BIOTECH BUZZ Genetic Resources Contributors: Gustavo de Freitas Morais and Walter Basílio Bacco Júnior The New Biodiversity Legislation

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1 BIOTECH BUZZ Genetic Resources Contributors: Gustavo de Freitas Morais and Walter Basílio Bacco Júnior The New Biodiversity Legislation (Federal Law n. 13,123/2015 and Decree n. 8,772/2016) Access and Benefit Sharing rules in Brazil Fifteen years after the issuance of the first Brazilian rules regulating the exploration of the Brazilian biodiversity, that is, the presently revoked Provisional Measure no. 2186/2001 (which succeeded Provisional Measure No. 2052/2000), a new law (Federal Law n. 13,123/2015) was finally sanctioned on May 20, 2015 and it is regulated by Decree n. 8,772/2016, published on 11 May, 2016 (also named Regulation ). The new law brings many changes that will certainly affect a wide range of businesses dealing with the Brazilian biodiversity. Since the year 2000 the main aspect of the Brazilian rules on activities involving components of the Brazilian biodiversity revolves around the concept of access. Under the prior rules, any access to the so called genetic heritage and also to associated traditional knowledge was subject to governmental authorization that should be obtained before the access itself. Moreover, what would constitute an access was not clearly defined. Under the new law, it is now clearly defined that an access subject to governmental control will only take place when one performs research or technological development. The former is understood to be related to academic activities while the latter is defined by the new law as a systematic work performed on the genetic heritage or associated traditional knowledge in order to develop new materials, products or devices and to improve or develop new processes of economic use. 1

2 This new definition will probably bring comfort to companies operating in Brazil since under the old - and also in the new -, regime the mere use of ingredients of the local biodiversity, without any sort of technical development could sometimes be considered as an access and therefore subject to previous authorization, benefit sharing, etc. In practice sanctions were imposed on companies that simply bought ingredients on the market and used them in the manufacture of commonplace products. Another significant change is a clearer definition of what constitutes the genetic heritage. This is now defined as information of genetic origin resulting from plant, animal, microbial species or species of other nature, including substances coming from the metabolism of such living beings. It is now clear under the law that access to metabolic substances - and not only to genetic information is subject to governmental control. The new law makes it clear that microorganisms are also within the scope of governmental control. Another feature of the new law is that the access to genetic resources is now conditioned to registration of the activities in an electronic database named SISGen and, in theory, this procedure will be much simpler than the full authorization previously required in the old regime. Any company intending to conduct research and/or develop products accessing Brazilian genetic heritage ( BGH ) or associated traditional knowledge ( ATK ) is required to register its activities at CGEN using SISGen database. SISGen, the National System for Management of BGH and ATK, is an electronic system and database created by Brazilian Law as an electronic tool to assist CGEN in the management of BGH and ATK. SISGen has been made available to the public on November

3 Any activities involving access to BGH or ATK must be registered with SISGen prior to applying for the protection of any intellectual property rights; to publication of research results or scientific papers; or to any economic exploitation of finished products or of reproductive materials. With respect to the finished products already in the market, it is important to mention that IBAMA (Brazilian Institute of Environment and Renewable Natural Resources) understands wrongly that the mere use of any native species in commercial products launched after June 2000 characterizes an access, ignoring the spirit and the letter of the revoked Provisional Measure and now of Law 13,123, which requires the performance of research/ technological development in order to characterize access. Although such understanding in our view is clearly wrong and may be challenged at the courts, the sad reality is that a line of products as envisaged by many pharmaceutical and cosmetic companies may be considered as derived from access of the BGH simply because they use a component of the Brazilian genetic heritage and therefore benefits must be shared. Anyone that performed access to the Brazilian genetic heritage as of June 30, 2000 must conform to the new law within specific time frames. The main assessment in this regard is whether the activities performed in Brazil can be characterized as an access or not. This can be particularly critical when such activities have in the past been considered as an access and were even resulted in the imposition of fines as a result of the so called Operações Novos Rumos I e II (New Paths Operations I and II). Further, it s advisable that companies make a preliminary review whether the activities carried out by the company for developing these products, such as development studies, efficiency tests, formulation development, may be considered as ordinary and not characterizing access because it is neither a research that generated new data nor a technological development, therefore characterizing an access to BGH according to Law 13,123 and the Regulation, Decree nº 8.772/

