Effect of compulsory licensing on International Trade
Author: Aanchala K Golecha, School of Law, Christ University.
What is compulsory licensing?
Compulsory licensing is when the government allows someone else to produce a patented product or process without the consent of the patent owner or plans to use the patent-protected invention itself. The idea of compulsory licensing is elaborated in the World Trade Organisation’s agreement on Intellectual property- The Trade-Related Aspects of Intellectual Property Rights) Agreement (TRIPS). This is usually associated with pharmaceuticals, but it could also apply to patents in any field.
The agreement allows compulsory licensing as part of the agreement’s overall attempt to strike a balance between promoting access to existing drugs and promoting research and development into new drugs. But the term “compulsory licensing” does not appear in the TRIPS Agreement. Instead, the phrase “other use without authorization of the right holder” appears in the title of Article 31. Compulsory licensing is only part of this since “other use” includes use by governments for their own purposes.
Within the medical context, pharmaceutical companies invest significant resources into researching, inventing, and gaining approval for new medicines to treat known and emerging diseases. Patent holders claim the high costs of successfully creating a new drug justify and often require high prices. Therefore, new medications are often inaccessible to low-income consumers, especially in developing and least-developed countries.
Proponents of compulsory licensing claim it is a mechanism through which governments can overcome access and price barriers. On the other hand, critics of compulsory licensing argue the practice discourages pharmaceutical companies from investing in new drugs as they are deprived of the benefit of monopoly rights. The result, according to critics, is that drug companies have less incentive and fewer resources to invest in new innovative, lifesaving medicines.
Under Article 31 of the TRIPS Agreement, there are a number of conditions listed for issuance of compulsory licenses:
- Normally the person or company applying for a licence has to have tried, within a reasonable period of time, to negotiate a voluntary licence with the patent holder on reasonable commercial terms. Only if that fails can a compulsory licence be issued, and even when a compulsory licence has been issued, the patent owner has to receive payment; the TRIPS Agreement says “the right holder shall be paid adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization”, but it does not define “adequate remuneration” or “economic value”.
- Compulsory licensing must meet certain additional requirements: the scope and duration of the licence must be limited to the purpose for which it was granted, it cannot be given exclusively to licensees (e.g. the patent-holder can continue to produce), and it should be subject to legal review.
However, Article 31(b) says that for “national emergencies”, “other circumstances of extreme urgency” or “public non-commercial use” (or “government use”) or anti-competitive practices, there is no need to try for a voluntary license.
Compulsory licensing must meet certain additional requirements. In particular, it cannot be given exclusively to licensees (e.g. the patent-holder can continue to produce), and usually it must be granted mainly to supply the domestic market.
The TRIPS Agreement does not provide any specific grounds for using compulsory licensing and normal compulsory licenses can be granted for all types of products or technologies provided the conditions in Article 31 are met.
The Doha Declaration on TRIPS and Public Health
The Doha Declaration refers to several aspects of TRIPS, including the right to grant compulsory licenses and the freedom to determine the grounds upon which licenses are granted, the right to determine what constitutes a national emergency and circumstances of extreme urgency, and the freedom to establish the regime of exhaustion of intellectual property rights. The Doha Declaration states that each Member has the right to grant compulsory licenses and the freedom to determine the grounds upon which such licenses are granted.
The TRIPS agreement has been amended to provide for an additional type of compulsory licensing, this change was decided at the 2001 Doha Ministerial Conference when Ministers recognized that countries unable to manufacture pharmaceuticals should be able to obtain cheaper copies produced under compulsory licensing elsewhere if necessary. All WTO members are eligible to export medicines under this special compulsory licensing mechanism. The mechanism covers pharmaceutical products, including medicines, vaccines and diagnostics, needed to fight an epidemic.
Some governments were unsure of how the TRIPS flexibilities should be interpreted and many countries requested clarifications. These clarifications were settled in the Doha Ministerial Conference in November 2001. WTO member governments stressed that it is important to implement and interpret the TRIPS Agreement in a way that supports public health by promoting both access to existing medicines and the creation of new medicines.
They therefore adopted a separate declaration on TRIPS and Public Health. They agreed that the TRIPS Agreement does not and should not prevent members from taking measures to protect public health. They underscored countries’ ability to use the flexibilities that are built into the TRIPS Agreement, including compulsory licensing.
