We are living in a time where there are rapid technological developments visible in most sectors of the economy. In the modern world, more and more people are putting their efforts and time into producing better products, and this has given rise to a new economic system. The term ‘New Economy’ describes the emergence of a new economic structure that has changed from the older model based on manufacturing to a new model primarily service-based and highly dependent on technology and innovation. According to the World Bank, India is transforming from an industrial-based large economy into a knowledge economy, leading to a greater reliance on goods containing ideas.[1] Intellectual property innovation has evidently emerged as a key economic force. Even when India has made very good progress in many areas, it retains its socialist inclinations, which are not only reflected in its preamble but also in the Competition Act of 2002 that promotes consumer welfare under a free and open market. What tends to go unsaid is that intellectual property innovation fuels the economy towards improved productivity, and eventually, it benefits consumer welfare. Waiving the TRIPS agreement in June 2022 is not likely to bear any outcome except devaluing the progress made so far by the global community.[2] Granting compulsory rights does affect the competition in the nation. Intellectual Property Rights (IPR) give inventors a commanding role in the market, whereas competition law seeks to promote competition as a reaction to market forces and consumer tastes, providing efficient resource allocation and acting as an incentive for innovation in the economy.[3]

This research paper is a detailed study of compulsory licensing with emphasis on its history and implications in intellectual property law. The paper also examines the use of compulsory licensing in India, which has utilized this method aggressively in order to advance public health and provide access to essential medicines. Further, the paper touches on the existing debate as to whether compulsory licensing is a blessing or a curse to society, balancing its merits against demerits. The coordination between compulsory licensing and competition law is also examined, highlighting how competition law regulates the application of compulsory licensing in order to avoid anti-competitive practice. Finally, this paper aims to provide a comprehensive analysis of the implications of compulsory licensing on intellectual property. Through this paper, we intend to shed light on the possible benefits and drawbacks of compulsory licensing, as well as its ability to further public welfare while balancing the interests of patent holders with those of the public at large.

THE CONTEXT AND SIGNIFICANCE OF COMPULSORY LISCENSING:

Patents confer exclusive rights to the owners, with some protection against abuse of these rights. Compulsory licensing is one such protection provided in the TRIPS agreement, by which a government may allow a third party to use the invention without the consent of the patent owner, under the terms determined by the government. The idea has been around since 1623 and did not originate with TRIPS. Nonetheless, the system has undergone significant changes, especially in the era after TRIPS. The historical evolution of compulsory licensing is one of the most under-studied areas of intellectual property law.[4]

The very concept of Intellectual Property Rights[5] is based on the fact that people who contribute intellectually must have exclusive rights to reap their rewards. As much as this appears to make sense, the monopoly that the inventor enjoys can be at variance with competition law and create human rights law concerns. Thus, there is a need to introduce measures to guard against the possibility of the misuse of the patent owner’s monopoly rights.

Compulsory licensing of patents is a protective remedy in which the government who granted the patent can authorize a third party to use the patent without the approval of the patent owner, as long as a reasonable royalty or compensation is given to the patent owner. This mechanism is a legally defined license that allows certain persons to pay royalty and use an invention without the approval of the patentee. This protection is especially crucial in the pharmaceutical industry, particularly in the event of public health crises when poorer countries have no option but to ease the patent limitations to improve access to affordable vital medicines for their economically disadvantaged citizens.

A compulsory license[6] is an authorization granted by a governmental authority to a public agency, corporation, or other entity, permitting the use of a patent without the permission of the patent owner.[7]In simpler words, a compulsory license is an action by the government that forces an exclusive holder of a right to allow the use of that right by other parties under terms set by the government. The government pays the patent holder a royalty for the unauthorized use of the patent. In effect, a compulsory license is a non-voluntary, state-issued license that is granted to a third party at the behest of the patent holder, and provided that the licensee pays reasonable remuneration to the rights owner in return. Additionally, a compulsory license may be described as an involuntary contract between a willing buyer and an unwilling seller, enforced and compelled by the state. The licensee is empowered to produce, sell, or import the product of the patented invention, steps that would normally be within the exclusive rights of the patentee. It can be seen that patents are key to encouraging innovation; without sufficient patent protection, businesses would have no incentive to develop new products. If existing products were copied by other firms, there would be no monopolies and prices would naturally fall. Price regulation, however, is at the cost of innovation. So, although patents are an imperfect weapon, they are needed to encourage innovation.

