United States: Trends in Compulsory Licenses in Greater China

Originally published in IP Law 360, August 16, 2006

Greater China, including mainland China and Taiwan, has long been eyed for its opportunities to reach an almost untouched billion person consumer base. Not surprisingly, a number of U.S. and multinational companies have entered the Greater China market. Those already in the market and those considering entering the Greater China market should be aware that intellectual property protection in those markets has a number of fundamental differences with protection of intellectual property rights in the United States. One such difference is the patentee’s right to exclude others from practicing a patented invention. Chinese and Taiwanese patent laws approach compulsory license laws differently from the United States, which tends to focus on patent misuse and antitrust laws.

I. What is a Compulsory License?

A compulsory license allows a non-patentee to practice a patent without authorization of a patentee. Member nations of the World Trade Organization have agreed that if they implement laws concerning compulsory licenses, such laws will be consistent with Article 31 of the Trade-Related Aspects of Intellectual Property Rights ("TRIPS") Agreement. Article 31 provides that if a member nation’s laws allow for the use of a patent without the authorization of the patent holder, including use by the government or third parties authorized by the government, the provisions governing such a compulsory license should include that: (i) prior to the grant of a compulsory license, the proposed user made efforts to obtain authorization from the patent holder on "reasonable commercial terms and conditions" and that such efforts were not successful within a "reasonable period of time"; (ii) if a national emergency arises, the requirement to make an effort to license the patent prior to obtaining a compulsory license may be waived; (iii) any compulsory license is not exclusive; (iv) a compulsory license is not assignable; (v) authorization of use will be limited to predominantly supplying the domestic market; and (vi) a patent holder will be paid "adequate remuneration." (http://www.wto.org/english/tratop_e/trips_e/t_agm3_e.htm).

The WTO has 149 members including the United States, mainland China, which joined in December 2001, and Taiwan, which acceded in January 2002. Although the United States has not opted to implement any laws permitting compulsory licenses, both mainland China and Taiwan have.

II. Mainland China’s Compulsory License Law

In mainland China, the Patent Law expressly authorizes the use of compulsory licenses. http://www.sipo.gov.cn/sipo_English/flfg/zlflfg/t20020327_33872.htm (Patent Law of the People's Republic of China). Similar to Article 31 of the TRIPS Agreement, mainland China requires that an applicant for a compulsory license must have requested authorization from the patentee to exploit the patent on reasonable terms and conditions and that such efforts were not successful after a reasonable period of time. In addition, if a national emergency arises, the Chinese government can grant a compulsory license. Adding a provision that does not stem from Article 31, China allows a compulsory license to be granted to practice "an important technical advance of considerable economic significance in relation to another invention or utility model for which a patent right has been granted earlier and the exploitation of the later invention or utility model depends on the exploitation of the earlier invention or utility model." Id.

To date, there have not been any published reports of a compulsory license granted to practice a non-Chinese corporation’s patent.

III. Taiwan’s Compulsory License Law

Taiwan’s Patent Act, like Article 31 of TRIPS, also allows for the grant of a compulsory license in the case of an applicant having failed to reach a licensing agreement with the patentee under reasonable commercial terms and conditions within a considerable time period, a national emergency, or a non-profit-seeking use of a patent for the enhancement of public welfare.(http://law.moj.gov.tw/Eng/Fnews/FnewsContent.asp?msgid=430&msgType=en&keyword) The scope of the compulsory license must be limited to satisfying the requirements of the domestic market. In addition, the compulsory licensee is required to pay the patentee "appropriate" compensation. Taiwan’s Patent Act also provides that a compulsory license may be granted without satisfying the requirements for a prior failed negotiations or a national emergency if the patentee has committed unfair competition, which under Taiwanese law includes violating antitrust law.

Recently, Taiwan granted two compulsory licenses—one covering an antiviral treatment for avian influenza and another covering the production of compact disk technology.

