The Agreement devotes particular attention to the conditions under which a compulsory licence may be granted.

1. Such a licence should be granted taking into consideration «its individual merits» [Article 31.a)]. This means that decisions have to be taken on each individual application and that they cannot apply in general to certain types of patent defined by their category, owner or in any other way.

2. Before granting a licence, the proposed licensee should have made efforts «to obtain authorization from the right holder on reasonable commercial terms and conditions», and it is a condition that «such efforts have not been successful within a reasonable period of time» [Article 31.b)]. This provision makes it mandatory to hold prior commercial negotiations with the patent owner, a requirement that is lacking in many laws, especially in cases where licences are granted for reasons of public interest. Nevertheless, Article 31 allows exceptions in cases of national emergency or other circumstances of extreme urgency, as well as for «public non-commercial use» or where a licence is granted to remedy anti-competitive practices.

3. The scope and duration of use «shall be limited to the purpose for which it was authorized» [Article 31.c)]. This clause means that a licence may be limited both in terms of scope (for example, to certain categories or types of product) and duration. Nevertheless, nothing prevents an application for a licence lasting up until the date of expiry of the patent. In fact, this practice has been generally accepted under the Paris Convention until now. For a licensee who invests in production or marketing, it will usually be essential to obtain a licence for the whole term of the patent.

Another important point is that the Agreement does not limit the purpose for which a compulsory licence may be granted. In other words, it may be granted for import as well for local production of a patented product. In some cases (licences to remedy abuse of a dominant market position or to protect public health), import may in fact be the only way of fulfilling the purpose for which the authorization was granted. Moreover, in developing countries there will be cases in which local industry might start making up formulations under licence on the basis of imports of the active constituents whose manufacture is not viable for reasons of scale or technology.

4. As prescribed in the majority of legislation, any authorization should be non-exclusive and non-assignable, except with regard to that part of the company that uses it. The non-exclusive character of a licence means that the holder may import or industrially work the invention in parallel with the licensee, by himself or by means of other voluntary licensees. It also means that more than one compulsory licence can be granted for a given patent.

5. Licences should be granted «predominantly for the supply of the domestic market» [Article 31.f)]. This provision (which may not be applicable to licences granted in order to remedy anti-competitive practices) is contrary to domestic laws which allow the compulsory granting of licences in order to satisfy export markets. This criterion, applied restrictively, may mean that it is not viable to produce locally any substances in which economies of scale play an important role.

6. One important change is introduced regarding the term of licences as usually applied at present. Article 31.g) states that a compulsory licence can be terminated «if and when the circumstances which led to it cease to exist and are unlikely to recur». Consequently, the competent authorities must have the authority to review, upon motivated request, the continued existence of these circumstances. Nevertheless, termination is subject to «protection of the legitimate interests of the persons» authorized to use the invention. Without this last condition, the Article in question would have totally weakened the potential of any system for the granting of compulsory licences. Protection of the legitimate interests of the licensee should be taken to mean that the latter cannot be deprived of his right to hold a licence once he has made serious preparations to use the invention or has created production or marketing facilities. If a reasonable degree of certainty is not guaranteed, no-one would be interested in applying for a licence that could be terminated at any time. Paradoxically, the licensee most directly affected might be precisely the one who has made the greatest contribution to remedying the situation that gave rise to the granting of the licence.

7. The owner of the patent must be paid «adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization» [Article 31.h)]. This provision would apply in principle to any kind of compulsory licence. For licences granted to remedy anti-competitive practices, however, the need to correct such practices «may be taken into account in determining the amount of remuneration» [Article 31.k)]. Since the aim is to restore healthy competition, this provision envisages the possibility of fixing reduced remuneration in order to make it easier for third parties to apply for and obtain a licence for this purpose. A licence free of royalties may also be granted (MENDES DA COSTA, 1992), as has repeatedly been done by United States jurisprudence to remedy anti-competitive practices¹⁸.

¹⁸ One example of a «royalty-free» compulsory licence is that granted by the United States Federal Trade Commission in 1990 to the French company Rhône Poulenc for five years.

There is still wide scope for interpretation at the national level of the criteria used to determine when remuneration is deemed to be «adequate». The provision undoubtedly establishes two elements for this interpretation: on the one hand, the adequacy of the amount must be determined by the circumstances of each case and, on the other, it is necessary to take into account - as a decisive but not unique factor - «the economic value of the authorization». Consequently, the circumstances of the licensee and in the country where he operates, as well as the purpose of the licence, have to be taken into account when establishing fair remuneration. A licence granted to meet public health or other needs must be subject to parameters other than those applicable when only purely commercial and industrial interests are involved. The «economic value» will differ, «inter alia» depending on the size of the market to be supplied (usually the domestic market), the age of the technology, the rate of obsolescence in the sector concerned, the degree of competition from substitute products and the coverage of the patent.

The word «adequate» also needs be clarified in order to give more precise guidance to national judicial and administrative authorities. One possible interpretation is that it simply means the remuneration that the patent owner could obtain in a transaction between independent parties. This is not, however, the true meaning of the word in the original English text¹⁹. A more appropriate interpretation would be to distinguish the value of the actual contribution made by the holder to the development of the invention, deducting any contributions by third parties, subsidies or other contributions which the patent owner may have received. The extent of amortization of research and development costs at the time of granting the licence also has to be calculated.

¹⁹ See Harry SMALL (1991) regarding the concept of «adequate remuneration». It is interesting to note that this is the only provision in the Agreement referring to «adequate» remuneration. Articles 14.4 and 70.4 use the word «equitable» remuneration instead.

8. The patent owner must be given the possibility of having the «legal validity» of any decision relating to the granting of a licence or to the remuneration reviewed by an administrative authority at a higher level or by a judicial authority [Article 31.i) and g)]. This right does not, however, prevent a Member country from granting a licence subject to subsequent revision so any appeal against the decision granting the licence does not suspend its immediate effect. This is particularly important in cases related to public interest and the remedy of anti-competitive practices.