Grounds for granting a compulsory licence

Reasonable requirements of the public

27.24 Section 133 of the Patents Act provides that a person may apply to a prescribed court for a compulsory licence three years after the grant of a patent where the ‘reasonable requirements of the public’ with respect to the patented invention have not been satisfied; and the patent holder has not given a satisfactory reason for failing to exploit the patent.^[34]

27.25 Section 135 sets out the circumstances in which the ‘reasonable requirements of the public’ will be deemed not to have been satisfied. This section appears to cover many circumstances in which an applicant might seek compulsory access to a patented genetic invention. For example, where a patent holder refuses to license a research tool on reasonable terms, a researcher or research organisation could apply for a compulsory licence on the basis that the demand in Australia for that tool is not being reasonably met.

27.26 The Patents Act does not provide any guidance regarding what would be considered a ‘satisfactory reason for failing to exploit the patent’. This would be a matter for the court to determine.

27.27 In practice, few applications have been made for a compulsory licence. IPAC suggested that this might be due to the formulation of the ‘reasonable requirements of the public’ test and the broad discretion granted to a court in applying it:

It is something of an enigma that, despite the apparent number of situations in which the compulsory licensing provisions could be invoked, only 2 cases of petitions for compulsory licences are known to have gone to court in Australia. One reason for this might be that in fact the provisions in question are ineffectual; that persons who would be prospective applicants for compulsory licences perceive, and are advised, that the grounds are so hedged with qualifications, discretion on the part of the court, difficulties of proof, and expense, that to petition would be too onerous or useless.^[35]

27.28 Several commentators have noted the lack of clarity in the ‘reasonable requirements of the public’ test.^[36] The compulsory licensing provisions have received little judicial consideration.^[37] In Fastening Supplies Pty Ltd v Olin Mathieson Chemical Corporation, Menzies J interpreted similar provisions in the Patents Act 1952 (Cth) as follows:

The demand for the patented article has not been reasonably met if the Court should be satisfied that, because of its superiority over articles already on the market, potential purchasers would have bought it had it been available. A market for a less efficient article indicates, other things being equal, a market for a more efficient article.^[38]

27.29 In that case, the High Court declined to grant a compulsory licence on the basis that, while the reasonable requirements of the public had not been satisfied at the date of the application, they had been satisfied by the date of the hearing.^[39]

27.30 Dr Charles Lawson commented that the present s 135 is framed more broadly than the provisions in the 1952 Act, and consequently could be interpreted differently. In his view, the terms ‘trade’, ‘unfairly prejudiced’, ‘reasonable terms’ and ‘reasonable extent’ may be interpreted in a way that promotes competition principles.^[40]

27.31 Dr Dianne Nicol and Jane Nielsen have expressed concern about the lack of judicial guidance on what constitutes the ‘reasonable requirements of the public’, and the means of assessing the remuneration that must be paid for a compulsory licence. They suggested that the circumstances in which an application for a compulsory licence can be made should be clarified.^[41]

27.32 DP 68 asked whether the Commonwealth should amend the Patents Act to clarify the test for the grant of a compulsory licence. The ALRC suggested two possible models for reform: (a) clarifying the circumstances in which the ‘reasonable requirements of the public’ with respect to a patented invention have not been satisfied; or (b) specifying that s 135 is not an exhaustive list of the circumstances in which the ‘reasonable requirements of the public’ have not been satisfied.^[42]

27.33 Many submissions supported clarifying the ‘reasonable requirements of the public’ test in some way.^[43] The Department of Health and Ageing also suggested the need to clarify the requirement that the patent holder has given ‘no satisfactory reason’ for failing to exploit the patent.^[44]

27.34 Several of these submissions supported clarification by amending the Patents Act to more clearly define the circumstances in which the reasonable requirements of the public have not been satisfied.^[45] In particular, the Department of Health and Ageing suggested that the test should specifically cover the availability and pricing of patented goods or services, and include a reference to supply of the product or service on reasonable terms, unqualified by any other conditions.^[46]

27.35 By contrast, most of the submissions that supported amendment of the compulsory licensing provisions considered that the best approach would be to specify that the circumstances listed in s 135 are not exhaustive.^[47] Submissions suggested that the test should be drafted to allow for maximum flexibility in determining what are the ‘reasonable requirements of the public’ with respect to a patented invention.^[48]

27.36 The Centre for Law and Genetics noted the difficulty involved in specifying with any precision the circumstances in which the test will be met. At the same time, it commented that ‘stating that s 135 is not an exhaustive list is sure to give rise to interpretational difficulties, as the bounds of the test will become increasingly unclear’. The Centre concluded that it would be preferable to attempt to clarify the circumstances in which the test will be satisfied, ‘paying close attention to the grounds in other jurisdictions’ legislation’.^[49]

