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EXCLUSIVE RIGHTS OF PATENTEE vis-à-vis COMPULSORY LICENCING:

A CRITICAL ANALYSISIN THE LIGHT OF NATCO v. BAYER

Submitted By:

KOMAL KAPOOR

ROLL NO. 27

P.G.D.,I.P.R. – 2014

Submitted on:

14.01.2015

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EXCLUSIVE RIGHTS OF PATENTEE vis-à-vis COMPULSORY LICENCING:

A CRITICAL ANALYSISIN THE LIGHT OF NATCO v. BAYER

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Abstract:

The issue of access to medicines has always remained at a crossroad

between the ongoing globalization of IPRs and significant demand for drugs

to meet critical public health needs. We need to make sure that IP system

facilitates and creates a balance between the intellectual property rights of

the Pharma Companies along with the need to ensure access to essential

medicines in developing countries. Compulsory licencing is legally

recognized means to overcome barriers in accessing affordable medicines.

The Pharma Battle in India took a new turn when generics manufacturer

Natco Pharma succeeded in obtaining a compulsory licence to manufacture

Bayer’s patented anti-cancer drug Nexavar. The decision raises interesting

and difficult issues. The author try to discuss the concept of Compulsory

Licencing vis-à-vis the rights of the patent holder and to comment upon the

question that whether India’s granting of its first ever compulsory licence

is a game changing move?

Key words: Patent, Monopoly, Compulsory Licence, reasonable

requirement, public health.

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EXCLUSIVE RIGHTS OF PATENTEE vis-à-vis COMPULSORY LICENCING:

A CRITICAL ANALYSISIN THE LIGHT OF NATCO v. BAYER

1. INTRODUCTION

‘Patent’ is a grant made by the government to an inventor, conveying and

securing him the exclusive right to make, use and sell his invention for a

term of 20 years. The object of the patent law has been explained by the

Supreme Court in M/s. Bishwanath Parsad Radhey Shyam v. Hindustan

Metal Industries1 as “to encourage scientific research, new technology and

industrial progress.” The grant of exclusive privilege to own, use and sell

the method or product patented for a limited period, stimulates new

inventions of commercial utility. The rationale behind granting the patent is

to ensure that it is worked (utilized) in the country and not to block

production or further research and development. A patent system

encourages technological innovation and dissemination of technology. This

in turn stimulates growth and helps the spread of prosperity and better

utilization of resources.2

A patent confers on the patentee, his agent or assignee the exclusive right

over the patented invention for a limited period to the exclusion of all

others. The patentee not only gets a monopoly right over the said invention

for a limited period to make or use the invention or to market it, but also the

right to prevent others from making, using or marketing such invention

during the period of protection.3 The justification for the granting patent

1 AIR 1982 SC 1444.2 Elizabeth Verkey, Law of Patents 321, Eastern Books Agency, Kolkata, (2005).3 P. Narayanan, Intellectual Property Law 45, 3rd Ed. Eastern Books Agency, Kolkata, (2001).

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right is discussed in detail in Chiron corporation v. Organon Teknika Ltd.

(No.10)4. It has been observed that:

“it is generally accepted that the opportunity of acquiring monopoly

rights in an invention stimulates technical progress in at least four

ways: First, it encourages research and invention; secondly, it

induces an inventor to disclose his discoveries instead of keeping

them a secret; thirdly, it offers a reward for the expense of

developing inventions to the state at which they are commercially

practical and fourthly, it provides an inducement to invest capital in

new lines of production which might not appear profitable if many

competing producers embarked on them simultaneously…”5

Encouragement, inducement and reward are the main factors

underlying the patent system.

Patents have been one of the most debated topics on access to essential

medicines since the creation of the World Trade Organization (WTO) and

the conclusion of the Agreement on Trade Related Aspects of Intellectual

Property Rights (TRIPS) in 1994. Patents are by no means the only barrier

to access to life-saving medicines, but they can play a significant, or even

determinant role as patents grant the patent holder a monopoly on a drug for

a number of years. The patent holder’s freedom to set prices has resulted in

drugs being unaffordable to the majority of people living in developing

countries.

On the other hand, a functioning patent system is also supposed to guarantee

that the public at large benefits from any innovation, including medicines.

Countries have deployed various strategies to strike a balance between

private and public interests in their intellectual property systems, and they

have had various degrees of success. Getting the right balance is particularly

important for governments of developing countries as they work to protect

4 (1995) FSR 325.5 Ibid.

