This article has been written by Nagesh H. Karale, pursuing a Diploma in US Intellectual Property Law and Paralegal Studies from LawSikho and edited by Shashwat Kaushik.

It has been published by Rachit Garg.

Introduction

A patent provides inventors with exclusive rights to their inventions. It covers new products, processes, or solutions.

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A limited exclusive right is necessary to provide the patent owner with the ability to utilise the invention, recover the costs associated with its development, and incentivize further research and innovation. This exclusive right allows them to have a competitive advantage in the market for a specific period, encouraging investment in new inventions and driving technological progress.

Role of patent in promoting innovations

Patents play the following roles in promoting innovation:

  • Patents allow the patentee exclusive rights to use the patent for over 20 years to commercially exploit. This motivates scientists, researchers and companies to carry on R&D in different fields. The exclusive rights for their invention benefit them with higher returns and more profits, which leads to more hard research work and advancement of science and technology. 
  • Technical information about the invention must be disclosed to the public in a patent application. Due to patenting, information regarding patented products/processes comes into public domain so further research on that technology becomes easy for scientists around the world.
  • Patents provide not only monetary benefits but also recognition for their efforts in society. The innovator gains additional revenue through licencing the patented product/process.
  • Patents encourage competition among companies, which results in the most favourable pricing, quantities, and quality of goods and services for consumers. The successful smartphone industry was made possible by a robust patent system that allowed the licencing and cross-licensing of proprietary technology across telephony, electronics, computing, and software industries.
  • Patent protection is costly but an alternate way to protect the invention may be to protect it as a trade secret. But trade secrets have limited options for monetisation beyond bringing a product to market yourself. It’s difficult to licence or sell a trade secret, as opposed to a patent. Trade secret protection does not protect your rights as the exclusive owner. Trade secrets are less beneficial to the public than patents because they do not involve any sharing of technical information. 
  • A patent makes a small business more attractive to investors and helps to stop third parties from free riding on the efforts of the inventor.
  • The patent system incentivises technological progress, boosts productivity, and improves a country’s world trade position, thereby strengthening its economy. By granting exclusive rights, patents encourage innovation, leading to economic growth and competitiveness in the global market.

However, this grant of exclusive right to use a patent is not absolute and under certain conditions and circumstances, third parties could be allowed to use a patent by granting a compulsory licence. By granting compulsory licencing, the government allows a third party to produce a patented product or process without the consent of the patent owner or plans to use the patented invention.

Article 8 of the TRIPS (Trade Related Aspects of Intellectual Property Rights) Agreement permits members to adopt measures for protecting public health and addressing intellectual property rights abuse or unfair trade practices. The focus is on protecting public health. The provision emphasises the need to balance intellectual property rights with public health concerns.

Article 31 of TRIPS, which, with the use without authorization of the right holder, lays down the set of conditions that govern the use of compulsory licencing by WTO members.

The important key conditions outlined in bullet points are:

  • Authorisation of use without the authorisation of the right holder should be considered on its individual merits.
  • Efforts to obtain authorization from the right holder on reasonable commercial terms should be made before such use is permitted.
  • Use may be allowed in cases of national emergency, extreme urgency, or public non-commercial use, with notification to the right holder.
  • The scope and duration of use should be limited to the authorised purpose, except in semiconductor technology for public, non-commercial use or to remedy anti-competitive practises.
  • Use should be non-exclusive and non-assignable, except with the relevant part of the enterprise or goodwill.
  • Use should predominantly supply the domestic market of the authorising member.
  • Authorisation may be terminated when the circumstances leading to it cease to exist and are unlikely to recur, subject to review by the competent authority.
  • Adequate remuneration should be provided to the right holder, taking into account the economic value of the authorization.
  • Decisions regarding authorization and remuneration should be subject to judicial or independent review.
  • Conditions for use may be waived in cases of anti-competitive practises, with consideration given to the amount of remuneration.
  • Additional conditions apply when use is authorised for a second patent that cannot be exploited without infringing a first patent, including important technical advances, cross-licensing, and non-assignability of the first patent.

Legal framework for compulsory licences in India

Under the Indian Patent Law, compulsory licences have been dealt with under Chapter XVI of the Patents Act of 1970. Sections 82 to 94 and Rule 96 to 102 deal with the working of patents, compulsory Licences and revocation of patents.

According to Section 83 of the Patents Act of 1970, the following points summarise the general principles applicable to the working of patented inventions.

  • Patents are granted to encourage inventions and promote their commercial implementation in India without undue delay.
  • Patents should not be granted solely to monopolise the importation of patented articles.
  • Protection and enforcement of patent rights contribute to technological innovation, technology transfer, and social and economic welfare, balancing rights and obligations.
  • Patents should not hinder the protection of public health and nutrition, and the government can take measures to safeguard public health.
  • Patentees should not abuse their rights or engage in practises that unreasonably restrain trade or hinder international technology transfer.
  • Patents aim to make the benefits of patented inventions available to the public at reasonably affordable prices.

