30 April 2023

Limitation of Patent Rights to Medicines in Russia

April 30, 2023

BRACE Law Firm©

The anti-Russian policy pursued by Western countries in recent years has inevitably affected Russian commodity markets. Consumers have faced the disappearance of familiar imported goods or a significant increase in their prices. These problems have not bypassed the pharmaceutical market.

To solve them, the state applied various methods ranging from providing support measures to Russian manufacturers of similar goods to authorizing parallel imports of foreign ones. However, due to the specific nature of such goods as medicinal products, most methods of overcoming problems are inapplicable to the pharmaceutical market due to the threat of harm to human life and health.

The situation required the development and adoption of specific measures. One such measure was the issuance of a state permit for the use of a patented medicinal product without the consent of the right holder, which the media has termed "compulsory licensing."

In this article, we will consider the cases in which international and Russian legislation allow for the limitation of patent rights to medicinal products and the prevailing law enforcement practice in Russia.

Limitation of Patent Rights: International Regulation

Intellectual property is one of the most valuable economic assets and is subject to patent protection. A patent grants its owner exclusive rights to an invention, which may be technical solutions in any field, including chemical compounds, APIs (pharmaceutical substances), and drugs, including the right to permit or prohibit third parties from using, selling, importing, exporting, and performing other actions with it. At the same time, such rights may lead to abuse by the right holder, creating obstacles to the development of a competitive environment and equal consumer access to goods.

The possibility of limiting patent rights is based on the provisions of the Paris Convention for the Protection of Industrial Property (the "Convention") as amended by the Stockholm Act of July 14, 1967 [1]. According to Article 5 of the Convention, the countries party to the Convention have the right to take legislative measures to prevent abuses that might result from the exercise of the exclusive rights conferred by the patent.

Subsequently, in connection with the establishment of the World Trade Organization (the "WTO"), the Agreement on Trade-Related Aspects of Intellectual Property Rights [2] (the "TRIPS Agreement") was adopted. In accordance with it, WTO members may provide for exceptions to the exclusive rights conferred by a patent, provided that such exceptions do not unreasonably conflict with a normal exploitation of the patent and do not unreasonably prejudice the legitimate interests of the patent owner. The conditions for the use of the subject matter of a patent without the authorization of the right holder are provided for in Articles 31 and 31bis of the TRIPS Agreement.

Thus, according to Article 31 of the TRIPS Agreement, the legislation of a WTO member state allows the use of a patented subject matter without the authorization of the right holder (the term "compulsory licensing" is used in TRIPS) subject to the following conditions:

The interested party has made efforts to obtain authorization from the right holder on reasonable commercial terms (exception: national emergencies or other circumstances of extreme urgency or public non-commercial use, as well as actions to remedy anti-competitive practices);
The scope and duration of such use shall be limited to the purpose for which it was authorized;
As a general rule, such use shall be non-assignable and shall be authorized predominantly for the supply of the domestic market of the country;
The right holder shall be paid adequate remuneration;
The authorization shall be liable to be terminated if and when the circumstances which led to it cease to exist and are unlikely to recur;
The judicial or other competent authorities of the state shall have the authority to review the legal validity of any decision relating to the authorization.

Article 31bis, included in the TRIPS Agreement as of January 23, 2017, regulates the use of a patented invention relating to a medicinal product for subsequent export. It is implemented in the following order:

States (primarily developing countries) wishing to import medicinal products using the compulsory licensing system submit a notification to the Council for TRIPS specifying the medicinal product and the expected quantity. They also confirm that the country has insufficient or no manufacturing capacities in the pharmaceutical sector for the production of the specified medicinal products and intends to grant a compulsory license. The granted compulsory license must contain conditions regarding the quantity necessary to meet the needs; the medicinal products produced must be clearly identified through specific labeling or marking.

In practice, these mechanisms have been used in recent decades primarily by developing countries regarding drugs for the treatment of HIV infection, viral hepatitis, and anticancer medicinal products, where the original medicinal products are too expensive for the country's population.

A Brief History of the Issue in Russia

Back in 2016, to reduce the risks of shortage of medicinal products, FAS Russia proposed depriving pharmaceutical companies of the right to exclusive production and sale of patented medicines if they refused to supply these drugs to Russia for economic or political reasons.

