Patent Working Requirements and Complex Products

Download PDF here. The paper was published by JIPEL NYU Journal of Intellectual Property & Entertainment Law, Vol. 7 – No.1 on January 16, 2018.

Introduction

In 2012, Natco Pharma Ltd. (“Natco”) petitioned the Indian Patent Office (“IPO”) for a compulsory license to manufacture Bayer’s patented cancer drug, Nexavar. Natco cited numerous grounds in support of its petition, including Nexavar’s high cost and limited availability in India. But along with these relatively common complaints in the global access to medicines debate, Natco raised a less typical theory; Bayer failed to “work” the patent sufficiently in India. In doing so, Natco invoked a seldom-used provision of Indian patent law that allows any person to seek a compulsory license under an Indian patent that is not actively being commercialized by its owner within three years from the issuance of the patent.

Patent working requirements exist in different forms throughout the world. Broadly speaking, to “work” a patent is to practice, in some manner, the patented invention within the country that issued the patent. While patents are seen as a means to create incentives for inventors to share their ideas, working requirements are intended to mitigate the exclusivity of patent monopolies by requiring the patent holder to disseminate its invention into the local market. The patent holder thereby imparts knowledge and skills to the local community, enhances economic growth, supports local manufacturing, and promotes the introduction of innovative new products into the local market.

While patent working requirements have existed in various jurisdictions for more than a century, working requirements have seldom been the subject of vigorous enforcement. The U.S.-Brazil dispute and the Natco case represent a revival of interest in patent working requirements. In particular, the Natco case has reintroduced questions of whether working requirements are, or should be, allowed under the TRIPS Agreement.

In prior work, Contreras and LakshanÈ have analyzed the domestic Indian patent landscape pertaining to mobile device technology. The authors now extend that work to examine the working of those patents. This Article presents a detailed case study of the Indian patent working statutes and their procedures, particularly the requirement that all patent holders file an annual form (Form 27) to demonstrate that their patents are being worked in the country. We collected and reviewed all publicly available Forms 27 in the mobile device sector to assess the completeness and accuracy of the information disclosed. We then analyzed the results to assess the robustness of India’s patent working requirement and its utility for complex information and communication-based products and technologies.

The remainder of this Article proceeds in four principal parts. Part I.A provides a brief history of patent working requirements. Part I.B describes the development of India’s current working requirements and its novel Form 27 filing requirement. Part II describes our empirical study of India’s Form 27 filings in the mobile device sector. Part III discusses our findings and analysis. We conclude with recommendations for further study and policy.

I. Patent Working Requirements

A. History of Patent Working Requirements

The origins of patent working requirements have been traced to the 1300s, when early patent privileges were granted in jurisdictions such as feudal England and the Republic of Venice, with an expectation that foreign innovators would teach the invented art to local industry. The underlying incentive for providing monopoly rights was thus tied to local industrialization. This incentive to share technology was directed not only to local citizens but, even more so, to foreign inventors. Countries issued patent privileges to encourage foreigners to migrate and develop or protect local industry by teaching their art to the local population. Local industrialization was thus considered a central means to economic development and technological advancement.

Despite these early developments, by the late 19th and early 20th centuries, developed countries’ conceptual understanding of a patentee’s obligation and its relevance to national development began to shift away from local manufacturing. As a result, in many developed countries disclosure through importation became sufficient to meet the “informational goal” of patents, particularly patents that represented improvements to existing technologies.

The 1883 Paris Convention for the Protection of Industrial Property prohibited the automatic forfeiture of a patent for a failure to work it locally. While both developed and developing countries disputed the proper remedy for the failure to work a patent, there remained a consensus that failure to work a patent was inconsistent with the patent privilege.