IV. Taiwan Grants a Compulsory License Covering Tamiflu Treatments for Avian Influenza

Roche Holding AG and Gilead Sciences own a Taiwanese patent covering the use of Tamiflu (oseltamivir) which had been shown to have an effect on treating influenza. Due to recent concerns over a possible avian influenza pandemic, the Taiwan Department of Health (TDOH) examined whether it had a sufficient stockpile of influenza treatments in case of an outbreak. In particular, Taiwanese official were concerned a large number of business travelers coming through Taiwan also went through countries with reported cases of avian influenza. (http://www.tecro.org/dev/contents/topics.php?ID=45). The World Health Organization suggested that countries stockpile treatments to cover ten percent of its population—equivalent to 2.3 million treatments in Taiwan. Taiwan’s Tamiflu stockpile, which Taiwan had ordered from Roche, could cover only 0.7 of its population. Because many other countries had placed orders from Roche, TDOH did not believe that Roche could meet Taiwan’s requirements. TDOH declared a national health emergency and applied to Taiwan’s Intellectual Property Office (TIPO) for a compulsory license to use the Tamiflu patent. At the same time, other governments, including the U.S. and Australia, were pressuring Roche to license its patents covering Tamiflu to ensure sufficient stockpiles of the antiviral treatment. (http://www.senate.gov/~schumer/SchumerWebsite/pressroom/press_releases/2005/PR41902.http://www.abc.net.au/science/news/stories/s1489474.html).

After learning that TDOH had applied for a compulsory license, Roche agreed to supply Taiwan with 2.3 million treatments. (http://www.roche.com/med-cor-2005-11-25) Despite the agreement, in November of 2005, TIPO granted TDOH a conditional compulsory license valid until December 31, 2007, to ensure an adequate supply of Tamiflu. (http://www.tecro.org/dev/contents/topics.php?ID=45) The conditions of the compulsory license include that Taiwan must use Tamiflu supplied by Roche before resorting to using any supply produced under the compulsory license. In addition, the compulsory license could be cancelled if TDOH obtained a voluntary license from Roche during the compulsory period. Furthermore, the products produced under the compulsory license would be limited to domestic prevention. And significantly, TDOH would provide adequate remuneration to Roche. The amount of the adequate remuneration has not been published; and Roche has not challenged TIPO’s decision to grant a compulsory license.

V. Taiwan Grants a Compulsory License Covering Philips’s CD Patents

Philips Electronics (Philips), Sony Corporation, and Taiyo Yuden pooled their patents covering recordable compact disk (CD-R) technology, including patents that were essential as well as non-essential to the production of compact disks to meet recognized technical standards.(http://www.tiplo.com.tw/English/News/clas/2004/EnewsY1.html).

In the late 1990s, Philips licensed the pooled patents in a set package to Taiwanese CD manufacturers, including Gigastorage. U.S. Philips Corp. v. Int’l Trade Commission, 424 F.3d 1179 (Fed. Cir. 2005), reh’g denied (Dec. 19, 2005). Gigastorage and other manufactures stopped paying licensing fees to Philips in 1999 and filed a complaint with Taiwan’s Fair Trade Commission (TFTC) against Philips, Sony and Taiyo Yuden. The Taiwanese CD manufactures alleged that the patentees violated the Fair Trade Act because through their patent pool they had a monopoly on the CD-R market, abused that monopoly power by demanding allegedly excessive royalties, colluded with each other to set prices, and tied non-essential patents to essential patents. TFTC Decision No. 21 (2001). The TFTC ordered the patentees to allow prospective licensees the option of licensing individual patents rather than a package of patents and imposed fines totaling about NT$14 million (US$437,000). Subsequently, Sony and Taiyo Yuden offered separate licenses, while Philips appealed.

On appeal, the Taipei Administrative High Court issued a decision that the patent pooling was not "concerted action" between horizontal competitors because the patents owned by each defendant patentee were not substitutable for patents owned by the other defendant patentees. Taipei High Administrative Court Decision (August 11, 2005). The High Court concluded, however, that the patentees had improperly used their monopoly power on CD-R technology to fix prices. In addition, the patentees abused their monopoly power by requiring licensees to withdraw any challenges to the validity of the patents to be licensed.

While the cases regarding an alleged violation of Taiwan’s Fair Trade Act were pending, Gigastorage applied to Taiwan’s Intellectual Property Office for a compulsory license for five of Philips’s Taiwanese patents covering CD-R technology. Gigastorage alleged that Philips had insisted on unreasonable royalties for the patents—the higher of three percent or ten Japanese Yen. In 2002, ten Yen was over 40 percent of the price of CDs. TIPO Zi Fa 0931860052-0 (July 26, 2004). Gigastorage, after having already agreed to that royalty rate in its 1999 license with Philips, allegedly offered to pay a royalty of between two to five percent. Philips declined that offer. Before any decision was issued by TIPO, Gigastorage continued to produce compact disks. TIPO concluded that Gigastorage’s unauthorized use of Philips patents did not prevent it from granting a compulsory license. In its decision, TIPO noted that while Philips had committed unfair competition, its basis for issuing a compulsory license was not based upon that violation. Instead, the basis for the grant was that Gigastorage met the Taiwanese Patent Law’s requirement that it could not reach an agreement with Philips for reasonable commercial terms and conditions after a considerable time period. Appeals from the Taiwanese decisions against Philips are pending.