When monopolistic patents are issued over products that are essential to humanity, they would adversely affect the socio-economic advancement of the patent-granting country. A direct effect of such patents would be the resultant increase in the prices and decreasing availability of the patented products due to the fact that the person holding the patent has a monopoly. The World Trade Organization recognizes, in its Doha Declaration,[8] the significance of having access to affordable drugs. In many underdeveloped and developing countries, life-saving drugs can become out of reach for the common population because of the patent covers extended to drugs by pharma companies. The reliability of access to these life-saving drugs decreases even more during times of national crises. Under these conditions, national governments can take advantage of the flexibility provided under WTO rules by introducing compulsory licensing provisions.

It is significant to note that a national emergency is not the only grounds for granting a compulsory license. The Doha Declaration on Public Health, formed in 2001, empowers member states to determine the grounds for compulsory licensing. Given that there are no international standards and guidelines for such practice, requirements for issuing compulsory licenses vary with each country depending on the particular laws of individual states.

Infringing the exclusive rights of the patentee is a component of compulsory licensing by nature. The justification to infringe those rights is based on changing the bargaining power dynamics between the buyer and the seller. For instance, if the government is the purchaser and the owner of the patent is the seller, and there is a failure between them to agree on a reasonable price for the product, the compulsory licensing provisions permit the setting up of an arrangement under which the government can reduce the exclusive patent rights of the owner of the patent and empower another person to market the same product.

However, compensation is given to the patent holder in exchange for the use of their patent. Therefore, compulsory licensing, through the promotion of competition from generics, increases the bargaining power of the government, resulting in lower prices. Hence, compulsory licensing can be seen as a required compromise. While it violates the rights of the patent holder, such violation could be necessary in order to ensure the availability of essential products at affordable prices.

It is also interesting to note that the necessity of access to drugs or for responding to acute public health emergencies is not the sole basis for issuing compulsory licenses. The instrument can also be used as a policy tool for fighting anti-competitive behaviour, responding to non-use of patents, or to correct other unfavourable conduct by patent owners. Forced licensing not only forces the owner of the patent to employ his invention for the common good but also facilitates the development of the generic industry in the nation that grants such licenses.[9]

THE INDIAN SCENARIO OF COMPULSORY LISCENCING:

Sections 82 to 94 of Chapter XVI of the Indian Patent Act provide the applicable framework for compulsory licensing. The basis for granting a compulsory license under the Act may be classified as follows:

• Abuse of patent rights (covered generally in Section 84)[10];
• ‘Public Interest’ (covered generally in Section 92)[11];
• New grounds created by the amendments of 2005;
• Other provisions concerning compulsory licensing, such as Section 91, which deals with the licensing of associated patents.

Under Section 84, anyone interested in the invention or who already has a license under the patent can apply to the Controller for a compulsory license on the patent three years after the grant date, provided that the following are satisfied:

• The public needs of the patented invention have not been satisfied.
• The invention patented is not available to the public at a price which is reasonably affordable.
• The patented invention is not in use within Indian territory.[12]

The Controller must consider several factors when granting a compulsory license, including the nature of the invention, steps already taken by patent holders or licensees to make fullest use of the invention, the ability of the applicant to utilize the invention for public good, the time elapsed since the grant of the patent, and other similar factors. Additionally, Section 92 of the Act states that the Controller of Patents is empowered to issue compulsory licenses ‘Suo motu’ on receipt of a communication by the Central Government in situations of ‘national emergency,’ ‘exceptional urgency,’ or other similar situations.[13] When the Central Government announces, in the Official Gazette, that exceptional circumstances call for the issuing of compulsory licenses in respect of patents that are useful for fighting the emergency, the procedure prescribed in this clause is set off. An applicant must still approach the Controller to make an application for the grant of a compulsory license under Section 92(2).[14]

