Compulsory Licensing: Everything You Need to Know
Compulsory licensing is a government-granted authorization given without the patent holder's permission, often relates to pharmaceutical patents and other IP. 13 min read
What Is Compulsory Licensing?
Compulsory licensing is a government-granted authorization given without the patent holder's permission. It often relates to pharmaceutical patents and other intellectual property (IP).
In normal circumstances, an individual needs permission from a copyright owner to reproduce, perform, or distribute a copyrighted work. With compulsory licenses, however, permission isn't required if the user follows certain rules and pays the appropriate fees. Compulsory licenses are commonly used by webcasters, music companies, cable providers, and streaming services.
The first international trade agreement to incorporate intellectual property law was the World Trade Organization-negotiated Agreement on Trade Related Aspects of Property Rights (TRIPS Agreement). While divisive, the TRIPS Agreement struck a balance between the long-term benefits IP rights generate and the short-term costs from exclusive marketing.
Under TRIPS, the following provisions are necessary for providing compulsory licenses:
- Each case is decided on its own merits.
- The compulsory license applicant must make efforts to get a license from the patent owner.
- The duration and scope of the compulsory license must be limited to the purpose for which it was granted.
- The patent owner must be adequately paid under the compulsory license.
- Judicial review determines what is adequate compensation for the patent owner.
- When a second patent gets exploited under compulsory licensing, the invention claimed in the second patent must have economic significance involving the first patent.
After TRIPS, there was more predictability in the international trade environment that allowed disputes to get resolved systematically. However, as with any international agreement, its viability comes down to following the principles agreed upon in the TRIPS Agreement.
Under the TRIPS Agreement, the authorities in the country concerned say whether the patent owner should be given the right to appeal in that country. This has always been the case, but some things have changed.
There used to be a provision that stated compulsory licenses must be granted to supply the domestic market. This was changed at the 2001 Doha Ministerial Conference so that countries unable to manufacture the pharmaceutical drugs could turn to cheaper options elsewhere when needed. The change legally occurred Aug. 30, 2003, when the General Council waived the provision and allowed generic copies made under compulsory licenses to be exported to countries lacking production capacity, as long as certain conditions and procedures were met.
All WTO countries are eligible to import products under this decision. Even so, 23 countries announced that they will not use the system to import. These countries include:
- New Zealand
- United Kingdom
- United States
Since joining the European Union, this list now includes 10 more:
- Czech Republic
- Slovak Republic
In a separate statement, 11 other members announced that they would only use the system as importers in situations of national emergency or extreme urgency. These countries include:
- Hong Kong
- Macau China
- Chinese Taipei
- United Arab Emirates
As for the world's least-developed countries, they were allowed to delay protecting pharmaceutical patents until 2016. As long as the pharmaceutical isn't patented in a least-developed country, the government doesn't have to issue a compulsory license to import. The supplying country, however, would need to issue a compulsory license to export a generic copy of the medicine that is patented in that country.
Why Is Compulsory Licensing Important?
One of the main reasons for compulsory licensing is public health. Innovative pharmaceutical companies have produced new medicines to fight worldwide epidemics, including AIDS, though these innovations aren't widely accessible due to pharmaceutical companies' rising drug prices.
Unfortunately, the poorest countries have some of the world's sickest populations. Even Americans have had to fill prescriptions from foreign countries, like Canada and India, in order to afford their medications. This is because prescription costs continue to rise above inflation rates.
The TRIPS Agreement specifically deals with the intellectual property surrounding pharmaceutical products. However, public health advocates and innovators disagree on compulsory licensing in addressing public health emergencies.
Due to disagreements, opposition to compulsory licensing is fierce. There are many obstacles that prevent the measure from doing as intended: making essential drugs affordable to everyone who needs them. Opponents tend to argue that compulsory licensing will lead to:
- Counterfeit drugs
- Lost capital gains
Research has shown that the benefits of providing essential medication far outweigh these risks.
Intellectual Property Law Versus the International Trading System
Before 1994, international trade policies and intellectual property law were separate entities with limited force and scope. Early treaties, including the Paris Treaty and Berne Convention, focused on keeping nations from passing biased IP laws. At that time, trade negotiations revolved around trade barrier and tariff reductions.