A half-century later, the 1925 Hague Conference, which amended the Paris Convention, recognized the failure to work a patent as an abuse that member states could “take necessary legislative measures to prevent.” As a remedy for non-working, drafters viewed compulsory licensing of non-worked patents as more palatable than outright forfeiture. Nevertheless, forfeiture of patent rights was still permitted under the Convention, though an action for forfeiture could not be brought until two years following the issuance of the first compulsory license covering the non-worked patent.In the 1967 Stockholm amendments to the Convention, further limitations on compulsory licensing for non-working patents were introduced, notably prohibiting member states from permitting the grant of a compulsory license for failure to work until three years after the issuance of the allegedly non-worked patent.

Within the flexibilities allowed by the Convention, developing countries continued to adopt strict working requirements and to resist international requirements that favored developed countries. For example, in the late 1970s and early 1980s, developing countries proposed revisions to the Paris Convention that would have provided that mere importation did not satisfy local working requirements and to permit the expansion of sanctions for non-working beyond compulsory licensing.

The desire of developed countries for stronger international rules relating to intellectual property led to the formation of the World Trade Organization (“WTO”) in 1994, under which the Trade Related Aspects of Intellectual Property Rights (“TRIPS”) Agreement was negotiated. While the TRIPS Agreement does not explicitly address patent working requirements, Article 2.1 incorporates Article 5A of the Paris Convention (i.e. the article related to compulsory licensing and the limitations on granting compulsory licenses discussed above), and Article 2.2 reinforces the existing obligations of members of the Paris Union. Additionally, Article 27.1 of the TRIPS Agreement, which establishes requirements for patentable subject matter, prohibits “discrimination as to the place of invention, the field of technology and whether products are imported or locally produced” raising a question as to whether countries with local working requirements must recognize importation as an acceptable manner of satisfying those requirements.However, Article 30 of the TRIPS Agreement permits a member state to allow exceptions to the exclusive rights of a patent holder, and Article 31 allows a state to issue a “compulsory” license under one or more patents without the authorization of the patent holder “in the case of national emergency or other circumstances of extreme urgency or in cases of public non-commercial use.” Given these mixed signals, commentators are divided on whether, and how, the TRIPS Agreement may affect local working requirements.

To date, the only WTO dispute challenging the validity of national working requirements has been between the United States and Brazil. In 2000, the Clinton administration, responding to concerns raised by the American pharmaceutical industry, initiated a WTO dispute proceeding to challenge Brazil’s local working requirement. The United States argued that Article 68 of Brazil’s 1996 Industrial Property Law violated Articles 27(1) and 28(1) of the TRIPS Agreement for discriminating against U.S. owners of Brazilian patents whose products were imported, but not locally produced, in Brazil.

Despite the pending WTO litigation, the Brazilian Ministry of Health adopted an aggressive stance toward reducing the price of antiretroviral medications and threatened to issue compulsory licenses for the local manufacture of two such drugs, both patented by U.S. companies, if they were not discounted by 50%. In response to political and public pressures, the United States and Brazil settled the dispute before any definitive opinion was issued by the WTO.

As a British colony, India’s pre-independence patent laws were modeled largely on then-prevailing English law. India gained its independence from Great Britain in 1947 and almost immediately began to consider the adoption of patent laws reflecting emerging national goals of industrialization and economic development. Thus, in early 1948, a committee known as the Tek Chand Committee was appointed to review and reconcile India’s patent laws with its national interests. The committee’s efforts resulted in the Chand Report, which recommended the use of compulsory patent licenses to stimulate India’s industrial economy.

A second major report commissioned by the Indian government and prepared primarily by Shri Justice N. Rajagopala Ayyangar, was issued in 1959. The Ayyangar Report suggested that India should deviate from the “unsuitable patent policies of industrialized nations” because patent regimes operate differently in developing versus developed nations. Recognizing that a significant weakness in developing nations “is that foreign patent owners do not work the invention locally,” the Ayyangar Report recommended compulsory licensing as “the remedy to redress the handicap of foreigners not working the invention locally.”