There are two types of Patent Licenses:

• Exclusive License: Under an exclusive license contract, the patent owner assigns the entire rights of ownership to the licensee while keeping only the title of the patent. The patent owner, in turn, gives up all the rights attached with the patent, such as the right to file infringement cases and the right to issue further licenses. In essence, the licensee steps into the shoes of the owner of the patent, acquiring the right to sublicense the patent and sue for infringement. This exclusivity, however, might be limited to a particular field of use, whereby the licensee is assured by the owner of the patent that the patent will not be licensed to any other party within that given field.
• Non-Exclusive License: Under a non-exclusive license, the owner of the patent agrees not to sue the licensee for patent infringement. Though many might think that with a non-exclusive license, the licensee is free to do anything within the realm of the licensed patent, it depends on whether or not the products of the licensee are infringing other patents.[15]

The terms and conditions of compulsory licencing:

The terms and conditions of the compulsory license, which can be kept secret on the request of either the licensor or the licensee, as decided by the Controller, are as follows:

• Any royalty or other payment due to the patentee or any other person who is entitled to the patent should be mentioned.
• The person to whom the license is granted should make use of the patented product to its fullest extent.
• The patented item must be made available to the public at rates that are reasonably within their means.
• The issued license is a non-exclusive license.
• The granted rights to the licensee are not assignable.
• The license is for the remainder of the term of the patent, unless a lesser term is found to be in the public interest.

IS COMPULSORY LISCENCING A BLESSING OR A CURSE?

The idea of compulsory licensing is not a recent development; however, India’s foremost instance of compulsory licensing occurred in the Natco Pharma case.[16] The first compulsory license granted under Section 84 in India was given because the patent controller found the prices charged by the patent holder to be too high for consumers and local producers. Therefore, the patent controller ignored the research and development costs of the patent holder.

The drug Nexavar, used for the treatment of kidney cancer, was granted a compulsory license. Nexavar entered India in the year 2008, and four years hence, when Bayer denied Natco Pharma a voluntary license, Natco Pharma approached the Patent Controller for a compulsory license. Natco Pharma approached the Patent Controller in August of 2011 with its request for a compulsory license. The Controller General of Patents then granted Natco Pharma permission for a compulsory license to manufacture Nexavar. Due to grave price distortions, Nexavar was not accessible to 98% of the Indian population, and hence the compulsory license was issued by Natco Pharma. Bayer was selling Nexavar at $5,000 per month. Natco Pharma submitted a proposal of $170 for one month. Thus, the cost was reduced by an extraordinary 97%. Bayer was holding an unreasonably high price for the Indian market, which called for compulsory licensure of Nexavar.

This act violated Section 84(b), which requires that drugs should be reasonably priced and available to the public. The case has sparked a controversy over the term ‘reasonable affordability.’ Bayer justified its pricing of Nexavar by citing the research and development expenses incurred in developing it. Generic manufacturers, on the other hand, do not incur such R&D costs, making generics around 97% cheaper than their branded versions. Natco Pharma defended its case, stating that the Indian price of Nexavar cannot be based on the assumption that the Indian market would bear all of the R&D expenses. They led the court to note that Bayer’s argument was unjust, as they distribute Nexavar in many countries, which indicates Bayer’s assumptions were not valid. Bayer’s justification of the need for R&D implied that either India was the sole market where profits were being made or that every country selling Nexavar must pay for R&D individually. For Bayer to introduce more drugs, it needs to recover the cost of Nexavar; however, it cannot attribute profits for R&D costs incurred in several countries. The Patent Controller eventually concurred with Natco Pharma that the ‘fairly cheap price’ under Section 84 must be evaluated from the perspective of the public and not a corporation. The result of the Nexavar case can shape future appeals since India’s courts seem to favor patients more and more. Bayer tried to appeal the Patent Controller’s decision in front of the Indian Patent Appellate Board (IPAB), which reaffirmed the Controller’s decision after rejecting the appeal. Bayer’s appeal was rejected on the basis that Nexavar was not being made available to the public at a fair price.

