Compulsory Licensing and Government Use: Natco v Bayer

1. International basis

• Paris Convention Art 5A: compulsory licences to prevent abuses such as failure to work, not before four years from filing or three years from grant, whichever is later.
• TRIPS Art 31 (“other use without authorisation”): no limit on grounds, but conditions: case-by-case consideration; prior efforts to obtain a voluntary licence on reasonable terms (waivable for national emergency, extreme urgency or public non-commercial use); scope and duration limited to the purpose; non-exclusive; non-assignable; predominantly for the domestic market (Art 31(f)); adequate remuneration; judicial or independent review.
• Doha Declaration (2001), para 5: each member has the right to grant compulsory licences and the freedom to determine the grounds, and to decide what is a national emergency.
• Article 31bis (the 2003 waiver, made a permanent amendment in force from 2017): members may grant licences to produce and export pharmaceuticals to countries without manufacturing capacity, setting aside Art 31(f).

2. Section 84: the general route

At any time after three years from the date of grant, any person interested may apply to the Controller on any of three grounds (s.84(1)):

1. (a) the reasonable requirements of the public with respect to the patented invention have not been satisfied;
2. (b) the patented invention is not available to the public at a reasonably affordable price; or
3. (c) the patented invention is not worked in the territory of India.

Section 84(7) deems the reasonable requirements of the public not satisfied where, among other things, the patentee's refusal to license on reasonable terms prejudices an existing trade or industry or the establishment of a new one, demand is not met to an adequate extent or on reasonable terms, a market for export is not supplied, the patentee imposes unfair licence conditions, or the invention is not worked in India on a commercial scale to an adequate extent, or demand is met by importation.

Factors (s.84(6)): the nature of the invention, the time elapsed since grant and the measures taken by the patentee to use it; the ability of the applicant to work it to the public advantage; the applicant's capacity to undertake the risk of providing capital; and whether the applicant made efforts to obtain a licence on reasonable terms and failed within a reasonable period (ordinarily not more than six months). Matters after the application are not considered.

Terms (s.90): royalty reasonable to the patentee having regard to the nature of the invention and expenditure; the invention to be worked to the fullest extent with reasonable profit; articles available at reasonably affordable prices; non-exclusive; non-assignable; for the unexpired term unless a shorter period is consistent with public interest; and predominantly for supply in the Indian market, but export allowed where needed to remedy anti-competitive practice. Under s.85, if the invention is still not worked or the requirements not met two years after the first compulsory licence, the patent may be revoked.

3. Natco Pharma v. Bayer Corporation

Facts. Bayer held an Indian patent (granted 2008) for sorafenib tosylate, sold as Nexavar for advanced kidney and liver cancer. Bayer imported the drug in small quantities and priced it at about Rs 2.8 lakh for a month's treatment. Natco, after Bayer refused a voluntary licence, applied under s.84, offering to sell at about Rs 8,880 a month.

Controller (9 March 2012). The Controller General granted India's first compulsory licence on all three grounds: (a) Bayer supplied only a very small fraction of the patients who needed the drug, so reasonable requirements were not met; (b) a price unaffordable to most of the public was not “reasonably affordable”, judged from the public's point of view; (c) importation was not working in India, which requires manufacture to a reasonable extent. Royalty was fixed at 6 per cent of net sales, with conditions that Natco supply free to a number of needy patients each year and sell only in India.

IPAB (4 March 2013) upheld the licence and raised the royalty to 7 per cent, but said that whether working requires local manufacture depends on the facts.

Bombay High Court (2014) dismissed Bayer's writ petition. It held that reasonable requirements must be met for every segment of the public; that the price must be reasonably affordable to the public, not merely justified by the patentee's research cost; and on working, that the patentee must show why the invention could not be manufactured in India, though importation may sometimes be enough. The Supreme Court dismissed Bayer's special leave petition later in 2014.

4. Applications that failed

• BDR Pharmaceuticals v. Bristol-Myers Squibb (dasatinib), Controller, 2013: rejected because BDR had not made a credible attempt to obtain a voluntary licence, the s.84(6)(iv) requirement.
• Lee Pharma v. AstraZeneca (saxagliptin), Controller, 2016: rejected because Lee had not shown that reasonable requirements were unmet when other drugs in the class were available, or that the price was unaffordable in comparison.

