CHAPTER IV REMUNERATION FOR NON-VOLUNTARY USE OF A PATENT UNDER TRIPS
1. R EGULATION C ONCERNING R EMUNERATION UNDER TRIPS
The provision in regard of remuneration under compulsory license is stipulated in Article 31 (h) of the TRIPS Agreement:
167Patent Law Reform: Injunctions and Damages: Hearing Before the Subcomm. on Intellectual Prop.
of the S. Comm. on the Judiciary, 109thCong. (2005) (comments of Mark A. Lemley)
168 Daniel R. Cahoy, Confronting Myths and Myopia on the Road from Doha, 42 GA.L.REV. 131, 138 (2007).
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(h) the right holder shall be paid adequate remuneration in the circumstances of each case, taking into account the economic value of the authorization;
The notion of compulsory license is in conflict with the TRIPS Agreement fundamental objective of protecting intellectual property rights as private property rights. Therefore the patent owners under compulsory licenses shall always be entitled to an “adequate compensation in the circumstances of each case, taking into account the economic value of the authorization”.169
Art. 31(h) provides two elements for said interpretation170: firstly, the
“adequate remuneration” is assessed according to the circumstances of each case.
To determine the due compensation, the circumstances of the licensee and of the country where the patented invention operates, and the purpose of compulsory license should be taken into account. Secondly, “the economic value of the authorization” is necessary to be considered, but not as the sole or determining factor. The value will significantly depend on the size of market to be supplied, the newness or maturity of the technology, and its rate of obsolescence, the degree of competition by substitute products, and the coverage of the patent.171
To give the meaning of “adequate” more precise guidance to national judicial and administrative authorities, there are two possible understanding. On the one hand, it simply means the licensor should be able to receive remuneration in accordance with the amount what he would have obtained in a voluntary arm’s-length transaction. On the other hand, several factors may also influence the decision, such as the subsidies or other contributions that the title-holder received
169 Correa, supra note 64, at 322.
170 Id.
171 Id.
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to develop the invention, the degree to which development costs have been amortized and the R&D commitment of the patent owner.172
Moreover, the TRIPS itself also provides for one element that may help clarify what “adequate compensation” means, which can be found in Art.44.2. It reads:
“Notwithstanding the other provisions of this Part and provided that provisions of Part II specifically addressing use by governments, or by third parties authorized by a government, without the authorization of the right holder are compiled with, Members may limit the remedies available against such use to payment of remuneration in accordance with subparagraph (h) of Artcle 31.[…].”173
Considering that Article 44 deals with injunction, in cases when the patent is infringed by a government or by a third party authorized by a government, WTO Members may provide that injunctions shall not be available. The only remedy in such case will be the payment of remuneration under Article 31(h), replacing the provision about payment for damages in Article 45. Since the judicial authorities have the duty and power to order the payment of adequate damages, the same criteria to assess adequate damages can be applied to gauge the adequate remuneration for compulsory license.174 In that sense; the conjunction of Art.
31(h) and 44.2 leads to the conclusion the price that compulsory licensee must pay should correspond, Like damage, to the amount of money the licensor would make if he were commercially exploiting the patented invention in the market of licensee. In other words, the average or uniform fee that is paid in the same sector or industry must be taken into account. Therefore, the payment should be
172 Id.
173 Id.
174 Id.
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calculated based on actual or potential financial gains that the licensee may extract from the market.175
These interpretations of the provision would apply, in principle, to any kind of compulsory license. 176 However; in the case of licenses to remedy anti-competitive practices, the needs to correct them may be taken into account in determining the amount of remuneration (Article 31(k)). The objective being to restore a healthy competition, this provision would allow for a reduced remuneration.177
The TRIPS Agreement rules on compensation embody substantial flexibility as a consequence of using the terms “in the circumstances of each case”, indicating that factors relating to the underlying reasons for the grant of the license may be taken into account in establishing the level of remuneration.