Following this decision, BDR Pharmaceuticals Pvt. Ltd. requested the grant of a compulsory license for DASATINIB, an effective chemotherapeutic drug in the treatment of chronic myeloid leukaemia. In the case of BDR Pharmaceuticals Pvt. Ltd. v. Bristol Myers[17], the controller stated that it is too early to determine whether the merits-based criteria set forth in Section 84 apply. The Controller also held that the applicant’s wilful decision to only invoke the provisions relating to compulsory licenses, without performing the mandatory legal action and refraining from any kind of communication with the patentee to achieve a voluntary license, cannot be treated as an ‘irregularity in procedure/timeline’ that can be waived, excused, or denied occurrence. Therefore, the Controller held that there was no prima facie case for the grant of a compulsory license under Section 87, resulting in rejection of the application for such a license. Similarly, in the case of Lee Pharma vs. AstraZeneca[18], the petitioner could not establish that the reasonable requirements of the public were met because they did not statistically establish the demand for Saxagliptin in India. The sheer hypothesis of an incertidumbre requirement for the drug was considered insufficient; the applicant would be required to statistically estimate the actual prescriptions written by doctors, the demand for the drug compared to its availability in the nation, and other necessary factors.

The Indian legal provisions on compulsory licensing are well laid out in the Indian patent legislation, and Natco Pharma case has been very important in the development of compulsory licensing. Compulsory licensing is used in India to serve public welfare purposes, but its use questions what danger the awarding of compulsory licenses can cause to the economic landscape or the competitive environment in a country. In addition, the TRIPS agreement[19], dealing with trade-related intellectual property rights, prescribes the minimum standards for governments of individual countries in handling particular types of intellectual property (IP), binding the citizens of other member countries of the World Trade Organization (WTO) as well. It is obligatory for all member nations of the World Trade Organization (WTO).

In October 2020, Eswatini, India, Kenya, and South Africa called for a temporary suspension of TRIPS obligations due to the global COVID-19 pandemic. This was a call for a waiver from the implementation of TRIPS Part II, 4 (Industrial Designs), Section 1 (Copyright), 7 (Protection of Undisclosed Information), and 5 (Patents), which would not be implemented, enforced, or required by the WTO.[20] This waiver applied only to measures taken to counter, control, and cope with the COVID-19 pandemic. The World Trade Organization determined the contested waiver in June 2022, following a ministerial conference initially set to run over four days but lasted longer. The common perception that intellectual property protection prevents vaccine manufacturing and that monopolies by the pharmaceutical industry are the key hindrance to universal vaccination helped in the introduction of the TRIPS waiver.[21] Instead of enabling more production of vaccines, the waiver of intellectual property rights would widen the scope for potential abuse of IP and severely discourage innovation.[22] The incentives for innovation that played such a key role in the creation of the COVID-19 vaccines, i.e., the safeguards provided by IP rights, are being undermined by this waiver.

COMPETITION LAW & COMPULSORY LISCENCING:

The interaction between intellectual property rights (IPRs) and competition law is complex and difficult. IPRs discourage the duplication and copying of goods, attributes, industrial designs, and such others, thus encouraging fair competition in the market. On the other hand, exclusivity that comes with IPRs could be limited by competition law if used in a way that unfairly restricts competitors’ access to the market. As a result, an extremely high or low level of protection for IPRs and competition may hurt the market by inducing unwarranted trade distortions. India is gradually moving towards a free-market economy, where prices are set by sellers instead of being controlled by the state. The policy of forced licensing of prices fixed by sellers in the guise of ‘consumer welfare’ is not only unjust but also denigrates the philosophy of a free market.[23]

Regardless of this, licensing agreements can raise competition risks. The greatest risk is the potential for cartelization, which can result if existing or potential competitors in a particular market sign an agreement. This leads to a risk of collusion, both in the market for products produced with the licensed technology and in the licensed technology market itself.[24] The creation of cartel arrangements among licensees in the market for products that use the licensed technology can take the form of apparently vertical distribution agreements. This involves the imposition by the licensor of resale price maintenance and thereby controlling prices at the level of the licensee. In improving the clarity and consistency of the licensors’ retail prices, vertical price fixing can also support the stability of a cartel arrangement at the licensor level. Even without exceptional circumstances, the CCI has the authority to impose a compulsory license to promote its socialist objectives, which substantially upsets the equilibrium between intellectual property rights and competition laws meant to foster innovation. With India’s apparent shortcomings in intellectual property rights protection, it encourages socialism and discourages foreign investment, thus eroding competition and a free market.

