Geneva when international organizations in the city convene a series of meetings to explore future legitimacy for the global regime of patent protection. The participants address a wide variety of increasing patent disputes, but they seem to amount to one of the most primitive questions -- do we truly need patent? If so, how should we develop its regime for the future? What global legitimacy would be conferred on such regime?

1.2. Review and Model

    To answer these questions, this writing starts in Chapter 2 by spotlighting various phenomenological behaviors of patent, and from these behaviors, common factors are extracted, which underlie a range of favorable and harmful phenomena patent has expressed in society. Such factors are described in a descriptive economic model with three novel concepts: "knowledge production," "allocation" and "liberalization," which are a generic language integrating numerous studies done thus far (e.g., Bessen, 2009; Landes, 2003; Merges 2004) for patent and other

    forms of intellectual property. This economic model allows us to universally understand intrinsic functions of protecting knowledge, and more importantly what is fundamental drawback of the current regime for knowledge protection and a guidance for possible improvement of it. In the latter half of Chapter 2, this economic model is applied to some of actual phenomena specifically selected in environmental technologies and essential medicines in order to develop several possible scenarios for the future with dismal consequences if we left patent as it is.

    In short, such economic model concludes that patents are widely believed to be indispensable for promoting innovations, or knowledge production. Once, however, innovation is protected, patents leave up to the market the dissemination of patented technologies, or knowledge allocation, which is the common culprit of various patent frictions, including the accessibility to essential medicines, the transfer of environmental technologies and the biased incentives of research toward commercial profitability rather than the most necessary public interest, for example, the "neglected diseases." (WHO, 2006)

1.3. International Bank for Innovation (IBI)

    Based on this conclusion, Chapter 2 proposes a straightforward solution to set off the lack of measure for knowledge allocation, which would introduce a financial mechanism into the present framework of patent in order to distribute knowledge with the best allocation in society for public benefit rather than profit motive. This idea could be achieved in several ways and one of them would be the establishment of an appropriate funding institution, which this writing calls an International Bank for Innovation or IBI (Nitta, 2005a; 2005b; 2006; 2007a; 2007b). IBI is designed to impose an extra official fee on patent applicants and holders besides the existing official fee for granting and maintaining patent. From this additional levy, IBI would create a trust fund and provide a wide variety of assistance financing knowledge allocation over both producers and users.

    The knowledge allocation over producers of an innovation would be one target to be promoted by the finance assistance from IBI, including fostering true innovations for the most necessary public interest such as neglected diseases and environmental technologies, and various funding proposed for needed research such as medical grants, prizes, treaties, public-private partnerships, advance market commitments, market exclusivities (orphan drug schemes) and tax credits (WHO, 2010). The allocation over producers would furthermore encompass

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    patentability and subject matter over biological and cultural diversities, specifically financial supports to exploit and protect genetic resources, traditional knowledge and folklore.

    Another target of IBI would be the knowledge allocation over users of an innovation, which would contain ensuring unimpeded access to essential innovations, in particular the compensation of technology transfer costs, e.g., royalty assumption, and other subsidies for purchasing patented products. The allocation over users would also include financial assistances for profit sharing and asset management over patented life and culture.

     ? Revenue: guarantee premium

     ? Expenditure: financial measures to facilitate knowledge allocation

    For producers, e.g., needed research, exploiting and protecting biological and

    cultural diversities

    For users, e.g., unimpeded accessibility, profit sharing over the protected diversities

    Box : Monetary flow through IBI.

    The extra levy would be an additional weight for patentees in the traditional balance of public interest (innovation disclosure) and private right (patent monopoly as a reward for the disclosure) in the patent legitimacy. In the sense of economics, such levy would serve as a combination of the "Tobin taxation (e.g., Johannes, 2007)" and

    "Pigovian taxation (e.g., New York Times, 2006)." From the Tobin's perspective, the levy is an international taxation imposed at a border when a knowledge asset is crossing. The Pigovian aspect of the levy is to facilitate the market incorporating its failure that patent protection generates in society because the system lacks an appropriate mechanism to allocate knowledge over both producers and users of it.

1.4. Patent Assurance

    IBI would collect the extra levy from patent applicants and owners in the name of "premium" because the financial assistance from IBI would serve as "assuring patent (cf. Austin Business Journal, 1998)." This

    financial assistance for knowledge allocation would be offered to people who are suffered from patent in order to enable them to acquire a patented product, and as a result, to deter them from defaulting patent protection. Such deterrent would allow for keeping patent intact, and at the same time, such acquisition would convince society of the wisdom of patent, and consequently, calm growing criticism over patent and uphold societal trust over it. This situation means that the financial aid from IBI would function as "awarding assurance of patent." In other words, the additionally-imposed fee would be a kind of premium for defending patent against risk of its erosion such as compulsory licensing and other safeguard flexibilities recognized in the present regime of patent.

