The EU’s proposal on compulsory licensing regulation

In EU member states (MS), if an IP right is an obstacle against handling a crisis, it may be tackled by a so-called compulsory licence (CL). The CL forces a rights holder to let another entity use its technology. However, it is a last resort option, only available if a voluntary agreement proves impossible.

The nature of the CL stems from the principles set out in TRIPS, which aim to preserve the balance between incentives for innovation and the ability to ensure swift access to critical technologies in crises.

However, with some exceptions, CLs only serve the needs of the domestic markets because they are presently only available on a national basis; whereas many of today’s crises, such as COVID-19, are cross-border. Hence, on 27 April 2023 the Commission published its proposal for a regulation on EU-wide compulsory licensing for crisis management.

An EU tool

The proposal addresses cross-border crises within the EU, so it leaves the national CL systems untouched (subject to MS obligations to report on their national CLs), but proposes a “Union CL”, which would only be available if a crisis mode or an emergency mode is activated under one of the EU instruments listed in the annex to the proposal; i.e.:

1. Regulation (EU) 2022/2371 on serious cross-border threats to health,
2. Regulation (EU) 2022/2372 on a framework of measures for ensuring the supply of crisis-relevant medical countermeasures in the event of a public health emergency at Union level,
3. Regulation (EU) 2017/1938 concerning measures to safeguard the security of gas supply,
4. draft Regulation on Single Market Emergency Instrument, and
5. draft “Chips Act”.

Scope of the CL 

The EU CL may cover patents (i.e., national patents and European patents, including European Patents with unitary effect), but also published patent applications, utility models, and SPCs.

Moreover, as an IP licence can sometimes prove insufficient for manufacturing or offering certain “crisis-relevant products” due to regulatory data protection (especially under pharmaceutical laws), the proposal refers to the draft of a directive on the EU code relating to medicinal products for human use. This draft directive provides for the suspension of data exclusivity and market protection when a CL is issued to tackle a public health crisis.

Procedure

According to the proposal, the Commission would be solely authorised to grant CLs. But when considering granting a CL, it will have to consult one of the competent advisory bodies (listed in the annex to the regulation, or if needed, an ad hoc advisory body), that will advise on, inter alia, crisis-relevant information and identification of the relevant IP rights.

The Commission must also give the rights holder and the licensees a chance to comment on the options of a voluntary agreement, the need to grant the CL and its intended conditions, including the remuneration. The CL may only be granted once the relevant factors are considered.

The contents of the CL

According to the proposal, the CL must specify:

• the respective right (patent, patent application, SPC or utility model), but the non-proprietary name of the products may suffice if identification of the specific right would significantly delay the granting of the CL,
• the right holder (unless in cannot be identified with reasonable efforts given the urgency of the situation),
• the licensee,
• the duration of the CL, as well as
• the crisis-relevant product to be manufactured under the CL.

Licence fees

The CL will also have to indicate the remuneration of the rights holder (only exceptionally may it be specified after the grant). The remuneration should be adequate and determined considering criteria, such as the economic value of the licensed activities, public support granted to develop the invention, amortisation of development costs, and where relevant, the humanitarian aspects of granting the CL (not further explained in the proposal).

In any case, however, the remuneration is not to exceed 4% of the total gross revenue generated by the licensee under the CL.

The parties’ obligations

Given that a CL is an exception to the general principle of freedom to/not to contract, the licensee’s rights will be strictly limited. Only permitted activities relevant to the supply of crisis-relevant products in the EU market may  be carried out, and only to the extent necessary.

The products manufactured must also be clearly marked as made under the CL, and should also be distinguishable from the products of the rights holder.

In addition, the proposal strictly forbids exports of such products outside the EU, noting that this CL framework is aimed solely at meeting EU market needs. The proposal even covers specific rules on involving the custom authorities to enforce this ban. 

However, the proposal also imposes some obligations on the rights holders. Not only will they have to respect the grant of CL, but also ensure their best efforts to fulfil, in good faith, the objective of the CL. The question is of course: Do rights holders have any incentive to do anything more than just endure the CL?

Fines and penalty payments

Well, there is at least one such “incentive”. If the regulation is enacted, the Commission will have the right to impose fines on rights holders (and the licensees), if they fail to comply with the principle of good faith and cooperation.

The licensee may also be fined if it fails to comply with its obligations (e.g. by exceeding the scope of the CL, or failure to pay the remuneration). Further, both parties may by sanctioned for the failure to meet the additional measures specified by the Commission in the CL, but the fines may not exceed 6% of the respective party’s total turnover in the preceding year.

In addition, most of the violations may also result in periodic penalty payments of up to 5% of the parties’ respective average daily turnover in the preceding year.

What about know-how and other IP rights?

An unambiguous and fairly broad definition of the CL’s scope, such that it also covers SPCs and patent applications, is no doubt an advantage of the proposal to licensees. At the same time, however, there is still a question of whether other IP rights are covered, including:

•  industrial designs, which may include, e.g., graphical interfaces, medical devices;
• know-how; and
• trade secrets.

Attempts of technology transfers during the COVID-19 pandemic, especially to less developed markets, showed that  IPRs (especially patents) are not the only barrier to the production, import or sale of products (such as vaccines). The biggest challenge was in fact the lack of appropriate know-how on the part of potential users of technology. For example, licensing a patent to a molecule will be useless if a licensee does not know how to manufacture, store or use it (because these activities are the protected know-how of the rights holder).

The proposal only partially addresses this problem. Under its art. 5.1(f), a CL can only be granted to a person “deemed to be in a position to exploit the protected invention”, meaning if the potential licensees don’t already have the requisite knowledge to exploit the invention, a CL cannot be granted.

Under the proposal, the Commission may also take additional measures to ensure the CL meets its objective. Such additional measures may include requesting further information which is deemed indispensable to achieve these objectives (but subject to adequate safeguards to ensure the protection of the legitimate interests of all parties).

However, it is not clear whether this means that the Commission may also require the rights holder to disclose and provide the licensee with the rights holder’s protected trade secrets. If so, it will certainly pose a very serious threat to the interests of rights holders. Thus, the question will arise as to whether it is at all possible to provide the licensee (often a competitor of a rights holder) with all relevant information without compromising the rights holder’s interests, and what safeguards should by applied.

Will it all work?

During the COVID-19 pandemic, actual cases of relying on a CL in MS were extremely rare. One of the fundamental problems is the question of when the voluntary agreements can be considered “not available or appropriate” to trigger the CL procedure. This includes questions about the actual efforts made by the parties, terms proposed during “voluntary” negotiations, and other relevant factors, which are often very fiercely disputed by the parties. Of course, this also makes the whole process much longer (sometimes even beyond the actual state of the crisis).

Fierce debate will most certainly also take place in connection with the application of the proposed regulation. However, as we are currently still dealing with a draft regulation, modifications can be expected. Therefore, it is worth closely following the legislative process and hoping some measures are implemented well beyond the next crisis.