– Karan Dhalla*
Compulsory Licensing is a mechanism through which the State can force a patent-holder to grant a license for exploitation to a firm subject to certain conditions set by law. Article 31 of the Agreement on the Trade-Related Aspects of Intellectual Property Rights [‘TRIPs Agreement’] prescribes minimum conditions that must be incorporated by the Member States in their respective compulsory licensing legislations [elaborated later]. These conditions form the scaffolding of any compulsory licensing regime and the Member States are free to put forth extraneous conditions in so far as they do not breach the minimum conditions contained in the TRIPs Agreement.
One such controversial condition is the condition that the patent sought to be licensed is not being adequately worked locally [‘local working condition’]. Essentially, if the patent holder is not working the patented product or process in a particular jurisdiction then the State can interfere and grant a compulsory license to a local manufacturer. The effect is that the patent-holder must situate production facilities – either herself or by licensing local manufacturers – within the patent granting State. Proponents argue that local working conditions are necessary to actualize the theoretical benefits of free trade and achieve important public policy goals – ensuring technology transfer, increased employment opportunities, development of industrial capacity and human resource. Detractors criticize the condition as protectionism and claim that it introduces market distortions and forces patent holders to make sub-optimal economic decisions.
This conflict reached a boil when the United States instituted a complaint to the Dispute Settlement Body against Brazil assailing the local working condition in Brazilian Patent Law. The United States eventually withdrew their complaint with liberty to litigate the matter again. In the absence of DSB dictum, such conditions continue to be found in the patent law of some States. While realpolitik may dictate whether such conditions are imposed or not, the issue of these conditions’ consistency with the TRIPs Agreement is a legal question.
I argue that the local working condition is ultra vires the TRIPs Agreement. I shall first, outline the Indian framework to contextualise this discussion; second, argue that the blanket authorisation in Article 5A(2) of the Paris Convention is subject to Article 27.1 of the TRIPs Agreement and third, argue that the local working condition breaches the principle of non-discrimination in Article 27.1.
I. Background: The Indian Framework
The Rajgopal Ayyangar Committee Report on the revision of Patent Law 1959 outlines the need for local working. As noted in the Report, allowing foreign patent-holders to just enjoy an import monopoly would curtail the capacity of local manufacturers to import the cheapest and most accessible version of the patented product from a jurisdiction of their choice. This could lead to discriminatory, exorbitant prices in the Indian markets for there is ‘nothing to prevent a patentee from selling the same article at different prices in different markets based on local conditions as to demand, the availability of alternative products etc.’ The Committee considered the aforementioned gains of local manufacturing as essential to justify the privilege of a patent monopoly. This normative preference for the local working condition materialized in a recommendation to depart from the model legislation for the upcoming Indian Patent statute – the UK Act of 1949. S. 37(2)(a) of the UK Act allowed the Controller to grant a compulsory license if the invention – otherwise capable of local working – was not worked locally. Under this Section, the patent-holder only had the burden to show that local working would not be profitable in order to avoid a compulsory license.
The Committee observed that while this may be fit for an industrialized country like England, this caveat would effectively nullify the local working condition in underdeveloped India. Thus, the Report recommended the imposition of a strict local working condition. The effect is that local working condition in India is deliberately blind to the economic considerations that dictate the discretion to license or manufacture. Local working was designed to be virtually mandatory as a quid pro quo of the patent monopoly.
Based on this recommendation, S. 83 of the Patents Act 1970 prescribes that while exercising the powers of compulsory licensing, the authority must consider whether the patented inventions are sufficiently worked in India and that the patents are not ‘granted merely to enable patentees to enjoy a monopoly for the importation of the patented article’. The message is clear – Indian law may tolerate imports but proscribes against just an import monopoly unaccompanied by local manufacturing. As noted earlier, this local manufacturing may be direct or through a local licensee.
Section 84 allows compulsory licensing if any of these three conditions are met – first, the reasonable requirements of the public with respect to the invention have not been satisfied [S. 84(1)(a)]; second, the patented invention is not available to the public at a reasonably affordable price [S. 84(1)(b)] and third, the patented invention is not worked in India [S. 84(1)(c)].
S.84(7) outlines situations wherein the reasonable requirement of the public with respect to the patented invention will be deemed to have not been met. S. 84(7)(a) denotes that insufficient supply vis-à-vis demand or a refusal to license prejudicial to industry may justify a compulsory license in public interest. S. 84(7)(e) provides that if the local working in India on a commercial scale is prevented or hindered by importation, then a compulsory license is maintainable. The statutory policy is clear – importation of a patent is only tolerable as long as there is no hindrance to the local working and such hindrance – for economic reasons or otherwise – justifies a compulsory license.
