Compulsory license under Article 31 of TRIPS means “Non-Voluntary” license to domestic producers “without authorization of the right holder” under “national emergency” or “extreme urgency” so long as due process requirements are met.
The Paris Convention on the Protection of Industrial Property formally recognizes Member’s rights to grant compulsory licenses in cases of abuse of patent rights including “failure to work”. Article 31 of the TRIPS Agreement leaves Members the freedom to determine grounds for granting compulsory licenses, provided that the conditions and procedures imposed by Article 31 are met, and taking into account the other provisions of TRIPS.
The New Measures of China which are also known as Measures for Compulsory Licensing of Patent Implementation were released on 1st May, 2012. Allowing China’s State Intellectual Property Office (SIPO) to grant compulsory licenses have left multinational big pharmas (MNCs) in tension. MNCs are already worried because of India where first compulsory license was granted to Natco to manufacture Bayer’s anti-cancer drug Nexavar. Bayer was supplying this drug at a price of over 5000$ whereas Natco had said that they will provide the same at the price of 176$.
Why China took so long ?
A compulsory license has never been granted in China but it is not as if there was no provision for compulsory license before these measures. China’s Patent Law of 2001 and its Implementing Rules already had provisions which allowed compulsory license under certain conditions and the same provisions were rectified in China’s Patent Law which was amended in 2008.
The New Measures are important because they mix and replace two sets of older regulations:
a) “Measures for Compulsory Licensing of Patent Implementation” (Order No. 31) promulgated in 2003.
b) “Measures for Compulsory Licensing of Patent Implementation Regarding Public Health” (Order No. 37) promulgated in 2005.
Also the New Measures are detailed and better defined relating to procedures for examining and terminating compulsory licenses under patent laws.
The three factors on the basis of which SIPO can grant or terminate a compulsory license are:
1. Non-use of the patented invention or misuse of patent in violation of anti-monopoly law
2. Public welfare, including “national emergency or extraordinary situation,” “public interest”
3. “Public interest” cross-license for exploitation of an improvement invention
If a compulsory license is granted, the parties may negotiate the royalties or ask the SIPO for adjudication on such fees. If a party is unsatisfied with the SIPO’s decision on compulsory licensing, it can apply for an administrative review or initiate an administrative litigation.
If granted, a compulsory license must:
– Be non-exclusive
– Pay a reasonable fee to the patentee, decided by both parties through consultation
– Be predominately for the supply of the domestic market only
– Shall stipulate the scope and time for exploitation
Is China following India?
It will be important to see whether China will follow footsteps of India as India is granting compulsory licenses to make expensive drugs less costly. MNCs are worried because descriptions of “national emergence or extraordinary situation” and “public interest” are broad and undefined. China had rules for compulsory license before too but these rules were not used but after the New Measures, there is a scope of this rule being used by SIPO. If China decides to follow the steps of India to actually grant a compulsory license (as did smaller countries such as Thailand, Indonesia, and Malaysia) to make expensive drugs less costly by granting compulsory licenses, many products will be affected in China. Another concern of the New Measures for MNCs is that MNCs have already contracted Chinese companies to make the key ingredients in their drugs thus, those companies are now technically able to make the products if they are granted compulsory license.
But some MNCs are optimistic with this change also and reasons that China may not use compulsory license like India because:
1. Granting a compulsory license will detract foreign investors who compete based on innovation and technologies which will be against Chinese policy of attracting foreign investments, particularly high-tech investment.
2. The current five year plan (2010-2015) has goals which emphasizes on establishing an innovation-oriented economy and promote intellectual property protections. If SIPO acts against China’s national IP strategy by granting compulsory licenses than it will only discourage innovations.
3. If China grants compulsory license than there are chances of objections from the governments of developed countries which in turn can lead to international trade tensions.
It cannot be clearly said that what will be the effect of these New Measures but it can be clearly stated that the New Measures will help Chinese government in negotiating deals with foreign countries. The clearest evidence is the current negotiation between the Chinese government and U.S.-based Gilead Science Inc. over Tenofovir – a drug for HIV treatment. China has been excluded from the Patent Pool for providing generic versions of Tenofovir to 111 countries. It seems that, after the New Measures took effect, Gilead offered certain concessions, e.g., by giving China a substantial donation of Tenofovir if China continues to buy an equivalent amount. Now, all eyes are on China to see how it will react with the New Measures, especially since China will lose its funding from the Global Fund to Fight AIDS, Tuberculosis and Malaria in 2013.
Also it can be foretold that SIPO might not grant compulsory licenses but the New Measures will still encourage more Chinese industries to file antitrust cases in courts and look for evidence of patent non-use and raise public welfare arguments before the SIPO to support their case for a compulsory license. Thus, MNCs should start to formulate their strategy that how they will cope up with those allegations.
Furthermore MNCs may consider an option of manufacturing drugs in China only to reduce the cost of the drug and avoid issuance of compulsory license.