Compulsory licensing

Also called: Compulsory licence · Topic: International Trade Policy, WTO and Intellectual Property · NCERT: Beyond NCERT

Meaning

A compulsory licence is permission from the government that lets a third party make a patented product without the patent holder's consent. The third party pays the holder a royalty (a fee on each sale).

It matters because a patent gives a monopoly, and a monopoly can keep a medicine too costly for poor patients. A compulsory licence lets the state widen access to such a medicine while the inventor still gets paid. This makes it the main tool for balancing incentive to innovate against access.

Explanation

How it works

• The normal rule: a patent (a right from the government) lets only its holder make, use, sell or import an invention for 20 years from the filing date.
• The override: under a compulsory licence, the government lets someone else, usually a generic firm, make the product during those 20 years.

• A generic is a copy of a drug. It is sold under its chemical name and works the same as the brand.

• The holder is still paid:

• The licensee pays a royalty that the authority fixes.

• So the patent is not cancelled. The holder only loses the power to say "no".

• The result:

• More sellers enter the market, so the price falls sharply and more patients can buy the drug.

Grounds: when it can be issued (India's Patents Act)

• Section 84 (the ordinary route): a licence can be sought 3 years after the patent is granted, on any one of three grounds:
• the public's reasonable needs are not being met;
• the product is not available at a reasonably affordable price;

• the invention is not "worked" in India (not made or supplied here).

• Section 92 (the emergency route): for a national emergency, extreme urgency or public non-commercial use.

• The government issues a notification, so the 3-year wait does not apply.

• Section 92A (the export route): a compulsory licence to make patented medicines for export to countries with little or no capacity to make them [5].

Worked example: Natco v Bayer (2012)

• Price cut:
• Bayer's price for Nexavar was about ₹2,80,000 a month. Natco's price was about ₹8,800 a month.

• Price cut = (2,80,000 − 8,800) ÷ 2,80,000 × 100 ≈ 96.9%.

• Royalty at 6%:

• One patient-year of Natco sales = ₹8,800 × 12 = ₹1,05,600.

• Bayer receives 6% of this, which is about ₹6,336 per patient per year.

• Lesson: the patent holder still earns money, but many more patients can now afford the drug.

The global rules behind it (WTO)

• TRIPS (Agreement on Trade-Related Aspects of Intellectual Property Rights, in force with the WTO in 1995) sets minimum IP standards for all WTO members. It also allows some flexibilities, and compulsory licensing is one of them.
• Doha Declaration on TRIPS and Public Health (November 2001):
• It says TRIPS "does not and should not prevent" members from protecting public health [1].
• It confirmed that members have the right to grant compulsory licences [2].

• It also said members are free to decide the grounds for a licence, and to decide what counts as a national emergency [2].

• The export problem and how it was fixed:

• A normal compulsory licence must be used mainly for the home market. So a poor country with no drug factories gains little from issuing one.
• A 2003 waiver (the "paragraph 6 system") allowed generics to be made under a compulsory licence only for export to such countries [1].

• This waiver was made permanent as Article 31bis of TRIPS. It came into force on 23 January 2017, after two-thirds of WTO members accepted it. It was the first amendment to any WTO agreement [1].

• COVID-19, MC12 Decision (17 June 2022):

• It lets eligible members override vaccine patents through a targeted waiver for five years [3][7].
• It also eased the export limits of Art. 31bis [1][3].

In India

• Law: the Patents Act 1970, as amended in 2005, which brought in product patents for drugs. The same 2005 amendment added safeguards such as s. 92A. Compulsory licences are covered by s. 84, s. 92 and s. 92A.
• Authority: the Controller General of Patents decides applications under s. 84 [5].
• First case: Natco v Bayer (March 2012):
• This was India's first compulsory licence.
• It covered Nexavar (sorafenib tosylate), a drug for kidney and liver cancer.

• It was granted under s. 84 with a 6% royalty [5].

• Why India needs this tool:

• Before 2005, India allowed only process patents for drugs. This built its generics industry.
• Indian generics make up about 20% of global generic exports by volume [6].

• After product patents came in (2005), compulsory licensing is one way to keep cheap generics possible.

• Outside pressure:

• The USTR Special 301 report (an annual US review of other countries' IP laws) keeps India on its Priority Watch List and cites compulsory licensing among its concerns.
• India's reply is that its law is TRIPS-compliant and that any dispute belongs in the WTO.

Don't confuse with

• Parallel import: this means importing a genuine patented product that the holder already sold legally abroad. No new maker is authorised. India allows it under s. 107A(b) (international exhaustion). A compulsory licence, in contrast, lets a third party manufacture the product.
• Voluntary licence / patent pool: here the holder agrees to license its patent. The Medicines Patent Pool (set up by UNITAID in 2010) works this way. A compulsory licence is issued without the holder's consent.
• Section 3(d): this rule stops a patent from being granted on minor changes to a known drug (evergreening), as in Novartis 2013. A compulsory licence applies to a patent that is already valid and granted.
• TRIPS waiver (MC12, 2022): this is a WTO-level decision that relaxes TRIPS rules for all eligible members, and it covers vaccines only [3]. A compulsory licence is a national order for one specific patent.

Prelims Hooks

• A compulsory licence lets a third party make a patented product without the holder's consent, but with a royalty. The patent is not revoked.
• s. 84 = available 3 years after grant (unmet needs / unaffordable price / not worked in India). s. 92 = national emergency, extreme urgency or public non-commercial use, with no 3-year wait. s. 92A = compulsory licence for export [5].
• India's first compulsory licence was Natco v Bayer (March 2012), for sorafenib (Nexavar), with a 6% royalty, granted by the Controller General of Patents [5].
• The Doha Declaration (2001) confirmed the right to grant compulsory licences. It also left each member free to choose the grounds and to decide what counts as a national emergency [2].
• Art. 31bis (export compulsory licences, from the 2003 "paragraph 6 system") came into force on 23 January 2017. It was the first-ever amendment to a WTO agreement [1].
• Trap: the MC12 TRIPS Decision (17 June 2022) covered COVID-19 vaccines only, for five years. It did not cover diagnostics or therapeutics [3][7].

Mains Points

• Innovation vs access, balanced by law:
• A compulsory licence keeps the patent reward (through a royalty) and still breaks monopoly pricing. In the Natco case, the price fell by about 96.9%.

• The Doha Declaration [1][2] makes it a legitimate TRIPS flexibility, not a violation. This is India's answer to USTR Special 301 pressure.

• Limits of the multilateral fix:

• The export route took 14 years to become permanent (2003 waiver → Art. 31bis in 2017) and has been little used.
• The MC12 decision covered vaccines only, and talks on extending it to diagnostics and therapeutics reached no consensus by December 2022 [4].

• This shows the North-South divide in the WTO. It also shows why voluntary tools such as the Medicines Patent Pool, and regional drug manufacturing, are still needed.

• Protecting India's policy space:

• TRIPS-plus demands in FTAs, such as data exclusivity (a period in which the regulator cannot use the originator's trial data to approve a generic) and patent-term extension, can make compulsory licences less useful in practice.
• Keeping s. 84, s. 92 and s. 92A strong protects India's generics industry and its role in global health (GS-II/GS-III link).

Related concepts

• Intellectual property rights
• TRIPS
• Patent
• Evergreening of patents
• Pre-grant opposition
• Parallel import
• Data exclusivity
• TRIPS-plus provisions
• Patent pool
• Patent thicket

Read more

• TRIPS and patents: innovation vs access to medicines