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public health while making their patent laws TRIPS compliant. A number

of safeguards, such as compulsory licencing and crown use, to curb any

significant abuse of the patent monopoly.6

2. COMPULSORY LICENCING

Compulsory licencing, which basically means allowing a third party to

make, use or sell a patented invention without the patentee’s consent,7 has

been viewed as a way of neutralising the perceived ills of the patent

system.8 There has always been a danger that the patentee will abuse the

monopoly granted to him. The patent is granted not only for the benefit of

the patentee, but also for the benefit of the public at large.9 To prevent such

monopoly, the Indian Patent Act, 1970 has provided the grant of

compulsory licences. The compulsory licences not only cover situations

where a patent is not being worked, but also available in other

circumstances such as where demand for a product is not being met on

reasonable terms.

Compulsory licences take away the patentee’s exclusive control over the

patented technology. The patentee can authorize others to practice the

patented technology, which is usually done for a negotiated fee.

Compulsory licences, in contrast, are basically ‘involuntary contracts

between a willing buyer and an unwilling seller imposed or enforced by the

state’. Compulsory licences are an abrogation of a patentee’s right, where

the government allows itself or a third party to practice the patented

6 David Bainbridge, Intellectual Property Rights 36, 5th Ed. Pearson Education Limited, Delhi, (2002).7 F.M. Scherer & Jayashree Watal, “Post-TRIPS options for access to patented medicines in Developing countries”, Available at < http://www.emhealth.org/docs/wg4_paper1.pdf.(visited on September 23, 2012).8 Compulsory licencing was a component of a late nineteenth-century English patent reform Bill.9 David Bainbridge, Intellectual Property Rights 88, 5th Ed. Pearson Education Limited, Delhi, (2002).

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invention without the patentee’s consent. The method of implementation

and the scope of compulsory licences vary, but most focus on the patent

right to exclusivity and vitiate it under specific circumstances.

To regulate the abuse of monopoly, a system of compulsory working of the

patented by the grant of compulsory licences by a statutory authority and

revocation of the patent for non-working invention have been adopted in

almost all countries, including the United Kingdom.10

2.1 International Patent Regime and Compulsory Licencing System

India is a party to several international agreements for the protection of

intellectual property that have provisions regulating compulsory licencing.

The earliest of these agreements is the Paris Convention for the Protection

of Industrial Property, which was entered into in 1883. Compulsory

licencing of patents is provided for under Article 5 of the Paris

Convention in order to prevent patent abuse.11  Article 5A(2) provides that

“each country of the Union shall have the right to take legislative measures

providing for the grant of compulsory licences to prevent the abuses which

might result from the exercise of the exclusive rights conferred by the

patent, for example, failure to work”.12  The patentee can avoid the

compulsory licence if he “justifies his inaction by legitimate reasons”.13 The

licence is non-exclusive and nontransferable.14

The TRIPS agreement places further limitations on the granting of

compulsory licences, providing that “members may provide limited

10 P. Narayanan, Patent Law 315, 4th Ed. Eastern Books Agency, Kolkata, (2006).11 Paris Convention for the Protection of Industrial Property, Sept. 5, 1970, 21 U.S.T. 1583, 828 U.N.T.S. 305.12 Id., Article 5A(2).13 Ibid.14 Section 4 provides: A compulsory licence may not be applied for on the ground of failure to work or insufficient working before the expiration of a period of four years from the date of filing of the patent application or three years from the date of the grant of the patent, whichever period expires last; it shall be refused if the patentee justifies his inaction by legitimate reasons. Such a compulsory licence shall be non-exclusive and shall not be transferable, even in the form of the grant of a sub licence, except with that part of the enterprise or good-will which exploits such licence.

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exceptions to the exclusive rights conferred by a patent, provided that such

exceptions do not unreasonably conflict with a normal exploitation of the

patent and do not unreasonably prejudice the legitimate interests of the

patent owner, taking account of the legitimate interests of third

parties”.15 Compulsory licences are regulated under Article 31, which has

the following requirements: (1) authorization must be considered on the

individual merits; (2) the applicant has attempted to obtain a licence from

the patentee; (3) the use is non-exclusive and non-assignable; (4) the use is

primarily for the domestic market; and (5) the patentee receives adequate

remuneration.16 TRIPS agreement allows the government to impose

compulsory licences as a remedy for “anti-competitive practices.”17 

2.2 DOHA DECLARATION

The Doha Declaration of the TRIPS Agreement and Public Health was a

major victory for developing countries that wished to make TRIPS more

amenable to “public health” concerns. The Declaration’s main importance

stems from its recognition that the existence of patent rights in the health

sector does not stop States from taking measures to protect public health.

