When Breaking Patent Rights is Good for Innovation

The lesson from a century ago is that compulsory licensing encourages R&D by boosting competition

The essentials

Compulsory licensing, which allows a patent to be licensed without the consent of the patent owner, is used to help developing nations access life-saving medicines and to counteract anti-competitive practices. Critics argue that the mechanism discourages innovation by weakening intellectual property rights. Researchers studied a period after the First World War when the U.S. granted 700 compulsory licenses of German-owned patents. They showed a 38 percent increase in inventions among German firms within fields affected by compulsory licensing, with a 25 percent increase in high-quality patents. The results suggest that compulsory licensing may encourage, rather than discourage, innovation by increasing competition, says researcher Petra Moser, who reported the findings at a Queen’s School of Business entrepreneurship conference.

If you want to get a rise out of a Big Pharma executive, extol the benefits of compulsory licensing. 

This legal workaround allows a patent to be licensed to a third party such as a manufacturer of generic drugs without the consent of the patent owner. Although compulsory licensing clearly violates intellectual property (IP) rights, it can be invoked under national patent laws and the Trade-Related Aspects of Intellectual Property Rights Agreement during a perceived public health or safety crisis. 

Thanks to international humanitarian efforts, compulsory licensing is a widely accepted mechanism to help developing nations access essential innovations, such as medicines to combat life-threatening diseases. It has also been used to counteract anti-competitive practices closer to home. 

But critics, particularly pharmaceutical multinationals, argue that compulsory licensing discourages innovation by weakening IP rights of foreign inventors.

Are the critics justified? A team of researchers took a closer look at their argument by going way back to the post-First World War period, to when the U.S. was more often an innovation follower than leader. In 1917, the U.S. passed the Trading with the Enemy Act that allowed American agencies to appropriate German-owned property in the U.S., including patents. From 1919 to 1926, almost 700 compulsory licenses of German-owned U.S. patents were granted.

The researchers, Joerg Baten (Center for Economic Studies in Germany), Nicola Bianchi (Stanford University), and Petra Moser (Stanford University), wanted to know what effect this mass appropriation of German-owned patents had on patenting behaviour back in Germany. 

According to Moser, who reported on the study at an entrepreneurship conference held at Queen’s School of Business, the team analyzed nearly 80,000 German patents in chemicals and pharmaceuticals. They compared changes in patenting after 1918 for fields in which German patents were violated with other fields. 

The mass appropriation of German-owned patents in the U.S. ironically spurred innovation back in Germany

Their analysis showed a 38 percent increase in inventions within fields affected by compulsory licensing, with a 25 percent increase in high-quality patents. Their firm-level analysis showed that German companies whose patents had been licensed under the Trading With the Enemy Act began to patent substantially more in research fields with licensing. There was also an increase in the number of research-active firms in the targeted research fields. 

“These results suggest that compulsory licensing may encourage, rather than discourage, innovation by increasing competition,” says Moser. Such mechanisms “encourage incumbents in concentrated industries to innovate to escape competition.”

Like the U.S., European Union, Japan, and many other countries, Canada has a national law, known as Canada’s Access to Medicines Regime (CAMR), that recognizes compulsory patent licensing. In effect since 2005, CAMR authorizes compulsory licensing of patented medicines, under specific circumstances, to manufacturers of generic drugs who wish to export patented medicines to developing countries (patent holders receive a royalty).

It was used only once. In 2007, Apotex Inc. was granted a compulsory license to manufacture a generic antiretroviral HIV/AIDS medication for export to Rwanda. But it was a frustrating and drawn-out experience, and Apotex said it would not go through it again until CAMR was reformed and the process streamlined. Legislation designed to do that, Bill C-393, passed in the House of Commons in 2011 but died on the Order Paper in the Senate in March 2012.

Alan Morantz

Smith School of Business
Goodes Hall, Queen's University
Kingston, Ontario
Canada K7L 3N6

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