Compulsory licensing for pharmaceuticals in investor-state arbitration

by: in Law
Pharma patent

A patent for a medicine gives the patent owner an exclusive right to prevent others from commercially exploiting the patented medicine. When patent regimes work well, the patent holder receives a return for costs of research and development enabling him to continue making further investments.  

However, since patents eliminate competition and lead to a temporary monopoly, the patent holders may push up the price of the patented medicine, which may as a result go beyond the purchasing power of a large part of the population. In such situations, a number of countries have imposed compulsory licences, permitting a third-party manufacturer (normally a domestic company) to produce the patented product without the consent of the patent owner, which results in affordable prices for the needed medicine.   

Meanwhile, under most international investment agreements (IIAs), patent right is covered as an investment. Therefore, foreign investors whose patents are subject to a compulsory licence may sue the host state directly through investor-state arbitration provided for in most IIAs, claiming that the licence constitutes an unlawful expropriation, mandating compensation that may be extremely high. A threat of such a prospect may make countries hesitant in issuing a compulsory licence, which might in turn have a great impact on the availability of medicines to their population. It is therefore important to consider how investment tribunals are likely to adjudicate compulsory licence claims. In her Master thesis Mai Anh Nguyen, LL.M. (Globalisation and Law Master programme), does just that and makes the following observations.

First, to determine the expropriatory nature of a compulsory licence, the element which would be much relied upon would be the financial loss caused by the licence for the patent holder. When the damage is substantial, a compulsory licence is very likely to be regarded as an expropriation. To decide whether the loss is indeed substantial, a number of facts are likely to be taken into consideration by investment tribunals, including the actual loss of profit that the patent holder suffers, bearing in account of the real ability of the patent holder to make profit from exploiting the patent and/or selling the patent to a third party, and the compensation amount offered by host state.

Second, even when a compulsory licence were to be decided to constitute indirect expropriation, this would not necessarily lead to a finding of a treaty violation. As long as it fulfills a number of requirements, a compulsory licence can still be regarded as lawful. According to the standard requirements found in most IIAs, a compulsory licence for pharmaceuticals could be a lawful expropriation when (i) there are sufficient data proving that the medicine subject to the compulsory licence is the most efficient one but unaffordable for the public to treat their disease; and (ii) the compulsory licence is issued in accordance with the applicable procedural rules e.g. national patent law and the WTO Agreement on Trade Related Aspects of Intellectual Property. 

Third, noteworthy enough, a compulsory licence for medicine could be “non-compensable” if it were regarded to be a regulation for the general welfare of the public. When the applicable IIA is silent on the issue of non-compensable regulation adopted for general public purposes, tribunals have adopted varied approaches. The approach which relies on the proportionality test appears to gain most support. Under this approach tribunals consider whether the issued compulsory licence is proportional to the objective sought by the host state and the harm caused to the foreign investor.

Factual elements, such as the effectiveness of the patented medicine, the loss suffered by foreign investors, the cost borne by host state when using the patent, etc., would play a decisive role in this case.

Finally, a compulsory licence for medicine is often issued in emergency situations such as epidemics. Therefore, host state could invoke the state of necessity as a ground to justify the licence. However, in most cases, host states would hardly satisfy all requirements to invoke a necessity defence because often they would be one of the factors causing the emergency situation. Moreover, often there would be other available ways to ensure people’s access to the medicine next to the issueance of a compulsory licence.

The thesis concludes that while the mere issuance of a compulsory licence may lead to legal challenges and even to a finding of a breach of an applicable international investment agreement, much would depend on the particular circumstances of each individual case, both with regard to the existence of expropriation as well as its possible justification.

 Written by Mai Anh Nguyen, (Master thesis - Globalisation and Law)
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