More specifically, it affirms that TRIPs should be interpreted and

implemented in a manner supportive of WTO Members’ right to protect

public health and, in particular, to promote access to medicines for all”.

The Declaration is a tool for the developing countries like Brazil, South

Africa and India to tackle their rampant HIV/AIDS crises. Amongst other

things, this Declaration reiterated the flexibilities of a member state to avail

of a compulsory licence to manufacture cheaper versions of patented drugs.

A compulsory licence entails granting permission (without the consent of

15 Agreement on Trade-Related Aspects of Intellectual Property Rights, Dec. 15, 1993, 33 I.L.M. 81, Article 30.16 Id., Art. 31.17Id., Art. 31(k).

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the patent owner) to a third party to manufacture cheaper versions of the

drug question.

2.3 Indian Position: The PATENTS ACT, 1970

The Chapter XVI of the Indian Patent Act, 1970 provides the detailed

provisions related to the compulsory licencing, when the application is made

by the person interested18 and also in cases where government may suo moto

issue compulsory licence which is also in consonance with Article 31 of the

TRIPS agreement.

The Patents Act, provides for compulsory licence of patent to a third party

by the Controller, on application made at any time after expiry of three

years from the date of sealing of the patent, on the following grounds:

the reasonable requirements of the public with respect to the

patented invention have not been satisfied; or

the patented invention is not available to the public at a reasonably

affordable price; or

the patented invention is not worked in India.19

If the Controller is satisfied about the grounds and the facts as set out in the

application, he may grant a compulsory licence on the patent and direct the

patentee accordingly to grant a licence to the applicant.20 In deciding on the

application, the Controller is required to take into account several factors

including the nature of the invention, the time which has elapsed since the

sealing of the patent, the measures taken by the patentee to make full use of

the invention, the ability of the applicant to work the invention to the public

advantage, and the applicant’s capacity to take capital risk.21 The Act also

18 Section 2 (t) “person interested” includes a person engaged in, or in promoting, research in the same field as that to which the invention relates.19 Ibid.20 Id., Section 84 (5).21 Id., Section 85.

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has special provision for compulsory licences on notifications by the central

government in a case of national emergency, or of extreme urgency or of

public non-commercial use.22

A compulsory licence can be terminated on patentee’s request when the

circumstances in which the grant was made no longer exist and are unlikely

to recur. The holder of the compulsory licence can of course object to the

application and the Controller shall take into account that the licencee’s

interest is not unduly prejudiced.23

2.4 U.S Position-

Although in the United States the patent law does not provide for

compulsory licences, this is probably the country with the richest experience

in the granting of compulsory licences to remedy anti-competitive practices.

But compulsory licence regimes exist under other Acts like the Atomic

Energy Act, the Plant Variety Protection Act, the Anti- Trust Law (Sherman

Act and Clayton Act) etc.

3. Natco Pharma Limited versus Bayer Corporation

The Pharma Battle in India recently took a new turn when generics

manufacturer Natco Pharma succeeded in obtaining a compulsory licence

to manufacture Bayer’s patented anti-cancer drug Nexavar. The decision

which has been appealed by Bayer raises interesting and difficult issues.

3.1 Factual Matrix

Bayer Corporation, a renowned German based developer and manufacturer

of innovative drugs in 2008 got a patent in India for Sorafenib Tosyalte

marketed under the trade name ‘NEXAVAR’ and is used in the treatment of

advanced stages of kidney and Liver cancer.

22 Id., Section 92.23 Nair, M.D. “Compulsory licences Imbroglio: Provisions under TRIPS and their interpretations”, JOURNAL OF INTELLECTUAL PROPERTY RIGHTS 9(5), 415-23, 2004 (Sep).

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NATCO first applied for a voluntary licence to BAYER which was refused.

In July 2011 Natco Pharma filed an application before the Controller of

Patents24 under Section 84(1) of the Indian Patent Act for grant of

Compulsory Licence in respect of Sorafenib tosylate covered under patent

No. 215758. Natco Pharma proposed to sell the generic version of the drug

at a price of Rs. 8800/- per month dosage as compared to the Bayer’s price

of Rs. 2,80,428/- for one month. On 09-08-2011, the Controller of Patents

granted compulsory licence in favour of Natco Pharma.

