Compulsory license rules and what they mean for patent owners

A voluntary license is a contract: the owner agrees to let someone practice the patent on negotiated terms. A compulsory license removes the consent element. The state authorizes use, sets or supervises the terms, and the owner keeps the patent and the right to remuneration but loses the power to refuse. The license is normally non-exclusive, so the owner can still practice the invention and license others.

The term is sometimes used loosely for situations that are not formal compulsory licenses, such as a court refusing an injunction and ordering an ongoing royalty instead, or a government using an invention and paying compensation afterwards. The economic result can be similar, but the legal basis, the procedure and the forum differ, and those differences matter when you advise an owner or price a portfolio.

• Consent is replaced by authorization from a government or court.
• The owner keeps title and the right to compensation.
• The license is usually non-exclusive and limited in scope and duration.
• Related mechanisms, such as ongoing royalties, are not formal compulsory licenses but can work like one.

The Patent Act does not contain a general provision allowing anyone to apply for a compulsory license on grounds such as non-working or public interest. That is a deliberate feature of US law, and the US has historically argued for strong limits on compulsory licensing in trade negotiations. Several targeted statutes and doctrines still allow use without consent.

The most important is 28 U.S.C. 1498. When the federal government, or a contractor acting for the government with its authorization or consent, uses or manufactures a patented invention, the owner cannot obtain an injunction or sue the contractor for infringement. The owner's remedy is an action against the United States in the Court of Federal Claims for reasonable and entire compensation. In effect, the government has a standing ability to use any patent, paying compensation afterwards.

The Bayh-Dole Act creates march-in rights under 35 U.S.C. 203. For inventions made with federal funding, the funding agency may require the contractor or its exclusive licensee to grant a license to a responsible applicant, or grant one itself, in defined situations: when the contractor has not taken effective steps to achieve practical application, to meet health or safety needs, to meet requirements for public use specified by federal regulations, or when the domestic manufacturing preference has been breached. The National Institutes of Health has received several march-in petitions over the years and has not granted any, and the federal government published draft guidance on the march-in framework in December 2023.

Narrower statutes exist as well. The Clean Air Act, at 42 U.S.C. 7608, allows a court to order a license on reasonable terms for a patent needed to comply with certain emission requirements when no reasonable alternative exists and the lack of a license would lessen competition or tend to create a monopoly. The Atomic Energy Act contains a provision for patents found to be affected with the public interest in the atomic energy field. These provisions are rarely invoked, but they show that Congress has chosen compulsory licensing case by case rather than in general.

• 28 U.S.C. 1498: government use, compensation in the Court of Federal Claims.
• 35 U.S.C. 203: march-in rights for federally funded inventions.
• 42 U.S.C. 7608: Clean Air Act licenses ordered by a court.
• Antitrust remedies: consent decrees and orders can require licensing as a remedy.

Since the Supreme Court's decision in eBay Inc. v. MercExchange in 2006, a patent owner who wins an infringement case is not automatically entitled to a permanent injunction. Courts apply the traditional four factor test: irreparable injury, inadequacy of money damages, the balance of hardships and the public interest. Owners that do not practice the invention, or whose patent covers a small component of a larger product, often fail the test.

When the injunction is denied, the court may award an ongoing royalty for future infringement, as the Federal Circuit discussed in Paice v. Toyota in 2007. The infringer then continues to use the patent and pays a court-determined rate. This is not called a compulsory license, but it operates like one: use continues without consent at a price set by the court. For valuation and licensing strategy, the possibility of an ongoing royalty instead of an injunction is one of the most important constraints on a patent's leverage. Our article on patent license agreements covers how negotiated terms compare.

Outside the US, most countries' patent laws include compulsory licensing provisions, for reasons such as non-working of the invention, refusal to license on reasonable terms, dependent patents, anti-competitive practices, national emergencies and public non-commercial use. The TRIPS Agreement does not list the permitted grounds, but Article 31 sets the conditions every member must respect when it authorizes use without the owner's consent.