2. The Patents Act, 1970

The India Patents Act, 1970, was enacted in 1972. Among other things, it sought to address the economic repercussions resulting from foreign dominance of the patent landscape in India, as recommended by the Chand Report and the Ayyangar Report. Accordingly, Section 83 of the 1970 Act provides certain policy-driven justifications for India’s working requirements, explaining:

“that patents are granted to encourage inventions and to secure that the inventions are worked in India on a commercial scale and to the fullest extent that is reasonably practicable without undue delay; [and]

that they are not granted merely to enable patentees to enjoy a monopoly for the importation of the patented article[.]”

These provisions make clear that working a patent in India is both an important policy goal and consists of something more than importation of the patented article into India. Some additional knowledge transfer must occur so that manufacturing of other steps necessary for commercialization are carried out in India.

Following the Ayyangar Report’s recommendations, Section 84(1) of the 1970 Act provided for compulsory licensing of patents as follows:

“At any time after the expiration of three years from the date of the sealing of a patent, any person interested may make an application to the Controller alleging that the reasonable requirements of the public with respect to the patented invention have not been satisfied or that the patented invention is not available to the public at a reasonable price and praying for the grant of a compulsory licence to work the patented invention.”

These requirements, particularly the availability of the patented article to the public at a “reasonable price,” seek to address issues raised in the debate over access to medicines, and particularly the high pricing maintained by many Western pharmaceutical firms in developing countries.

However, working of patents more generally is incorporated into the compulsory licensing regime through Section 90, which clarifies when the “reasonable requirements of the public” will be deemed not to have been satisfied. In particular, Section 90(c) specifies that, for purposes of compulsory licensing under Section 84, “the reasonable requirements of the public shall be deemed not to have been satisfied Ö if the patented invention is not being worked in the territory of India on a commercial scale to an adequate extent or is not being so worked to the fullest extent that is reasonably practicable[.]” Thus, local working of patents is tied to the public interest and has become express grounds for requesting a compulsory license in India.

In addition to giving applicants the right to seek a compulsory license under non-worked patents, the 1970 Act also gave the Controller the power to revoke a patent on the grounds that the reasonable requirements of the public were not being satisfied or the patented invention was not available to the public at a reasonable price. Under Section 89(1), any interested person could apply to the Controller for such an order of revocation no earlier than two years following the grant of the first compulsory license under the relevant patent.

3. India’s Current Working Requirement

India became a member of the World Trade Organization on January 1, 1995, also making India a party to the TRIPS Agreement. In order to reconcile the 1970 Act with the TRIPS Agreement, India amended its Patents Act in 1999, 2002, and 2005. Most relevant to this Article, the 2002 amendments modified India’s compulsory licensing and working requirements.

India’s amended Patents Act retains strong working requirements, which permit the Controller to revoke unworked patents. Section 83 of the Act, as amended in 2002, provides several additional justifications for India’s patent working requirement not contemplated in earlier versions of the Act. For example, the 2002 amendments recognize that patents are intended to support the “transfer and dissemination of technology . . . in a manner conducive [sic] to social and economic welfare.” Several of the new justifications emphasize that patents should support, and not impair, the public interest, particularly “in sectors of vital importance for socio-economic and technological development of India.”

Against this backdrop, the amended Act explicitly makes compulsory licenses available for non-worked patents. Section 89 explains that one of the “general purposes” of compulsory licenses is to ensure that “patented inventions are worked on a commercial scale in the territory of India without undue delay and to the fullest extent that is reasonably practicable.” The amended Act expanded Section 84(1), which authorizes third parties to seek compulsory licenses, to include as an express basis for seeking a compulsory license “that the patented invention is not worked in the territory of India.”

Thus, new section 84(1)(c) establishes working of a patent as an independent ground for seeking a compulsory license, in addition to the grounds under sections 84(a) and (b) that the patented technology fails to reasonably meet public needs. This approach contrasts with the original 1970 formulation, discussed above, in which non-working of a patent formed a basis for seeking a compulsory license, but only as an element of the “reasonable requirements of the public,” rather than an independent ground in itself.

