India creates a ‘licence of rights’ system for GM patents: Is it legal?

We are happy to bring our readers a guest post by Prashant Reddy – a prolific writer, a Delhi based lawyer and a person who otherwise needs no introduction on this blog! Through this incisive post, he examines in detail the legality of the “Licensing and Formats for GM technology Agreements Guidelines, 2016” published by the Ministry of Agriculture on May 18, 2016.

India creates a ‘licence of rights’ system for GM patents: Is it legal?  

Prashant Reddy

The Ministry of Agriculture (MoA) has fired yet another salvo in its ongoing war against Monsanto by publishing and notifying the “Licensing and Formats for GM Technology Agreements Guidelines, 2016”. These guidelines, which appear to be targeted at Monsanto, are in addition to an attempt by the DIPP to revoke Monsanto’s Bt. cotton patent under Section 66, a Competition Commission of India (CCI) inquiry into Monsanto’s licensing practices (that was ordered at the behest of the Ministry of Agriculture) and lastly, the Cotton Price Seed Control Order, 2015 (CSPO) whereby the Ministry of Agriculture decided to fix IP royalties between Monsanto and its Indian partners for the Bt patents owned by the former Monsanto’s. As per media reports, the MoA slashed royalties payable to Monsanto, as per voluntary contracts, by 74%.

Each of these measures taken by the Government of India is unprecedented and has raised eyebrows because it appears that the government is blatantly taking sides in what is essentially a commercial dispute between Monsanto and 9 Indian seed companies. The stakes for Monsanto are significant because according to the Statement of Working filed by the company for the year 2013, the revenues earned from its Bt cotton patent was Rs. 6,855,580,000 (Rs. 685 crores).

(In order to understand the legal and technology issues in this post, I would strongly recommend reading previous posts on this issue that were published on SpicyIP and IPKat: here, here and here.)

An introduction to the Licensing and Formats for GM Technology Agreements Guidelines, 2016

The “Licensing and Formats for GM Technology Agreements Guidelines, 2016” (“Guidelines”), published by the MoA in the Gazette of India on May 18, 2016 goes far beyond the CSPO’s move to regulate technology licensing fees. These Guidelines  require all patentees of GM technology to offer their technology on a Fair, Reasonable and Non-Discriminatory (FRAND) basis to any seed company willing to pay Monsanto, a government mandated royalty for the patent. In other words, Monsanto cannot deny anybody a license. In case the patentee doesn’t respond within 30 days, the guidelines create a presumption that the licence has been granted. I reproduce the clause below for the benefit of the readers:

(5) The Licensor shall not refuse grant of a license to any eligible seed company fulfilling the aforesaid criteria. The Licensor shall award the license for the Genetic Engineering Appraisal Committee (GEAC) approved GM Trait within 30 days of receipt of a request from Licensee along with proof of fulfilling the qualification criteria. An Agreement shall be signed by the Licensor and the Licensee in accordance with the approved License Format as specified in the ANNEXURE. If the Licensor fails to meet the above obligation, the Licensee is deemed to have obtained the license for the GEAC approved GM Trait as per FRAND mechanism and the deemed license holder shall abide the terms of such licensing guidelines and agreement issued under the Order.  

These Guidelines were likely required because the CSPO’s reduction of royalty payable to Monsanto was rendered useless by the fact that Monsanto had already terminated its licensing agreements with nine of the biggest Indian seed companies after they refused to pay Monsanto around R. 400 crores in outstanding royalties. When it appeared that some of the companies like Nuziveedu were continuing to sell seeds with Monsanto’s GM technology and trademarks the company instituted patent and trademark infringement lawsuit before the Delhi High Court in February this year. Before the High Court, Nuziveedu meekly consented to be restrained from manufacturing any new seeds after disposing its existing stock and also consented to paying Monsanto outstanding royalties. The court’s order can be read here.

Since the technology licensing agreements were terminated and the courts intervened to restrain IP infringement, the government’s orders under the CSPO had no real practical effect for the biggest Indian seed companies. And thus, the Ministry of Agriculture notified these guidelines on May 18^th 2016 to essentially force Monsanto to licence out its technology.