Under Article 31, each authorization must be considered on its individual merits. The proposed user must first have tried to obtain a license on reasonable commercial terms within a reasonable period, although that requirement can be waived for a national emergency, other circumstances of extreme urgency or public non-commercial use. The scope and duration must be limited to the purpose, the license must be non-exclusive and non-assignable except with the part of the business that uses it, use must be predominantly for the domestic market, the owner must receive adequate remuneration taking into account the economic value of the authorization, and decisions must be open to judicial or other independent review.

The 2001 Doha Declaration on the TRIPS Agreement and Public Health confirmed that each member has the right to grant compulsory licenses and the freedom to determine the grounds, and that each member can decide what constitutes a national emergency. Because the domestic market condition made it hard for countries without manufacturing capacity to benefit, members adopted Article 31bis, which allows compulsory licenses for export of pharmaceutical products to eligible importing countries. The amendment entered into force in 2017.

The best known cases involve medicines. Thailand issued government use licenses for several HIV and heart disease drugs in 2006 and 2007. Brazil issued a compulsory license for the HIV drug efavirenz in 2007 after price negotiations failed. In 2012, the Indian Patent Office granted Natco Pharma a compulsory license for sorafenib tosylate, sold by Bayer as Nexavar, on the grounds that the drug was not available at a reasonably affordable price and was not sufficiently worked in India, with a royalty set as a percentage of Natco's sales.

Europe has its own examples. Germany's Patent Act provides for compulsory licenses in the public interest, and in 2016 the Federal Patent Court granted a provisional compulsory license for an HIV drug containing raltegravir, a decision later upheld by the Federal Court of Justice. Cases like these are rare, but they show that courts in major markets will act when the conditions are met.

Outside pharmaceuticals, compulsory licensing appears mostly in competition law, where authorities can require a dominant firm to license as a remedy, and in standards, where commitments to license on fair, reasonable and non-discriminatory terms constrain what an owner can demand even without a formal compulsory license.

• Public health is the most common ground in practice.
• Failed negotiations on price usually come before a grant.
• Royalty rates are set by the authority and can be modest.
• Competition law and standards commitments create similar pressure in technology markets.

For most US patents, the realistic risks are government use under section 1498, march-in for federally funded inventions and the denial of an injunction after trial. For global portfolios, add the compulsory licensing laws of each country where the patent family is in force. Each of these affects the leverage the patent provides and therefore its value, which is why a careful patent valuation considers them for products with public interest exposure.

Federally funded inventions deserve particular care. Under Bayh-Dole, the government retains a non-exclusive, paid-up license to practice the invention for government purposes, the patent should contain a government interest statement, and agencies often record confirmatory licenses at the USPTO. An acquirer that does not notice these obligations may pay for exclusivity that the government already shares.

Good records also determine who is paid. Compensation under section 1498, a royalty set abroad, or an ongoing royalty after trial goes to the patent owner, and the claimant has to prove ownership. A chain of title with a missing inventor assignment, an unreleased security interest or a merger that was never recorded can delay or reduce recovery, and in a dispute the other side will look for exactly those gaps.

• Identify federal funding and recorded government licenses for each asset.
• Map where each family member is in force and the local licensing rules.
• Confirm the owner of record matches the entity that will claim compensation.
• Record missing assignments and releases before a dispute begins.

In countries with active compulsory licensing, the possibility of a grant shapes voluntary deals. Owners often offer tiered pricing, voluntary licenses to generic manufacturers or regional licensing programs, partly because a negotiated arrangement gives more control than a rate imposed by an authority. Licensees, for their part, can point to the prerequisites in Article 31 when a negotiation stalls.

For licensing teams, the lesson is to document offers and negotiations carefully, since the prior request requirement and the reasonableness of terms may be examined later. For deal teams, it is to confirm that the licensor actually owns the patents it is licensing in each country. Our pages on patent licensing and patent licensing companies cover how licensing programs are structured.

This article is general information about how compulsory licensing works, not legal advice. Whether a mechanism applies to a specific patent depends on the facts and on the law of each jurisdiction, and should be assessed by qualified counsel.