Another view is that compulsory licensing can encourage healthy competition. By discouraging anticompetitive arrangements, enhancing economic efficiency, and giving consumers welfare, a strong competition regime can be the way out. Therefore, competition law steps in to avoid monopolistic positions taking root in the market, thereby bringing forth compulsory licensing in certain niche situations. This strategy intrudes into the free market so as not to allow monopoly owners to use their position against the broader community. Mandatory licensing promotes healthy competition by making the applicant pay a specified amount to the patent owner. This is in accordance with economic principles that form the foundation of the Competition Act. The compensation that the patent holder receives acts as extra income and recovers the development cost of the product. Additionally, it raises the cost of production for the applicant of the license who wants to sell the same product. In this way, it establishes an equitable balance in the market by making sure the interests of everyone are taken care of. The intersection and tension between competition law and intellectual property rights arise from this restraint of the patent holder’s rights, even though they operate in separate areas with different goals. In India, the obligatory licensing regime has been subject to various modifications and still remains evolving, with various challenges arising from the lack of adequate legal precedents. This creates a dilemma between the inventor’s rights and the public interest, specifically access to knowledge, which is the main purpose of intellectual property law. When someone is awarded a patent, his or her personal rights can become more important than the public right to health, which is a problem for poor countries like India, where access to drugs can be greatly hindered. People have to pay a fee to acquire a license for access to these patented products. Due to the monopoly involved in these products, high licensing fees are usually expected, leading to restricted and difficult access to patented ideas, particularly in the medical field.[25]

One of the common misperceptions is that intellectual property rights (IPRs) and competition law operate best together to promote both competition and innovation in the long term. Nevertheless, there is increasing dissatisfaction among some legal scholars that IPRs and competition legislation are inherently contradictory. This is because the industry-wide exclusionary impacts of IPRs, which has generated an increasing number of people subscribing to this view.

CONCLUSION:

Compulsory licensing is a crucial mechanism for providing the public with access to affordable life-saving drugs. India has led the way in adopting this method to balance the interests of patent holders and the public. The Natco Pharma case marks a turning point in India’s attempts to have a clear legal framework for compulsory licensing. However, the release of compulsory licenses becomes an issue with regards to its implications on the economic scenario and competitive landscape of a country. The recent debates on the TRIPS waiver during the COVID-19 epidemic highlight the need for an equilibrium view of intellectual property rights in association with public health. Whereas the imposition of licensing can improve accessibility to cost-efficient healthcare, great care has to be exercised such that there does not develop any compromise that might hurt incentives in research and developing new medicines. Ongoing discussions in this arena invite all those interested in developing a resolution of sorts so it suits all stake-holding interests equitably.

The balance between intellectual property rights and competition law is subtle, requiring a delicate balance to encourage fair competition and innovation while preventing the misuse of exclusive rights. India’s shift towards a free-market economy is a welcome progression; nevertheless, compulsory licensing should not be used to undermine intellectual property rights or to further socialist agendas presented in disguise as consumer interest. A more even-handed approach which protects intellectual property rights while fostering equitable competition will spur innovation, draw in foreign investment, and sustain a vigorous free market.

In some cases, mandatory licensing becomes imperative to encourage proper competition and contain market abuse by monopolies. However, the Indian legal regime for mandatory licensing still faces several hurdles as a result of lacking legal precedents. Striking a balance between personal rights and the greater good is an important issue, particularly in developing nations where access to essential medicines might be denied. The promotion of accessibility to knowledge is a core purpose of intellectual property law; the prohibitively costly licensing charges attached to patented products, however, can hinder such access. As much as there is a growing view among certain legal scholars that intellectual property rights and competition law are incompatible with each other, it is still important to examine the means whereby these two domains can work in tandem to create both innovation as well as aggressive competition in the long term. Finally, the goal must be to achieve a balanced harmony between protecting the rights of inventors and promoting the common good of society.