The Antimonopoly Authority prepared amendments to the Civil Code of the Russian Federation proposing to classify antitrust violations in cases where they create a threat to life and health as grounds for issuing a compulsory license under Article 1362 of the Civil Code, as well as granting the Government of Russia the right to authorize the use of an invention without the consent of the patent owner in the interests of protecting the life and health of citizens under Article 1360 of the Civil Code in relation to medicinal products. However, the proposed amendments caused a wide resonance. Many parliamentarians, officials, lawyers, and business representatives considered this measure excessive. Consideration of legislative initiatives was postponed for several years, and the antimonopoly authority subsequently abandoned the amendments to Article 1362 of the Civil Code. However, as representatives of FAS Russia noted, the actual adoption of measures to limit patent rights turned out to be a matter of time.

The subsequent spread of COVID-19 in 2019–2020 and anti-Russian sanctions brought this issue back for consideration. In 2021, two federal laws amending the Civil Code were adopted:

On April 11, 2021, Federal Law No. 212-FZ [3] was adopted, supplementing the Civil Code with a new Article 1360.1, Use of an Invention for the Production of a Medicinal Product for the Purpose of Its Export in Accordance with an International Treaty of the Russian Federation;
On April 30, 2021, Federal Law No. 107-FZ [4] was adopted, amending Article 1360 of the Civil Code, Use of an Invention, Utility Model, or Industrial Design in the Interests of National Security.

Below we will analyze in detail the regulatory framework and cases of issuing permits for the use of inventions without the consent of the right holder.

Use of an Invention in the Interests of National Security

Article 1360 of the Civil Code, in the version effective from May 11, 2021, empowered the Government of the Russian Federation, in case of extreme necessity related to ensuring the defense and security of the state, and protecting the life and health of citizens, to decide on the use of an invention without the consent of the patent owner.

When reading the norm, a logical question arises as to what is meant by the wording "extreme necessity related to ensuring the defense and security of the state, protecting the life and health of citizens." One can agree with researchers of this topic that the essence of "extreme necessity" should imply the presence of a real danger threatening the rights and legitimate interests of the individual, society, and the state. It is important that this danger in a specific situation cannot be eliminated by other means. In this regard, the criterion of extreme necessity should not be associated with the desire to reduce state budget expenditures or the implementation of an import substitution strategy [5].

The right holder must be notified of the decision taken as soon as reasonably practicable and must be paid proportionate compensation. Decree of the Government of the Russian Federation No. 1767 dated October 18, 2021 approved the Methodology for Determining Compensation (the "Decree No. 1767", the "Methodology") [6]. According to the Methodology, the amount of compensation is 0.5% of the actual revenue of the person who exercised the right to use the invention from the production and sale of goods. In March 2022, the Government of Russia amended the procedure for providing compensation [7]: compensation is not provided to patent owners from unfriendly countries, including if they hold citizenship of these states, or if these states are their place of registration, the place of their primary business activity, or the place of their primary profit generation.

In other cases, the procedure for paying compensation is as follows. Compensation is paid in the form of annual payments no later than 30 days from the end of the calendar year in which the revenue was received. Payment may be made by one of the following methods:

By placing funds in a bank account in the form of an irrevocable confirmed letter of credit. In this case, the patent owner must be notified of its placement;
By sending an offer to the patent owner to conclude an agreement on payment specifying the terms and timing of compensation payment. In such a case, compensation must be paid no later than 6 months from the date the patent owner signs the agreement.

In December 2020, the Government of Russia exercised the powers granted to it by Article 1360 of the Civil Code for the first time. By Order No. 3718-r dated December 31, 2020, the joint-stock company "Pharmasynthez" was granted the right to produce the pharmaceutical product for the treatment of coronavirus infection "Remdesivir" during 2021. The patent holder for this drug is Gilead Sciences, a company registered in the USA. As explained by representatives of FAS Russia and JSC Pharmasynthez, the reason for this decision was the manufacturer's refusal to grant a voluntary license. In addition, Gilead Sciences set different prices for the drug for individual states; the price regime proposed for Russia was several times higher than the price regime for other countries.

The right holder attempted to challenge the said order in the Supreme Court of the Russian Federation. In the administrative claim, the right holder cited its inconsistency with Article 1360 of the Civil Code and the Paris Convention for the Protection of Industrial Property: the absence of conditions of extreme necessity and inconsistency with the goals of ensuring state security. Expectedly, the Supreme Court of the Russian Federation refused to satisfy the claim, stating that in accordance with Article 1360 of the Civil Code, the Government of Russia made such a decision within its powers. The order was issued in connection with the spread of COVID-19, which is recognized by the World Health Organization as a public health emergency and constitutes a threat to the national security of the Russian Federation. The provisions of civil legislation correspond to the provisions of the TRIPS Agreement. Furthermore, the contested order in no way restricts the turnover of the patented medicinal product "Veklury" and does not prevent the plaintiff from carrying out business activities in Russia [8].

