Patent war: FRAND is what the doctor has ordered for drugs as well

In the technology driven world of electronics and communication, Standard Essential Patents (SEP) has come to hold sway and accepted. These patents are the state of the art and indispensable for any handset manufacturer for example. The European Standards Organization (ESO) which has 62 member-countries from five continents has therefore ushered in a regime called FRAND – grant of patents on fair, reasonable and non-discriminatory terms.

Under this regime, the Swedish electronics major, Ericsson that has upwards of 33,000 patents the world over including 400 in India and enjoys virtual monopoly on GSM set technology, with a 38 percent global market share, is obliged to tone down its ambitions by granting licenses to anyone asking for it on FRAND terms. FRAND thus resolves admirably the conflict of interest between the inventor-patent holder and consumers though in the matter involving India’s Micromax, the Competition Commission of India was horrified to find Ericsson following some sharp practices like not disclosing the royalty charged from other licensees and charging royalty at the rate of 1.25 percent on the handset price whereas it ought to have been on the chip alone embedded in the handset, the item contributed by it.

Nevertheless, the regime has a lot to commend itself for and in fact worthy of emulation on a broader front especially in the realm of medicines. Compulsory licensing is the drug equivalent of electronics’ FRAND, with the World Trade Organization giving its thumbs up to it vide the TRIPS agreement. But the western drug majors are not happy with it. Compulsory licensing means state or its instrumentality intervening to grant manufacturing license to someone who is interested in and capable of manufacturing the generic version of the drug. Brazil has been doing this for years, daring the multinational drug majors in the process and rubbing them on the wrong side.

The Indian government under UPA II made bold to follow Brazil, and the first compulsory license was granted to the Hyderabad based NATCO Pharma for Nexavar, a patented liver and kidney cancer drug. The German firm Bayer, the patent holder went all the way in appeal right upto the Supreme Court which in December 2014 upheld the grant of compulsory licensing to NATCO. As against the whopping Rs 284,000 per month per patient charged by Bayer, NATCO agreed to make available its generic equivalent for Rs 8,800 with a royalty of 7 percent (initially it was 6 percent but on appeal increased to 7 percent) to Bayer.

There are some parallels between FRAND and compulsory licensing. Both aim at prevention of patent hold up and royalty stacking, the two of the most common abuses a patent holder resorts to. The first one is sitting tight on the invention so that its scarcity value goes up. The second one is dividing the same technology into multiple parts and charging royalty on each one of them so that the royalty income soars undeservedly with dangerous implications for the consumer in terms of price. In fact the rationale of compulsory licensing is to make available a critical drug in large enough quantities at affordable prices without leaving the inventor unrewarded. But while FRAND is voluntary, compulsory licensing has an element of state-enforced coercion.

It would be eminently in the interest of everyone if the international drug majors take a cue from ESO and bring in a regime for drugs akin to FRAND. Diseases stalk poor and rich nations alike though hygiene related ones are found more in the third world countries. Be that as it may, a FRAND like dispensation would be fair for everyone – the inventor, the generic manufacturer and the patients. In any case, a patent holder in return for the limited monopoly rights, 20 years, owes to the society the obligation of working directly or indirectly his patent rights for the benefit of humankind at large.

Cell phones and smartphones are manufactured by numerous manufacturers who often only do assembling with cutting edge technology being made available by the likes of Ericsson. A drug patent holder has the option of not granting any license and manufacturing the patented drug himself in all the countries he has got the patent registered but licensing is a more workable and viable option. It is like a franchising agreement with a greater danger admittedly of copycats prying open the technology.

If the drug majors band themselves together like ESO, the confrontation of drug companies with governments of the developing nations would be a thing of past. A maximalist position like the one taken by Bayer does not pay in the long run but a nuanced and balanced position, the one that settles for reasonable rewards is what the doctor has ordered.