Granting authorities are instructed to “take into account the economic value of the authorization”, but not required to base the royalty payable to the patent holder on that value.178
To conclude, there may be several approaches to decide which would be the adequate compensation based on the above reasoning179:
1.1. The Market Rate
On Approach to determine the remuneration is simply resorting to the commercial compensation that the patentee would have to pay in ordinary
175 Id.
176 Carvahol, supra note 4, at 366.
177 C Correa, Intellectual Property Rights and the Use of Compulsory Licenses: Options for Developing Countries, Trade-Related Agenda, Development and Equity, Working Papers (1999:
Geneva, South Centre), at
http://southcentre.org/index.php?option=com_content&view=article&id=75%3Aintellectual-property-r ights-and-the-use-of-compulsory-licenses-options-for-developing-countries&catid=41%3Ainnovation-t echnology-and-patent-policy&Itemid=1&lang=en
178 Supra note 64, at 475.
179 Id. at 476.
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circumstances. Assuming that there is a market for licenses regarding the type of technology involved in the particular case, the market rate would have provided an indication at least to what patent holders might expect from licensing their technology. This method came from the notion that compulsory licenses basically break the patent owner’s power to impose monopoly pricing which TRIPS guarantees.180
Nevertheless, this approach could be misleading and difficult to settle the due price from two aspects.181 One is that the market features specific kind of technology might be limited to a certain amount of patent holders, which may lead to higher rates than those in an efficiently functioning market. The other problem is most of the patent licenses are granted among members of the same enterprise group. As a result, the royalties may be overcharged considering the group’s interest in order to reduce tax burden. Besides, it is hard to break down available data so as to establish what market rates would look like without the information from intra-group licenses.182 In such cases, the joint venture interests involved might cripple the objectivity of the presumption of the normal market-rate transactions and make the determination of a market price substantially arbitrary process. A possible solution to this would be to require the patent owner to justify any market losses.183
1.2. Royalty Request by Patent Holder
Another feasible way is requiring the licensor to provide detailed information regarding its development costs and research as reference of determination in
180 Id.
181 Id.
182 Id.
183 Grain Processing Corp. V. Am, Maize-Prods. Co., 185 F. 3d 1341, 1349 (Fed. Cir. 1999).
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respect of royalty level.184 The data given by the patent holder may include whether it received or made use of any government subsidies developing its inventions, its total global market for the patented innovation, the percentage of the global market represented by the country granting the compulsory license, the average rate of return on its patented products. These factors presenting the patent holder’s interests may help the granting authorities to adjudicate the adequate sum of remuneration.185
However, this approach misses an important point of drug discovery, research and development spending and returns are not completely segregated by drug. A company’s overall research and development investment may involve several drugs. Thus, to trace down a single costs of certain drug may be difficult.
Besides, a company may plan to sell a drug at a lower price below its costs using the support of another high-priced medicine.186 In that sense, a fair royalties of given drugs would require the company’s overall portfolio, which is rather complex for the government administrators to cope with under compulsory license.
Contrary to the method is user-based analysis, which depends on the effectiveness of the treatment and the degree of advancement over existing alternatives.187 Such valuation may close the gap between the patented product’s real value and the exaggeration of the property right’s value claimed.
1.3. Royalty Guidelines Made by International Organization
The international organizations can provide a royalty guidance of
184 Supra note 64, at 477.
185 Id.
186 Cahoy, supra note 168, at 166.
187 See Austl’n Productivity Comm’n, International Pharmaceutical Price Differences 25-26 (2001).
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compulsory license for the national concerned authorities to adjudicate in each case.188 The licensee’s royalty obligation may be calculated as a percentage of its income from sales of the licensed product. The income may be represented, for example, by its wholesales, and may be net of tax liabilities. However, a unitary system for remuneration is barely practical. There are a variety of perspectives and no single approach is optimal in any condition, every method comes with its ambiguity in its overall impact. Therefore, even under international standards, any workable system requires compromise from each party involved.189