4 It is important to highlight that certain activities are not considered as access under Law 13,123/15, as long as no research or development is involved, pursuant to article 107 do the Regulation. If an access is characterized (performed between June 30, 2000 and November 17, 2015), the company should regularize its activities, according to article 38, of the Law 13,123/15. In this last case, an additional notification on such exploitation and the registration of the corresponding benefit-sharing agreement before SISGen are required. Furthermore, international shipment of any material resulting from access to BGH or ATK requires the prior registration of a Material Transfer Agreement (MTA) with SISGen. Under Law 13,123, the remittance abroad of samples of the Brazilian genetic heritage with purposes of access is covered by the new law and should be registered through the electronic system SISgen, which is already operational since November 6, 2017, according to article 12, IV of Law 13,123, below transcribed: Art. 12. The following activities shall be registered: IV remittance of genetic heritage component samples abroad with the purpose of access, in the hypotheses of items II and III of this caput; and ( ) Law 13,123 also suggests that the mere act of remittance abroad of samples of the BGH between June 30, 2000 and November 17, 2015 needs to be regularized through SISgen, under art. 38, III of Law 13,123, as transcribed below: Article 38. It shall comply with the provisions of this Law within 1 (one) year from the date the Registration was made available by CGEN (Council for the Management of Genetic Heritage), the user that, between June 30, 2000 and the date of entry into force of this Law, performed the following activities at odds with the legislation in force at the time: I- access to genetic heritage or associated traditional knowledge; 4

5 II access and economic exploitation of product or process obtained from the access to genetic heritage or associated traditional knowledge, referred to in Provisional Act of August 23, III remittance abroad of samples of the genetic heritage; or IV - disclosure, transmission or retransmission of data or information that are part of or constitute the associated traditional knowledge. Under certain circumstances, foreign entities accessing BGH or ATK also require prior authorization from the National Defense Council (in areas indispensable to national security) or from the Maritime Authority (in Brazilian marine areas). Note that if the company already has products with Brazilian biodiversity assets with authorization issued by the CGEN under former legal statute (PM No ), the company must apply for the adjustment of the CGEN authorization under the new law (Lawi 13,123/15). This adjustment must be applied for within ONE year counted from the date of availability of SiSGen. This deadline will expire on November 5, We highlight that the regularization will depend on a Commitment Term, containing an obligation to register the access, notify any economic exploitation and an undertaking to share the benefits arising from the use of genetic resources, as the case may be. Notwithstanding, minimum conditions and standards for the signature of this commitment term are still under discussion at the CGEN. In case of the finished product or reproductive material is arising from access to BGH or ATK, and the component of the BGH or ATK is a key element of added value to the product, and, also, if the case does not fall into any benefit sharing exemption establishes by the Law 13,123/2015, the manufacturer of the finished product or the producer of the reproductive material will be subject to benefit-sharing, regardless of who previously performed the access. 5

