‘Working’ a Patent under the Indian Patent Act, 1970 – Does importation of a patented invention count?


In early January this year Sai had carried a post on a public notice issued by the Patent Office, under Section 146 of the Patents Act, requesting all patentees to furnish statements, by 31st of March, 2010, in the format prescribed by Form 27 on how their patents were being worked in India. Form 27 is available on the Patent Office website over here and requires the patentee to furnish the following information:

(i)Is the patent being worked in India?
(ii)If not then in that what are the reasons for not working it in India?
(iii)The quantum and value of sales of the patented article and most importantly whether the patentees are manufacturing the article in India or whether they are importing the product from foreign countries.
(iv) The licences and sub-licences granted for the manufacture of the patented article.
(v)A statement on whether public requirement has been adequately met to the fullest extent possible at a reasonable price.

While there have been pertinent questions raised in a guest post by Mr. Feroz Ali, on the need for the patent office to request for such information the greater apprehension amongst the pharmaceutical industry should be the fact that the first ever granted pharmaceutical patents are crossing the three-years limit, under Section 84 of the Indian Patents Act, thereby allowing for compulsory licensing provisions to be invoked by the domestic generic pharmaceutical industry. The information collected by the Patent Office will go a long way in helping generic pharmaceutical companies determining which patents are ‘ripe’ for compulsory licensing. Some leading generic pharmaceutical companies like Cipla have stated in no uncertain terms in their annual reports that all life-saving pharmaceutical patents should be automatically compulsory licensed for a suitable royalty. It can therefore be expected that they will file CL applications by the end of the year.

The relevance of ‘local working requirements’ in the compulsory licensing debate: The relevance of this debate on the local working requirements, is that most of big PhRMA’s manufacturing happens in its home countries, with very few of them having any local manufacturing capacity in India. Therefore if the Patents Act, 1970 is interpreted to require local working, all most all pharmaceutical patents granted to foreign manufacturers are liable for compulsory licensing. The main issues which need to be examined in this context are threefold and are as follows:

(i)Whether a ‘local working’ requirement is TRIPs compatible?
(ii)Whether the Indian Patent Act requires patents to be ‘locally worked’?
(iii)The economics of the international trade in pharmaceutical products and whether a ‘local working’ requirement would result in the lowest possible prices for the consumers?

(i) Whether a ‘local working’ requirement is TRIPs compatible?
At first glance TRIPs seems to provide a straight forward answer, to the question of ‘local working’, in Article 27.1. Although Article 27 is titled ‘Patentable Subject Matter’ it concludes by stating that patent rights will be enjoyed without discrimination as to whether a product is imported or produced locally. It would seem that this would obviate the need for a debate on the subject but things are seldom so simple when it comes to real life. An excellent article authored by Paul Champ & Amir Attaran which is published in the Yale Journal of International Law (YJIL) provides an in-depth look into the question of TRIPs compatibility. In the YJIL article the authors go through the entire negotiating history of the TRIPs agreement and point out how the same is inconclusive in establishing whether or not the member states actually wanted the insertion of a ‘local working requirement’. The authors then end the paper by examining the local working requirement from the perspective of Articles 30 & 31 of TRIPs and conclude that Articles 30 & 31 of TRIPs permit members states to maintain a ‘local working’ requirement. Articles 30 & 31 of TRIPs are the same provisions used by developing countries to defend the presence of compulsory licensing provisions in their intellectual property laws.
In the year 2000 the Dispute Settlement Body (DSB) of the WTO had a chance to clarify this question when the U.S.A filed a complaint against Brazil for having a local working requirement in its patent law. At that time India had joined the dispute as an interested party. Unfortunately for the U.S.A. it turned out that one of their legislation had a similar provision for local working of all federally funded innovations. As a result the U.S.A. beat a hasty retreat and withdrew from the dispute, reserving its right to re-start the litigation. The relevant WTO documents can be accessed here.