The patentability determination in the preamble of the Licensing and Formats for GM Technology Agreements Guidelines, 2016

These Guidelines begin with a curious preamble, which I reproduce below:

“And whereas, even though biotechnology inventions are patentable, once the GM Traits developed through biotechnology are transferred into a variety (“transgenic variety”), the transgenic variety per se cannot be patented; the seeds carrying such trait also cannot be patented and hence, the plant varieties including transgenic varieties carrying the GM Traits can be protected only under the Protection of Plant varieties and Farmer’s Rights Act, 2001.

And whereas, the transgenic varieties become the intellectual property of the breeder or company who has developed it;”

The last assertion i.e. “the transgenic variety becomes the intellectual property of the breeder or company who has developed it” appears to be inaccurate because a new variety developed by a seed company, which carries a modified genetic sequence patented by a biotech company like Monsanto, will contain IP rights belonging to both the seed company and Monsanto. While the new variety is protected under the Protection of Plant Varieties & Farmer’s Rights Authorities Act, 2001, the modified genome is protected under the Patents Act, 1970. Given that Monsanto’s patented Bt gene technology is being introgressed into the variety developed by the seed company, the genome of the seeds will always contain Monsanto’s patented gene sequence. Therefore the transgenic variety will have IP belonging to both, the seed company and Monsanto.

It is not clear why the Ministry has made such an assertion regarding patentability in the preamble but if a court of law were to accept such an assertion in infringement proceedings, such as the one faced by Nuziveedu, then it is but obvious that seed companies can never be restrained from selling varieties containing patented genes.       

GM Patents as Standard Essential Patents and the FRAND requirement

The requirement of the Guidelines for patentees of GM technology related to increased insect resistance in cotton seeds is quite surprising because FRAND or “Fair, reasonable and non-discriminative” mechanism is usually used in the context of standard essential patents (SEPs) such as the telecom patents being asserted by Ericsson against various Indian companies.

The logic for SEPs is quite simple. The development of certain technologies depends on the entire industry adopting certain standards. For example in the context of cellular phones, if a phone manufactured by one company has to ‘talk’ to a phone manufactured by another company, they will have to agree to use certain technologies as standards. Deciding which technologies may be recognised as “standards” is left to the private industry bodies called “Standard Setting Organisations”. These SSOs have as members, both the patentees who own the technology that may be declared as “standards” and users, who are going to be licensing the “standards” to use in products developed by them. SSOs are supposed to behave in a transparent, democratic manner while declaring the patents that are SEPs. Once a patent is declared to be a SEP, the owner of the patentee is required to licence the SEP on a FRAND basis i.e. on fair, reasonable and non-discriminatory basis. The FRAND requirement is necessitated by the fact that the SEP owner wields extraordinary power because without access to a technology declared as a “standard”, no entrant can enter the market. Given the potential profits that can accrue from a technology being declared a standard, the owner of the SEP would be ready to make the sacrifice of licensing a patent on FRAND terms. Of course, the issue is rarely that simple and as demonstrated in the Ericsson patent litigation against Indian telecom companies, the issue of “reasonableness” and “non-discrimination” is quite contentious.

While the concept of FRAND licensing is well accepted in the telecom industry, it has really never been applied to agricultural technologies. So where did the idea emanate from?

Smart Agriculture in an article published 6 months ago (H/t to Shamnad for this article) reports that  Prabhakar Rao who is the Chairman of the Nuziveedu Group was actively lobbying the government to apply FRAND principles to GM seeds. It reports that his office has been circulating an academic article published in the Colorado Law Review titled Genetically Modified Seeds as De Facto Standard Essential Patents (2014). You can access the article on SSRN. The article which was written in the context of increasing punitive damages that were being imposed on American farmers in patent litigation instituted by Monsanto, argues that GM seeds should be treated on the same lines as SEPs which are licensed on a FRAND basis. As a result of such classification, the authors argue that farmers will be liable to pay only reasonable royalties in case of infringement rather than the punitive damages that were being imposed by American courts on farmers.

