A fairer way to determine royalties in Turkish compulsory licensing

Compulsory licensing, which is regulated by both  Article 99 of the repealed Decree Law  551 and  Article 129 et seq of the Industrial Property Law, which follows Article 31 of the Trade-Related Aspect of Intellectual Property (TRIPs), is a fairly recent institution in Turkey. However, covid-19 has given new urgency to the debate on this issue.  

Even though it has never actually been applied, compulsory licensing has been widely discussed, not only as a convenient tool to facilitate vaccines or preventive medicines needed to combat covid-19 in the short term, but also as a negotiation tool in the price discussions for certain vital medicines considered to be a burden on the public budget. Despite being popular, the fact that compulsory licensing has never been applied in Turkey means that its conditions and consequences have not been fully grasped, while the wording of the Industrial Property Law is quite ambiguous.

There is a misapprehension that compulsory licences are granted for free or at rates far below actual licence fees. However,  the Industrial Property Law provides that a royalty, calculated “taking into account the economic value of the patent” still needs to be paid to patentees. Despite this it remains unclear what “the fee which will be determined by taking into account the economic value of the patent”, as described  in Article 133/1 of the Industrial Property Law, shall be, and how it should be calculated.

Neither Article 31(h) of the TRIPs Agreement, nor Article 133 of the Industrial Property Law provide a method for calculating “adequate remuneration, taking into account the economic value of the patent”. Another point to be addressed, is that Article 31(h) of the TRIPs Agreement refers to the “economic value of the authorisation”, while Article 133 of the Industrial Property Law alludes to the concept of ‘economic value of the patent’. The term ‘authorisation’, as used in Article 31(h) of TRIPs refers to the consent/authorisation to be granted by the patentee for using its patent, namely the licence, to be conferred on a voluntary basis as it is stated under the heading “Other Use Without Authorisation of the Right Holder” in the same section. In parallel, it would be appropriate to interpret the phrase ‘economic value of the patent’, as  used in  Article 133 of the Industrial Property Law as the value originating from a licence granted on a voluntary basis to use such patent. This is because, in principle, Article 133 is not intended to confer less protection than the limits outlined in the TRIPs Agreement. Specifically, the phrase economic value of a patent refers to the remuneration to be paid to the rights holder, in the event of the patent in question being subject to a contractual licence. Accordingly, contrary to expectations, the remuneration to be paid to the patent holder in the case of compulsory licensing shall not be lower than the commercial licence value to which it is entitled, under normal circumstances and competitive market conditions.

The only exception to this is a compulsory licence granted for humanitarian aid purposes, as necessitated by public health problems in other countries. This is regulated by Article 31(f) of the TRIPs Agreement and Article 129/1(ç) of the Industrial Property Law. It is explicitly stated that the economic value of such a licence, in respect of the importing country “taking the non-commercial and humanitarian purposes into consideration”, shall be assessed on the basis of the determination of the remuneration to be paid for compulsory licences. This  statement also indicates that the remuneration payable to the patent holder for compulsory licences shall be of a commercial nature, namely for profit.

While there are no guiding regulations in Turkish law about how the “adequate remuneration to be determined, taking into account the economic value of the patent” shall be calculated, attempts have been made to establish how member states shall determine the remuneration payable for the compulsory licence to be granted under Article 31(h) of the TRIPs Agreement. Within this scope, the tiered royalty method was mentioned for the first time in the Remuneration Guidelines for Non-Voluntary Use of a Patent on Medical Technologies, published by the United Nations Development Programme (UNDP) and the World Health Organisation, and is often cited by the World Trade Organisation as well.

The guidelines were drafted in 2005 to consider appropriate options for the adequate remuneration of patent holders in cases of compulsory licensing for medicines, medical devices and all kinds of medical technologies. They address contractual licence experiences, which often occur in the private sector and underline that compulsory licence royalties should be calculated based on these experiences. Another finding from the guidelines is that the average rate for the pharmaceutical sector is between 4% and 5%, even though the rates reported for different industries may greatly vary. The tiered royalty method, as well as other methods for setting the remuneration payable to the patent holder for compulsory licensing, are referred to in the guidelines as having been used to reach this conclusion.

For instance, in the UNDP Evaluation Guidelines (2001), payment of a standard licence royalty of 4% is suggested with a deviation rate of 2%, depending on the therapeutic value of the concerned product and the government’s contribution to the related R&D expenses. In respect of the government-owned patents (which exist for inventions derived from government-funded research), the Japan Patent Office (JPO) Guidelines on Royalty Rates (1998) give rates of between 0% and 6%. In this model, rates vary depending on the following:

• the profit expected to be obtained from the licensed product;
• the importance of the patented invention in respect of the final product;
• the amount of additional research required for release of the invention into the market;
• the presence of public interest in the use of the patent;
• the novelty of the product; and
• various other factors.

Adapting this model for medicaments would mean considering certain other factors, such as the extent to which a relevant invention has benefited from publicly funded research, the therapeutic value of the invention and the requirement for fulfilling needs relating to public health. The Canadian Guidelines for Exporting Health Products (2005), on the other hand, set the upper limit for licence royalties as 4% within the scope of the regulations in Article 31(f) of the TRIPs Agreement, and then lower this based on the rating of the importing country in the United Nations Human Development Index. All these approaches introduce a significant restriction: setting licence royalties based on the value of a generic product.

The tiered royalty method is different from all three sets of guidelines in that the royalty rate is not based upon the price of the generic product. Instead, it stems from the price of the patented product in a high-income country. The base royalty is 4% of the high-income country price, which is then adjusted to account for relative income per capita or, for countries facing a particularly high burden of disease, relative income per person with that disease. This method can be implemented without extensive data or analytical resources. Therefore, it seems convenient for administrative purposes.

Providing transparency, predictability and ease of implementation lies behind countries’ need to prepare and execute remuneration guidelines on compulsory licensing. Even though the tiered royalty method could, to a certain extent, establish a balance for fulfilling this need, it provides a royalty calculation method that  fully ignores the legal criterion mentioned in both Article 31(h) of the TRIPs Agreement and Article 133 of the Industrial Property Law in respect of setting compulsory licence remuneration: namely the economic value of the patent. Therefore, making a calculation using this method carries the risk of providing rates that do not comply with the criteria introduced in both TRIPs and the Industrial Property Law.

If a compulsory licence is issued in light of the applicable legal regulations of Turkish law, the fundamental criterion to be taken into account in setting the remuneration payable to the patent holder shall be the economic value of the patent. According to the common view of the doctrine, the basic indicator for setting this is the royalty rate, which will be calculated based on the market value, should the patent in question be subject to a contractual licence. Nevertheless, none of the methods covered here pays regard to this criterion. In fact, they are based on the economic value of either generic products or patented products.

However, the economic value of a patent (ie, a licence) and that of a patented product are not equal concepts, and they do not involve equal figures. Accordingly, to calculate lawful and fair remuneration, a compulsory licence rate should be determined according to the individual requirements of each case, in light of the conditions requiring compulsory licensing, based on the remuneration payable to the patent holder should a contractual licence be granted. The ultimate aim ought to be to find the balance between the inventor’s right to take economic advantage of their invention and develop new products, while allowing the public to access to the invention more quickly.

The mechanism that would serve this aim best is determining the compulsory licence royalty as the remuneration to be paid to the patent holder for a contractual licence. For this purpose, earlier licence contracts executed for similar products or derived income or royalties payable for the same patent in different markets should be used as a basis.