Cause for concern

Applications and review process

Under the Patent Law, there are five circumstances under which a compulsory licence may be granted: 1) patent non-use; 2) monopolistic patent misuse; 3) national emergencies, extraordinary circumstances, or in the public interest; 4) public health; and 5) dependent patents. Under the Measures, these remain unchanged and little new guidance on how these five circumstances are to be interpreted or applied is provided. These circumstances are detailed in figure 1.

SIPO remains the government authority responsible for accepting applications for compulsory licences, reviewing and evaluating the applications. In addition, SIPO is responsible for reviewing and evaluating applications for determination of royalty payments and request for early termination of compulsory licences granted.

The Measures set forth three separate administrative procedures: 1) the request for a compulsory licence; 2) the request for determining the royalty; and 3) the request for early termination of a granted compulsory licence. Each of these administrative procedures is shown in figure 2.

Together with the three separate procedures outlined in the Measures, the process for applying for a compulsory licence can be divided into five distinct steps, illustrated in figure 3.

For compulsory licences based on patent non-use and dependent patents, an applicant must first engage in negotiations with the patentee for a licence. For compulsory licences under monopolistic patent misuse, the applicant must first follow the enforcement mechanisms under China's anti-monopoly law and regulations. For compulsory licences considering public health, the applicant may directly submit a request to SIPO to grant a compulsory licence. If SIPO grants a compulsory licence, the applicant and patentee must engage in negotiations to determine the compulsory licence royalty and other specifics. If royalty negotiations are unsuccessful, either party may ask SIPO to determine the royalty. Finally, unless the compulsory licence is automatically terminated because either the compulsory licence term has expired or the patent has expired or been declared invalid, the patentee can file a request for early termination once the circumstances under which the compulsory licence was granted no longer exist and will not reappear.

Time limits

Compared with the 2003 Measures, the 2012 Measures provide for clearer time limits, which are designed to ensure that compulsory licence applications and decisions are completed reasonably quickly. For responding to notices, the applicants and patentees now have 15 days from the date of receipt of notices to submit responses, although failure to respond would not affect SIPO's decision. For the notification of decisions on compulsory licence grants and royalty determinations, SIPO is required to notify both the applicant and the patentee within five days of the date of decision. In addition, under Article 29 of the Measures, SIPO is required to make a decision on the determination of royalties within three months of the acceptance of the request for determining the royalty.

However, no time limit is provided for SIPO to make its decision on granting a compulsory licence or the early termination of a compulsory licence already granted.

Judicial and administrative review

SIPO's decision is subject to judicial review by filing an administrative lawsuit with the People's Court and the Measures further provide for administrative review of the decision. While the possibility of administrative review has been specified, it remains unclear what rules would govern the administrative review procedure and whether an administrative review would need to be exhausted before seeking judicial review of the decision.

Royalties and licence terms

The Patent Law requires the payment of a reasonable royalty under a compulsory licence, which is to be determined by negotiations between the applicant and the patentee. The Measures facilitate this process by separating the procedures for granting a compulsory licence from the determination of a compulsory licence royalty. If the parties are unable to reach an agreement on a reasonable royalty for the compulsory licence, either party may submit a request to SIPO to determine the royalty. A request for determining the royalty will be rejected if the parties have not started negotiations or have not reached an agreement through negotiations.

Under the Measures, the applicant must now specify the requested term for the compulsory licence in the request. However, they do not indicate any guidelines regarding compulsory licence terms or the criteria for determining compulsory licence terms.

After a compulsory licence is granted, it may be terminated under several circumstances. A compulsory licence will automatically terminate when the term of the compulsory licence specified in the decision of granting the compulsory licence expires. Alternatively, the patent for which the compulsory licence is granted expires or is declared invalid. In addition, a patentee may apply to SIPO for an early termination of the compulsory licence where the patentee has evidence to prove that the circumstances under which the compulsory licence was granted no longer exist and will not reappear.

Questions unanswered

The Measures do not significantly change the existing compulsory licence regime. They fail to provide sufficient guidance on how these procedures would work in practice. Details on what factors are relevant to deciding whether to grant a compulsory licence and a determination on the royalty and term, such as what market data (market demand, price, and sales of the patented product, royalty rates, profits, development costs, and distribution) is relevant are not addressed. From a practical standpoint, it remains unclear how an applicant or a patentee would go about collecting evidence and documentation. It is also uncertain how they would prepare to submit or respond to a request for a compulsory licence.

Since China has yet to grant a compulsory licence, a recent case in India may help to illustrate how SIPO might approach a request for a compulsory licence. The India Patent Office (IPO) issued its first compulsory licence on March 9 this year to Natco Pharma, a domestic generic drug manufacturer, to produce and sell Bayer's patented cancer drug Nexavar. From public reports on the process, evidence related to the lack of availability in parts of the country and high price of Nexavar played a significant role in the IPO's decision. Because of the compulsory licence, the monthly cost for the drug is expected to drop from approximately $5,700 to below $177, a decrease of nearly 97%. From this case, information regarding the availability and price of a product may be relevant factors, but there remains no guidance on what information SIPO might consider important in making a decision on whether to grant a compulsory licence.

Questions that remain unaddressed also include how the licence scope, licence term, and royalties will be determined and what factors would be considered. Another potential issue is that patentees may find it difficult to collect evidence and documentation showing that the circumstances under which the compulsory licence was granted no longer exist and will not reappear. These are necessary to obtain an early termination of the granted compulsory licence from SIPO. The Measures also do not provide for a mechanism to amend the details of compulsory licences once they are granted. A patentee may thus be forced to continue to bear the terms of the compulsory licence, at least until the patentee is able to prove that the situation meets the requirements for early termination, even if a change in actual market conditions makes the granted compulsory licence too broad or unnecessary.

While the Measures are helpful in providing further clarity on the administrative procedure for the application and evaluation to request compulsory licences, royalty determination, and early termination, many areas remain unclear. As a result, Chinese and foreign patentees will continue to speculate as to what factors SIPO will consider important and are unlikely to adjust their patent licensing activities in China to respond to China's compulsory licensing regime. This will continue until a reference case in China exists or additional guidance is available.

Geoffrey Lin, David Chen, and Binxin Li, Ropes & Gray, Shanghai