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Analysis of compulsory licensing provisions - International Law Office

International Law Office

Intellectual Property - India

Analysis of compulsory licensing provisions

January 17 2011

Compulsory licensing
TRIPs provisions
National Pharmaceutical Policy and Parliamentary Standing Committee
Concerns relating to drug prices and availability
Available options
Compulsory licence categories
Issues for resolution


The Department of Industrial Policy and Promotion recently published its discussion paper on the compulsory licensing of patents. The paper mainly deals with the compulsory licensing provisions of the patent laws. The department has also invited views and suggestions on the same. The paper's objective is to develop a predictable environment for the use of measures related to compulsory licensing. It is also a tool for government discussion on the subject, allowing for an appropriate policy decision to be made at an appropriate time.

Compulsory licensing

According to the compulsory licensing system, the government is empowered to allow third parties to produce and market a patented product or process with or without the patent owner's consent. This mechanism has been developed to maintain a balance between rewarding patentees and the need to make inventions available to the public. Under the Patents Act, the objective is to balance patentees' rights and monopolies, but at the same time to ensure the working of patents in India, the availability of patented products at a reasonable price, the promotion and dissemination of technological inventions and the protection of public health.

Compulsory licensing is an integral part of the patent regime. Article 5(2) of the Paris Convention provides as follows:

"Each country of the Union shall have the right to take legislative measures providing for the grant of compulsory licenses to prevent the abuses which might result from the exercise of the exclusive rights conferred by the patent, for example, failure to work."

The concept of compulsory licensing has already been successfully applied in many developed countries, and after the Doha Declaration on the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) and Public Health, many developing and less-developed countries have also adopted the concept. The Indian regime incorporates a provision for the mandatory working of patents and, in case of 'non-working' patents, compulsory licences can be granted to an interested party on request. However, while the procedure and tests are detailed under the law, no compulsory licences have been issued in India to date.

TRIPs provisions

Articles 30 and 31 of TRIPs provide for the issuance of compulsory licences to third parties. Article 30 states that limited exceptions are to be provided to the rights conferred by patents, provided that they do not "unreasonably prejudice the legitimate interests of the patent owner, taking into account the legitimate interests of third parties". Article 31 contains conditions for qualification for use without the rights holder's authorisation. According to this article, the local requirement conditions for public non-commercial use or circumstances of national emergency or extreme urgency are not required where such licensing is aimed at anti-competitive prices. Furthermore, Section XIV of TRIPs stipulates the adequate remuneration to be paid to the right holder.

National Pharmaceutical Policy and Parliamentary Standing Committee

According to the paper, the National Pharmaceutical Policy 2002 was aimed at ensuring the adequate supply of good-quality essential pharmaceuticals of mass consumption at affordable prices. The draft National Pharmaceutical Policy 2006, while acknowledging the satisfactory growth of pharmaceutical products, proposed to enact a new law to exercise a more effective price control mechanism of drugs, creating a National List of Essential Medicines consisting of 354 drugs and thus strengthening the drug regulatory system, limiting trade margins and negotiating prices for patented drugs.

On August 4 2010 the Parliamentary Standing Committee on Health and Family Welfare presented its 45th report on "Issues Relating to the Availability of Generic, Generic Branded and Branded Medicines, their Formulations and Therapeutic Efficacy and Effectiveness". This report addressed the following issues:

  • the high prices of newly patented drugs due to a lack of regulation by the National Pharmaceutical Pricing Authority; the report highlighted the need to bring these under the ambit of the authority;
  • the need for checks of unorthodox practices undertaken by drug companies whereby regulated drugs are substituted with new ingredients in popular brands to avoid regulation; and
  • the takeover of Indian drug companies by foreign companies and the need to generate policy options to "ensure that major Indian pharmaceutical companies remain in Indian hands".

The paper went on to state that India is recognised as a leading global player in the manufacture of medicines. It ranks third in terms of volume of production and 14th in terms of value. Despite this fact, India has a large unmet demand for critical medicines. According to the World Health Organisation's World Medicine Situation 2004, 65% of the Indian population still lacks access to essential medicines.(1) This situation has arisen due to the export-orientated production of medicines by pharmaceutical companies. The takeover of Indian companies and strategic alliances by multinationals will further worsen the situation. Given this background, the need for affordable and high-quality medicines is critical for the sustainable growth of the Indian economy.