VI. U. S. Federal Circuit Holds Philips’s Pooling of CD Patents Did Not Constitute Patent Misuse

Concurrent with the Taiwanese litigations, Philips alleged in an investigation in the United States International Trade Commission that Gigastorage and other Taiwanese CD manufacturers infringed its patents. In re Certain Recordable Compact Discs & Rewritable Compact Discs, Inv. No. 337-TA-474 (Int’l Trade Comm’n Mar. 25, 2004). Similar to the unfair trade practices allegations asserted in the Taiwan litigations, the CD manufacturers asserted a defense that Philips, Sony, and Taiyo Yuden’s package licensing of both essential and non-essential patents covering CD technology were allegedly illegal tying arrangements constituting patent misuse. Like the Taiwanese courts, the US International Trade Commission concluded that Philips’s practice of not giving prospective licensees the option of licensing individual patents rather than the package license was per se patent misuse. Philips appealed the Commission’s decision.

The United States Court of Appeals for the Federal Circuit reversed the Commission, holding that pooling essential patents with non-essential patents did not constitute impermissible tying under either a per se or rule of reason analysis. Philips, 424 F.3d at 1198-99. The Federal Circuit reasoned that the package license offered by Philips did not prevent licensees from using any alternative technology it chose over the non-essential patents. Id. at 1188. Moreover, there was no evidence that the inclusion of the non-essential patents in the package offered by Philips increased the royalty rate. Id. at 1189. Furthermore, the package licenses offered many efficiencies, such as resolving in advance all potential patent disputes between the licensor and the licensee, reducing transaction costs by eliminating the need for multiple contracts and reducing the licensors’ administrative and monitoring costs, and allowing parities to price the package based on their estimate of what it is worth to practice a particular technology rather than trying to determine the worth of each individual patent. Id. at 1192-93. Thus, the Federal Circuit concluded that "[t]he package license is thus not anticompetitive in the way that compelled purchase of a tied product would be." Id. at 1190. Therefore, under U.S. patent law, Philips’s package license agreements did not constitute patent misuse.

VII. U.S. Supreme Court Holds a Patent Does Not Give a Presumption of Market Power

In Independent Ink, the U.S. Supreme Court considered the issue of whether a patent was presumed to have market power in an antitrust context. Independent Ink, Inc. v. Illinois Tool Works, Inc., 126 S. Ct. 1281 (Mar. 1, 2006). The patentee tied its patents covering ink jet printheads and ink containers to unpatented ink, requiring its licensees to purchase ink exclusively from the patentees and prohibiting refilling of the patented ink containers. The Supreme Court noted that the addition of 35 U.S.C. 271(d) on patent misuse into the Patent Act eliminated the presumption of market power from applying to patents in the context of patent misuse claims. The Court analogously held that a patent does not give a presumption of market power in the context of antitrust claims. Id. at 1291. In particular, the Supreme Court acknowledged the pro-competitive effects of patent ties:

Many tying arrangements, even those involving patents and requirements ties, are fully consistent with a free, competitive market. For this reason, we reject both respondent’s proposed rebuttable presumption and their narrower alternative.
Id. at 1292. Thus, just as a patent pool does not constitute patent misuse under Philips v. Int’l Trade Comm’n, a patent is not presumed to give a patentee market power resulting in an antitrust violation under Independent Ink.

VIII. Conclusion

Because both mainland China and Taiwan have compulsory license provisions in their respective patent laws that allow third parties to practice patents without authorization from the patentee, companies negotiating licenses in Greater China should keep in mind that their bargaining position is not as strong in the Greater China as compared to in the United States where the right to exclude others from practicing a patent is almost absolute. Moreover, Taiwan has shown its willingness to grant conditional compulsory licenses under a range of conditions, including an attempt to promote competition.

Although the U.S. Supreme Court and the Federal Circuit, the two sources of dispositive U.S. patent law, see no problems with patent pools and package licenses, Greater China does not seem to agree. At least one Taiwanese court has found that package licenses of essential and non-essential patents trigger the compulsory license provisions and violate unfair competition laws. Thus, while package licenses may be permissible in the U.S., the same package license in Greater China may trigger a grant of a compulsory license.

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