27.37 On the other hand, several submissions argued that there is no demonstrated need for clarification of the ‘reasonable requirements of the public’ test.^[50] For example, IP Australia commented that it is not aware of any evidence that a lack of clarity has limited the use of compulsory licences.^[51] The Queensland Government suggested that clarifying the test ‘may complicate rather than simplify the operation of the compulsory licensing provisions’.^[52] GlaxoSmithKline noted that compulsory licences are rarely, if ever, granted in other jurisdictions except as a remedy for a breach of competition law. In its view, the likely reason for this is that the patent system does not give rise to problems that would necessitate the grant of a compulsory licence.^[53]

Anti-competitive conduct

27.38 Chapter 24 discusses the application of competition law to intellectual property rights over genetic materials and technologies. Given the unique nature of many biotechnology inventions, and hence their possible lack of substitutability, the anti-competitive exploitation of a patent could have significant implications for downstream research or access to certain healthcare services.

Existing provisions

27.39 The Patents Act does not make specific provision for the grant of a compulsory licence as a remedy for anti-competitive conduct. In some circumstances, the ‘reasonable requirements of the public’ test may permit the grant of a compulsory licence on competition grounds. For example, where the patent holder of an upstream genetic research tool refuses to grant a licence on reasonable terms, and this unfairly prejudices a trade or industry, a court may find that the reasonable requirements of the public have not been satisfied. However, it is not clear whether this test would address all anti-competitive conduct.

27.40 The Trade Practices Act 1974 (Cth) (TPA) also appears to permit the grant of a compulsory licence as a remedy for anti-competitive conduct. As discussed in Chapter 24, Part IV of the TPA prohibits certain anti-competitive conduct, including the misuse of substantial market power.^[54] Where a court finds a breach of Part IV, and that a party to the proceedings has suffered, or is likely to suffer, loss or damage as a result of the breach, the court may make such order as it thinks ‘appropriate’ to compensate the party for the loss or damage, or to prevent or reduce the loss or damage.^[55] This may provide scope for the grant of a compulsory licence over a patented invention.

27.41 However, many dealings in intellectual property rights are likely to fall outside the scope of the TPA, due to the statutory exemption from certain provisions of Part IV for licence and assignment conditions that relate to the subject matter of intellectual property rights; and the practical difficulty of establishing ‘misuse of market power’ within the meaning of the TPA.^[56]

Proposed test

27.42 In its report, Review of Intellectual Property Legislation under the Competition Principles Agreement, the Intellectual Property and Competition Review Committee (IPCRC) concluded that there would be merit in providing for third party access to intellectual property rights in a similar way to that provided for other services under Parts IIIA and XIC of the TPA.^[57] However, it considered that this objective would be best served by reviewing and, where appropriate, amending the relevant provisions in the intellectual property statutes.^[58]

27.43 Accordingly, the IPCRC recommended that the existing ‘reasonable requirements of the public’ test in the Patents Act be replaced with a competition-based test that would contain the following conditions:

• access to the patented invention is required for competition in the (relevant) market;

• there is a public interest in enhanced competition in that market;

• the reasonable requirements for such access have not been met;

• the order will have the effect of allowing these reasonable requirements to be better met; and

• the order will not compromise the legitimate interests of the patent holder, including the patent holder’s right to share in the return society obtains from the owner’s invention, and to benefit from any successive invention, made within the patent term, that relies on the patent.^[59]

27.44 The IPCRC suggested that the conditions for granting a compulsory licence should be stringent. The term ‘required for competition in the (relevant) market’ should mean that there is no other option for competition in that market, and that the enhancement of competition that would be secured by the grant of the licence would have to be material and substantial.^[60]

27.45 The Australian Government accepted the IPCRC’s recommendation in part. The Government response noted that the IPCRC’s test could be more stringent in some circumstances than the existing test for a compulsory licence. For example, the proposed test would not cover some situations where the non-working of an invention, or other effective denial of reasonable access to it, has a negative effect on the public interest. Accordingly, the Government stated that it would adopt the competition-based test in addition to—rather than instead of—the existing ‘reasonable requirements of the public’ test.^[61]

27.46 The Australian Government has not yet implemented the competition-based test recommended by the IPCRC. DP 68 proposed that the Commonwealth should amend the Patents Act to insert the test as an additional ground for the grant of a compulsory licence. The ALRC also proposed that an independent review of the operation of the compulsory licensing provisions in addressing the competition concerns relating to patented inventions be conducted within five years.^[62]

