Abuse of Compulsory Licensing System


Accessed from here.

India signed the Trade Related Aspects of Intellectual Property Rights (“TRIPs”) agreement which came into effect from 1st January, 1995. The agreement led to some major compliance related changes in the Indian patent system. The Ayyangar Committee Report on patents in 1959 had a major impact on the patent law as we know it now in India. By the recommendation of the report, India did not have product patents in pharmaceutical industries till the year 1995. After signing the TRIPs agreement, which ensures that no discrimination on the basis of field of invention is allowed by the signatories, India, albeit with a buffer period of ten years, was finally compelled to grant product patents in pharmaceutical sector. However, in order to balance out the ill-effects of monopoly of the patent regime, TRIPs also has the idea of compulsory licensing by means of which a domestic entity may, on application to the patent office, under certain circumstances, be granted a license to manufacture the products of a patent holder, paying a royalty for such a license to the patentee. This is called a compulsory license and it may be used by the patent office under certain circumstances.

What is Compulsory License?

Under Sec. 84[i] compulsory licenses can be granted by the patent office, on application to the Controller, after expiry of at least three years from the grant of patent. The grounds for such a grant or application are i. the invention has not been worked in India, ii. the reasonable requirements of public with respect of the invention are not being met and iii. the invention is not being available at reasonable prices[ii]. In consideration of the application, the Controller shall see — i. the measures taken by the patent holder to work the invention in India, ii. the ability of the patent holder to work the invention to public advantage, iii. the capacity of the applicant to work the invention efficiently and iv. whether the applicant has already made efforts to apply for a license from the patent holder.[iii] There are various other considerations to decide whether the reasonable requirements of the public are being met. From these, we see that the Controller has power to grant compulsory license to other players in case the patentee avoids making use of the invention in India to benefit the public with reasonable supply of the invention. However, compulsory licenses are very subjective and the authorities shall take into consideration various factors related to amount of import of the product, availability in the market, market price etc. before granting it. It may also be revoked in case the conditions leading to such a grant is no longer in prevalence and is so proved by the patent holder.

Effects of Abuse

There can be several ways of abusing compulsory licenses. India provided its first compulsory license to Natco against the patentee Bayer’s drug Nexavar. The drug was marketed in India by Bayer at an exorbitant price which Natco marketed at a 97% lower price. The consideration for such a license was the lack of public access to the drug in view of its price which was not deemed satisfactory by the granting authority.

Accessed from here.

One of the effects of having a compulsory licensing regime is the creation of a grey market. The drugs so manufactured are not sold at the market price but at a lower price and exported to different markets without the permission of the patentee. The market is different from black market as the drugs are not counterfeit products but products manufactured by compulsory licensees who exploit their license to sell the drugs at lower prices which are further sold in markets where such compulsory license with respect of those drugs have not been granted. This affects the patentee and defies creates a disincentive for them.[iv]

Moreover, standards of national emergency have not been well defined in the statutes. Hence, while in India, a breakout amidst 1% of the population may not be proportionately suitable to be termed as a national emergency, the sheer number of people affected may be easily construed to use the compulsory licensing mechanism to the detriment of the patentee.[v]

Accessed from here.

There is also concern regarding whether patented goods when licensed out would not provide disincentive to the patentee and retard its attempts at innovation. This may be addressed by saying that even though there was a warning by the United States towards India and other countries using compulsory license whereby trade with such countries was threatened, the patentees will generally be inclined to exploit the market of such third world countries and the fear of compulsory licensing shall give them impetus to innovate more and work their inventions more.[vi]

Finally, there is no specified guideline for royalty to be provided to the patentee where a compulsory license is granted. In many cases, it is difficult for the patentee to work the invention as opposed to simply importing it at higher prices. However, this difficulty is generally not recognized in situations of emergencies and very low royalties are paid to such patentees in public interest. Thus there is a necessity for a fair system of evaluation of royalty when compulsory licenses are granted.[vii]

Alternatives and Conclusion

In order to maintain a balance between the compulsory license regime and the incentive of monopoly provided for invention, there has to be a more stringent and limited application of the provision. However, the provision ought to be used in cases of emergency. Thus in order to avoid portraying a negative picture of the patent system of the country, the Government ought to expend more in research and especially in capital heavy sectors in order to allure more inventors so that the country may ultimately benefit from the invention. The government should also fund more research to develop homegrown drugs and innovations in order to avoid the necessity of compulsory licensing. Pricing, in the pharmacy sector may also be regulated or negotiated before granting patents. Incentives should be given to charity through tax exemption or other mechanisms. Certain inventions may be acquired for public benefit with a fair compensation to the patentee. All of these might ameliorate the fear of compulsory licensing in inventors who shall be thus assured of strict and limited application of compulsory licensing mechanism in presence of such other considerations adding to public benefit.[viii]

[This post has been written by Sayantani Saha and edited by Drishti Das, both 5th year law students at WBNUJS, Kolkata].


[i] Sec. 84, Indian Patents Act, 1970

[ii] Ibid.

[iii] Ibid.

[iv] Amanpreet Kaur and Rekha Chaturvedi, ‘Compulsory Licensing Of Drugs And Pharmaceuticals: Issues And Dilemma’ (2015) 20 Journal of Intellectual Property Rights.

[v] Richard A. Epstein and F. Scott Kieff, ‘Questioning The Frequency And Wisdom Of Compulsory Licensing For Pharmaceutical Patents’ (2011) 78 The University of Chicago Law Review.

[vi] Ibid.

[vii] Ibid.

[viii] Richard A. Epstein and F. Scott Kieff, ‘Questioning The Frequency And Wisdom Of Compulsory Licensing For Pharmaceutical Patents’ (2011) 78 The University of Chicago Law Review.


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