The Bombay High Court in Bayer Corporation v/s Union of India., has accorded judicial sanction to this statutory policy. In this judgment, the Bombay High Court upheld the grant of a compulsory license for the drug Nexavar to Natco Pharmaceuticals. The Supreme Court dismissed the SLP against this judgment.
In Paragraph 15(b) of the judgment, the High Court noted, ‘Manufacture in all cases may not be necessary to establish working in India as held by the Tribunal. However, the patent holder would nevertheless have to satisfy the authorities under the Act as to why the patented invention was not being manufactured in India keeping in view Section 83 of the Act. This could be for diverse reasons but it would be for the patent holder to establish those reasons which makes it impossible/prohibitive for it to manufacture the patented drug in India.’ [emphasis supplied]
Correct or not, this judgment currently occupies the field. The effect is that local manufacturing is the norm and importing is the exception. The burden of proof is on the patent holder to justify her deviation from the norm. The next section shall observe the validity of this local working condition with India’s obligations under the TRIPs Agreement.
II. The TRIPs Agreement versus the Paris Convention
Article 31 of the TRIPs Agreement authorizes member nations to enact exceptions to absolute patent protection subject to minimum conditions including inter alia, good faith negotiation, judicial oversight and due compensation. Compulsory licensing regimes all over the world, are grounded in the authorization conferred by this Article. Article 31 accords discretion to the States to legislate the grounds on which a compulsory license may be granted as long as the grounds are consistent with the TRIPs Agreement.
The case assailing the legality of local manufacturing conditions is that the condition breaches the proscription against discrimination contained in Article 27.1 of the TRIPs Agreement. The operative part of Article 27.1 prescribes that ‘…patents shall be available for and patent rights enjoyable without discrimination as to the place of invention, the field of technology and whether patents are imported or locally produced.’ [emphasis supplied]
It must be noted that Article 27.1 speaks of general principles governing patent protection. It is not intuitive whether these principles apply to Articles 30 & 31 which govern exceptions to patent regime. However, in the Canada Pharmaceutical Case, the WTO Panel Report noted that Articles 30 & 31 of the TRIPs Agreement are subject to Article 27, which is an absolute clause. Some commentators have disagreed, yet the legal position in this regard appears to be settled.
The question, therefore, is whether local working conditions are hit by Article 27.1 of the TRIPs Agreement. The opposition to this claim is grounded in the application of Article 5A(2). Article 5A(2) of the Paris Convention affords great discretion to the States to legislate compulsory licensing measures to prevent patent abuse in some circumstances ‘for example, failure to work’. The argument is that the Paris Convention explicitly preserves the right of nations to enforce local working conditions for compulsory licensing in their compulsory licensing regime to prevent abuse of patent. Since Article 5A(2) has been incorporated into the TRIPs [more on this later], the imposition of uniform local working conditions can never be discriminatory and fall foul of Article 27.1 of the TRIPs Agreement.
In order to solve the interpretative conundrum, recourse must be had to Article 30 of the Vienna Convention on the Law of Treaties. Article 30 of the Vienna Convention on the Law of Treaties 1969 [‘VCLT’] lays down the principles for solving a conflict between successive treaties on the same subject matter. Article 30(2) prescribes that when a treaty specifies that it is subject to, or that it is not to be considered as incompatible with an earlier treaty, the provisions of the first treaty would prevail. In the absence of such direction, Article 30(3) is triggered and the earlier treaty only applies as long as it is compatible with the later treaty.
Article 2 of the TRIPs Agreement contains an important direction. This Article has two portions – Article 2.1 reads Articles 1-12 & 19 of the Paris Convention into Parts II-IV of the TRIPs Agreement. The effect is that even those States who are not parties to the Paris Convention have to consent to the application of Articles 1-12 & 19 once they ratify the TRIPs Agreement. Thus, disputes arising over the interpretation and application of Articles 1-12 & 19 are subject to the jurisdiction of the Dispute Settlement Body.
