A compulsory license is an authorization which is granted by the government without the permission of the patent holder. Most countries have provisions for compulsory licenses, either under their patent law or, as in the US, through anti-trust legislation. Under the TRIPs Agreement, countries have the right to issue such licenses. While the Agreement does not limit the grounds - or reasons - for granting compulsory licenses, countries can only use those grounds which are allowed by their national legislation. The development of appropriate national legislation is therefore crucial. TRIPs further states that the conditions under which a compulsory license is granted should be regulated in accordance with the TRIPs Agreement (Article 31).


Grounds

Countries have specified many different grounds for issuing compulsory licenses; these can include public health reasons. Other grounds are for instance emergency situations, epidemics, public non-commercial use, to remedy anti-competitive practices or to protect the environment; it is entirely up to the national law to decide which are the grounds, so there is a lot of flexibility. The German law, for example, simply states that compulsory licensing is allowed ‘for reasons of public interest’; a broad description that can be used in many situations. Under US law, compulsory licenses can be issued to remedy anti-competitive practices and for use by the Federal Government; both these grounds are used extensively for issuing such licenses.

Conditions

A compulsory license limits the rights of the patent holder, but does not take those rights away. TRIPs therefore specifies the conditions that need to be applied when countries want to grant a compulsory license. An important condition is that each case shall be considered individually. Also, in general, efforts should first be made to obtain a license from the patent holder (a so-called voluntary license), on reasonable terms. What is considered ‘reasonable’ depends on national (case) law.

The conditions mentioned in TRIPs merit careful reading, and it is important to select carefully the wording when translating TRIPs into national legislation:
 

• Remuneration for the patent holder shall take into account (not “be equal to” or “be based on”) the economic value of the authorization. So if the contribution of a patent is minor, as for instance in case of a formulation patent, the royalty rate can be lower. Under US national law, compensation is based on what the patent holder has lost. In case of a CL to provide drugs to a population who would otherwise not be able to afford those drugs, it could be argued that the patent holder lost nothing.
   
• In case of public non-commercial use or government use, TRIPs does not require countries to provide for the right of injunction, only for payment of compensation. Again, this is important for the actual implementation of a CL for public use. This is practiced in the US; the US Government cannot be sued for infringement of a patent, it can only be sued about the amount of compensation paid. Under US law, the same applies to contractors acting on behalf of the US Government.
   
• A decision to issue a CL must be subject to review, but this does not have to be a judicial review; TRIPs only requires that the review is independent, so countries may opt for an administrative review, which is less burdensome and much faster. It seems advisable for developing countries to provide for an administrative review only, to prevent patent holders from blocking the use of a CL by initiating time-consuming court procedures.
   
• A compulsory license shall be predominantly for the supply of the domestic market. A CL therefore would hardly interfere with practices of differential or tiered pricing. However, “predominantly” is not exclusively, so some export is still possible. Public interest groups advocate that export to a market where a CL has been issued, should be allowed; otherwise, countries with small markets, where local production is not viable, would not be able to use CL provisions effectively.
   
• If a CL is issued to remedy anticompetitive practices, many of the conditions do not apply, such as the requirement to first try to obtain a voluntary license. Also, the restriction on export no longer applies; this is important for the US, which frequently issues compulsory licenses to remedy such practices.

Main function

At times, the fact that few such licenses have been granted is used as an argument against the compulsory license system. While it is true that in some countries, e.g. UK, few compulsory licenses have been issued, other countries, such as the US, have granted a large number of compulsory licenses. But regardless of whether or not they are used frequently, provisions for compulsory licensing are needed, because they will encourage the patent owner to behave correctly. They give a sign to the patent owner that in the case of abuse of rights and/or non-availability of the product, a third party could be allowed to use the invention; this prevents malpractice and misuse of the monopoly rights. In fact, one of the most important aspects of a compulsory license system is its impact on the actual behavior of the patent owner; therefore it is a necessary element in any IPR law. However, to ensure the system can be used effectively, it is important to carefully state the grounds and conditions for its use in the national legislation; these should include its use for reasons related to public health.