Journal of Medical Society

REVIEW ARTICLE
Year
: 2020  |  Volume : 34  |  Issue : 2  |  Page : 55--60

Compulsory licensing of patents and its effect on competition


Ruchika Ghosh 
 Department of Law, The WB National University of Juridical Sciences, Kolkata, West Bengal, India

Correspondence Address:
Ruchika Ghosh
The WB National University of Juridical Sciences, Kolkata, West Bengal
India

Abstract

Various countries have engaged in serious re-examinations of the legal regimes they use to support innovation in recent times. This is partly due to the establishment of the World Trade Organization and its adoption of the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement. TRIPS made it necessary for revision of most national intellectual property laws. Patentable subject matter is defined in such a manner that protection cannot be granted for “Discoveries”. For eg. Advances such as any abstract principles of science, the fundamental relationship between energy and mass, any living organism, etc. An application for a patent must involve an “invention”. Competition law, on the other hand, aims at promoting competition as a means of market response and consumer preference so as to ensure effective and efficient allocation of resources and to create an incentive for the economy for innovation. The cost and availability of patented drugs is a key development issue, directly impacted by various government policies that affect the degree of competition. A compulsory license provides that the owner of a patent licenses the use of their rights against payment either set by law or determined through some form of adjudication or arbitration. This might be a solution to balance the two competing interests between intellectual property rights and competition law. This article will be especially useful to legal practitioners as well as pharmaceutical companies. These companies need to be aware of the laws of the land while manufacturing and marketing their drugs. They also need to be mindful of the exceptions existing in the law relating to pharmaceutical patents. This article will also be useful to Competition Lawyers in various jurisdictions.



How to cite this article:
Ghosh R. Compulsory licensing of patents and its effect on competition.J Med Soc 2020;34:55-60


How to cite this URL:
Ghosh R. Compulsory licensing of patents and its effect on competition. J Med Soc [serial online] 2020 [cited 2021 Feb 28 ];34:55-60
Available from: https://www.jmedsoc.org/text.asp?2020/34/2/55/307907


Full Text



 Introduction



“The pharmaceutical industry is developing exponentially and is under tremendous business sector weight. Pharmaceutical organizations consistently contend to deliver novel and better medications and in addition adjust the issues identifying with patient safety, price, and obligation.”

In today's age of development, distances between people are reducing, increased automation is taking place, and medicinal science has achieved wonders. More and more inventions are taking place every day, and people are investing labor to improvise and bring into existence a better product. Every day, human beings are being infected with new diseases and need new medicines. It is this need for creativity which is imperative for the progress and development of the world.

But too often, we find that the price of medicines, especially in developing and least-developed countries (LDCs), is out of reach of the millions who need them.[1] Moreover, prices are constantly increasing. For instance, in the financial year of 2016, the Wholesale Price Index for drugs and medicines was Rs. 129.59, which means it increased by about 30% from the base year of 2005.[2] With the progress of medicinal science, the average age of man increased from 50 years to an average of 70–90 years. Thus, it is imperative that creativity persists and developments keep taking place.

”Antitrust law in general and the Sherman Act in particular are the Magna Carta of free enterprise. They are as important to the preservation of economic freedom and free enterprise system as the bill of rights is to the protection of our fundamental personal freedoms.”[3]

Various countries have engaged in serious re-examinations of the legal regimes they use to support innovation in recent times. This is partly due to the establishment of the World Trade Organization and its adoption of the Trade-Related Aspects of Intellectual Property Law (TRIPS) Agreement. TRIPS made it necessary for revision of most national intellectual property laws.

TRIPS was introduced as a part of the General Agreement on Tariffs and Trade to grant standardized intellectual property rights (IPRs) across nations. It was signed in 1994 in Morocco. An environment conducive for creativity to flourish shall be maintained for which people should be provided with incentives to create more work. Intellectual property law provides the inventor with rights which allows him to protect the work created by him.

This is especially important in today's technological age where innovations are taking place at a rapid pace. The object of antitrust policy in the country's economy is to ensure fair competition in the market by way of regulatory mechanisms. It is not intended to create restrictions or constrictions that may be disadvantageous to the progress of the society.[4] New economic theories have driven a reassessment, particularly at the interface between intellectual property law and antitrust law. Mostly, however, the importance of knowledge products in the modern global economy has focused attention on finding optimal methods to promote domestic intellectual production.[5]

 Are Intellectual Property Rights and Competition Inherently Conflicting?