(ii) Whether the Indian Patent Act requires patents to be ‘locally worked’?
Section 84 (c) of the Patent Act states a compulsory license may be granted if the applicant can prove that the patentee has worked the patent invention in the territory of India. Although the Act is silent on the definition of ‘working’ it does lay down certain other provisions from which it can be determined as to whether or not local working is required:
The two provisions that touch on the topic of local working/importation are:

(i)Section 83 (b) [General principles applicable to working of patented inventions] that they [patents] are not granted merely to enable patentees to enjoy a monopoly for the importation of the patented article;

(ii)Section 84 (7)(e) [Defining when the Reasonable Requirements of the public are not met] if the working of the patented invention in the territory of India on a commercial scale is being prevented or hindered by the importation from abroad of the patented article.
The first provision i.e. S. 83 (b) is quite unique for an Indian legislation since it is clearing not binding and is more in the nature of a guiding principle. If the provision was meant to be binding Parliament would have drafted the language of the same to reflect the rigidity of the provision. Such non-binding, merely guiding principles of law are not entirely alien to Indian law. The Constitution of India has a set of Directive Principles of State Policy which lays out the socio-economic goals for the country but which are not binding and are therefore non-justiciable.

The second provision i.e. S. 84 (7)(e) is a sub-clause to the Section which defines the circumstances in which the law deems the reasonable requirements of the public to have not been met. According to this Section the reasonable requirement of the public are deemed to have not been met when the working of the patented invention in the territory of India on a commercial scale is being prevented or hindered by the importation from abroad of the patented article. My reading of this provision suggests that this provision will kick in only those circumstances when a CL applicant can establish that the sole reason for the inadequate availability of the patented invention within India is the fact that it is being imported i.e. to say the process of importation is in itself leading to the shortage of the patented invention in India. The process of importation could be impeded by a variety of reasons such as natural disasters, socio-economic reasons in the exporting country, political reasons such as sanctions imposed by a foreign country wherein the manufacturing plants of the patentee are situated. To very briefly summarize this point – Section 84(7)(e) will not kick in, in those cases where importation is not hindering the working of the patented invention in India either in terms of cost or availability. Instead S. 84(7)(e) will kick in only in those circumstances when the process of importation is preventing or hindering the working of the product within India in terms of cost or availability. The test therefore lies in whether or not, there lies a direct co-relation, between the cost/availability of the product and the fact that the same is imported. Therefore a pharmaceutical company which imports the patented product into India from Europe or the U.S.A. and sells the same in India cannot be held to have not met the reasonable requirements of the Indian public unless a CL applicant can prove that the process of importation is adversely affecting the working of the product in terms of either cost or availability.

(iii) The economics of the international trade in pharmaceutical products and whether a ‘local working’ requirement would result in the lowest possible prices for the consumers?

There is one basic economic concept that is relevant to the discussion on whether a ‘local working’ requirement is in the best interests of the consumers and that is the concept of ‘economies of scale’.
Economies of scale: This concept basically refers to the advantages that accrue to a business and the consumer if the business were to manufacture a product on a large scale. Basically a company achieves economies of scale when its per unit cost decreases for every extra unit manufactured. This usually happens due to the increase in manufacturing capacity which in turn facilitates the more efficient use of resources. To give a simple example – if a company were to manufacture 100 units of a product it would have to price each unit at a cost which would be higher than if it were to manufacture 1000 units in order to make similar profits.
Economies of scale applies in particular to the pharmaceutical industry. Take for example Cipla, which is one of India’s largest pharmaceutical companies. With a mere 8 manufacturing plants, located in India, Cipla is able to sell products worth Rs. 5000 crores (including exports of Rs.2743 crores to over 180 countries worldwide). It is presumable that foreign pharmaceutical companies which have already established their manufacturing plants in their home countries will be able to achieve similar economies of scale with their existing plants. To establish new plants in India just to meet local working requirement will disrupt the economies of scale that they are able to achieve through their present manufacturing plants. If in case these economies of scale were to be disrupted the cost per unit would escalate. In short a ‘local working requirement’ under the Patent Act would in fact lead to an increase in the cost of patent pharmaceutical products in India.

Conclusion: The local working requirements of the Indian Patent Act are therefore malleable to meet the conditions of the day. The suitability of using such a requirement to facilitate the transfer of technology to India is questionable. Ultimately transfer of technology depends on a whole range of factors and not simply a statutory requirement.