    In addition, assuring of patent would accomplish a dual benefit not only for users of innovation in the form of financial aid, but also for owners of patent in ensuring patent, which would readily build consensus by applicants and patentees on their burden of paying the assurance premium. This dual benefit would attract not only corporations facing predicaments in patent protection, such as pharmaceutical industries, but also any research-oriented sectors in developed countries because they all need ensured patents.

    Chapter 3 further delves into the concept of assuring patent and resultant dual benefit for both users and producers of innovation. This chapter constructs a legal model, in which patent is accorded as an entitlement in general international law, and assurance would be an instrument to underpin an international entitlement. Indeed, assuring an entitlement would be a kind of countermeasure in response to encountering the risk of injury in an entitlement. In the face of an obstacle to compliance with an entitlement, awarding assurance would eliminate such obstacle and allow for still observing an entitlement and circumventing prospective breach of it. Importantly, assurance would differ from traditional countermeasures such as remedies, sanction and retaliation, and even as well regular insurance, in that most of these conventional measures focus on reacting to circumstances after an incident happened whereas assurance this writing devises would be a proactive planning for possible future outcomes, i.e., prevention of breach.

    This proactive nature of assurance would confer on it excellent compatibility with the basic structure inherent in general international law. In this structure, an international entitlement is firmly accorded with the so-called

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    property rule whereas it is merely underpinned to the extent of proportionate compensation without punitive actions (Pauwelyn, 2008). Such inconsistent structure compels international law to rest heavily on self-compliance behavior of individual contracting parties in order to uphold an entitlement because most international settings lack a collective authority to invoke punitiveness in the event of violation. Due to such importance of self-compliance in international law, assurance would have a high feasibility of a novel proactive instrument to backup an entitlement in international law. This is because assuring an entitlement would enhance the stability of an entitlement through avoidance of violating an entitlement by awarding assurance. Such stabilized entitlement would attract contracting parties and strongly encourage them to respect it with their voluntary incentive.

1.5. Operation

    Following broad conceptional arguments about IBI and patent assurance from economic and legal views, Chapter 4 draws a blueprint for specific procedures to operate IBI overall such as collecting premium, receiving a claim for assurance, reviewing it, approving it and awarding assurance as well as negotiating and deciding the price of premium, eligibility for assurance, its coverage and other requirements. Although some of these factors look like detailed, they are of importance in running IBI well and yet reflected back to the fundamental principle of patent assurance.

    The patent assurance would be payable to any eligible governments, including both developing and developed countries, and as well qualified companies and nongovernmental organizations in public and private sectors in response to their requests for financial assistance, i.e., claims for assurance. Such requests would be deliberated

    to assess the feasibility of facilitating knowledge allocation during an international quasi-judicial process, modeled after, for instance, the MIGA (Bishop, 2005) affiliated with the World Bank and the WTO dispute settlement mechanism (WTO, 2004). One of the principal criteria for granting a financial assistance would be solid foreseeing that the requested assistance would surely accelerate to knowledge allocation over users or producers, or both for the largest public benefit possible rather than profits in market.

    ? Knowledge allocation mechanism in the WTO dispute settlement system

    Since the financial mechanism to assist knowledge allocation, or the "knowledge allocation mechanism" in

    short, could be regarded as one of the procedures to settle disputes over patent, it is a possible option to

    design deliberation of a claim for assurance in the mechanism by staring in reference to the quasi-judicial

    process in the WTO dispute settlement system (WTO, 2004). In this case, another major criterion for

    awarding assurance should be highlighted: the fact that full compliance with patent protection has raised an

    adverse situation. Since the knowledge allocation mechanism would exclude violation of patent

    protection and the mechanism would defer such violation to the regular violation complaint in the WTO

    dispute settlement system, the criterion of full compliance in the quasi-judicial deliberation over a claim for

    assurance might require new discussions over TRIPS 64.3 (non-violation and situation complaints).

    ? Patent assurance in MIGA

    Besides a similarity to the WTO dispute settlement system, the operation of IBI would also share several

    practices with MIGA (World Bank, 2007, page 20). First, IBI would grant the payment of assurance for a

    predefined coverage and amount to the extent equivalent to or less than proportionate compensation for

    predictable injury in value of patent once it was violated. This proper ceiling on assurance payment would

    intend to avoid two major drawbacks well recognized for regular insurances: moral hazard and adverse

    selection. Such restriction would also contemplate the actuarial equivalence principle, and as a result,

    protection of capital in IBI and sound management of it. Second, IBI would learn practical skills from a

    wide variety of experiences of MIGA for investment dispute mediation services. Third, IBI would also

    embrace at least a part of four guiding principles MIGA has well established: focus on clients, engage in

    partnerships, promote developmental impact and ensure financial soundness.