Section 146(2) and Rule 131 of the Patents Act 1970 require every patentee and licensee to provide information on the extent to which the patented invention has been worked on a commercial scale in India in Form 27 every calendar year, within three months of the end of each year.

Non filing of such information is a punishable offence and invites a fine, which may extend up to Rs. 10 lakh. Imprisonment for up to six months, a fine, or both will be imposed for providing false information.

Conditions for granting compulsory licences

After three years from the date of patent grant, any interested person, including the licence holder, can apply in Form 17 for a compulsory licence on the patent. Section 84 and Rule 96 of the Patents Act 1970 deal with the grounds for the grant of a compulsory licence on a patent.

  1. Reasonable requirements of the public regarding the patented invention have not been met.
  2. The patented invention is not available to the public at a reasonably affordable price.
  3. The patented invention is not being worked on within the territory of India.

Reasonable requirements

In considering the application under this section, the controller shall take into account:

  1. Nature of the invention, time elapsed since patent sealing, and measures taken by the patentee or licensee to utilise the invention.
  2. Applicant’s ability to work the invention for the public’s benefit.
  3. The applicant’s capacity to undertake the financial risk associated with capital investment and working of the invention.
  4. Whether the applicant has made reasonable efforts to obtain a licence from the patentee and such efforts have been unsuccessful within a reasonable period determined by the Controller. The “reasonable period” shall be construed as a period not ordinarily exceeding a period of six months.

This clause does not apply in cases of national emergency, extreme urgency, public non-commercial use, or instances of anti-competitive practises by the patentee.

The other sections related to compulsory licences

Section 91 and Rules 96 to 98 for licencing of related patents -Any person, whether a patentee or a licensee, who has the right to work on another patented invention, can apply to the Controller for a licence of the first mentioned patent. The application can be made on the grounds that the person is prevented or hindered from efficiently and effectively working on the other invention without the licence.

Section 92 for special provisions for compulsory licences on notifications by the Central Government- In circumstances of “national emergency” or “extreme urgency” or “public non-commercial use,” if the Central Government is satisfied that it is necessary that compulsory licences be granted at any time after the sealing thereof to work the invention, it may make a declaration to that effect by notification in the Official Gazette.

Section 92A of the Indian Patents Act 1970 states that a compulsory licence shall be available for the manufacture and export of patented pharmaceutical products to any country having insufficient or no manufacturing capacity in the pharmaceutical sector for the concerned product to address public health problems, provided a compulsory licence has been granted by such country or such country has allowed importation of the patented pharmaceutical products from India.

As per Section 86 of the Indian Patensts Act 1970, if the patented invention has not been worked on a commercial scale in the territory of India to an adequate extent or to the fullest extent that is reasonably practicable, the controller may, by order, adjourn the further hearing of the application for such a period not exceeding twelve months in the aggregate as appears to him to be sufficient for the invention to be so worked.

According to Section 85(1) and Rule 96 of the Indian Patents Act 1970, after two years from the date of granting the first compulsory licence for a patent, the Central Government or any interested person can apply to the Controller in Form 19 for an order to revoke the patent.

Grounds for revocation of patents

Patent revocation grounds include:

  1. The patented invention is not working within the boundaries of India.
  2. The patented invention does not fulfil the reasonable expectations of the public.
  3. The patented invention is not available to the public at a reasonably affordable price.

The controller can terminate a compulsory licence granted under Section 84 according to Section 94 and Rule 102(1) of the Indian Patents Act 1970. The patentee or any other person with title to or interest in the patent can apply for termination of a compulsory licence using Form 21. If the reasons for the grant of a compulsory licence no longer exist and are unlikely to recur in the near future, then it can be terminated. However, the holder of the licence has the right to contest the termination decision.

The Central Government and authorised individuals can use the invention for government purposes under Section 100 of the Indian Patents Act of 1970. For this purpose, a patent application should be filled out or a patent should be granted. This provision enables the government to employ patented technology for the advancement of its own interests and objectives.

For public purposes, the Central Government has the power to acquire an invention or patent from the applicant or patentee. Section 102 of the Indian Patents Act of 1970 deals with this power. When the government publishes a notification in the Official Gazette, the invention/patent’s rights automatically go to the government. The government fully owns and controls it. The government pays royalties to the inventor as mutually agreed.