This decision is of paramount importance, as essentially the first precedent in the country for limiting the rights of a patent owner in the interests of national security was created. Subsequently, the validity period of the permit was extended, and a second permit was issued in March 2022 to the Russian company R-Pharm for the same drug, allowing license-free use of the invention until December 31, 2022 [9].

Furthermore, it should be noted that the said decision assessed the legal nature of the mechanism for granting permission to use an invention by an act of a state body. According to the Supreme Court of the Russian Federation, unlike compulsory licensing, which constitutes the conclusion of a contract on a mandatory basis, the use of a patent subject matter in the interests of national security is carried out on a non-contractual basis; the court does not compel the patent owner to give consent; the permission to use the object is given by the state. Thus, compulsory licensing actually represents compulsion to conclude a license agreement in a judicial proceeding, whereas authorization of use by an act of a state body is a compensated non-contractual use and a different type of limitation of patent rights.

Use of an Invention for the Production of a Medicinal Product for the Purpose of Its Export

The second norm establishing a limitation of patent rights to medicinal products is Article 1360.1 of the Civil Code, enacted on June 22, 2021. This norm empowered the Government to make a decision to use an invention without the consent of its right holder for production on the territory of Russia for the purpose of its export in accordance with international treaties.

The procedure for adopting such a decision and the methodology for determining the amount of compensation were approved by Decree of the Government of Russia No. 947 dated May 25, 2022 [10] (the "Decree No. 947"). In accordance with this decree, the Government of Russia has the right to decide on the use of an invention without the consent of the patent owner given the following set of conditions:

Receipt by the Council for TRIPS of a notification from a WTO member or regional organizations of the intention to use the system provided for in Article 31bis of the TRIPS Agreement as an importer. Such notification must contain a number of mandatory details established by Article 31 of the TRIPS Agreement, such as the name and quantity of the necessary medicinal product, and confirmation of the absence or limited capacity for their own production of the specified medicinal products.
Receipt by the Government of Russia of a request from a WTO member or regional organizations regarding the possibility of producing such a medicinal product on the territory of the Russian Federation without the consent of the patent owner. The request must contain information on the required production volume, delivery time, and price of the medicinal product based on the needs of the given foreign state.
Availability of the possibility to produce the specified medicinal product on the territory of Russia.
Compliance with the requirements provided for in Article 31(b) of the TRIPS Agreement, namely, if the proposed user has made efforts to obtain authorization from the right holder on reasonable commercial terms and conditions and such efforts have not been successful within a reasonable period of time. This requirement may be waived in the case of a national emergency or other circumstances of extreme urgency or in cases of public non-commercial use, provided that the right holder is notified immediately.
Existence of a contract between the foreign state and a manufacturer of medicinal products having the capacity to produce the medicinal product on the territory of the Russian Federation, taking into account the declared volume, delivery terms, and price of the medicinal product.

The decision on the use of the invention is made in the following order:

The Government of Russia sends a copy of the received request from the WTO member to the Ministry of Economic Development of Russia to prepare a conclusion on compliance with all specified conditions, and to the Ministry of Industry and Trade of Russia to prepare a conclusion on the availability of the possibility to produce the specified medicinal product. The deadline for preparing conclusions is 10 business days.
After receiving the conclusions, the author of the request is notified of the availability of production capabilities and sent a list of manufacturers capable of production with a proposal to conclude a contract with any of them or with several.

After the conclusion of the contract, the Government of Russia issues an act specifying:

The basis and purpose of its adoption;
The list of persons authorized to use the invention without the consent of the patent owner, and the place of its production;
The list of patented inventions authorized for use and their patent owners;
Information on the medicinal product authorized for production (INN or chemical or grouping name, dosage form, or form of release);
Information on the authorized production volume determined by the needs of the foreign importing state. If there are several manufacturers, the production volume of the medicinal product is indicated for each. In this case, the total authorized production volume cannot exceed the declared need;
The name of the foreign state to whose territory the medicinal product is subject to export;
Requirements for persons authorized to produce and for the medicinal products and their packaging in accordance with the TRIPS Agreement (in particular, the packaging of such medicinal product must have a specific designation);
The validity period of the decision taking into account the production volume, time costs for transportation, customs clearance, and performance of other procedures necessary for export.

The validity of the decision terminates upon the expiration of its validity period or prematurely in the event of a change in the conditions that served as the basis for the decision, TRIPS conditions, occurrence of force majeure circumstances, or by a court decision.