3.2 Substantive Issues

While examining the grounds under Section 84(1), the Controller examined

the evidence submitted by both the parties. Several questions of law and

facts were raised and dealt with by the Controller. The substantive issues

that were raised during the proceedings were stated as under along with the

reasons provided by the Controller.

1. Whether as per Section 84(1)(a) the reasonable requirements of

public with respect to the patented invention have not been

satisfied?

With regard to the first issue the Controller had to first determine “what

is reasonable requirement of public?”

Section 84 (7) provides deeming provisions in relation to reasonable

requirement of public (RRP). It provides for certain situations when it

would be deemed that RRP is not satisfied.

In the present matter, Natco relied only on one fact of market demand

not being met by Bayer’s sales (Section 84 (7)(a)(ii)) as the supply of

the drugs by Bayer in the Indian market was not sufficient as compared

to the number of patients suffering from the advanced kidney and liver

cancer.

24 Compulsory Licence Application No. 1 of 2011.

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2. Whether the patented invention was not available to the public at

reasonably affordable prices?

For the second issue the Controller had to observe that “what is a

reasonably affordable price?”

In the Act “reasonably affordable price” has not been defined

anywhere nor are there any guidelines as to how it ought to be

determined. However, the Controller observed that “reasonably

affordable price has to be construed predominantly with reference to

public”, but has not delved into this aspect as based on the sales

made by Bayer, he came to the conclusion that the drug was not

available at “reasonably affordable price”. While doing so, the

Controller has considered that since the sales of Bayer were a small

fraction of the actual demand, it was logical that people did not buy

the Drug due to its exorbitant price. Hence, the Drug was not

reasonably affordable to public. On the other hand, the Controller

also considered that NATCO offered to market the drug at Rs.

8800/- per person per month which is a small fraction of the price

offered by BAYER. Therefore, the Controller considered that high

prices of the drugs should not be a hurdle in access to medicines for

the poor.

3. Whether the patented invention not worked in the territory of

India?

Deciding on this issue is the most controversial part of the entire

order. NATCO urged that since the Drug is being imported, it is not

being commercially worked in India. BAYER argued that the

working requirement of Section 84 (1) (c) does not mean that the

patented product has to be locally manufactured. According to Bayer

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“working” of a patent means that there should be a supply of the

patented product in the territory of India

The Controller relied on Paris Convention, TRIPS, the un-amended

Patents Act of 1970 and Sections 84 (7), 83 (b) and 90(2) of the

Indian Patents Act, to come to the conclusion that importation

cannot amount to working of a patented product: “The term ‘work

the invention’ does not include imports as a compulsory licence

holder has to necessarily work the patent by manufacturing the

patented invention in India.”

3.3 Order of the Controller

The Controller granted a non‐exclusive and non‐assignable Compulsory

Licence to NATCO solely for the purpose of making, using, offering to sell

and selling the Drug for the purpose of treating Kidney & Liver Cancer in

humans within the territory of India. The Drug will have to be manufactured

by NATCO in its own manufacturing facility only and cannot be

outsourced.

In his decision, Controller of Patents P.H. Kurian notes that "a right cannot

be absolute. Whenever conferred upon a patentee, the right also carries

accompanying obligations towards the public at large. These rights and

obligations, if religiously enjoyed and discharged, will balance out each

other. A slight imbalance may fetch highly undesirable results. It is this fine

balance of rights and obligations that is in question in this case.”

NATCO received the first Compulsory Licence in March 2012, against the

payment to BAYER of 6% royalty on sales. Immediately after the

Compulsory Licence was issued to NATCO, this order of the Controller was

challenged by BAYER in the Intellectual Property Appellate Board (IPAB).

But Natco was granted the Compulsory Licence because Bayer had made

the drug available only to a small percentage of patients (approximately 2%)

which did not meet the requirements of public interest. The IPAB, on

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September 17, 2012, upheld Natco’s claim for Compulsory Licence and

dismissed Bayer’s petition.25 The compulsory licence has been granted by

the Controller of Patents in Mumbai to Natco for the eight years - to 2020 -

which Nexavar will remain patented in India, and against the payment of a

royalty rate fixed at 8% per annum. 