    In addition to these deliberations in a quasi-judicial process, it is important that when the request for financial assistance were rejected, IBI would have to ensure opportunities for the rejected country to consider an alternative action, including the traditional flexibilities in patent such as compulsory licensing, parallel importing, generic production and the Bolar exemption. These safeguard measures of the TRIPS flexibility in the event of denial of assurance payment must be affirmed in conformity with the spirit and scope of the Doha Declaration, its relevant bisdecisions and historical background, and TRIPS 30 (exception), 31 (use without authorization) and 31 (Abbott,

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    2002).

1.6. Institution

    Besides an operational model built in the foregoing chapter, Chapter 5 provides an institutional model of IBI in an attempt to envision its organizational image. To this end, the chapter starts with a comparison of three leading institutions in global funding and intellectual properties: the World Bank/MIGA, WTO and WIPO. The World Bank/MIGA share functional similarity with IBI in that the Bank provides financial assistances to developing countries and MIGA (e.g., Baker, 1999; Shihata, 1988) guarantees the investments that developed countries have thrown into developing countries while IBI would offer financial assistances to allocate patented knowledge and products in favor of developing countries and, at the same time, ensure patent rights that developed countries invested and established in territories of developing countries. On the other hand, WTO (e.g.,Bossche, 2008) is

    heavily involved in intellectual property issues through the TRIPS Agreement and WIPO specializes in them, yet the latter is more like a rather neutral administrative bureau with less policy and advanced operations to collectively maintain 23 treaties regarding intellectual property at the moment (e.g.,WIPO, 2004). Although this

    sort of comparative studies have been repeatedly conducted elsewhere (e.g., Coffey, 2006; Buira 2005; Alexander,

    2005), this chapter particularly takes the implementation of IBI into consideration, which turns out a prototype of IBI.

    ? WTO

    WTO would likely have eligibility in underlying or even affiliating IBI due to the WTO's characteristics of

    a member-driven, equally-represented and rule-based organization. This eligibility is also supported by

    the fact that the financial assistances as assurance awarding from IBI would be indeed one of the financial

    measures to settle disputes over patent, which the WTO dispute settlement mechanism would potentially

    encompass. However, WTO's susceptibility to slow and cumbersome operation has been of concern and

    sometimes become a reality due to consensus decision-making (e.g.,Bossche, 2008), which might adversely

    affect a quasi-judicial process in IBI. In addition, WTO has no experience at all in funding and any other

    financial actions including assurance.

    ? World Bank/MIGA

    By contrast, the World Bank/MIGA specializes in funding, global financial assistance and guaranteeing

    foreign investments, and its structure has an executive board to direct the executive officers of the

    organization. However, such structure rests on a power-based principle with permanent participation by

    the major industrial countries and weighted voting, which has been sometimes far from equitable

    representation by each party.

    Since the MIGA shares many conceptual and structural similarities with the World Bank, their guarantee

    coverage and its issues as well as insurance payments are regulated by the scope of industrialized Members

    with a similar fashion to the World Bank (e.g., Baker, 1999; Shihata, 1988). This leadership by developed

    countries has functioned well so far in the operation of the MIGA because, in that institution, major

    Members of both capital subscribers (fund donors) and guarantee beneficiaries (fund acceptors) are

    developed countries whereas lenders (fund donors) and borrowers (fund acceptors) in the World Bank are

    developed and developing Members, respectively. That is to say, major customers of the MIGA are

    developed nationals and developing countries merely provide place where such actors play, implying that

    the MIGA has no experience in acting with developing nationals and it is totally uncertain that the

    framework of the MIGA is applicable to the actions of developing nationals.

    ? WIPO

    WIPO is excellent in administrating international registrations of intellectual properties while retaining the

    original mission of BIRPI (les Bureaux Internationaux Reunis pour la Protection de la Propiete

    Intellectuelle) or the international secretariats for the Paris and Berne Conventions. In other words, WIPO

    is rather a politically-inexperienced institution in comparison with the World Bank/MIGA and WTO, and

    therefore, it is expected to lay a technical groundwork for procedures in IBI.

    Actually, the principal function of WIPO is to facilitate constructing various infrastructures for intellectual

    property management in both developed and developing countries (e.g.,WIPO, 2004). Although WIPO

    has significantly considered and influenced a wide range of intellectual property politics, its arguments

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