(2000; 140 pages) [French] [Spanish]
X.1 Grounds for Granting Compulsory Licenses
The provision of compulsory licenses is a crucial element in a health-sensitive patent law. Such licenses may constitute an important tool to promote competition and increase the affordability of drugs, while ensuring that the patent owner obtains compensation for the use of the invention. The use of such licenses, however, has been generally opposed by the research-based pharmaceutical industry152, on the grounds that they discourage investment and R&D153.
152 See, e.g., Bond, 1999.
153 On the impact of compulsory licenses on R&D in the USA, see Scherer, 1999.
Most countries, including developed countries, make available some forms of compulsory licenses154. Such licenses are one of the mechanisms that States can use in order to promote competition and access to drugs. While it is advisable that national laws provide for a compulsory licensing system (as further elaborated below), it should be borne in mind that such a system is not intended to, and can not fix problems arising from the defective granting of patents, for instance, when the novelty or inventive steps were not actually met. It is, hence, of critical importance to ensure that the patentability criteria are rigorously defined and applied in the pre-grant process (see Sections 4 and 5 above).
154 See e.g., Correa and Bergel, 1996; Correa, 1999b.
Compulsory licenses are generally available for lack or insufficiency of working155, to remedy anti-competitive practices, for cases of emergency, governmental or “crown” use, and for other public interest grounds. Most developed countries provide for use of compulsory licenses. Many developing countries that have recently revised their patent laws have also defined a more or less comprehensive list of reasons for the granting of such licenses.
155 “Working” of a patent was originally understood as the execution of the invention in the country of registration (see, e.g., Penrose, 1974). The current trend in some countries is to admit that working may take place through importation. Article 27.1 of the TRIPs Agreement has been interpreted by some (notably the research-based pharmaceutical industry) as excluding the possibility of requiring the local execution of the invention. See, however, Brazilian patent law (1996) which established such obligation unless not economically viable (article 68.1).
The World Health Organization has recommended the use of compulsory licenses where there is “abuse of patent rights or a national emergency” in order to ensure that drug prices are consistent with local purchasing power. UNAIDS has also recommended the use of such licenses, as provided under the TRIPs Agreement, “such as in countries where HIV/AIDS constitutes a national emergency” 156.
156 UNAIDS, 1999, p. 2.
Although U.S. patent law does not provide for compulsory licenses, compulsory licenses are allowed under special legislationa) and under the antitrust law. The United States is probably the country with the richest experience in the granting of compulsory licenses to remedy anti-competitive practices and for governmental use, including national security. More than one hundred such licenses have been granted (Scherer, 1998), both for present and future patents. Licensees have generally been required to pay a reasonable royalty, determined on the basis of the “willing-buyer, willing-seller” formulation (Finnegan, 1977, p. 140), but in some cases the compulsory licenses have been conferred royalty freeb). In some cases, moreover, the patentee was required to make the results of its research readily available to other industry membersc), or to transfer the know-how.
Antitrust authorities in the United States have recently ordered compulsory licenses in the Ciba-Geigy and Sandoz merger (1997) in relation to cytokine productsd), and as a condition for approval of Dow Chemical’s acquisition of shares in Rugby-Darby Group Companies. In the Dow acquisition, the Federal Trade Commission required Dow to license to a potential entrant intangible dicyclomine assets, including all formulations, patents, trade secrets, technology, know-how, specifications, designs, drawings, processes, quality control data, research materials, technical information, management information systems, software, the Drug Master File, all information relating to the United States Food and Drug Administration Approvals that are not part of the acquired company’s physical facilities or other tangible assets.
Some countries have provided compulsory licenses for specific products, such as pharmaceuticals and food. Canada first introduced compulsory licensing for medicines in 1923. As a result of the adoption of the TRIPs Agreement and its membership of NAFTA, Canada abrogated this system in 1993 (retroactive to December 1991) - under which numerous compulsory licenses had been granted and a sizeable generic pharmaceutical industry had developed.
Compulsory licenses specifically related to medicines have been provided in other countries as well. For instance, French law authorizes compulsory licenses when medicines are “only available to the public in insufficient quantity or quality or at abnormally high prices”. In Israel, a license can be granted, if it is necessary to assure the public of a reasonable quantity of a product capable of being used as a medicament, to manufacture a medicament or a patented process for manufacturing a medicament (section 120(a)(1) and (2))e).
Some laws refer, more generally, to public health. For instance, Brazilian Decree 3201/99 established that in cases of national emergency or public interest, declared by the Federal Executive Authorities, a temporary ex officio nonexclusive compulsory license can be granted if necessary. Public interest is defined to include public health protection, satisfying nutritional requirements, protection of the environment and other areas of fundamental importance to the technological or social and economic development of Brazil.
Despite the provisions for compulsory licenses in many national laws, relatively few compulsory licenses have actually been granted157. But commentators generally agree that the mere authority to grant compulsory licenses itself promotes some degree of competition, and that the impact of the compulsory licensing mechanism therefore cannot be measured on the basis of the number of licenses granted. Ladas (1975) has noted that “The practical value of the existence of compulsory license provisions in the Patent Law is that the threat of it usually induces the grant of contractual licenses on reasonable terms, and thus the objective of actually working the invention is accomplished.” 158
157 The largest number of compulsory licenses has probably been granted in Canada, under the 1969 law amendment that authorized automatic licenses on pharmaceuticals, and in the USA, under antitrust laws.