By 1994, the pharmaceutical, entertainment, and high-tech industries prompted a major shift in international trade policy at the Uruguay Round of the General Agreement of Trades and Tariffs (GATT). At the end of the GATT, the World Trade Organization (WTO) formed to enforce international trade agreements.
Part I of the TRIPS Agreement details the importance of adhering to nondiscrimination GATT principles. Under these principles, IP agreements from the Paris Convention, Berne Convention, Rome Convention, and the Treaty on Intellectual Property in Respect of Integrated Circuits were adopted.
Part I of the original TRIPS Agreement concerns the pharmaceutical industry. Article 7 states that IP protection is reserved for promoting innovation in a way that benefits economic and social welfare with a balance of obligations and rights. Article 8 then goes into the issue of suspending IP rights for public health purposes, which is more controversial.
The original TRIPS agreement was vague in how or when WTO members could circumvent IP rights to access medications. TRIPS:
- Required WTO members to have a minimum standard of protection for intellectual property rights.
- Gave WTO jurisdiction over resolving disputes related to IP rights.
- Provided remedies and procedures for resolving disputes.
At the time, the original TRIPS agreement placed more emphasis on promoting innovation than on providing access to critical medications. The WTO quickly turned to place more emphasis on public health.
During the 2001 WTO Ministerial Conference, the Doha Agenda emerged, declaring the need to recognize a nation's right to protect public health, even at the expense of IP rights. This Doha Declaration confirmed a sovereign nation's authority to grant compulsory licenses in the event of national emergencies, such as a major epidemic.
Even so, the Doha Declaration failed to "promote access to medicines for all," as was intended. Despite compulsory licensing, many countries don't have the capacity or means to manufacture medications. TRIPS required that most drug manufacturers and sales from compulsory licensing must occur in the domestic market.
At the time of the Doha Declaration, South Africa's national HIV epidemic affected 11.4 percent of the population.
In 2003, WTO met once again to negotiate the Doha Agenda at the Fifth Ministerial Conference in Cancun. There, WTO passed the Implementation Decision, extending compulsory licensing provisions and temporarily removing restrictions on drug exports to those countries unable to manufacturer the drugs themselves.
In the Hong Kong Declaration of 2005, the General Council decided to make the Implementation Decision permanent. The Council amended TRIPS, allowing countries to gain eligibility for compulsory licensing even if they lacked the ability to manufacture drugs. The medication can be imported from exporting members operating under the compulsory license.
Compulsory Licensing Concerns
Despite WTO's efforts, the TRIPS amendment couldn't resolve issues standing in the way of a diplomatic compulsory licensing system. There was a lack of specific requirements to determine compulsory licensing eligibility, not to mention the risks associated with counterfeit drug production.
Compulsory licensing provisions are quite vague when trying to broaden their scope. Problems arise in terms of which diseases, drugs, and nations are eligible. This lack of specificity was meant to provide flexibility, but it created more controversy than anticipated.
For example, after the Doha Declaration, India examined patented drugs for compulsory licensing potential to rev up generic production. One of the country's compulsory licenses involved Bayer's Nexavar, a drug used to treat advanced stage kidney and liver cancer.
In the Nexavar case, at least 100,000 people in India were suffering from renal cell and hepatic cell cancers, with 30,000 individuals added to the patient pool each year. More than 24,000 patients in India die from these diseases annually. Given India's 1.2 billion population, these incidences account for only 0.0083 percent of the population, which isn't considered a national emergency.
As such, India has undermined its intellectual property rights, weakened patent protection, and abused compulsory licensing provisions from the Doha Declaration. India has also attacked or invalidated patents on 15 medications.
Those who gained from India's actions were not patients or innovative pharmaceutical companies, but local generic manufacturers. In this case, India needs more doctors, clinics, hospitals, and nurses, not Nexavar.
Proposed solutions to these drawbacks have included the demand for an updated list of valid drugs, diseases, and nations every year.
Clarifying compulsory licensing ambiguities will help improve efficiency in bringing pharmaceuticals to those in need. Proposed solutions include:
- Clearer terms in compulsory licensing provisions.
- Patent buyouts.
- Financing pharmaceutical research for the public domain.
