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Compulsory Licensing– A Double Edged Sword

Licensing of a protected innovation or property implies permission or authority granted by the inventor or the protection holder to a third party to make use of their invention on pre-established terms. There can be a number of reasons for which a patent holder will opt to license their invention, for instance, in case the patent holder is not interested in setting up manufacturing and additionally does not want to incur the additional cost of marketing and trying to penetrate the respective markets by themselves. Instead they simply opt to license their invention to an organization that is bigger and already a major player in the respective industry.

Licensing as a concept has a plethora of both advantages and disadvantages. Advantages of licensing for instance can be:

  1. Lower capital investments.
  2. Easy and quicker access to foreign markets.
  3. Return on investment is potentially higher as well as lesser financial and legal risks.
  4. Often such licensing deals encourage and build partnerships among the countries and their organizations.

In a similar manner we could enlist few of the major disadvantages of licensing as follows:

  1. The licensee could be a potential competition in the future.
  2. Poor business practices by the licensee could tarnish the image of the organization that holds the rights.
  3. There is very low level of control, as the licensee could be an unaffiliated company.
  4. The licensee might be drawing lesser profits as opposed to the scenario where they would be manufacturing and selling their own products.

Licensing hence is much like a gun; it can be used for the collective good or it can be used with nefarious intent. Licensing of an asset is achieved via licensing agreements where the licensor is the one who owns the asset and licensee is the one buying the license. The most common example of licensing is the Microsoft office, where the user pays for the license in exchange of using the software product.

Compulsory licensing is basically a provision that allows for the government to allow for the use of patented inventions without consent of the patent holder. When the developing countries in 2001 raised concern over the narrow interpretation of The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)by the developed countries, which thereby resulted in the initiation of talks which later came to be referred as Doha Declaration which indicated that TRIPS should not prevent states from dealing with public health crisis. The TRIPS agreement allows for the grant of compulsory license at a nation’s discretion.

One of the difficulties observed with the compulsory licensing provision is that the countries in the developing phase mostly do not have the capabilities to manufacture and/or reverse – engineer the existing patent medicine, thereby making the compulsory licensing a moot point.

Compulsory Licensing – Indonesia

Ministry of Law and Human rights released regulation no. 39 of 2018 concerning the procedure for Granting of Compulsory licensing. The regulation came as a surprise for many as it was never discussed with the private sector industries while in the drafting stages. The provision of these regulations is vague at best and need further clarification in terms of urgency and scope of these provisions. According to the regulation, compulsory license may be granted if:

  1. The patent holder has not set up manufacturing process in Indonesia within 36 months of the grant of the patent (as is the mandate of the patent law).
  2. The patent granted is detrimental to the welfare of the society in any form or manner.
  3. The patent cannot be implemented without using other patent which is still under protection.

Article 22 of the regulation states that the ministry of Law and Human Rights may grant the compulsory license for the purpose of curing the human disease, with no further indication on how the regulation is to be implemented. This provision also contradicts the regulation which allows for the patent holder to apply for an extension to delay the local manufacturing from 36 months to 5 years.

The process of acquiring such a license is through an application to the Directorate General of IP followed by an examination process.

vWhat is questionable here is the fact if Indonesia is simply trying to implement TRIPS/Doha provisions or is there an underlying intent to allow use and sale of unused patents.

In Conclusion: Economic impact on the stakeholders in the Pharmaceutical industry

The most straightforward way to circumvent the compulsory licensing scare for the large companies around the world is to simply reduce the price of their products to the cost of production or close to the cost of production, this allows for the relatively poorer people in the developing countries to have access to the medicines.

This is however if there are laws that prevent the low-priced medicines from being re-exported to the rich countries as parallel imports. It means allowing organization to discriminate on the price at which the products will be sold based on the per capita GDP. It basically allows these companies to sell their medicines to a higher number of poorer people at prices close to the cost of production as opposed to sale at higher price to a fewer number of people in middle income countries.

However one of the major reasons companies do not proceed with this strategy is that if they engage in sale of the same product at a relatively higher prices in the rich countries as opposed to the poorer countries, it is a cause of outrage for the people in the richer countries even though the companies are justified for charging higher prices to recoup the exuberant costs incurred for Research & Development. Alternative suggestions provided by Patricia Danzon and Adrian Towse include a policy of secret rebates which would restrict the regulators from discovering the prices at which the product will be sold in the relatively poorer countries.

Author: Mr. Dhruv Verma, Business Analyst at Khurana & Khurana, Advocates and IP Attorneys. In case of any queries please contact/write back to us at [email protected].


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