Historically, IPRs have been seen as the price paid by the society to the inventor of the work.[6] It focuses on individual rights as opposes to the rights of the society. The law was enforced with the objective of rewarding the inventor for disclosing the patent and spending the resources for developing it.[7] Hence, the law creates legal rights in favor of the inventor of the work while solely allows him to exploit the product, thereby creating monopoly rights.

The protection of IPRs per se is not abusive. However, if it dominates over the market, it is not justifying its purpose, which is to create incentives for further innovation. The analysis of intellectual property as a “property right” has been an important feature of the modern debate over the establishment of legal protection of information.[8] The need to institute a property rights system in order to enhance inventiveness has always been a contentious issue in the organization of economic activity. For some, the patent system is a “huge mistake” as invention arises mainly “from a philosophical instinct of contrivance” and creativity.[9]

Creativity is imperative for the progress and development of the society. The creation of exclusive monopoly rights is seen as an incentive for the author. This is because exclusive rights put the inventor in a dominant position wherein he has the ability to control the market and charge a price for the product as per his discretion. The dominant position which allows only him to commercially exploit the product incentivizes the inventor to create more products. Otherwise, growth would have been slower if every new invention was directly put into public domain.[10] However, this comes at the expense of allowing the inventor to be in a dominant position in the market enabling him to exploit it. He can misuse his dominant position by charging excessively high prices or refusing to license his patented invention. Since there are no other sellers in the market, consumers are compelled to buy at the price dictated by the seller [Figure 1].{Figure 1}

The Patents Act, 1970 defines patentable subject matter in a way that “discoveries” are not Patentable. For eg. Principles of science such as the fundamental relationship between energy and mass would be termed as a “discovery” and hence not patentable. Another example would be “living organisms”. Living organisms would be termed as a “discovery” and hence not patentable as held in the Diamond vs Chakrabarty case. An application for a patent must be an “invention”, have novelty and capable of industrial application. Competition law, on the other hand, aims at promoting competition as a means of market response and consumer preference so as to ensure effective and efficient allocation of resources and to create an incentive for the economy for innovation. There is a set of rules at the intersection between intellectual property law and competition law that are crafted to protect follow-on innovation and a competitive market place for technological products (and, in some cases, for technological opportunities).

 Legal and Economic Issues Arising in the Health-Care Sector in India



One of the important indicators of any country's development is health care. The status of advancement of health care indicates the nature of the development of a country. This is now apparent more than ever in the light of the corona pandemic.

Most health-care expenditure in India consists of “out of pocket” spending by patients and their families, and a substantial proportion of this is accounted for by the cost of medicines. Such expenses are directly responsible for households falling into poverty or having to sell assets or incur debts, impairing their standard of living [Figure 2].[11] Inability to afford medications leads to morbidity, lost workdays, and low productivity. The cost and availability of patented drugs is, therefore, a key development issue, directly impacted by various government policies that affect the degree of competition.{Figure 2}

Antitrust regulation aims at curbing anticompetitive behavior that might result in limiting competition, output, or increasing prices of products. IP, on the other hand, aims at protecting and further incentivizing private investment in progressive development of technology, products, and processes that are more efficient and cost-effective.[12] Competition law and IPRs overlap when a work has been patented. A patent provides strong protection and incentive to the work.

In case of patents, many countries impose barriers to trade which might not be fair.[13] For pharmaceutical patents, the licensee has to negotiate with the licensor i.e. the patent holder for a price that would be agreeable to both. In many scenarios, if this is not lucrative enough for the patent holder. Thus the patent holder is not willing to grant the licensee the pharmaceutical patent at the price offered. . Path-breaking innovations in the technological field as well as the medicinal field happen due to the continuous research and development taking place.[14] Companies can monopolize their technologies for a limited period of time, but they cannot maintain a monopoly over the market. The patents on medicines can make the difference between life and death for millions, first hit home with the AIDS pandemic, when medicines to treat HIV were priced way out of reach of patients and governments in developing countries.[15] However, when companies hesitate or refrain from licensing their intellectual property to competitors, they undermine the basic tenets of competition law as well as the spirit of intellectual property protection. At the outset, it does seem that both the concepts are at loggerheads with each other in their areas of operation. However, there might be a solution.

Historically, IPRs have been seen as the price paid by the society to the inventor of the work.[16] It focuses on individual rights as opposes to the rights of the society. The law was enforced with the objective of rewarding the inventor for disclosing the patent and spending the resources for developing it.[17] Hence, the law creates legal rights in favor of the inventor of the work while solely allows him to exploit the product, thereby creating monopoly rights.

