LETTER FROM INDIA
Issue 19 March 2006
TRIPS AGREEMENT AND RECENT CHANGES IN PATENT LAW
AFFECTING THE PHARMACEUTICAL INDUSTRY
In accordance with its obligations under the Agreement on Trade Related Aspects of Intellectual Property Rights ("the TRIPS Agreement") of the World Trade Organisation (“WTO”), India ushered in from January 1, 2005, a full-fledged product patent regime covering food, medicines, drugs and substances prepared or produced by chemical processes.
The Statement of Objects and Reasons accompanying the amending legislation records: "Efforts have been made not only to fulfill our final obligation under the TRIPS Agreement but also to simplify and rationalize the procedure." Therefore, in order to check the soundness of the salient amendments, one has necessarily to benchmark them against the equivalent provisions of the TRIPS Agreement.
Since the novel features brought in by the amendments have raised issues which are particularly significant for right holders in the pharmaceutical industry, we have sought to analyse them in detail in this special issue of our newsletter.
- S. 3 (d): THE CONCEPTS OF EFFICACY, DISCOVERY AND INVENTION One of the most controversial amendments has been the one contained in Section 3(d) of the Patents Act. The relevant provision reads:
Section 3 - What are not inventions - The following are not inventions within the meaning of this Act, --
- a. -------------------
- d. the mere discovery of a new form of a known substance which does not result in the enhancement of the known efficacy of that substance or the mere discovery of any new property or new use for a known substance or of the mere use of a known process, machine or apparatus unless such known process results in a new product or employs at least one new reactant.
Patentable Subject Matter
Subject to the provisions of paragraphs 2 and 3, patents shall be available for any invention, whether product or process, in all fields of technology, provided that they are new, involve an inventive step and are capable of industrial application. Subject to paragraph 4 of Article 65, paragraph 8 of Article 70 and paragraph 3 of this Article, patents shall be available and patent rights enjoyable without discrimination as to the place of invention, the field of technology and whether products are imported or locally produced.
- Explanation:- For the purposes of this clause salts, esters, ethers, polymorphs, metabolites, pure form, particle size, isomers, mixtures of isomers, complexes, combinations and other derivatives of known substance shall be considered to be the same substance, unless they differ significantly in properties with regard to efficacy.
As can be seen from the substances mentioned in the explanation, this provision pertains mostly to pharmaceutical products.
Section 3(d) shows a fascinating interplay between the diametrically opposite concepts of 'Invention' and 'Discovery' as can be seen from the following definitions:
The relevant subsections under Section 2(1) of the amended Act which carries the heading 'Definitions and Interpretations' are:
(i) "invention" means a new product or process involving an inventive step and capable of industrial application.
(ii) "inventive step" means a feature of an invention that involves technical advance as compared to the existing knowledge or having economic significance or both and that makes the invention not obvious to a person skilled in the art."
On the other hand, a discovery means detection as a result of uncovering, revealing and laying open to view that what was hidden, concealed or unknown.
Section 3(d) thus, seems to allow patenting of a "discovery" of a new form of a known substance if it results in the enhancement of the known efficacy of that substance. Efficacy is not defined in the statute and more importantly, does not find mention in the TRIPS Agreement or for that matter, in any other statute in the world. This is in direct conflict with the definition of an "invention" as well as "inventive step". For something to be discovered it must already exist. It is antithetical to the very concept of patents which rewards human intervention and creation. The use of the term 'derivative' in the explanation to Section 3(d) implies human intervention and an inventive step and not a discovery. The law seems to recognise the supremacy of an invention to discovery and proposes to give the latter the status of an invention if it passes the test of efficacy. This seems to lack logic.
The Government is well-aware that the amendments are tenuous and may be anti-TRIPS. It has formed an Expert Committee with the following terms of reference:
(i) Whether it would be TRIPS compatible to limit the grant of patents for pharmaceutical substances to a new chemical entity or to new medical entities involving one or more inventive steps; and
(ii) Whether it would be TRIPS-compatible to exclude micro-organisms from patenting.