Prashant Reddy

Prashant Reddy

T. Prashant Reddy graduated from the National Law School of India University, Bangalore, with a B.A.LLB (Hons.) degree in 2008. He later graduated with a LLM degree (Law, Science & Technology) from the Stanford Law School in 2013. Prashant has worked with law firms in Delhi and in academia in India and Singapore. He is also co-author of the book Create, Copy, Disrupt: India's Intellectual Property Dilemmas (OUP).

14 comments.

  1. AvatarAnonymous

    Dear Mr. Reddy,

    Does this mean that the Ptaent Office asked for working of patent only for pharma products and working of patents is applicable only for pharma product. while filing Form 27 for our client we realised that format of Form 27 should be modified according to the field of invention. there should be different format for electronics, mechanical, chemical patents

    Reply
  2. AvatarRaag

    On the point of economies of scale, I can’t help but disagree. Two points:

    1. First, companies with production units outside India price their products keeping in mind the increased cost of production in that country as compared to India (I’m assuming production in India is substantially cheaper) and the cost of import/related expenditure. Even if these companies were, today, asked to set up shop in India, the production units would operate at a far cheaper variable and fixed starting cost (even without economies of scale). Indeed, even if production in India will be at a greater cost compared to the production centre in another country because of that centre’s economies of scale), such a difference would be marginal, considering India’s comparative advantage in terms of production cost.

    2. Second, even assuming that the new production units, if they were to be set up, in India were operating at a substantially higher operating cost – in time, these production units will, inevitably, benefit from economies of scale. Any increase in cost, as you refer to, will be a short term increase, at best. Further, the local production rule, if enforced, would mean that any company that sets up a production unit in the future, will have the sense to do so in India itself. Thus, future benefits accrue.

    Allowing companies to circumvent the local production rule on the basis of economies of scale, thus, seems highly problematic.

    Reply
  3. AvatarPrashant Reddy

    @Anon – The statements of working are required from all patentees. I had focussed exclusively on pharmaceutical patents as they are going to be the most controversial topic of discussion.

    Prashant

    Reply
  4. AvatarAnonymous

    Hi

    In my opinion, just by filing Form 27 a patentee cannot escape from CL issue. Filing of Form 27 has no connection with CL
    In the second line of para ii starting with Section 84(c)….should be “has not worked”

    Reply
  5. AvatarPrashant Reddy

    @Anon – I never said that a patentee can escape a CL liability by filing a Form 27. I just pointed out where the Form 27 requirement is going to lead this year for pharma companies. It provides the industry with enough information to determine which patents are eligible for CLs.

    Prashant

    Reply
  6. AvatarAnonymous

    The whole purpose of “locally worked” provision with respect to pharmaceuticals is a no-brainer. In India Economies of scale for a pharmaceutical drug are always less than those of US. Try looking up equivalent drugs marketed in india. You will find 50 companies producing drugs. I have a copy of an RX list publication and I am looking at flucanazole an anit-fungal and there are at least 15 companies manufacturing the drug.

    I will hazard a guess that some of these operate out of small factories in mumbai or pune. The economic argument of scale is an American one and hardly if ever is applicable in India. You just walk into any US pharmacy and you will realize that “economics of scale” dictates that even off patent drugs are sold at $20 and $30 per course. Economics of scale might be valid for not producing in country with a population of just under 300 million and not for a country with a population of a billion plus. Also this economics of scale business hardly matters when you have a PPP of 1:5 for products produced locally. So if you argue that economically it is cheaper product all things in US and export the same to us. at 5 times the cost. Just look at the cost of apple computers in India. This is what you are looking to do with pharmaceuticals and the economics of scale argument.

    However I think your “economic” argument might hold right in the case of products like fabrication units. Even in that case there is a sound policy argument to keep insisting on “locally worked”. Get fab units set up in India in the long run. If patents are held to be “not locally worked” in the long run Fab units will be set up in India since they are impossible to operate in other countries without violating the “IP rights” which are only being used to protect pure “imports”.

    Given the policy argument and the “economics of scale” rarely if ever is valid in India I think the act as it exists on the book is good.

    Reply
  7. AvatarAnonymous

    I fail to understand how the US’ retreat because they themselves violate the TRIPs’ Agreement in case of federally-funded innovations, could have any relevance for the question whether the Indian local working requirement is TRIPs-compatible.