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[1] World Bank. (2020). India: Transitioning from a Major Industrial Economy to a Knowledge Economy. Retrieved from https://www.worldbank.org/en/news/feature/2020/07/23/india-transitioning-from-a-major-industrial-economy-to-a-knowledge-economy

[2] Sanya Goel, TRIPS Waiver and Compulsory Licensing: A Socialist Dystopia, CSIPR, 25/09/2022, https://csipr.nliu.ac.in/intellectual-property/trips-waiver-and-compulsory-licensing-a-socialist-dystopia/

[3] Dutfield G. (2019). Intellectual property and development: Key trends and future directions. WIPO Journal, 11(1), 7-32. https://www.wipo.int/edocs/pubdocs/en/wipo-pub-944-2022-en-world-intellectual-property-report-2022.pdf

[4] Dr. Raghuvir Singh, Law Relating to Intellectual Property – A complete comprehensive material on Intellectual Property covering Acts, Rules, Conventions, Treatise, Agreements, Digest of Cases and much more, (3rd Edition, 2010)

[5] K.G Nair, Intellectual Property Rights, 301 (1st Edition, 1994).

[6] The inception of the compulsory licensing concept can be traced back to the requirement established by the Statute of Monopolies in the United Kingdom in 1623. Reports indicate that compulsory licensing gained popularity in Britain as early as the 1850s. Subsequently, it was acknowledged by the international community via the Paris Convention of 1883.

[7] Paris Convention, 1883

[8] The Doha Declaration on the TRIPS Agreement and Public Health, adopted by the WTO Ministerial Conference on November 14, 2001, emphasized the ability of TRIPS member states to bypass patent rights to enhance access to essential medicines.

[9] Convention for the Protection of Performers

[10] The Indian Patent Act, 1970, §84 No.39, Acts of Parliament, India (1970)

[11] The Indian Patent Act, 1970, §92 No.39, Acts of Parliament, India (1970)

[12] Supra Note 10

[13] Supra Note 11

[14] Id

[15] Avtar Singh, Intellectual Property Rights: Patents, Copyrights, Trademarks & Allied Rights (7th ed. 2019).

[16] Natco Pharma Ltd. v. Bayer Corporation, (2012) 2 SCC 357.

[17] BDR pharmaceuticals Pvt. Ltd. Vs Bristol Myers, C.L.A. No. 1 of 2013.

[18] Lee Pharma vs AstraZeneca, (C. L. A. No. 1 of 2015).

[19] Supra Note 1

[20] India, Kenya, South Africa, and Eswatini. “Waiver from certain provisions of the TRIPS Agreement for the prevention, containment and treatment of COVID-19.” Council for Trade-Related Aspects of Intellectual Property Rights. WTO IP/C/W/669, October 2, 2022

[21] Huna Onderkova, Compulsory Licensing in India and changes brought to it by the TRIPS Agreement, IP helpdesk, 12/10/2021, https://intellectual-property-helpdesk.ec.europa.eu/news-events/news/compulsory-licensing-india-and-changes-brought-it-trips-agreement-2021-10-12_en

[22] Supra Note 1

[23] Suelen Carls, Daria Kim, Matthias Lamping et al, Arguments against a Waiver of Intellectual Property Rights, Oxford Business Law Blog, 29/05/2021, https://blogs.law.ox.ac.uk/business-law-blog/blog/2021/06/10-arguments-against-waiver-intellectual-property-rights

[24] Padilla, Ginsburg, and Wong Ervin, 2019, OECD 20-21, 1989

[25]  Ruchika Ghosh, Compulsory Licensing of Patents and its effect on competition, 2020, https://www.jmedsoc.org/text.asp?2020/34/2/55/307907

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Author: Siddhanth Durgesh Nadkarni

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