Article 2.2 subjects any obligation under Parts I-IV of the TRIPs Agreement to obligations under the Paris Convention. Any conflict between the obligations created by these Articles and the TRIPs Agreement would be decided in favor of the Paris Convention – following Article 30(2) of the VCLT. However, if the conflict does not concern obligations, then since the Paris Convention is an earlier treaty, the TRIPs Agreement would prevail – following Article 30(3). It is imperative to observe that the phrasing of Article 2.2 deliberately differs from the phrasing of the General Interpretative Note to the GATT. The operative part of the General Interpretative Note reads as such –
“In the event of conflict between a provision of the General Agreement on Tariffs and Trade 1994 and a provision of another agreement in Annex 1A to the Agreement Establishing the WTO … , the provision of the other agreement shall prevail to the extent of the conflict”. [emphasis supplied]
The effect of this part is that any right or obligation in a covered treaty would supersede conflicting obligations in the GATT. The deliberate departure in the language of Article 2.2 of the TRIPs Agreement clearly shows that the drafters intended to only allow the obligations – and not rights –in Article 1-12 & 19 of the Paris Convention to supersede contrary obligations in the TRIPs Agreement.
Therefore, the direction in Article 2.2 does not apply to Article 5A(2) because the Article does not create an obligation but codifies a right. Admittedly, the traditional formulation of rights – influenced by the works of Kelsen – argues that every right creates a corresponding obligation on another State. However, the premise behind such formulation has always been that the right is conferred against other States who, in turn, have the obligation to respect the right. Article 5A(2) does not fall into this category. This Article merely preserves inherent right of the member States to take measures to prevent failure to work. The effect of this right is within the sovereign domain of the enacting State and this right can be fully actualized without any other State respecting this right. As a result, this right, by its very nature, does not create a corresponding obligation on other States. Since there is no obligation per se, Article 5A (2) does not supersede competing clauses of the TRIPs Agreement through Article 2.2 of the TRIPs.
Since there is no supersession, Article 30(3) of the VCLT is applicable. As the discretion to apply local working conditions under Article 5A(2) of the earlier Paris Convention is not consistent with the non-discrimination obligation under Article 27.1 of the TRIPs Agreement, the former has to give way. So, even if Article 5A(2) originally allowed States to enact local working conditions, after the entry into force of the TRIPs Agreement, Article 5A(2) can no longer be interpreted as the source of that authorization.
In conclusion, the blanket prescription in Article 5A(2) of the Paris Convention has been circumscribed by Article 27.1 which now occupies the field. As a result, the States’ blanket discretion under Article 5A(2) to legislate over patent abuse is subject to the non-discriminatory provision in Article 27.1.
III. A Discriminatory Regime
It is prudent to highlight that mere differential treatment between imported products and locally manufactured products is not illegitimate discrimination. The WTO Panel in the Canada Pharmaceutical Case opined that discrimination refers to ‘results of the unjustified imposition of differentially disadvantageous treatment’. The local working condition undoubtedly differentiates between imported and manufactured patented products. The test is whether this differentiation is ‘disadvantageous’ and ‘unjustified’.
This is the simpler of the two. The local working condition is clearly disadvantageous to a foreigner holding a patent in India [‘foreign patent holder’]. Even a foreign patent holder that finds it more economical to meet the Indian demand at a reasonable price is exposed to coercive interference into her patent rights, from the Indian State. The foreign patent holder, thus, has to either invest in opening and operating a manufacturing plant in India or license someone irrespective of the economic worth. This inherently economic decision is in effect, blind to any and all economic considerations. Important factors such as the cost of setting up a manufacturing unit, sourcing raw material, developing the skill level of workers, and regulatory compliances must be completely disregarded by the patent holder if he wishes to protect her patent.
Although through licensing arrangements, a patent owner could outsource these concerns to a local licensee, who may operate local industrial plants, this may still be less efficient than simply importing the patented product, manufactured in the optimal jurisdiction and imported into India. Further, the threat of a compulsory license also creates an incentive for local entities to bargain for economically perverse terms – knowing full well that they may opt for a compulsory license if the patent holder does not succumb to their demands. This artificial distortion in the global supply chain is not merely, disadvantageous to a foreign patent holder but is also antithetical to the object and purpose of the TRIPS Agreement – the creation of a global free market with supply chains free from myopic sovereign interference.
The local working condition may be disadvantageous but is it unjustifiable? Many commentators have argued – mainly in the context of pharmaceuticals – that the condition is essential to ensure public health and the right to life to its citizens. The resultant gains of technology transfer and the leeway afforded for cheap importation– as initially articulated by the Ayyangar Committee – are touted as possible justification for the local working condition.