The new law makes all the eleven grounds of a post-grant opposition applicable to pre-grant (representation) proceedings initiated by "any person" against the patent application as well. Significantly, there is no official fee to be paid for pursuing such opposition and there is no vested right to an appeal. The aggrieved party would have to approach the Court of competent jurisdiction under a writ petition, acceptance of which is subject to the discretion of the Court.
SECOND PROVISO TO SECTION 11A (7)
Another significant point to remember is that according to the second proviso to Section 11A (7), for all patents arising out of black-box applications, the rights of a patentee shall accrue from the date of the grant of the patent as opposed to the date of publication of the patent in all other cases. This significantly reduces the period from which damages can be claimed. This is, again, antithetical to the TRIPS Agreement where no such discrimination is made.
THIRD PROVISO TO SECTION 11A (7)
Another amendment that makes a departure from TRIPS is the third proviso to Section 11A (7):
"Provided also that after a patent is granted in respect of application made under sub-section (2) of Section 5, the patent-holder shall only be entitled to receive reasonable royalty from such enterprises which have made significant investment and were producing and marketing the concerned product prior to the 1st day of January, 2005 and which continue to manufacture the product covered by the patent on the date of grant of the patent and no infringement proceedings shall be instituted against such enterprises."
This provision resembles Article 70(4) of TRIPS, set out below, but is at variance on critical aspects:
" In respect of any acts in respect of specific objects embodying protected subject matter which become infringing under the terms of legislation in conformity with this agreement, and which were commenced, or in respect of which a significant investment was made, before the date of acceptance of the WTO Agreement by that member, any member may provide for a limitation of the remedies available to the right holder as to the continued performance of such acts after the date of application of this Agreement for that member. In such cases the member shall, however, at least provide for the payment of equitable remuneration."
The table below compares the two provisions -
|Applies only to black box applications, i.e. applications filed between January 1, 1995 and January 1, 2005 (the period offered to developing countries to become TRIPS compliant) in respect of food, medicines or drugs and substances prepared or produced by chemical processes.
|Significant investment - not defined
||Significant investment - not defined
|Enterprise should have made significant investment and was producing and marketing the concerned product prior to the 1st day of January, 2005 and continued to do so thereafter
||Any acts in respect of the protected subject matter which were commenced or in respect of which a significant investment was made prior to the 1st day of January, 1995.
||Comment: There is a ten year difference in the computation of the relevant time period. However, the Indian amendment prescribes a stricter standard in requiring both significant investment and commencement of production and marketing prior to January 1, 2005.
|Patent holder entitled to receive only 'reasonable royalty'
||Patent holder entitled to receive at least 'equitable remuneration'
||Comment: The term 'equitable remuneration' is wider in meaning and import than 'reasonable royalty'.
|Extinguishes the rights of the patentee
||Member may provide for limitation of the remedies available to the patentee
The history of Article 70(4) indicates that it was meant to protect acts and investments by potential infringers in respect of subject matter that got protected by domestic law modified by virtue of the TRIPS Agreement at the time the Agreement came into existence, i.e. January 1, 1995. The Article certainly was not meant to be used as a basis to protect vested rights created at any point in time.
The amendment, as it currently stands, condones the acts of infringers who have had the benefit of studying the specification of corresponding patents in other jurisdictions, and thereafter reverse-engineering the drugs in question. Surely, the TRIPS Agreement was not intended to bless such an endeavour.
It may be argued that there are some 'qualifications' which an infringer must have in order to come within the protection of the third proviso. That is, the patent-holder shall only be entitled to receive reasonable royalty, and no infringement proceedings shall be instituted against enterprises -
(i) which have made significant investment;
(ii) and were producing and marketing the concerned product prior to the 1st day of January, 2005; and
(iii) which continue to manufacture the product covered by the patent on the date of grant of the patent.