3.4 NATCO versus BAYER: Impact on Innovators

The decision overall appears to tilt the scales in favour of the generic

manufacturers. However, some of the consequences of this decision which

can be forecast are listed below:-

Effect on India’s image as an investing hub- There is no empirical

work demonstrating that licences affect the rate of innovation. The

critics of Compulsory Licence claim that foreign investment would

be hampered and economic growth would suffer if such licences are

issued to the detriment of foreign players. It is also argued that the

decision will further wane India’s credibility in terms of a weak

intellectual property regime. Innovator companies will not feel

secure enough to invest in a country where their extensively

researched products (incurring millions of dollars) could be subject

to compulsory licencing. This argument holds no ground as in the

past decade India has been receiving around 5% of its foreign direct

investment in pharmaceuticals, prior to that in 1999 the rate of FDI

was less than 0.50%.26 The Indian Pharma industry is growing

because of investment by domestic companies rather than

multinationals.27 Therefore, the decision will have a positive impact

25 Sakthivel Selvaraj, Health Economist with the Public Health Foundation of India-“Just What the Doctor Ordered”, Hindustan Times dated 21 September, 2012.26 The Department of Industrial Policy and Promotion- FDI Statistics (April 2000-September 2012), http://dipp.nic.in.27 See Edith Penrose, The Economics of the International Patent System, Sweet & Maxwell, London, (1951) at p. 34.

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and may provoke the domestic players to invest more in the

pharmaceutical sector in India. This may also provide an opportunity

for the Indian Generic Drug Co’s to target least developed countries

and set up their manufacturing units.

Effect on R&D in domestic companies- It could be argued that

though the Compulsory Licencing provision is aimed at providing

medicines at an affordable price, it does hamper research. In essence

the Government of India (GOI) has decided to kill the domestic

research pipelines with this move, because a company would not risk

the huge expenditures involved in research when with a single stroke

the GOI can allow another company to copy the product legally at a

negligible cost. This move is likely to reinforce the copy cat image

of the pharma industry. But it is an analogy and not a concrete fact.

Effect on pricing strategies used by Foreign Pharma Co’s.- The

decision to grant compulsory licence may force foreign pharma

companies to adopt multiple or dual pricing for drugs where

medicines are sold in developing countries at a fraction of the cost

charged by them in developed markets. It serves as a warning to

foreign pharma companies that when drug companies are increasing

the price and limiting availability, the patent office has the power to

end monopoly to ensure that the patient has access to life saving

medicine. It is time now that everybody realizes that the blockbuster

model which used to produce patented drugs needs to produce drugs

for specific indications in a shorter time span, for shorter life cycle

and at a lesser price. This is a challenge for innovators.28

4. CONCLUSION

28 “Should compulsory licencing be allowed”, Times of India, 14 March 2012; “Natco gets India’s first compulsory licence”, Live Mint, 13 March 2012.

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Benefits of invention must reach those who need it, and the ruling in favour

of Natco is a move by the government to send the message that the spirit of

public welfare should not be diluted for profit driven means. This decision

will not only impact the pharmaceutical industry but also be applicable to all

industries. It remains to be seen how concepts such as “reasonable

requirement of public” and “reasonably affordable by public” will be

interpreted when dealing with non pharmaceutical products. For the

pharmaceutical industry in particular, patents occupy a significant place.

Drugs, due to high R&D costs, a significantly high level of field research

and ease of successful research, depend highly on patent protection. Hence,

measures that reduce this protection, such as compulsory licence, are viewed

as harmful for the innovator companies.

This case offers a lot of takeaways for innovator companies, especially

pharmaceutical companies. Pharmaceutical companies should take care to

be able to demonstrate intention and willingness to make the patented

product available in India. Of course, if the patentee does not view India as

a market for its product on the assumption that the market will not be able to

‘afford’ its drug, then grant of a Compulsory Licence in relation to such

drug does not have an economic impact on the patentee, in fact, patentee

may get certain royalty from India. Innovator companies need to rethink

their strategy especially if they plan to only sell and not manufacture for

initial period. This move is most likely to spur other generic manufacturers

to apply for compulsory licences. Different stakeholders need to work

together to identify potential candidates for the issuance of compulsory

licences in the future. This will not only accelerate access to essential

medicines in India but will facilitate its access in several developing

countries that are looking to India for direction. Health activists are hopeful

that the sorafenib case will establish a strong precedent for more frequent

compulsory licences on key HIV/AIDS, cancer, and psychiatric medicines,

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indeed, on medicines more generally and India’s first ever compulsory

licence can prove to be a game-changing move.

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