158 Ladas (1975, p.427). Beier (1999) has recently presented a similar view in a comprehensive study on the matter Compulsory licenses “through their mere existence as well as through the apprehension of compulsory license proceedings are liable to increase the willingness of a patent owner to grant a voluntary license” (Beier, 1999, p. 260).
The TRIPs Agreement specifically allows Member States to grant compulsory licenses on grounds to be determined by each Member country (Article 31). The TRIPs Agreement specifies some grounds for the granting of compulsory licenses but does not restrict the possible grounds to those actually cited. In contrast, the Agreement is quite specific with respect to the conditions to be met should a compulsory license be granted. These conditions include: the requirement - in certain cases - that a license be voluntarily requested before being granted on compulsory terms, non-exclusivity, and an adequate remuneration to the patent holder.
A health-sensitive patent law may specifically provide for several grounds for compulsory licenses, notably:
• refusal to deal: when the patent holder refuses to grant a voluntary license which was requested on reasonable commercial terms159 and, for instance, the availability of a product is negatively affected or the development of a commercial activity jeopardized;
• emergency: such as when urgent public health needs exist as a result of a natural catastrophe, war or epidemics160;
• anticompetitive practices: for instance, to correct excessive prices and other abusive practices;
• governmental use161: such as to provide health care to the poor;
• lack or insufficiency of working of an invention needed for health care or nutrition;
• public interest: broadly defined to cover other situations where the public interest is involved.
159 This ground is contemplated, for instance, in the UK patent law (article 48.3d) and in China’s patent law (article 51).
160 The situation of some African countries in relation to AIDS may be deemed, for instance, a public health emergency.
161 This type of licenses is grounded, in some jurisdictions, on the concept of the eminent domain vested in the State.
The TRIPs Agreement provides special rules for compulsory licenses granted to government agencies or contractors. Countries’ national legislation may eliminate a patent owner’s right to seek an injunction to bar the government or a government contractor from using its patent, allowing the patent owner only the right to seek compensation (Article 31(h)). This is, in fact, the practice in the USA, where the government may use patents without a license, and the patent owner’s sole remedy is to seek compensation under 28 USC 1498162.
162 The US Executive Order 12889 regarding the implementation of NAFTA. Sec. 6, formally waives the requirement in NAFTA 1709.10.b to seek advance authorization from the patent owner on “reasonable commercial terms and conditions,” if use of a patent is by or for the government. The government or its contractors are required to notify patent owners of the use, if there are reasonable grounds to know an invention is covered by a valid patent, but the government can proceed with use directly without seeking a license.
Some public health-concerned organizations have urged countries to grant compulsory licenses for the “essential drugs” listed by the World Health Organization (WHO). Such a policy may be of limited importance, however. Although new important therapeutic developments (e.g. for AIDS) may be patented and on the essential drugs list, most of the drugs on the list are off patent. Moreover, high-priced drugs (such as those useful to treat AIDSs) are currently excluded from the list - and these are the medicines for which compulsory licensing may be most valuable.
A national law provision subjecting “essential drugs” (either as listed by WHO or otherwise defined by a national government) to compulsory licenses would not contradict the obligation to consider each application for a compulsory license on its individual merits (Article 31 (a)). Such a provision would specify one of the grounds for granting such licenses, but they could remain subject to case-by-case evaluation. Compulsory licenses for essential drugs would not relate to a full “field of technology” but to a limited number of inventions which are of utmost importance for public health, and thus may be deemed as not violating Article 27.1 prohibition on discrimination among fields of technology. Moreover, Article 8.2 specifically authorizes measures necessary to protect public health. Measures necessary to protect public health are also accorded an exception to GATT rules. Article XX(b) of GATT 1947 specifically permits Members to adopt measures, necessary to protect public health, which violate their general obligations under the GATT.
The process by which compulsory licenses are granted will influence the space enjoyed by a WTO Member to grant compulsory licenses for health-related products. Countries will be in the strongest position to issue compulsory licenses if they establish the existence of health emergencies through public hearings and undertake serious negotiations with industry before issuing compulsory licenses. Action by many developing countries, or by their regional groups, dealing with common emergencies could also reinforce the legitimacy of compulsory licenses. Such measures are not necessary, however.
Countries should examine the potential negative impact of compulsory licensing, as with other measures limiting patentees’ rights. The consequences include the possibility of discouraging foreign investment, transfer of technology, and research, including research into local diseases. Although it has been argued that there may be some risk that compulsory licensing will lead to the marketing of inferior products (since they will be manufactured without the patentee’s co-operation), the production and commercialization of medicines are in all countries subject to prior approval and State controls.
The conditions for the application of compulsory licenses are of particular importance. Procedures which are too burdensome may effectively discourage the use of the system and deprive compulsory licensing of its potential value as a pro-competitive tool. Particularly important implementation issues are considered below.