Concerns relating to drug prices and availability

The sales of India's top 10 pharmaceutical companies represent nearly 39% of the total industry sales. Compared to 1998 to 1999, after recent takeovers, there are now three multinationals in the top 10. If this trend continues, an oligopolistic market will develop, which will result in a small number of companies dictating the prices of drugs that are critical for addressing public health concerns, including fighting front-line diseases such as HIV, AIDS and hepatitis C. Furthermore, if large Indian generic pharmaceutical companies are taken over themselves, there will be no one to manufacture drugs based on the compulsory licences issued to them, and thus the cheap and effective generic drugs industry may be threatened. The paper suggests the following reasons for this predicted situation:

  • If taken over, the Indian companies will no longer be willing to apply for compulsory licences, even if eligible. Thus, their deterrent threat is weakened.
  • In case of a public emergency, adequate and capable drug manufacturers may not be available to come forward, apply for a compulsory licence and work the patent at a reasonable cost.
  • The foreign companies may utilise the marketing channels of the acquired Indian companies to sell more expensive patented drugs or branded generics, rather than the cheaper generics that were previously being sold.
  • Under foreign control, the Indian companies will no longer be interested in taking grants from the government or state support to manufacture relevant essential drugs.

Available options

The paper also proposes the following options that are available to the government to counter these ensuing problems:

  • In case of a public emergency (eg, a pandemic), or whenever demand is not met, the government should issue compulsory licences to qualified companies to produce the required drugs, thus invoking the government use purpose.
  • The government should invoke the Competition Act 2002 to scrutinise whether the price or availability of a drug is a consequence of an anti-competitive agreement or combination which has an adverse effect on competition or the abuse of a dominant position, and initiate suitable action.
  • The government should review the policy on foreign investment for pharmaceutical companies. The proposals for mergers and acquisitions in the pharmaceutical sector should be scrutinised by the Foreign Investment Promotion Board.
  • The government should expand the ambit of the National Pharmaceutical Pricing Authority and vest it with the power to regulate the prices of a larger number of drugs than the present 74.

Compulsory licence categories

While dealing with legal provisions for the grant of compulsory licences, the paper divides compulsory licences into two categories.

Category I CL
Category I CL includes compulsory licences issued by the government by way of notification (Section 92 of the Patents Act) on the following grounds:

  • circumstances of national emergency;
  • circumstances of extreme urgency; and
  • in case of public non-commercial use.

Compulsory licences issued under Section 92A of the act for the export of pharmaceutical products and compulsory licences issued under Section 100 for government use also come under this category.

Category II CL
Category II CL includes compulsory licences issued under Section 84 of the Patents Act. The essential element for issuance of compulsory licences is the ability of the applicant to prove that:

  • the reasonable requirements of the public with respect to the patented invention have not been satisfied;
  • the patented invention is not available to the public at a reasonably affordable price; or
  • the patented invention is not worked in India.

Issues for resolution

Finally, the paper lists the issues for resolution, which are as follows:

"1. Are guidelines necessary or required for the issue of compulsory licences?

2. Do the requirements for issue of a notification by the Central Government (national emergency; extreme urgency; public non-commercial use) under Section 92 require amplification through issue of guidelines?

3. How should recourse to issue of a compulsory licence under Section 92 and recourse to use by the Central Government of an invention under Section 100 be differentiated in the matter of use? Under what circumstances should each be invoked?

4. Can products manufactured under a Category I licence be effectively distributed solely through government channels? Does issue of Category I CL envisage sale of the compulsory licensed goods outside the ambit of government and in the market?

5. Should CLs be issued on the basis of anti-competition law - if it is determined that companies have abused their dominant position in the market or engaged in unfair competition?

6. Should working of a patent in the territory of India be interpreted to mean that it should be manufactured within the territory of India?

7. How should the essential elements of a Category II CL outlined in Para 54 and 55 above be proved by the applicant to the satisfaction of the Controller?

8. What should be the basis for royalty payments to compensate for CLs? Should a uniform stance be taken for Category I CLs; Category II CLs and Central Government use of inventions? Or should a differential approach be adopted?

9. Should the Controller be obligated to examine and take a final view on all CL applications within a specified time period? What should this time period be?"

Through publication of its paper on invoking compulsory licensing, the Department of Industrial Policy and Promotion seeks to invite views and suggestions on these issues for resolution. Based on expert advice and suggestions, the government will take the necessary steps to address the issue of the availability of essential medicines to the general public at affordable prices, either by issuing new guidelines or by enacting a new law.

For further information on this topic please contact Manoj Kumar Singh at Singh & Associates by telephone (+91 11 4666 5000), fax (+91 11 4666 5001) or email (manoj@singhassociates.in).

Endnotes

(1) World Health Organisation's World Medicine Situation 2004, quoting 1999 figures.


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