6 Please see below a transcription of some key rules on benefit sharing as provided for in the Law 13,123: Art. 17. The benefits from the economic exploitation of the finished product or reproductive material resulting from access to the genetic heritage of species found in situ or to the associated traditional knowledge, even those produced abroad, shall be fairly and equitably divided, and in the case of the finished product the component of the genetic heritage or associated traditional knowledge must be one of the main elements for value aggregation, pursuant to this Law. Art. 2. ( ) XVI finished product a product that requires no type of additional productive process, resulting from access to the genetic heritage or to the associated traditional knowledge, in which the component of the genetic heritage or associated traditional knowledge is one of the main elements of aggregation of value to the product, being suitable for use by the final consumer, be the latter a natural person or a legal entity; XVIII main elements of aggregation of value to the product elements whose presence in the finished product is a determining factor for the existence of the functional characteristics or for the formation of the marketing appeal; In particular, one should bear in mind the interpretation of Article 17, chapeaux of the Law 13,123 according to which economic exploitation resulting from access to genetic heritage is obliged to share benefits: Article 43. The benefit sharing referred to in Law 13,123, of 2015, shall be due while there is economic exploitation of: I The finished product derived from access to genetic resources or associated traditional knowledge carried out after the enactment of Law 13,123, of 2015, or II Reproductive material derived from access the genetic resources and associated traditional knowledge for agricultural activities carried out after the enactment of Law 13,123, of

7 1. In the case of the finished product referred to in item I of the head provision, the component of the genetic resources or associated traditional knowledge should be one of the main elements of added value. 2. Pursuant to item XVIII of Article. 2 of Law 13,123, of 2015, main elements of added value are considered to be elements whose presence in the finished product is crucial to the existence of the functional characteristics or the formation of the marketing appeal. 3. For the purposes of this Decree, the following meanings apply: I marketing appeal: reference to genetic resources or associated traditional knowledge, to their origin or differentials arising therefrom, related to a product, product line or brand in any means of visual or auditory communication, including marketing campaigns and featured in product labeling; and II functional characteristics: characteristics that determine the main purposes, strengthening the action of the product or expanding its list of purposes. The applicant may choose (i) monetary benefit-sharing or (ii) non-monetary benefitsharing. i) Monetary benefit-sharing: If the monetary type is chosen, the applicant is required to update the SISGEN information annually in order to pay the benefit-sharing consideration. Upon each update, the following information should be provided for: - supporting evidence on the amounts reported as net revenue obtained during the fiscal year with the economic exploitation of the finished product or notified reproductive material. - annual net revenue obtained during the fiscal year with the economic exploitation of the finished product or reproductive material notified, according to article 17 of Law 13,123/15 which establishes that: The benefits from the economic exploitation of the finished product or reproductive material resulting from access to the genetic heritage of species found in situ or to the associated traditional knowledge, even those produced abroad, shall be fairly and equitably divided, and in the case of the finished product the component of the genetic heritage or associated traditional 7

8 knowledge must be one of the main elements for value aggregation, pursuant to this Law. Besides, when you make the registration of the product on the SISGEN, the online form requires information inter alia of local and international scope of manufacturing and sales your finished product. It is therefore presumed that the Brazilian authorities will consider international sales (worldwide) also as a basis for the calculation of benefit sharing. The system will automatically calculate the amount due as a share of benefits (1% of the net revenue or down to 0.1%, under pursuant to special agreements for a given economic sector, as provided for in section 21 of Law ), as transcribed below: Art. 20. When the chosen mode is monetary benefit sharing resulting from economic exploitation of finished product or reproductive material resulting from access to genetic heritage, one installment of 1% (one percent) of the net annual income obtained with the economic exploitation shall be paid, except in the event of reduction to up to 0.1 (one tenth) by means of sectoral agreement as per Article 21. Art. 21. Aiming at ensuring competition in the chosen sector, the Federal Government, at the interested party s request, and in accordance with the norms, may enter into sectoral agreement that allows for the reduction of the monetary benefit sharing value to up to 0.1% (one tenth percent) of the net annual income obtained with the economic exploitation of the finished product or reproductive material resulting from access to the genetic heritage or associated traditional knowledge of unidentifiable origin. Sole paragraph To subsidize the execution of a sectoral agreement, the official authorities that protect the rights of indigenous populations and traditional communities may be heard, in accordance with the norm. Evidence of effective payment must be subsequently submitted at CGEN. ii) Non-Monetary benefit-sharing: If the non-monetary type is chosen, the benefit sharing agreement must be presented at CGEN. Please find below transcribed article 22 of the Law 13,123/15: Art. 22. In the non-monetary modes of benefit sharing corresponding to subsections a, e and f of item II of the caput of Article 19, benefit sharing shall 8