A copy of the Government act is sent no later than 30 days from the date of its entry into force to the patent owner at the address indicated in the relevant register of inventions. The Ministry of Economic Development also notifies the Council for TRIPS, and Rospatent notifies the Eurasian Patent Organization in the event of a decision regarding an invention protected by a Eurasian patent.

Decree No. 947 also approved the Methodology for determining the amount of compensation paid to the patent owner. The amount of compensation is 0.5 percent of the value of the medicinal products, calculated by multiplying the authorized production volume of the medicinal product by the selling price per unit excluding VAT, customs duties, and other mandatory payments:

C = 0.005 x (Vreq x Popt)

Compensation is paid by the person authorized to produce no later than 30 days from the date of receipt of funds for the sold medicinal product.

Payment may be made by one of the following methods:

By placing funds in a bank account in the form of an irrevocable confirmed letter of credit for a period of at least 3 years. In this case, the patent owner must be notified of its placement no later than 15 days from the date of placement of funds;
By sending an offer to the patent owner to conclude an agreement on payment specifying the terms and timing of compensation payment. The bank account is opened in a bank included in the list of systemically important credit institutions formed by the Central Bank of Russia. Compensation must be paid no later than 6 months from the date the patent owner signs the agreement.

Unlike Decree No. 1767, the act under review does not deprive right holders from unfriendly countries of the right to receive compensation. At the same time, the Methodology provides that the failure to receive a refusal from the patent owner within 3 years from the date of the offer, or the failure to claim funds on the letter of credit within 3 years, or the patent owner's refusal to conclude an agreement terminates the obligation to pay compensation. Also, compensation is not paid if the patent for the invention has ceased to be effective due to the expiration of its validity period and is not subject to reinstatement in the manner provided for in Article 1400 of the Civil Code.

Refusal to pay may be appealed by the patent owner in court.

Summing up, we conclude that the provisions of Russian legislation regulating the mechanisms for limiting the rights of patent owners generally do not contradict international legal regulation, and in some cases even contain reference norms to international acts. At the same time, the application of these mechanisms, in our opinion, is permissible only in extreme cases when there is no other way out of the situation. Since these measures, while bringing a positive effect in the short term, such as quickly providing the population with necessary drugs, may cause harm in the long term, such as loss of investment and significant reputational risks.

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References

[1] Concluded in Paris on March 20, 1883, revised and enacted by the Stockholm Act of July 14, 1967.

[2] Concluded in Marrakesh on April 15, 1994.

[3] Federal Law No. 212-FZ dated June 11, 2021, On Amendments to Part Four of the Civil Code of the Russian Federation.

[4] Federal Law No. 107-FZ dated April 30, 2021, On Amendments to Article 1360 of Part Four of the Civil Code of the Russian Federation.

[5] I.N. Dekhtyar, Problematic Issues of Compulsory Licensing of Pharmaceutical Products in Connection with Violation of Antimonopoly Legislation // Bulletin of the Saratov State Law Academy, 2022 No. 2.

[6] Decree of the Government of Russia No. 1767 dated October 18, 2021, On Approval of the Methodology for Determining the Amount of Compensation Paid to the Patent Owner Upon Making a Decision on the Use of an Invention, Utility Model, or Industrial Design Without Their Consent, and the Procedure for Its Payment.

[7] Decree of the Government of the Russian Federation No. 299 dated March 06, 2022, On Amendments to Clause 2 of the Methodology for Determining the Amount of Compensation Paid to the Patent Owner Upon Making a Decision on the Use of an Invention, Utility Model, or Industrial Design Without Their Consent, and the Procedure for Its Payment.

[8] Decision of the Supreme Court of the Russian Federation No. AKPI21-303 dated May 27, 2021, On Refusal to Satisfy the Administrative Claim Challenging the Order of the Government of the Russian Federation No. 3718-r dated December 31, 2020.

[9] Order of the Government of the Russian Federation No. 429-r dated March 05, 2022, On Authorizing JSC R-Pharm to Use Inventions Protected by Eurasian Patents.

[10] Decree of the Government of the Russian Federation No. 947 dated May 25, 2022, On the Use of an Invention for the Production of a Medicinal Product on the Territory of the Russian Federation for the Purpose of Its Export Without the Consent of the Patent Owner (together with the Rules for Making a Decision on the Use of an Invention for the Production of a Medicinal Product on the Territory of the Russian Federation for the Purpose of Its Export Without the Consent of the Patent Owner and Termination of Such Decision, Methodology for Determining the Amount of Compensation Paid to the Patent Owner Upon Making a Decision on the Use of an Invention for the Production of a Medicinal Product on the Territory of the Russian Federation for the Purpose of Its Export Without the Consent of the Patent Owner, and the Procedure for Its Payment).