In my view, the local working condition is plainly unjustifiable. This condition applies across fields of technology so public health concerns cannot justify the blanket imposition of this condition outside the context of pharmaceuticals. However, even where the patent is integral to a public good and the product supply is insufficient – by design of the patent holder – to meet demand, then a compulsory license under Section 84(1)(a) may be justified. Additionally, this condition has nothing to do with the cost of the patented product. Where such cost is unreasonable, Section 84(1)(b) offers an independent ground for issuing a compulsory license. Thus, even in the case of essential pharmaceuticals, the concerns regarding adequate supply to the sick and reasonable cost are assuaged without recourse to the local working condition.
Further, the goal of technology transfer is adequately satisfied by the disclosure requirement in the Indian Patent regime. While applying for a patent, the patent holder must provide a clear blueprint of the invention to the patents office. This blueprint is publicly available to supplement derivative technological development. Local working condition is immaterial to this technological transfer. The condition may be relevant to transfer ‘know-how’ or practical skills required to manufacture the patent to the factory workers. However, educating the factory-workers is the domain of the Indian State. India cannot use its coercive power to force the patent-holder to compromise on legitimate economic interests just to endow Indian workers with requisite skill. The TRIPs Agreement, at no point, elevates the transfer of ‘know-how’ to an essential purpose behind the Agreement nor does it justify privileging developing know-how over the inherent discretion of the patent-holder to set up shop in the most economical setting. Know-how may be important but it simply cannot be balanced against the potential loss to the patent-holder due to the artificial distortion created through the local working condition.
In conclusion, the local working condition is a relic from protectionist India. It may certainly have its benefits but the Indian State has chosen to trade those benefits in favor of the gains obtained from integration into the free-market oriented WTO system. To hold onto the condition now, is ultra vires India’s obligation under Article 27 of the TRIPs Agreement.
* Karan is a final year student of law at the National Law School of India University, Bangalore.
 Agreement on Trade-Related Aspects of Intellectual Property Rights, (Apr. 15, 1994), Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, 1869 U.N.T.S. 299, 33 I.L.M. 1197 (1994), art 3 [hereinafter TRIPS Agreement].
 Althaf Marsoof, ‘Local Working of Patents: The Perspective of Developing Countries’ in Multi-Dimenional Approaches towards new technology (Springer, 2018) pages 315-337.
 Michael Halewood, ‘Regulating Patent Holders: Local Working Requirements and Compulsory Licenses at International Law’, 35 Osgoode Law Journal 243, 246 (1997).
 Elliot R., ‘US files WTO complaints against Brazil over requirement for “local working” of patents’, (2000) 5(4) Canada HIV AIDS Policy Law Review 28.
 Report on the Revision of the Patents Law by Shri Justice N. Rajagopala Ayyangar, (September 1959) paragraph 35. [Ayyangar Report]
 Ayyangar Report, paragraph 145.
  SCC OnLine Bom 963.
 WIPO Standing Committee on the Law of Patents, ‘Draft Reference Document on the Exception regarding Compulsory Licensing’ (21 May 2019) SCP/30/3 at para 9.
 WTO Panel Report, Canada – Patent Protection of Pharmaceutical Products, WTO Doc. WT/DS114/R (17 March 2000) at Para 7.93. [‘Canada Report’]
 Paul Champ and Amit Attaran, ‘Patent Rights and Local Working under the WTO TRIPs Agreement: An Analysis of the US – Brazil Patent Dispute’, (2002) 27(2) Yale Journal of International Law 365-393, at Page 386.
 Vienna Convention on the Law of Treaties, 1155 UNTS, vol. 331 (23 May 1969).
 See, Panel Report, European Communities—Regime for the Importation, Sale and Distribution of Bananas, Footnote 403, WT/DS27/R/USA (May 22, 1997).
 NP de Carvalho, The TRIPs Regime and Patent Rights (2010, Kluwer International) 139
 see, Bryan Mercurio and Mitali Tyagi, ‘Treaty Interpretation in WTO Dispute Settlement: The Outstanding Question of the Legality of Local Working Requirements’ (2010) 19(2) Minnesota Journal of International Law.
 Canada Report at Para 7.94.
 GB Reddy and Harunrashid Kadri, ‘Local Working of Patents–Law and Implementation in India’ (2013) 18 Journal of Intellectual Property Rights 15
 Srividya Raghavan and Prabha Sridevan, ‘Patents and Protecting Public Health’, The Hindu (New Delhi, 10 April 2018).