    Of course, the requirement of Article 27 TRIPs Agreement (no discrimination as to whether a product is imported or locally manufactured) must be read in context: in case of abuse of the patent in that the Indian market demands for the patented product are insufficiently satisfied by import (too few products are being imported to satisfy the local needs for the product), India may use Article 31 TRIPs Agreement to grant compulsory licenses to fill the gap between demand and supply.

    Reply
  8. AvatarYogi

    Hi Prashant,
    Great post! The compatibility of this requirement has been one of the most contentious issues since Paris revision, and now, the TRIPS Agreement. I just wanted to add something more fundamental to the issue of requirement of “local working”- at a conceptual level, though. None would disagree with positive nature of local working requirement that would expect of a patentee to do a particular Act. This for sure in some sense is inconsistent with section 48, which provides for a negative set of rights. This is confirmed by the Bayer (Del. DB) judgment. The local working requirement has its origin in the principle of “abuse of patents”- originally based on the UK law. If patent law does not confer a right to use (work) an invention, it can be logically argued that the patent law in itself cannot provide for something that is positively expected out of a patentee (to work). So does the negative nature of rights run inconsistent with this requirement? Should it be then within the domain of competition law to ascertain if by virtue of non-local working, the patentee has abused the dominance? And naturally, the difference of limiting this to competition law would require establishing a market power, which is not clearly the requirement under sec. 84 of the Patents Act.
    However, we all understand the public interest nature of this provision and also that effect must be given to all parts of the statute. I am all for having this requirement as a matter of policy, notwithstanding the difficulty in legally and conceptually justifying the same. I think a possible answer would lie is the nature of wording in section 48 itself, which states “Subject to the other provisions contained in this Act”, notwithstanding the negative wording in 48(a) and (b). Does this mean that section 84 is placed on a higher pedestal than section 48?

    Reply
  9. AvatarPrashant Reddy

    @ Anon (4:37) – Who ever said anything about the US ‘retreat’ helping India? I only said that the DSB lost a chance to clarify the law because the U.S. withdrew from the litigation.

    Reply
  10. AvatarPrashant Reddy

    @ Raag: Excellent observations on both counts!!!!

    Firstly, I would like to reiterate that my hypothesis was in regards only patented drugs and not off-patent drugs.

    Secondly, if your presumption that, production in India was indeed substantially cheaper than any other country, is true, then in that case, wouldn’t a rational economic being, automatically outsource production to India? In that case there would not be any opposition to a local working provision would there? Clearly there appear to be other locations (China?) which are cheaper manufacturing grounds than India.

    Thirdly your presumption that an Indian plant would achieve economies of scale will in itself have to be based on the presumption that the foreign manufacturer would shut down all other foreign plants and concentrate production in India. It is a moot point on whether foreign companies would want to shut down production plants which they have been running in another country for decades together since they would lose substantial investments both in the terms of productions units but also technical expertise. In any case the costs of shutting down foreign production plants and commissioning new plants in India is bound to cause a spurt in the expenditure of the company which they will seek to recover through increased prices. It is impossible to say for how long these increased prices will last. It will often depend on the nature of the drug portfolio of the company and the disease profile of the Indian market. It is however no dispute that there will be an increase in the price rise for Indian consumers for atleast a limited term. A price rise which could otherwise be avoided.

    Reply
  11. AvatarAaradhana

    Thank you Prashant for this post. It was very helpful. I personally think compulsory licences can do the trick and the requirement of “working of invention” should just be dissolved. It adds to administrative tasks which do not add much.

    Reply
  12. AvatarJ. Sai Deepak

    Hi Yogi,
    That’s a very interesting comment and this question has never occurred to me. It does call for a detailed analysis, for now i agree with your point on treatment of CL mechanism as falling within the realm of competition law. I would like to give this some more thought before I give a more comprehensive comment.

    Bests,
    Sai.

    Reply
  13. AvatarPrashant Reddy

    Hey Yogi – Long time!

    That is a very, very pertinent observation. I have never seen the provision from that perspective. I for one, am all for deleting the public interest provision and instead re-drafting the provision to require the problem to be solved from a pure competition law perspective which would include ‘the abuse of dominant position.’

    Prashant

    Reply

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