The Doha Declaration also extended the transition period for Least-Developed Countries (LCDs) for implementation of the TRIPS obligations from 2006 to 2016. However, the extension is limited to the obligations under provisions in the TRIPS Agreement relating to patents and marketing rights, and data protection for pharmaceutical products. Thus, LDCs are still obliged to implement the rest of their obligations under the TRIPS Agreement as of 2006. From a public health perspective, this extension of the transition period for LDCs is of significant importance. It is a recognition of the implications of patent protection on public health, and thus, it is recommended that all LDCs adopt the necessary measures to use the 2016 transition period in relation to pharmaceutical patents and test data protection.
Importing under Compulsory Licensing
Article 31(f) of the TRIPS Agreement says products made under compulsory licensing must be “predominantly for the supply of the domestic market”. This applies to countries that can manufacture drugs but it limits the amount they can export when the drug is made under the compulsory license. It has an impact on countries unable to make medicines and therefore wanting to import generics. They would find it difficult to find countries that can supply them with drugs made under compulsory licensing.
The idea is that if such a country needs to turn to the option of compulsory licensing to produce required affordable drugs, producers from overseas can step in and supply the required drugs/ pharmaceuticals, even if a compulsory license is needed in that country. Therefore, it is a compulsory license especially for production in one country, for export, to meet the public health needs of one or more countries.
The legal problem for exporting countries was resolved on 30 August 2003 when WTO members agreed on legal changes to make it easier for countries to import cheaper generics made under compulsory licensing if they are unable to manufacture the medicines themselves. When members agreed on the decision, the General Council chairperson also read out a statement setting out members’ shared understandings on how the decision would be interpreted and implemented. This was designed to assure governments that the decision will not be abused.
The decision contains three waivers:
- Exporting countries’ obligations under Article 31(f) are waived which means that any member country can export generic pharmaceutical products made under compulsory licences to meet the needs of importing countries.
- Importing countries’ obligations on remuneration to the patent holder under compulsory licensing are waived to avoid double payment. Remuneration is only required on the export side.
- Exporting constraints are waived for developing and least-developed countries so that they can export within a regional trade agreement, when at least half of the members were categorized as least-developed countries at the time of the decision. That way, developing countries can make use of economies of scale.
All WTO member countries are eligible to import under this decision, but 23 developed countries have announced voluntarily that they will not use the system to import: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom and the US.
By TRIPS agreement, India has enacted legislation providing a provision for compulsory licensing under Section 84 and 85 of the Indian Patent Act, 1970. Under Section 83 it is desirable that the patent granted in India is to be practiced. The applicant has to submit form 27 to the Indian patent office, which must contain details about the use of the granted patent technology in the Indian domain. If the protected technology is not being used up to three years after the grant of a patent, then the interested party can ask for a voluntary license under Section 84. In case the patent applicant refuses to give a voluntary license then the interested party under Section 84 can approach the patent office for a compulsory license.
India has issued one compulsory license to generic Indian player Natco Pharma Ltd., for Bayer’s Nexavar, an advanced stage kidney, and a liver cancer drug. The question is whether the use of flexibilities provided by the compulsory licensing was appropriately used. Recent data indicates that there are about 100,000 patients in India suffering from different forms of renal cell and hepatic cell carcinoma and 30,000 patients are added to the patient pool every year. Over 24,000 patients die in India every year on account of these diseases. Considering the 1.2 billion population of India, the incidence of these conditions is 0.0083 percent of the population.
Role of Compulsory Licensing in the context of COVID-19 Outbreak
The Covid-19 outbreak has led to increased demand for several medicines around the world, including among developed and least developed countries that lack the capacities to manufacture essential medicines. Exclusive rights granted through patents often obstruct access for low-income people in need of medicine due to high prices. In addition, several WTO members, including developed countries, want to ensure that exclusive rights do not prevent them from producing enough medicine to combat Covid-19. As a result, several countries, including Canada, Germany, Ecuador, and Chile, have taken steps to make it easier to use compulsory licenses.
Considering the spread of the pandemic, the WHO granted its support to Costa Rica’s proposal to create a pool of rights to tests, medicines, and vaccines, with free access or licensing on reasonable and affordable terms for all countries. This proposal goes much further than compulsory licensing provisions by including technologies from a larger number of players rather than on a drug-by-drug, country-by-country basis. Costa Rica’s proposal aims to create more equitable access to drugs and medicine as well as avoid disjointed efforts to mitigate affordability and access.