The corollary to the above is that theoretically it may be possible to file infringement proceedings against those enterprises that do not meet one or more of the above qualifications to trigger negotiations for a "reasonable royalty".
However, as regards the entities falling within the protection of the third proviso, the embargo against filing of suit proceedings seems to be absolute as is indicated by the use of the word 'only' in the clause "...the patent holder shall only be entitled to receive reasonable royalty..."as well as the word 'and' in the clause "... and no infringement proceedings shall be instituted against such enterprises. "Arguably, this embargo continues to remain absolute even if negotiations between the parties as regards the reasonableness of the royalty fail. In that event, the only aspect that will come before the Court will be the matter of what constitutes reasonable royalty. If it decides what reasonable royalty is, the suit cannot proceed.
A note on 'reasonable royalty'':
Insofar as 'reasonable royalty' is concerned, this is a grey area. Some guidelines can be derived from Section 90 of the Patents Act which speaks of terms and conditions of compulsory licenses. There, the royalty is to be paid with regard to the 'nature of the invention', 'the expenditure incurred by the patentee in making and / or in developing it', the expenditure incurred in 'obtaining a patent and keeping it in force' and 'other relevant factors'. However, the Patent Rules do not provide any guidelines for the operation of Section 11A (7).
The patent holder, however, can take some comfort from certain 'liberal' government policies in place which might be brought to the attention of the Courts to decide on the quantum of royalty payable. To elaborate, the current guidelines on royalty for know-how provide for an upfront fee of up to US$ 2 million and in addition a royalty at the rate of 5% (on domestic sales) and 8% (on exports) of the ex-factory sale price of the enterprises' products. This may help in arriving at "reasonable royalty".
Finally, since under the current policy, a royalty arrangement can be entered into for an unlimited period of time, payment of "reasonable royalty“ would certainly cover the duration of the patent. Of course, if the agreement involves transfer of know-how, royalty thereon can be derived in perpetuity.
The compensation payable by the Government to use the invention may also be mentioned. Until May 19, 2003, Section 100 of the Patents Act, 1970, read as follows:
"Provided that in the case of any such use of any patent in respect of any medicine or drug or article of food, the royalty and other remuneration shall in no case exceed four percent of the net ex-factory sale price in bulk of the patented article (exclusive of taxes levied under any law for the time being in force and any commissions payable) determined in such manner as may be prescribed."
From May 20, 2003, this provision has been changed and there are no upper limits prescribed. The current text reads as follows:
"Provided that in case of any such use of any patent, the patentee shall be paid not more than adequate remuneration in the circumstances of each case, taking into account the economic value of the use of the patent."
Under the TRIPS Agreement, provisions which are mandatory cannot be tampered with or watered down unilaterally by Member nations when implementing them in domestic law. Their applicability can only be altered either by suspension or changes introduced by consensus reached between Member countries. The Doha Declaration and the subsequent amendment in the Indian Patents Act, 1970, is a good example in this regard.
On the implementation of paragraph 6 of the Doha Declaration on the TRIPS Agreement and Public Health, on September 1, 2003, the General Council for TRIPS held:
Noting the Declaration on the TRIPS Agreement and Public Health (the "Declaration") and, in particular, the instruction of the Ministerial Conference to the Council for TRIPS contained in paragraph 6 of the Declaration to find an expeditious solution to the problem of the difficulties that WTO Members with insufficient or no manufacturing capacities in the pharmaceutical sector could face in making effective use of compulsory licensing under the TRIPS Agreement,
The obligations of an exporting Member under Article 31(f) of the TRIPS Agreement shall be waived with respect to the grant by it of a compulsory license to the extent necessary for the purposes of production of a pharmaceutical product(s) and its export to an eligible importing Member(s) in accordance with the terms set out below in this paragraph:
Article 31(f) of TRIPS, referred to in the Declaration, reads as follows:
Where the law of a Member allows for other use of the subject matter of a patent without the authorisation of the right holder, including use by the government or third parties authorized by the government, the following provisions shall be respected:
(b) any such use shall be authorised predominantly for the supply of the domestic market of the Member authorising such use;
(ta) "pharmaceutical substance" means any new entity involving one or more inventive steps;
India, too, has given effect to this Declaration by inserting S. 92A in the Patents Act under the third amendment. The section reads:
"92A. Compulsory license for export of patented pharmaceutical products in certain exceptional circumstances.-
(1) Compulsory license shall be available for manufacture and export of patented pharmaceutical products to any country having insufficient or no manufacturing capacity in the pharmaceutical sector for the concerned product to address public health problems, provided compulsory license has been granted by such country or such country has, by notification or otherwise, allowed importation of the patented pharmaceutical products from India."
