Determination of Royalty in Case of Compulsory License

The institution of “compulsory licensing”, which is regulated firstly in Article 99 of the repealed Decree-Law No. 551 and then, under Article 129 et seq. of the Industrial Property Law (“the IP Code”) in force, as a reflection of TRIPS Article 31, has not been needed to be implemented for long years in our country [Turkey].

However, with the outbreak of the COVID-19 pandemic, it has suddenly gained popularity since it is regarded as a “convenient” tool for abrogating patent rights which are seen as the main, almost the sole obstacle to access to vaccines and treatment.

Even though it has never been actually implemented; “compulsory licensing” has been mentioned and widely discussed not only as a convenient tool for reaching the vaccines or preventive medicines needed to combat the COVID-19 outbreak in the short term but also as a negotiation tool in the price negotiations of certain vital medicines, which are considered a burden on the public budget. Despite being highly popular and having been mentioned often as a negotiation tool, its conditions and consequences could not be fully grasped because it has never been implemented, and the wording of the IP Code is quite ambiguous.

The misperception that the compulsory licenses shall be granted “for free” or “at rates far below the actual license fees” lies behind this environment of discussion and negotiation. However, all compulsory licensing regulated in the IP Code, including the grant of compulsory licenses for the public interest, could be implemented if a royalty, to be calculated “considering the economic value of the patent”, is paid to the patentee. Nevertheless, it is a greater mystery what “the fee which will be determined by taking into account the economic value of the patent”, as worded in the IP Code Article 133/1, shall be and how this fee shall be calculated.

Neither TRIPS Article 31(h) nor the IP Code Article 133 provides a method for calculating the “adequate remuneration, taking into account the economic value of the patent.” Another point to be addressed before proceeding with the common approaches in this field is that TRIPS Article 31(h) refers to the “economic value of the authorisation” while the IP Code Article 133 refers to the concept of the “economic value of the patent”. The word “authorisation”, as used in TRIPS Article 31/h refers to “the consent/authorisation to be granted by the patentee for using such patent, right to use, namely the license, to be voluntarily conferred”; as the heading reads as “Other Use Without Authorisation of the Right Holder”. In parallel, it would be appropriate to interpret the phrase “economic value of the patent” as used in the IP Code Article 133, as a value originating from a license voluntarily granted to use such patent. This is because, in principle, the IP Code Article 133 is not intended to confer less protection than the limits outlined in the TRIPS. On the other side, the phrase “economic value of a patent” refers to the remuneration to be paid to the right holder if the patent in question is subject to a contractual license.[1] Accordingly, contrary to expectations, the remuneration to be paid to the patent holder in the case of compulsory licensing shall not be lower than the “commercial” license value to which the patent holder becomes entitled if a license is granted under normal circumstances and competitive market conditions.

The only exception is the compulsory license granted for humanitarian aid purposes, as necessitated by public health problems in other countries, regulated under the TRIPS Article 31(f) and corresponding Article 129/1(ç) of the IP Code. It is explicitly stated by the legislator that the economic value of such use (license) in respect of the importing country “taking the non-commercial and humanitarian purposes into consideration” shall be taken as basis in determination of the remuneration to be paid for compulsory licenses, which shall be granted in referred cases. This explicit statement also indicates that the remuneration payable to the patent holder for compulsory licenses shall be in a “commercial” nature, namely for “profit”.

While there are no guiding regulations in the Turkish Law as to how the “adequate remuneration to be determined, considering the economic value of the patent” shall be calculated; in the international law, certain frames are attempted to be drawn as to how the remuneration payable for the compulsory license to be granted under the TRIPS Article 31(h), shall be determined by member states. Within this scope; it is seen that the “Tiered Royalty Method” which has been mentioned for the first time in the “Remuneration Guidelines for Non-Voluntary Use of a Patent on Medical Technologies”, published by the United Nations Development Program (“UNDP”) and the World Health Organization (“WHO”), is often cited by the World Trade Organization (“WTO”) as well.

The Remuneration Guidelines for Non-Voluntary Use of a Patent on Medical Technologies is a document drafted in 2005 to consider appropriate options for adequate remuneration of patent holders in cases of compulsory licensing for medicines, medical devices and all kinds of medical technologies. Referred Guidelines address contractual license experiences, often observed in the private sector, and underline that the compulsory license royalties should be calculated based on these experiences. Another finding from the Guidelines is that the average rate for the pharmaceutical sector is at 4-5%, even though the rates reported for different industries may greatly vary. Both the “Tiered Royalty Method” and other methods followed for setting the remuneration payable to the patent holder for compulsory licensing are referred in the Guidelines to reach this conclusion.

