Based on the previous analysis, a provision on compulsory licenses may contain some of the following elements:
Grounds and conditions for compulsory licenses
a) Non-exclusive compulsory licenses shall be granted in any of the following cases:
(i) when the patentee has refused to grant a voluntary license under reasonable commercial terms and conditions, and the working or efficient working of any other patented invention which makes a substantial technical contribution is prevented, or the establishment or development of commercial or industrial activities are unfairly prejudiced;
(ii) in cases of declared national emergency;
(iii) when required for reasons of public health, such as to ensure the availability to the population of essential drugs, or when required in the public interest, including for security reasons;
(iv) to remedy anticompetitive practices;
(v) when required by the government or a public entity to provide to the population goods and services for health care or other public purposes, on a non-profit basis;
(vi) when the patent fails to be worked or is insufficiently worked in the country, and working is necessary for health care or to promote a sector of vital interest for socioeconomic development;
(vii) to use a patent which cannot be exploited without infringing another patent, provided that the former patent covers an invention that involves an important technical advance of considerable economic significance, and the owner of the latter patent is entitled to a cross license on reasonable terms.
b) A compulsory license can be conferred to import or to locally produce the patented product or a product directly made with a patented process.
c) The license shall be granted for the remaining lifetime of the patent, unless a shorter term is justified in the public interest.
d) Except in the cases mentioned in b), e) and f) above, a compulsory license shall be granted if the requesting party has made efforts to obtain authorization from the patent holder on reasonable commercial terms and conditions, and such efforts have not been successful within 150 days from the request. In situations of national emergency or other circumstances of extreme emergency, the right holder shall, nevertheless, be notified as soon as reasonably practicable. In the case of public noncommercial use, where the government or contractor, without making a patent search, knows or has demonstrable grounds to know that a valid patent is or will be used by or for the government, the right holder shall be informed promptly.
e) A compulsory license shall be non-assignable, except with that part of the enterprise or goodwill which enjoys such use.
f) The use of a compulsory license shall be predominantly for the supply of the domestic market, except in cases of paragraph e) above.
g) The remuneration for a compulsory license shall be determined as a percentage of net sales, taking into account the value of the license in the relevant domestic market and the average royalty rates usually paid in the sector or branch to which the invention belongs. The remuneration can be reduced or excluded when the license is granted to remedy anticompetitive practices.
h) The patent office shall have the authority to review, upon motivated request, the continued existence of the circumstances that led to the granting of a license, and may admit or refuse a request to terminate the license. The eventual termination shall be subject to the adequate protection of the legitimate interests of the persons authorized to use the invention, particularly when the licensee has made serious preparations or commenced to execute the invention.
i) The patentee shall have the right to request from a competent higher authority the review of any decision relating to the legal validity of a compulsory license or to the remuneration determined by the national authority. An application for review shall not suspend the effects of a granted license.
The wording of paragraph a(1) is based on the UK Patent Law (article 48(A (1))(b)). In some countries (Argentina, China) a compulsory license can be granted when it is proven that the patent holder has refused to give a voluntary license on reasonable commercial terms within a specified period.
It should be noted that the granting of a compulsory license under the reasons indicated in a(vii), requires a definition of “worked in the country”, an issue that national law should address bearing in mind that Article 31 of the TRIPs Agreement does not explicitly prevent a country from requiring local production. However, Article 27.1 of the TRIPs Agreement is ambiguous and some have interpreted it as requiring “worked in the country” to be defined as “made available in the country” including through imports, rather than as “manufactured in country.” Also the reference to health care in a(3), a(vi) and a(vii) might be deemed as constituting impermissible discrimination between fields of technology; however, “public health” cannot be considered as a “field of technology” but rather as a problem area (such as education or safety) that may be served with technologies originating in different fields.
Compulsory licenses may legitimately be granted for the importation, as well as the manufacture, of a protected product. Importation will be crucial for developing countries with limited technological or financial capabilities to undertake manufacturing of the protected product and to address emergency or anticompetitive situations, in which rapid action is necessary.
The duration of a compulsory license is an important issue. If the term is too short, there may be no incentive for a third party to request or accept a license. General practice is for compulsory licenses to be granted for the remaining term of the patent. This is the solution proposed above, with an exception when justified by reasons of public interest.
Determination of the remuneration to be paid to the patent holder is a key issue. The respective royalty rates may be established on the basis of the rates generally applicable in the respective sector171. Another possible method may be to define a “reasonable” royalty as that which a third party would pay for a voluntary license. This method, introduced by US law in 1922, has been extensively applied in US case law relating to the infringement of patent rights172. In the case of compulsory licenses for U.S. governmental use, however, the remuneration may be based on what the owner has lost, not on what the licensee has gained173.
171 See, e.g., article 43 of the Argentine patent law (1995).
172 See, e.g. Chisum, 1992, para. 20.02.2. In the area of copyright, the U.S. Court of Appeals for the District of Columbia has recently held that “reasonable” royalty rates under Section 801 (b) of the Copyright Act does not mean “market rates”, but a rate determined according to statutory criteria (Recording Industry Association of America v. Librarian of Congress, D.C. Cir. No. 98-1263, 21-5-99).
173 See, e.g., the U.S. decision in Leesona, 599F F2nd. at 969.
The practice in Canada (while a system of compulsory licenses was in force), was to require royalty rates of 4% of the sales price of the medicines under the license174. In India, the applicable policy guidelines normally limit royalty payments to a maximum of 4% of net sales, while royalties of up to 8% have also been reported175.
174 See, e.g., McFertridge, 1998, p. 83
175 See Graber, 1999, 3.
In order to determine compensation, authorities may require the patent holder to disclose product-specific R&D investments, revenues and other relevant economic data, while ensuring adequate protection of any confidential commercial data. They may also take into account the domestic market share in the total world market for the licensed product, in order to determine what proportion of actual R&D costs the country should fairly bear. In commercial practice, royalty rates usually range from 0,5% to 10% of the (net) sales of the licensed product, depending on the market volume and turnover of the specific product176, and on the stage of the technology in the life cycle, among other factors177.
176 Niess, 1999, p. 16-17.
177 Kumar and Bhat, 1999, p. 21.
It should be noted, finally, that the review of a decision granting a compulsory license may be made by an administrative or judicial body, and that the patentee’s rights to such review may be limited - in accordance with the TRIPs Agreement - to the legal validity of the license and to the accorded remuneration.