The lesson is that s.84 requires evidence: of attempts to license, of unmet demand, and of affordability, measured against alternatives.

5. Section 92: licences on notification

Where the Central Government is satisfied that there is a national emergency, extreme urgency or public non-commercial use, it may notify that compulsory licences should be granted for a patent. The Controller then grants a licence on application, without the three-year wait or prior negotiation (s.92(1)–(3)). This applies especially to public health crises including AIDS, HIV, tuberculosis, malaria and other epidemics.

6. Section 92A: export to countries without capacity

A compulsory licence is available for manufacture and export of patented pharmaceutical products to any country having insufficient or no manufacturing capacity, to address public health problems, if that country has granted a compulsory licence or allowed importation by notification. This implements Article 31bis. Natco's 2008 applications to export cancer drugs to Nepal under s.92A were the first attempt to use it, and did not lead to a licence.

7. Government use and acquisition

Section 100: the Central Government and persons authorised by it may use an invention “for the purposes of Government”, on terms agreed or, failing agreement, settled by the High Court, with compensation. Section 102: the Government may acquire a patent from the patentee for a public purpose on payment of compensation. Section 66: the Government may revoke a patent that is mischievous to the State or generally prejudicial to the public, after hearing the patentee.

8. COVID-19

In 2021 India and South Africa proposed a WTO waiver of TRIPS obligations for COVID-19 vaccines, treatments and diagnostics. The Ministerial Decision of June 2022 adopted a narrower measure, clarifying and easing the use of compulsory licences for vaccines. In India, the Supreme Court in its suo motu case on distribution of essential supplies (2021) asked the government to consider ss.92 and 100; the government relied on voluntary licences rather than compulsory ones.

9. Comparison

The US has no general compulsory licensing statute, but uses government use (28 U.S.C. §1498), “march-in” rights under the Bayh-Dole Act, and antitrust remedies. The UK Patents Act 1977 (ss.48–54) allows compulsory licences after three years, with different grounds for WTO and non-WTO proprietors. Brazil (efavirenz, 2007) and Thailand (several drugs, 2006–08) issued compulsory licences for HIV and other medicines.

10. Abuse of patent rights and the wider powers of the Central Government

“Abuse of patent rights” is a syllabus item in its own right. Article 5A(2) of the Paris Convention gives failure to work as the example of an abuse, and TRIPS Articles 8.2 and 40 allow members to prevent abuse of IP rights and anti-competitive licensing. The Patents Act addresses abuse in five ways:

1. Principles (s.83): patents must not be abused, and the patentee must not resort to practices that unreasonably restrain trade or adversely affect the international transfer of technology.
2. Non-working and unaffordable pricing: compulsory licences under s.84 and revocation under s.85, discussed above.
3. Restrictive conditions (s.140): tie-ins, exclusive grant-backs, bans on challenging validity and coercive package licences are void, and their presence is a defence to an infringement suit while they remain (s.140(3)).
4. Transparency: the statement of working (s.146(2), Form 27), which the Delhi High Court in Shamnad Basheer v. Union of India (2015–20 proceedings) pressed the government to enforce, leading to a simplified Form 27 in 2020; the 2024 Rules reduced filing from annual to once in every three financial years.
5. Competition law: section 3(5) of the Competition Act, 2002 protects only reasonable conditions for protecting IP rights; refusal to license, excessive royalties and abuse by a dominant patentee fall under section 4, subject to the Delhi High Court's view in Ericsson v. CCI (Division Bench, 2023) that the Patents Act is the special law for patent abuse (see the note on SEPs).

Powers of the Central Government. Besides government use (ss.100–103), acquisition (s.102) and revocation in the public interest (s.66), the Government may give secrecy directions for inventions relevant to defence (ss.35–42), require residents to seek permission before filing abroad (s.39), notify an emergency for compulsory licences (s.92), and, under s.157A, take any action it considers necessary to protect the security of India, including withholding information or revoking a patent. Compensation for government use is fixed by agreement or, failing that, by the High Court (s.103).

How this is examined

A 16-mark question on compulsory licensing, or a short note on Natco v. Bayer. For the essay: international basis, s.84 grounds and factors, s.90 terms, Natco at three levels, failed applications, ss.92, 92A and 100, and the critique.