Further, because this is a special provision, a party seeking a compulsory license on this ground does not have to wait for three years after grant of patent as is required in the case of a "normal" compulsory license.
The draft Patent Manual of Practice and Procedure proposed by the Indian Patent Office and now under consideration has this to say on this provision:
"This provision is to be construed in a wider sense to allow export to any country having insufficient or no manufacturing capacity in the pharmaceutical sector whether it is a member of WTO or not. As this section is intended to address the public health problems faced by a country having insufficient or no manufacturing capacity in the pharmaceutical sector and to facilitate access to affordable medicines for the people in these countries, it should be used in good faith and not with the primary purpose of addressing other objectives in particular objectives of a purely commercial nature.
"It may be noted that this section is an "enabling provision" for the export of pharmaceutical products to any country having insufficient or no manufacturing capacity in the pharmaceutical sector in certain exceptional circumstances to address public health problems. The term "provided compulsory license has been granted by such country" has therefore to be given a liberal meaning and it should be considered to include 'a license in any form' from such countries also where there is no patent protection or where the drugs in question are not patented."
This is not to say that a manufacturer in India can export drugs under a compulsory license only in cases of public health emergency as stated above. Although under the TRIPS Agreement, compulsory licensing in the normal course is predominantly meant to cater to the domestic market, under the amended Patents Act fulfilling the needs of foreign markets is also a ground to apply for a compulsory license - as documented in Section 84(7) of the Act (though this can be done only after three years). This provision reads as follows:
"For the purposes of this Chapter, the reasonable requirements of the public shall be deemed not to have been satisfied-
(a) if, by any reason, of the refusal of the patentee to grant a license or licenses on reasonable terms,...
(iii) a market for export of the patented article has not been met to an adequate extent or on reasonable terms.
It is interesting to note that save for Section 92A - enacted to give effect to the Doha Declaration of the WTO - no other amendment, when tabled in Parliament, carried with it any explanation, as is the norm; these amendments were added at the last minute due to political exigencies.
THE ROAD AHEAD
Perhaps, there will be a legal challenge to the controversial provisions by one or more right holders who find that they are unable to work with Section 3(d) and the second and third provisos to Section 11A (7).
Another aspect that comes out starkly is the number of ways patent rights can be truncated or interfered with. Under the present regime, the following interventions are possible:
The amendments are, therefore, unprecedented and pose new challenges to right holders and practitioners alike. An early understanding of the meaning and import of these provisions and the formulation of a clear, practical and unequivocal strategy is crucial to protect and enforce valuable intellectual property rights.
- Compulsory License by the Government for its own use - At any time after the patent grant;
- Compulsory License under Section 92A - Again, at any time;
- Compulsory License under the 'traditional' provisions (can include supply in the export market) - Three years after patent grant;
- Compulsory License under Section 11A (7) by paying "reasonable royalty"- Any time after patent grant; and
- As per the draft National Pharmaceuticals Policy, 2006, patented products launched after January, 2005, would be subjected to mandatory price negotiations before grant of marketing approval.
© Remfry & Sagar
"Letter from India" is intended to provide our clients and associates with information of general nature on legal issues and recent developments in the areas of intellectual property, foreign investment and corporate laws. It should not be relied upon as legal advice or opinion.