9 be equivalent to 75% (seventy five percent) of the monetary mode, according to the criteria defined by the CGEN. Sole paragraph The CGen may delimit result or efficacy criteria or parameters the users must meet, substituting the cost parameter of non-monetary benefit sharing as provided for in the head of the Article. When the case does not involve ATK, the Benefit-Sharing Agreement may be presented to CGEN within 365 days after the Notification. If the agreement is not submitted within this period, the registration and notification will be automatically canceled. The Agreement should include the proposed allocation of benefits, the schedule of activities to be developed, the date of signature of the agreement, and its term of validity. For instance, allocation of benefits may include activities or projects for conservation or sustainable use of biodiversity, protection and maintenance of knowledge, innovations and practices of population associated with traditional knowledge, technology transfer, training of human resources on issues related to conservation and sustainable use of BGH or ATK, free distribution of products in social programs etc, according to article 19, II of Law 13,123/15: Art. 19. The benefit sharing resulting from economic exploitation of finished product or reproductive material resulting from access to the genetic heritage or the associated traditional knowledge may be divided into the following groups: I - monetary; or II non-monetary, including, but not limited to: a) projects intended for conservation or sustainable use of biodiversity or for protection and preservation of knowledge, innovation or practices of indigenous people, traditional communities or traditional farmers, preferably at the site where the species is found under in situ conditions or where the sample was collected whenever the original site cannot be specified; b) transfer of technologies; c) making a product available in the public domain, without protection by intellectual property rights or technological restriction; d) licensing of burden-free products; e) staff training in subjects related to conservation and sustainable 9

10 use of the genetic heritage or associated traditional knowledge; and f) free distribution of products in social interest programs. The applicant must update annually SISGEN with information regarding the Non- Monetary benefit-sharing activities, including (i) annual net revenue obtained during the fiscal year with the economic exploitation of the finished product or reproductive material notified; and (ii) proof of monetary equivalence between the activities performed and the amount predicted for the distribution of benefits under the monetary type. Concluding, we also clarify that the new Law is applicable for activities started after November 17, 2015, but also establishes rules there are applicable to activities occurred prior to this date, and after June 30, All activities carried out before June 30, 2000 are beyond the scope of the legislation and are not subject to penalties as described in the Law. Any violation to the new law, in special: (i) irregular access to the genetic heritage and associated traditional knowledge, (ii) irregular sale of products derived from such access, and, (iii) lack of payment of benefit sharing, etc. is subject to a number of administrative sanctions provided for in the new law, such as fines, product seizure, interdiction of the offending company and others. The law does not provide for criminal sanctions. The following hypotheses are considered violations to the Law: 1. economic exploitation of finished product or reproductive material based on access to BGH or ATK without prior notification; 2. shipping of BGH abroad without prior registration or in disagreement with legal requirements; 3. publication of research results or scientific paper without prior registration; 4. access to ATK of identifiable source without obtaining prior informed consent or in disagreement with this; 5. failing to indicate the origin of ATK of identifiable source in publications, utilizations, explorations and disclosures of results from the access. In these cases, the following administrative penalties may be imposed: 10

11 (i) Warning notice (ii) Fines (iii) Suspension of effects of the registration (iv) Cancellation of the registration (v) Embargo on the specific activity related to the violation (vi) Seizure of relevant products (vii) Temporary suspension of the manufacture and sale of the finished product or reproductive materials (viii) Partial or total prohibition of the establishment, activity or enterprise. Disclaimer: The above general observations on patent law, policy and practice do not amount to any kind of legal counsel and are for information/entertainment purposes only. Gustavo de Freitas Morais is a partner and Walter Basílio Bacco Júnior is an associate at Dannemann Siemsen, São Paulo. 11