27.47 Many submissions supported this proposal.^[63] The Centre for Law and Genetics commented that there is a risk of anti-competitive conduct in relation to gene patents. It noted that a particular issue for the biotechnology industry might be the misuse of market power through the defensive use of patents by oligopolies to create a barrier to entry for non-oligopoly members. It stated that many compulsory licences have been issued in the United States to remedy anti-competitive conduct.^[64]

27.48 A few submissions opposed the proposal on the basis that there is no demonstrated problem with the existing provisions and therefore no need to amend them.^[65] The Queensland Government suggested that the Advisory Council on Intellectual Property (ACIP) could review the necessity for the proposed test.^[66]

27.49 Ian Turnbull stated that the compulsory licensing provisions would not be invoked, even if they were amended, because ‘they are contrary to the culture of traditional science’. This culture, he submitted, is based on free communication of results, peer review, and the need for recognition of hard won success. Compulsory licensing is ‘inherently confrontational’, and the prospect of applying to a court for access to a DNA fragment from a colleague would be abhorrent to many researchers.^[67]

27.50 IP Australia suggested that, as there has been very limited use of the compulsory licensing provisions, and there is no indication that their use will increase significantly in the future, review of any amended provision after five years might not produce any meaningful results.^[68]

ALRC’s views

27.51 The ALRC recommends that the Commonwealth should amend the Patents Act to insert the IPCRC’s competition-based test as an additional ground for the grant of a compulsory licence.

27.52 This test would address those circumstances in which there is a public interest in enhanced competition in a market, and the patent holder has not met reasonable requirements for access to the patented invention. The test has the potential to enliven the compulsory licensing provisions in the legislation. As the IPCRC noted, such a test would complement the national access regime provided under the TPA for the services of facilities of national significance. The Australian Government has already indicated its intention to implement the IPCRC test, which was supported by many submissions.

27.53 DP 68 proposed a subsequent independent review of the operation of the compulsory licensing provisions in addressing the competition concerns relating to patented inventions. While there was some support for such a review, the ALRC considers that the proposed period of five years may not provide sufficient opportunity to assess their use in practice. Instead, the ALRC suggests that the Australian Government keep the option of a future review under consideration. Such a review could consider the operation of the compulsory licensing provisions generally, once the competition-based test has been introduced and, perhaps, applied by the courts. Such a review could also consider the potential interaction between the court’s scope to grant a compulsory licence as a remedy for anti-competitive conduct under Part IV of the TPA, and under the compulsory licensing provisions of the Patents Act.

27.54 The ALRC supports the retention of the ‘reasonable requirements of the public’ test to address other public interest grounds for granting a compulsory licence. The ALRC agrees with the Australian Government that there may be circumstances where the non-working of a patented invention—or other effective denial of reasonable access to it—would have a negative effect on the public interest. For example, the reasonable requirements of the public might not be satisfied where a patent holder’s monopoly control of its patented medical genetic test has had an injurious effect on the development of skills within the Australian healthcare sector.

27.55 The ALRC considers that there would be benefit in clarifying the existing test for several reasons. First, the ALRC considers that the existing lack of clarity in the ‘reasonable requirements of the public’ test may be one reason why few compulsory licences have been sought, or granted, under the Patents Act.

27.56 Most of the submissions in response to DP 68 supported clarification of the existing test, but were divided as to the best way to approach it. Generally, there was greater support for an approach that retains the ‘reasonable requirements of the public’ test, but specifies that s 135 of the Patents Act is not exhaustive of the circumstances in which these requirements will not have been satisfied. However, the Centre for Law and Genetics considered that this approach would provide even greater uncertainty, as the bounds of the test would become increasingly unclear.

27.57 The ALRC considers that the scope of the existing test should be clarified in a way that provides greater guidance to those seeking compulsory licences, yet also retains the flexibility necessary to respond to new public interest concerns as they arise. One way to ensure the flexibility of the test would be to amend the Patents Act to provide that s 135 is not exhaustive. However, in the absence of judicial interpretation this approach could create even more uncertainty. Therefore, the ALRC considers that it would be more appropriate to clarify the circumstances in which the reasonable requirements of the public with respect to a patented invention are to be taken not to have been satisfied.

27.58 Once the competition-based test is implemented, the Patents Act will have two potentially overlapping grounds upon which a compulsory licence could be granted. Therefore, it may be necessary to clarify the scope of each test in so far as they apply to competition-based grounds for granting a compulsory licence. Such clarification could benefit both applicants for compulsory licences, and the courts in applying these tests.

27.59 The ALRC considers that the introduction of the competition-based test provides a good opportunity to clarify both the scope of the ‘reasonable requirements of the public’ test itself, and its relationship with the competition-based test. Accordingly, the ALRC also recommends that the Commonwealth should amend the Patents Act to clarify the scope of the ‘reasonable requirements of the public’ test.