Section 84(6) specifies factors that the Controller must take into account when considering an application for a compulsory license, including:

(i) the nature of the invention, the time which has elapsed since the sealing of the patent and the measures already taken by the patentee or any licensee to make full use of the invention;

(ii) the ability of the applicant to work the invention to the public advantage;

(iii) the capacity of the applicant to undertake the risk in providing capital and working the invention, if the application were granted;

(iv) as to whether the applicant has made efforts to obtain a licence from the patentee on reasonable terms and conditions and such efforts have not been successful within a reasonable period as the Controller may deem fit [i.e., not ordinarily exceeding a period of six months] . . . . 

Section 84(6) appears to represent a concession to patent holders, making clear that compulsory licenses will only be granted to applicants that are able to exploit the licensed patent rights in a manner that is likely to remedy the failure of the patent holder to work the patent.

While a formal definition of working is not provided under the statute, the language of section 83 suggests that the patented invention must be manufactured locally to the extent possible and that importation would be acceptable only if local manufacturing is unreasonable. Additionally, the statutory language suggests that if importation is necessary, only the patent holder or its chosen licensees may import the patented invention. The statute also fails to establish any circumstances that may be excused from India’s patent working requirement. This omission may have been intentional, perhaps suggesting that any technology that is worth patenting in India should also be capable of being worked in India.

In short, India’s patent working requirement is intended to be taken seriously. The penalties for failing to work a patent include the issuance of a compulsory license beginning three years after patent issuance, and if that does not fulfill public requirements for the patented article, possible revocation of the patent. Moreover, there is evidence that Indian courts may be reluctant to grant injunctive relief to patent holders that do not work their patents.

C. The Indian Working Requirement and Natco Pharma Limited v. Bayer Corporation

India’s patent working requirement was featured prominently in Natco’s recent compulsory license request with respect to Bayer’s Indian patent covering sorefanib tosylate, a kidney and liver cancer drug marketed by Bayer as NexavarTM. Bayer obtained an Indian patent covering Nexavar in 2008. Despite Bayer’s estimate that more than 8,800 patients in India were eligible to take the drug, its imports were sufficient to supply only 200 patients. Moreover, Bayer priced a monthly dose of the drug at more than 280,000 Rupees (approximately US$5,608), a price unaffordable to the vast majority of Indians. In response, Natco, an Indian generic drug manufacturer, attempted to negotiate a license with Bayer to manufacture and sell Nexavar in India. However, when negotiations were unsuccessful, Natco applied to the Drug Controller General of India for regulatory approval to manufacture a generic version of Nexavar in India. The approval was granted.

Natco then petitioned the Controller of Patents under section 84 of the Patents Act for a compulsory license to manufacture a generic version of Nexavar. Natco offered several justifications in support of its application for a compulsory license, including Nexavar’s high cost and limited availability in India. In addition, Natco argued that Bayer had failed to work its patent in India within three years of its issuance, as required under section 84(1)(c) of the Patents Act. Specifically, Natco argued that “[t]he patented product is being imported into India and hence the product is not worked in the territory of India to the fullest extent that is reasonably practicable.” Additionally, Natco argued that Bayer faced “no hurdle[s] preventing [it] from working the Patent in India” because Bayer already had “manufacturing facilities in India for several products.”

Bayer responded that it actively imported Nexavar into India, which demonstrated sufficient working, and argued that India’s working requirement did not require manufacture of the patented product in India. In evaluating Natco’s petition, the Controller considered the legislature’s intent, the Paris Convention, the TRIPS Agreement, and India’s Patents Act. In view of these authorities, the Controller interpreted the term “worked” to mean that the patented invention must be manufactured or licensed within India, reasoning that “[u]nless such an opportunity for technological capacity building domestically is provided to the Indian public, they will be at a loss as they will not be empowered to utilise [sic] the patented invention, after the patent right expires.” Under this interpretation, the Controller concluded that Bayer had not worked its patent in India since importation is not sufficient to constitute “working” a patent. Accordingly, in 2012 the Controller issued a compulsory license to Natco under Bayer’s patent covering Nexavar.

