The compulsory licensing scheme applies to pharmaceutical products and is one of the aspects included in the TRIPS Agreement for implementation. Compulsory licensing provides the government the power to insist on a patent right holder to pass on his licensing rights to another manufacturer who will have the permission from the government to produce and sell a licensed product. The government will fix the amount of compensation payable to the original right holder and also the time up to which he has to pass on the right to the third party.
This may cause some inconvenience to the original holder. The compulsory licensing legislation tends to provide for only limited access to the new pharmaceutical products, with a low level or at the non-existent levels of intellectual property protection. Such legislation also has the effect of implementing compulsory licensing covering a broad range of circumstances. These circumstances include some loosely defined "national requirements.
The developing countries who are members of the World Trade Organisation (WTO) are obligated to offer protection to the patent rights under the TRIPS. However these developing nations have very ineffective protection rules and measures against the patents. The TRIPS Agreement has enabled the developing countries to make the use of the method of compulsory licensing based on the condition that the respective government pays a correct compensation to the original holder in relation to the value of the product.
The compulsory licensing can be regarded as a supplement to the general protection granted to the products in an environment where there are strict legislative frameworks for the general protection of IP rights under TRIPS agreement. But the fact remains that the conditions envisaged by TRIPS is far from reality at the moment. The arguments that are being offered in favour of compulsory licensing are:
Article 31 of the TRIPS Agreement entitled ‘Other Use Without Authorisation of the Right-holder’ provides "Where the law of a Member allows for other use of the subject matter of a patent without the authorization of the right holder, including use by the government or third parties authorised by the government, the following provisions shall be respected... " This Article provides several other conditions and one of the conditions stipulate that the original patent holder must receive royalties. This is a distinct advantage provided by the Agreement for the developing countries especially to countries like South Africa.
Article 8. 1 Agreement further provides that "Members may in formulating or amending their laws and regulations adopt measures necessary to protect public health and nutrition, and to promote the public interest in sectors of vital importance to their socio-economic and technological development. " Since the compulsory licensing ensures that the medicines are available at comparatively lower prices in countries like South Africa where the HIV infection rates as high as 20% which is considerably higher in certain segments, making medicines affordable to mass of the population is “necessary to promote public health.
The position of South Africa in the issue of Compulsory Licensing is well protected against the opposition of the US by Article 1 of the TRIPS Agreement provides that the members of the WTO are obligated to implement the protection through their laws only to the extent that is required under the existing conditions and they need not extend more extensive protection than is required in the TRIPS Agreement. The following are the arguments against the compulsory licensing:
Though compulsory licensing is expected to offer lower prices of pharmaceutical products to the governments as well as to the consumers, the situation in the developing countries is that there are only a few companies who have the capacity to make large investments in the research and development process of inventing and manufacturing new medicines. The compulsory licensing has a negative impact as it further weakens intellectual property protection. This is evident from the fact that only very few new medicines would be developed and marketed by the developing countries.
Further the compulsory licensing cannot be expected have a positive impact on the prices in a market where there is little or no scope for protection to the intellectual properties. Another drawback of compulsory licensing is that with the threat of getting the patent subjected to compulsory licensing at any point of time there will be little initiative for the pharmaceutical companies to introduce new medicines in those countries where compulsory licensing regime is in operation. Thus compulsory licensing slows the availability of new medicines in whatever stage the development may be.