In the USA, antitrust laws and patent laws coexist as has been rightly held by a 1948 US Supreme Court opinion which has described the boundaries of the immunity this way “the possession of a valid patent or patents does not give the patentee any exemption from the provisions of the Sherman Act beyond the limits of the patent monopoly.”[18]

The Indian pharmaceutical industry is one of the most vibrant sectors of the Indian Industry. There are >20,000 registered pharmaceutical manufacturing Page 5 of 184 units (including 5 central public sector units) in India. The pharmaceutical industry in India meets around 70% of the country's demand for bulk drugs, drug intermediates, and pharmaceutical formulations.[19]

In The USA and various other countries Antirust and Patent Laws co- exist even though both are conflicting by nature. The Sherman Act governs Antitrust Laws. The question that might arise in such a case is that which law should prevail over the other. The Answer has been given by a 1948 decision of the US Supreme Court where it held that “the possession of a valid patent or patents does not give the patentee any exemption from the provisions of the Sherman Act beyond the limits of the patent monopoly.” Thus we see that a Patent holder cannot be involved in anti- competitive practices and is limited by the provisions of The Sherman Act. [20] Protection of IPRs and competition law have evolved historically as two systems of law. The traditional role of competition law has been to promote efficiency in the market automatically preventing market distortions. The objective of intellectual property law is to protect innovative ideas in the form of inventions which create private monopoly rights for a limited period of time (20 years) under the TRIPS Agreement and under the current Patent Act.

The general perception is that there are inherent conflicts between IPRs and competition, because protection of IPRs gives monopoly rights and competition law fights against monopoly in the market. However, monopoly per se in the market is not anticompetitive in nature, but abuse of monopoly is considered as anticompetitive.

The technological advances and patent protection laws lead to more cases on abuse of monopoly rights, where it requires more fundamental research on the interplay between intellectual property and competition law.

A compulsory license provides that the owner of a patent licenses the use of their rights against payment either set by law or determined through some form of adjudication or arbitration. Compulsory licenses are defined as “authorizations permitting a third party to make, use a product with authorization of the patent holder.” The term is not defined in the TRIPS Agreement. However, it is provided for in Section 84 (1) of the Indian Patents Act, 1970.[21]

The real issue is whether compulsory licensing is anticompetitive or does it promote fair competition?

The first thing that we have to do here is to try and see what competition is. Perfect competition is when the demand equals supply and the price stabilizes at the point which is most beneficial to all the consumers. However, perfect competition is utopian. It almost certainly cannot exist in reality. Competition law is intrinsically connected with economics. The focus of competition law is to protect the consumer.

The utmost that can be achieved is when the price stabilizes at a point closest to the D line or the closest to the perfect competition scenario. If the firm who is granted a patent and who has monopoly rights over a product charges a price for it, this price will not be anywhere close to the price fixed by perfect competition. It is justifiable to be so. The profit that the patent holder makes from the difference between the price of the product and the cost is his reward for his invention. It would be unfair to take that away from the inventor. Furthermore, it would discourage further research, developments, and inventions.[22] As a result, when a novel product is introduced in the market, it is sought to be protected for the intellectual labor invested by the creator of the product, thereby creating a monopoly over the product in the market. This in itself is in contravention to the objective of competition law.

Creativity is imperative for the progress and development of the society. The creation of exclusive monopoly rights is seen as an incentive for the author. This is because exclusive rights put the inventor in a dominant position wherein he has the ability to control the market and charge a price for the product as per his discretion. The dominant position which allows only him to commercially exploit the product incentivizes the inventor to create more products. Otherwise, growth would have been slower if every new invention was directly put into public domain.[23] However, this comes at the expense of allowing the inventor to be in a dominant position in the market enabling him to exploit it. He can misuse his dominant position by charging excessively high prices or refusing to license his patented invention. Since there are no other sellers in the market, consumers are compelled to buy at the price dictated by the seller.

The Competition Act was enacted only in 2002. Previously, the Monopolistic and Restrictive Trade Practices Act, 1969 applied. Under the previous act, one had to apply as a monopoly. Only then could an enterprise begin operations. This is because dominance is okay as long as it is not abusive. It is here that it conflicts with IPRs which creates a dominant position for the inventor in the market such that it is abusive.[24] A well-developed competition regime can provide a solution by preventing anticompetitive agreements and improving economic efficiency and consumer welfare. Hence, competition law steps in to prevent such a monopoly situation from getting deep rooted in the market, and the concept of compulsory licensing is conceived from here in certain specialized cases.[25] It tampers with the competitive market so that the monopoly holder does not use it indiscriminately and to the disadvantage of the general public. Compulsory licensing promotes healthy competition as it requires the license seeker to pay a certain fee to the patent holder.[26] This is in line with economic principles on which the Competition Act is founded. The remuneration given to the patent holder acts as an extra income as well as helps in recovering the costs incurred in making the product. At the same time, it is an added cost for the license seeker who wishes to provide the same product in the market, thereby increasing the cost of production. As a result, it creates a fair equilibrium in the market which balances the interests of all the stakeholders. In the process, it limits the IPRs available to the patent holder and his rights thereto because of which competition law and IPRs converge and clash despite them operating in separate domains and trying to seek two different objectives.