A common suggestion is maintaining a set list of diseases considered threats to public health, which make countries eligible for compulsory licenses. WTO can also adopt a more uniform socio-economic model on who is eligible. Also, any ambiguity regarding patent rights should be clarified.
With patent buyouts, markets can get around compulsory licensing issues altogether to provide drugs at production costs. By selling drugs to countries not participating in the Organization for Economic Cooperation and Development (OECD), public help benefits outweigh any lost revenue without taking away the incentive to innovate.
Another way to improve access to patented drugs is by financing medication research for the public domain. This way, drugs directly enter the public domain and companies can create generics at competitive prices. U.S. Representative Dennis Kucinich has proposed publicly supported research centers and prize money for pharmaceutical breakthroughs to keep incentivizing research.
Compulsory Licensing in the United Kingdom
The U.K. Patents Act 1977 allows compulsory licenses to be granted under patents in situations where monopoly rights in relation to such patents have been abused. Compulsory licenses, however, are rarely used in the U.K. because competition law offers more effective provisions for controlling this type of abuse. Still, since the United Kingdom is a WTO member, its compulsory licensing regime must comply with the TRIPS Agreement.
Applying for a compulsory license in the U.K. involves filing with the Comptroller of Patents any time following the expiration of three years from the date of the patent grant. After the applicant provides proof, the Comptroller can determine whether and on what terms to grant the license.
There are two regimes for compulsory licenses in the U.K.: one for patentees who are "WTO proprietors" and one for non-WTO proprietors.
A WTO proprietor is a resident of a WTO member country or has a business in one. In practice, most patentees will be WTO proprietors.
For WTO proprietors, including U.K. nationals, there are three grounds for relief:
- Where demand for a patented product is not being met.
- By reason of the patentee's refusal to grant a license on reasonable terms, which includes exploitation of another patent in the U.K. representing an important technical advance or where commercial or industrial activities are unfairly prejudiced.
- Where unpatented activities are unfairly prejudiced.
In addition, obtaining a compulsory license from a WTO proprietor involves:
- Signing an agreement stating that the applicant must previously have made unsuccessful efforts to get a license from the patentee on reasonable terms and conditions.
- That the patent must not be in the field of semi-conductor technology unless the license is needed to fix a practice determined to be anti-competitive.
Once the grounds for granting a compulsory license in the U.K. have been satisfied, the Comptroller deciding whether or not to grant the compulsory license must consider the following:
- The nature of the invention, the action of the licensee or proprietor in developing the invention, and the time which has elapsed since grant of the patent.
- The ability of the applicant to work the invention to public advantage.
- The risks undertaken by the applicant in working the invention and providing capital.
The terms of a compulsory license in the U.K. is decided by the Comptroller on a case-by-case basis. WTO proprietors will also be subject to the following conditions:
- The license shall not be exclusive.
- The license can only be assigned along with the portion of the applicant's business that uses the patented invention.
- The license must be predominantly for the United Kingdom's market supply.
- The compulsory license includes conditions entitling the patentee to satisfactory compensation depending on the circumstances of the case.
- The license must be limited in duration and scope to the purpose for which it was granted, which means it's at risk of modification or termination if situations change.
Compulsory Licensing in Austria
As a member of the WTO, Austria follows compulsory licensing requirements under Art 31 of the TRIPS agreement and is regulated nationally by sections 36 and 37 of the Austrian Patent Act.
The Austrian compulsory licenses regime is similar to that of the United Kingdom with the following differences:
- The period that must have passed when applying for a compulsory license is three years after the patent's publication or four years after applying for the patent, whichever period expired first.
- The same rules apply to all proprietors regardless of whether they live inside or outside the WTO.
As for Austrian proceedings, compulsory licenses are decided by a senate of the Austrian Patent Office, which consists of five members. Three of these members are technical experts. Although the office is more of an administrative body than a court, it must hear the proprietor and account for any objections raised. Also, an appeal against its decisions can be lodged at a higher body, which consists of technical experts and judges.
Compulsory Licensing in the Music Industry
Compulsory licensing allows a musician to record and sell a rendition of any previously recorded song by paying royalties to the copyright holder. As such, you can legally release your version of the song even if you don't have the copyright holder's permission (in certain cases). This is an unusual exception to intellectual property law in which an owner maintains exclusive rights.