For instance, in the UNDP Evaluation Guidelines dated 2001, payment of a standard license royalty of 4% is suggested with a deviation rate of 2%, depending on the therapeutic value of the concerned product and the government’s contribution to the related R&D expenses. Regarding the government-owned patents[2], rates are given between 0% and 6% in the JPO Guidelines on Royalty Rates, released in 1998. In this model, rates vary depending on the profit which is expected to be obtained from the licensed product, the importance of the patented invention in respect of the final product, the amount of additional research required for the release of the invention into the market, the presence of public interest in the use of the patent, and the novelty of the product and other factors. Adaptation of this model for medicaments would mean considering certain other factors such as the extent to which relevant invention has benefited from the publicly funded research, therapeutic value of the invention and the requirement for fulfilling the needs concerning public health. The Canadian Guidelines for Exporting Health Products (2005), on the other side, sets the upper limit for license royalties as 4% within the scope of the regulations in the TRIPS Article 31(f) and then lowered this rate based on the rating of the importing country in the United Nations Human Development Index. All these approaches introduce a significant restriction, setting the license royalties based on the value of the generic products.

Tiered Royalty Method is different from the 2001/UNDP, 1998/JPO and 2005/Canadian methods in that the royalty rate is not based upon the price of the generic product. Instead, the royalty rate is based upon the price of the patented product in the high-income country. The base royalty is 4% of the high-income country price, which is adjusted to account for relative income per capita or, for countries facing a particularly high burden of disease, relative income per person with the disease. It is considered that this method can be implemented without extensive data or analytical resources. Therefore, it seems convenient for administrative purposes.

Providing transparency, predictability and ease of implementation lie behind the countries’ need to prepare and implement remuneration guidelines on compulsory licensing, without a doubt. Even though “Tiered Royalty Method” could establish a balance to a certain extent for fulfilling this need; it provides a royalty calculation method, which fully ignores the “legal” criterion mentioned in both TRIPS Article 31(h) and Article 133 of the IP Code, in respect of setting compulsory license remuneration, namely “economic value of the patent”. Therefore, a calculation to be made according to this method will carry the risk of providing rates that are non-compliant with the criteria introduced by TRIPS and IP Code.

In conclusion, if a compulsory license is issued in light of the applicable legal regulations of Turkish Law, the fundamental criterion to be taken into account in setting the remuneration payable to the patent holder shall be the economic value of the patent. According to the common view of the doctrine, the basic indicator for setting the economic value of a patent is the royalty rate which will be calculated based on the market value provided that the patent in question is subject to a contractual license.[3] Nevertheless, none of the methods covered in this article pays regard to this criterion. These calculation methods take the economic value of either a generic product or a patented product as a basis. On the other hand, the economic value of a patent (namely license) and the economic value of a patented product are not equal concepts, and they do not point at equal figures. Accordingly, for calculating a lawful and fair remuneration, a “compulsory license rate” should be determined according to individual requirements of each case in the light of the conditions requiring compulsory licensing, based on the remuneration payable to the patent holder should a contractual license be granted. The ultimate aim should be finding the balance between the inventor’s right to take economic advantage of the invention, encouraging the inventor to search for and to develop novel products, yielding such economic advantage, and the benefit to be obtained from the public’s access to such invention in a shorter period. The mechanism which would serve this aim in the truest sense of the word is the determination of the remuneration to be paid to the patent holder for a contractual license, as the compulsory license royalty. For this purpose, earlier license contracts executed for similar products or derived income or royalties payable for the same patent in different markets should be taken as basis.

[1] (Compulsory Licensing System Introduced by the Decree-Law on the Protection of Patent Rights No. 551, Arslan Kaya, page 361); (Dr. Ayşegül SEZGİN HUYSAL, Marmara University, Department of Commercial Law, Pharmaceutical Patent, Vedat Kitapçılık, Istanbul 2010, pages 238-239)
[2] Government-owned patents exist on inventions that have come from government-funded research.
[3] (551 Sayılı “Patent Haklarının Korunması Hakkında Kanun Hükmünde Kararname” ile Getirilen Zorunlu Lisans Sistemi, Arslan Kaya, page 361); (Dr. Ayşegül SEZGİN HUYSAL, Marmara University Department of Commercial Law, İlaç Patenti, Vedat Kitapçılık, İstanbul 2010, pages 238-239)

First published by IAM - International Report in Mar 31, 2022.

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