Bayer unsuccessfully appealed the Controller’s decision to the Indian Intellectual Property Appellate Board (IPAB). The IPAB affirmed the Controller’s decision, but disagreed with the Controller’s interpretation of the term “worked.” Instead of ruling that working categorically excludes importation of the patented product into India, the IPAB concluded that determining whether a patented invention is worked must be considered on a case-by-case basis. Thus, the term “worked” does not necessarily exclude importation, but it also does not strictly require manufacturing in India.

In affirming the decision of the IPAB, the Bombay High Court opined that “[m]anufacture in all cases may not be necessary to establish working in India[.]” However, the court implied that working a patent without local manufacture could be a high hurdle to clear, reasoning that the patent holder must then “establish those reasons which makes it impossible/prohibitive for it to manufacture the patented drug in India.” It is only when the patent holder satisfies the authorities that “the patented invention could not be manufactured in India” that it can be considered worked by import.

Apart from the working requirement, the Bombay court focused on whether Bayer had reasonably satisfied the requirements of the public, recognizing that those requirements might differ depending on the type of product covered by the patent. Thus, when assessing whether demand for the patented article was met to an “adequate extent,” the considerations pertaining, for example, to a luxury article would vary significantly from those pertaining to a lifesaving medicine. In the case of medicines, the court reasoned, meeting public demand to an adequate extent should be deemed to mean it is available to 100% of the market: “Medicine has to be made available to every patient and this cannot be deprived/sacrificed at the altar of rights of [the] patent holder.”

Following Natco’s successful application for, and defense of, its compulsory license, other generic drug manufacturers sought compulsory licenses to manufacture patented pharmaceutical products in India. For example, in 2013, BDR Pharmaceuticals, Ltd., an Indian manufacturer, filed an application for a compulsory license to manufacture Bristol Myers Squibb’s anti-cancer drug dasatinib (marketed as SprycelTM), and the Indian Ministry of Health recommended that the Department of Industrial Policy and Promotion (DIPP) grant local manufacturers compulsory licenses for trastuzumab, a breast cancer drug marketed by Roche (HerclonTM) and Genentech (HerceptinTM) and ixabepilone (Roche’s IxempraTM). To date, each of these petitions has failed for various reasons other than that pertaining to dasatinib, which remains under consideration by DIPP.

D. Form 27 and India’s Reporting Requirement

The Indian patent working requirement under Section 84 of the Patents Act, as well as the availability of compulsory licenses for non-worked patents, is not unique to India, and other developing countries have adopted similar legal requirements. India has, however, enacted what appears to be a unique reporting structure associated with its patent working requirement. India adopted a form submission requirement as a means to regulate the patent working requirement under the India Patents Act in 1970.Specifically, section 146(2) of the Patents Act provides that:

every patentee and every licensee (whether exclusive or otherwise) shall furnish in such manner and form and at such intervals (not being less than six months) as may be prescribed statements as to the extent to which the patented invention has been worked on a commercial scale in India.

In support of this statutory requirement, the patent rules adopted by the Indian Ministry of Commerce and Industry provide that the required statements of working must be submitted in a prescribed format (Form 27). The rules also provide that such statements must be furnished to the Controller of Patents in respect of every calendar year within three months following the end of such year.

Form 27, a template of which is appended to the 2003 version of the Indian patent rules, requires the patent holder to disclose “the extent to which the patented invention has been worked on a commercial scale in India.” To that end, Form 27 requires that the patent holder complete the following information:

The patented invention:

(i) { } Worked { } Not worked [Tick (✓) mark the relevant box]

a. if not worked: reasons for not working and steps being taken for the working of the invention.

b. if worked: quantum and value (in Rupees), of the patented product:

manufactured in India

imported from other countries (give country wise details)

(ii) the licenses and sub-licenses granted during the year;

(iii) state whether the public requirement has been met partly/adequately/to the fullest extent at reasonable price.

Under Section 122, failing to submit a Form 27 or providing false information on the form may lead to a significant fine, imprisonment, or both.

Though India’s working requirement first appeared in the Patents Act in 1970, it appe