EXCLUSIVE RIGHTS OF PATENTEE vis--vis

COMPULSORY LICENCING:
A CRITICAL ANALYSIS
IN 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

EXCLUSIVE RIGHTS OF PATENTEE vis--vis

COMPULSORY LICENCING:
A CRITICAL ANALYSIS
IN THE LIGHT OF NATCO v. BAYER

______________________________________________
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
Bayers patented anti-cancer drug Nexavar. The decision raises interesting
and difficult issues. The author try to discuss the concept of Compulsory
Licencing vis--vis the rights of the patent holder and to comment upon the
question that whether Indias granting of its first ever compulsory licence
is a game changing move?

Key

words:

Patent,

Monopoly,

Compulsory

requirement, public health.

Licence,

reasonable

EXCLUSIVE RIGHTS OF PATENTEE vis--vis

COMPULSORY LICENCING:
A CRITICAL ANALYSIS
IN 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).

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 simultaneously5 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 holders 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
4 (1995) FSR 325.
5 Ibid.

important for governments of developing countries as they work to protect

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 patentees 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 patentees exclusive control over the
patented technology. The patentee can authorize others to practice the
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).

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 patentees right, where the
government allows itself or a third party to practice the patented invention
without the patentees 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

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.

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
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
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.

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).

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 Declarations 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
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:
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.

 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 applicants capacity to take capital risk.21 The Act also
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 patentees 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

19 Ibid.
20 Id., Section 84 (5).
21 Id., Section 85.
22 Id., Section 92.

application and the Controller shall take into account that the licencees
interest is not unduly prejudiced.23
2.4 U.S PositionAlthough 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 Bayers 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.
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
23 Nair, M.D. Compulsory licences Imbroglio: Provisions under TRIPS and their
interpretations, JOURNAL OF INTELLECTUAL PROPERTY RIGHTS 9(5),
415-23, 2004 (Sep).
24 Compulsory Licence Application No. 1 of 2011.

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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 Bayers 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 Bayers 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.
2. Whether the patented invention was not available to the public at
reasonably affordable prices?

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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
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

12

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 nonexclusive and nonassignable 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
September 17, 2012, upheld Natcos claim for Compulsory Licence and
dismissed Bayers petition.25 The compulsory licence has been granted by
the Controller of Patents in Mumbai to Natco for the eight years - to 2020 25 Sakthivel Selvaraj, Health Economist with the Public Health Foundation of
India-Just What the Doctor Ordered, Hindustan Times dated 21 September, 2012.

13

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 Indias 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 Indias 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
and may provoke the domestic players to invest more in the
pharmaceutical sector in India. This may also provide an opportunity

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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for the Indian Generic Drug Cos 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 Cos.- 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
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
28 Should compulsory licencing be allowed, Times of India, 14 March 2012;
Natco gets Indias first compulsory licence, Live Mint, 13 March 2012.

15

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,
indeed, on medicines more generally and Indias first ever compulsory
licence can prove to be a game-changing move.
___________

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