A compulsory license for music serves to foster creativity and give indie artists more flexibility in creating new versions of popular songs. For example, Prince was known for refusing permission to make any recordings of his music. However, by following compulsory copyright law, you can release your version of "When Doves Cry" legally.
To take advantage of this, you must notify the copyright owner and include the statutory fee set by the Copyright Office. These fees are currently 9.1 cents per song or 1.75 cents per minute of playing time. You will need to fill out a Notice of Intention listing your album's information, release date, number of CDs manufactured, and the artist's name.
A musician can also ask permission from the song owner directly to negotiate a lower price. In this case, you aren't required to obtain a compulsory license.
When the copyright holder receives a Statement of Account regarding the royalties, he or she can request an annual audited statement.
Keep in mind, there are a few limitations on compulsory licenses. You can't use one to:
- Make changes to a song's melody or lyrics or rearrange sheet music.
- Request a song that hasn't been released.
- Request a song not copyrighted in the U.S.
- Use the song on a background track, karaoke, or for live, public performances.
In countries subscribing to the Universal Copyright Convention (UCC), including the U.S., a songwriter may have to grant a compulsory license to a subscribing government wanting to translate the work to the country's primary language. This can only be done if no translation has been published within seven years of the song's original publication date.
Frequently Asked Questions
- Why is counterfeit drug production a compulsory licensing risk?
The general consensus is that compulsory licensing in the pharmaceutical industry undermines efforts to make drugs affordable and maintain the revenue needed for pharmaceutical research. One theory is that producing and exporting counterfeit drugs with no therapeutic value will increase because buyers in developed countries will unknowingly purchase cheaper substitutes without knowing they're counterfeit.
However, no evidence proves any real threat of counterfeit drugs stemming from compulsory licensing. In fact, most counterfeit drugs are produced domestically. As drug prices fall due to compulsory licensing, so does the incentive for criminals to produce counterfeits because there's no longer a decent profit margin.
- What is arbitrage?
Arbitrage, also known as "diversion" or "parallel trading," is an international trade problem that occurs when a buyer purchases goods below market value and then exports those goods to another market where they're priced higher. Arbitrage, according to economic theory, shifts the surplus from producer to consumer.
- Are we seeing improved access to medications?
In general, yes. The poorest countries have been able to take advantage of low prices. More than that, compulsory licensing has motivated companies to produce more accessible drugs. In some cases, they have voluntarily lowered prices and offered royalty-free licenses.
On the other hand, many argue that compulsory licensing hasn't helped bring drugs to countries in need. Low-income nations like Columbia, Thailand, and South Africa are being pressured by more powerful nations to adopt rigorous IP laws in free-trade negotiations. Other countries lack coordinated efforts to do so.
- Are patent flexibilities a new concept?
No, they have existed ever since the TRIPS Agreement went into effect in 1995.
- Does a compulsory license void a patent?
No. The patent owner continues to hold the patent's rights, including the right to be paid for authorized copies.
- Does requesting a compulsory license have to be an emergency?
Not necessarily. The TRIPS Agreement doesn't specify the reasons to justify compulsory licensing. In fact, the Doha Declaration confirms that countries can determine the grounds for granting the licenses on their own accord. Still, compulsory licenses must meet certain requirements.
For national emergencies, however, trying to get a voluntary license isn't required. Regardless, the patent owner must still be paid.
- What paperwork is required to satisfy compulsory law?
There is no physical paperwork required from copyright holders under compulsory law. Instead, a license is automatically granted and the copyright holder doesn't have to send any return paperwork.
- Who decides how much the patent owner deserves to be paid?
Each country's authorities decide on adequate payment. The patent owner also has the right to appeal.
- Does a compulsory license issued under the original TRIPS Agreement fall under the newer 2003 decision?
No. The 2003 decision only deals with compulsory licenses for export.
- What is a "license of right?"
Where a patent is endorsed "licenses of right" in the U.K., anyone is entitled to a license under the patent. Terms must be agreed on with the patentee or, if no agreement is possible, determined by the Comptroller.
- Can an applicant apply for a compulsory license in the U.K. if they already have a license under the U.K. patent?
Yes. The Comptroller can grant a compulsory license and cancel the existing license. The Comptroller may also amend the terms of the existing license.
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