Key implications for patent holders

  • Compulsory licences weaken patent rights. They should be rare exceptions.
  • In developing countries, the government may adopt certain policies of affordability and local manufacturing. This discourages investment in developing countries in the pharmacy sector. Pharma is an inherently risky business. At the end, the   collaborations become unattractive and potentially isolate these countries. So these affected countries have limited control over essential medications for future population needs. Finding the right balance between low costs and innovation is very important.                                                                                                                                
  • Cheap compulsory licences discourage research by generic manufacturers. Developing nations are keen to acquire technology through transfers only.
  • Foreign patent owners might hesitate due to a nation’s perceived lack of patent-friendly policies and uncertainty about its intellectual property regulations.
  • Issuing compulsory licences in developing countries might reduce foreign investment. Companies might hesitate to invest where intellectual property isn’t well protected. This affects local industries reliant on foreign direct investment (FDI) inflows.
  • Compulsory licences can hinder economic growth. Countries with weak intellectual property laws become less competitive. Talented scientists leave the country, causing a brain drain. This hurts development and innovation prospects.

Balancing public interest and patent protection

  • Generic drug makers help the public, especially in developing nations. They provide cheaper options, making medicines accessible. This fosters competition, innovation and the employment of many.
  • Compulsory licences in pharmaceuticals spur innovation. They let low-cost companies create new inventions. Governments issue licences, enabling tech transfer and affordable treatments.
  • More generic companies mean more inventions and products. Due to this, patented drugs are sold at lower prices. 
  • Due to compulsory licencing, only efficient inventions are allowed to survive in the market.
  • Generic manufacturers can produce drugs at affordable prices due to compulsory licences. This helps patients in underdeveloped countries continue medical treatments for a long time.
  • Due to the government’s intervention in compulsory licencing, both parties—patent owner and licensee—get fair price negotiations for essential drugs.
  • Due to compulsory licencing, developing countries get opportunities to exploit developed countries’ intellectual property at cheap prices. This gives a developing country a chance to progress.

Case studies of compulsory licences in India

Bayer Corporation vs. Natco Pharma Ltd. (2013)

In this case, in India, Bayer Company was selling the kidney cancer drug Nexavar. Due to the high price in India, most of the patients were unable to buy the drugs. Natco Pharma wanted a voluntary licence in India. So it approached the Bayer Company. But Bayer denied a voluntary licence to Natco Pharma. So they applied for a compulsory licence. In March 2012, the Controller General of Patents granted Natco Pharma the licence for high cost of drugs. This allowed them to produce and sell a more affordable version of Nexavar.

Bayer justified high prices due to heavy expenditures on research and development. In reply, Natco Pharma argued that the burden of cost should be distributed to the other countries where this drug was sold.

The Patent Controller and the Indian Patent Appellate Board gave verdicts in favour of Natco Pharma. They gave paramount importance to reasonable affordability for the common public. This case highlighted the importance of the common public’s interest in India’s legal system.

Bristol-Myers Squibb Holdings … vs. Bdr Pharmaceuticals … (2020)

In this case, BDR Pharmaceuticals requested a compulsory licence for the leukaemia drug Sprycel. The Delhi High Court pointed out that evergreening violations are not sufficient grounds for a compulsory licence. Before applying for compulsory licencing, the applicant must try for a voluntary licence. In India, compulsory licences are granted based on valid reasons only. 

Challenges and controversies

Using compulsory licencing blindly will cause damage to innovation. Though compulsory licencing provides benefits for a short period of time, it is detrimental to R&D in the pharma sector in the long run. 

Due to compulsory licencing, there may be less revenue generated by selling drugs at cheap prices, which leads to low profits. The diminished royalties fail to cover R&D costs. Nexavar, which was made by Bayer, is used for the treatment of liver and kidney cancer. Under compulsory licencing, it was sold at a much cheaper rate but paid just 6% royalties to Bayer.

The United States and foreign multinational companies criticise some countries’ compulsory licencing laws. The compulsory licensee can get heavy profits without investing in R & D. This demotivates others who are involved in research or investing in R & D. Compulsory licencing can create trade tensions with drug-producing nations.

There are different views on compulsory licencing. Developing countries look at it as a human rights issue. They think that every patient should have access to life-saving medicines. But the pharma companies in developed countries look at it as a violation of patent protection. In 2001, the UN Sub-Commission on Human Rights recognised conflicts between the TRIPS Agreement’s intellectual property rights and international human rights law.

The government should consider all important factors, like affordability, accessibility, and motivation for research, for societal well-being.

Conclusion

The advantage of the patent system is that it motivates innovation. But the exclusive rights are owned by patentees. This leads to monopolies in the market and high prices for drugs. The patenting system is more suitable and profitable for developed countries but detrimental to underdeveloped and developing countries. Compulsory licencing is required for affordable lifesaving drugs for the poor. It is a powerful tool for the government to deal with the health crisis in the country. A study by Johns Hopkins suggests India saves about $843 billion annually through generic substitutions.

Compulsory licencing in India ensures access to medicine for all. It balances innovation and affordability simultaneously. Proper use of compulsory licencing keeps a balance between motivation for innovation and easy access to medicines. Strict voluntary licencing and quality regulations are important factors in the success of compulsory licencing.

References

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