The first case in which a compulsory license was imposed was the Bayer v Natco case. It was argued by Natco that Bayer was abusing its dominant position in the market. They were imposing an unfair price condition on the drug Nexavar. Natco applied for a compulsory license for the drug under Section 84 of the Patents Act, 1970. Bayer was also using its dominant position in the United Kingdom to dominate the developing and LDCs. This is known as leveraging. It would dictate prices way beyond the reach of these countries. As it was one of the significantly large manufacturers, it would push small pharmaceutical manufacturers out of the market. Bayer proposed a price of Rs. 284,000/month which was reduced to Rs. 30,0000/month by way of the compulsory license. The marginal cost of production for Bayer was reducing every year, but the benefits were not being passed on to the consumers.[27]

The patent was being “worked” by Natco, the licensee in Pakistan and China but not in India, as Bayer had refused the voluntary license that Natco had sought. The principle of “working of patents in India” is given in Section 83 of the Patents Act, 1970.[28] Therefore, the condition of not being worked in India was met as required under Section 84 of the act. Bayer, however, argued that working includes “import” and India could import the drug by way of parallel imports from the neighboring countries.

Natco did not contest the position that “working” includes import, only that the act leaned toward local manufacture. Bayer was depending on the network. Effect-more buyers would increase the price rather than the usual practice of economics where if the market base is increased, a corresponding drop in price is noted. Bayer's armor was that higher demand would increase the prices. They argued that they were not being able to work the invention in India as Natco was flooding the market with generics.

The compulsory licensing regime in India has undergone several changes and is yet developing. Due to the underdeveloped jurisprudence, there are several concerns regarding the individual's rights over his invention and whether it is triumphed by the overall public interest. The primary objective of intellectual property law is to promote access to knowledge. If an individual is granted a Patent, it is a private right that triumphs over the public Right of “Right to Health”. This becomes problematic for developing countries like India where access to medicines might be hampered. In order to gain access to these patented products, they have to license these products and make it available to the public. Due to the monopoly over the product, the price demanded for the license is extremely high and often access to the patented inventions, especially in the field of medicine, is very limited and scarce.

There is a popular belief that the competition law and IPRs are complementary to each other, and in the long run, both of them promote competition and innovation. Despite this belief, there is a growing discontent among a section of jurists that there exists inconsonance between the competition law and IPRs. The number of people having belief in idea is on rise because of exclusionary effect of IPRs in industry.

As a result, knowledge exchange among the public is limited. On the other hand, imposing the burden of compulsory licensing acts as a disincentive for these companies from seeking a patent for their product in developing countries in India, due to the obligations imposed on them for compulsorily licensing their product to the other manufactures. This reduces the profits of the manufacturer. Consequently, the market is then flooded with generic drugs and the expensive investment in researching and developing innovative products will not be made.[29] This brings down the price of the product in market as there are more competitors willing to manufacture it, and though subscribing to the objective of the statute of making knowledge more accessible, it dilutes the rights of the person holding the patent. Compulsory Licensing is extremely beneficial from the point of view of the commercial markets. It helps in regulating the market and balancing the interests of all the parties, rather than the patent holder only. It especially benefits the consumers and promotes public health. This has a direct impact on the growth and development of the country.[30]

 Conclusion



India needs the availability of better medicines, fair competition, and conducive market conditions such that entry and exit barriers in the market are not stringent.[31] The cost of production and economies of scale are integral to the development of developing countries. Patents favour developing countries and may result in neo-colonization.[32] Thus, disease eradication and access to better technology are limited. Therefore, at the international level, compulsory licensing has been recognized to be an effective mechanism.

This mechanism helps in ensuring that access is not limited and the economic forces in the market are unperturbed. This has been recognized not only under Indian law but also under the TRIPS and other international conventions.[33] It is a practice aimed at curbing the anticompetitive practices patent owners indulge in. It prevents them abusing their dominant position in the market while adequately compensating them for allowing others to use their product.[34] Compulsory License does not take away the entire fee the Patent holders are entitled to charge. It merely limits the same in the larger public interest.

Financial support and sponsorship

Nil.

Conflicts of interest

There are no conflicts of interest.

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