The difficulty in extending FRAND principles to GM seeds is twofold: The first is the factual issue regarding the technology itself. Monsanto’s GM patents, give it an exclusive monopoly over a certain genetic sequence incorporating genes from the bacillus thurgingiensis (Bt) genome into the cotton genome – the resulting seed is resistant to the Bollworm, a pest which has caused havoc to the cotton crop in India. Monsanto licences this Bt technology to Indian seed companies, who incorporate it into the different varieties of seeds that they sell in different parts of the country depending on local soil and climate conditions. If a seed company wants to sell cotton seeds without Monsanto’s Bt technology, it can still do so – the only difference is that these seeds will not be resistant to the Bollworm, but they will still grow cotton. The issue of Bollworms can still be tackled through increased pesticide use. Thus Monsanto’s Bt technology is substitutable. This is different from cellular phone technology where certain new entrants could simply not enter the market if denied access to SEPs. Thus, would it be fair to define GM technology like Monsanto’s Bt technology as an industry standard?

The second problem in applying FRAND principles to GM patents is that FRAND as a concept is supposed to be a voluntary act, wherein both parties enter into a contract (usually through SSOs) agreeing  to be regulated by the principle of FRANDs. If there is no such contract between both parties agreeing to apply such principles, as is the case with Monsanto and Indian seed companies, there is no question of FRAND principles applying to the contract. Of course, Monsanto can still be scrutinised under competition law – that investigation will require an analysis of how the Bt patents in questions are affecting competition downstream. As mentioned earlier, the CCI has already begun such an inquiry against Monsanto under the Competition Act.

The legality of the ‘Licensing and Formats for GM Technology Agreements Guidelines, 2016’ from a TRIPS perspective

Let’s begin with an analysis under international law i.e. the Agreement on Trade Related Intellectual Property Rights (TRIPS). One of the major points of contention during the negotiation of TRIPS was the concept of ‘licence of rights’. The concept of ‘licences of right’ which was enshrined in Section 87 and 88 of the Patents Act allowed any person to seek a licence for a certain class of patents (mainly process patents for technologies like drugs and chemical) at a royalty rate determined by the Controller and subject to an upper ceiling of 4% of the net ex-factory sales price. In other words, although patents were being granted for these technologies, the patents were de-facto available to everybody after an exclusivity period of three years provided the statutory royalty was paid. The developed countries were against such blanket licensing provisions – instead they wanted each case to be decided on an individual basis. You can read an account by Jayashree Watal, a negotiator for the Indian government at the time, over here, where she chronicles the negotiating process. Despite her team’s best efforts, India lost its quest to retain ‘licence of rights’.

Article 31 of the final version of TRIPS clearly states that members can authorise the use of a patent without the authorisation of the patentee but that each “such use shall be considered on its individual merits”. As a result India deleted the provisions related to “licences of rights” from the Patents Act but retained the compulsory licensing provisions since those provisions provide only for a case-by-case consideration. However the Guidelines under discussion basically attempt to recreate a “licence of rights” framework by allowing all seed companies the right to a licence from patentees of GM technologies related to increased insect resistance in cotton seeds, provided that they agree to pay government mandated royalties. Although Monsanto appears to be the only target of these guidelines, it will be applicable to anybody else who owns patents in GM technologies related to increasing insect resistance in cotton seeds. In my view a potential TRIPS challenge on this issue will be strong because the government is targeting an entire class of technologies rather than a particular patent.

The constitutionality of the ‘Licensing and Formats for GM Technology Agreements Guidelines, 2016’

The more immediate legal issue is whether the Guidelines are legal under domestic law. These Guidelines are drafted by the MoA under Clause 5(8) of the CSPO. As explained previously, the CSPO has been brought in by the Indian government under powers delegated to it by Parliament through the Essential Commodities Act, 1955 and its legality is currently under challenge on the grounds that the government cannot circumvent patent rights by resorting to powers under the Essential Commodities Act. If that challenge succeeds, these guidelines will automatically be null and void. The related question is whether the government has the power to draft such broad Guidelines under Clause 5(8) of the CSPO. Clause 5(8) of the CSPO, under which the present Guidelines have been framed, only states “All License Agreements shall be as per the format, as may be prescribed by notification.” The MoA thus basically had the power to only draft a format of licensing agreement but instead it created new substantive rights. In my view, it is plain as day that the Guidelines go far beyond the language of Clause 5(8) of the CSPO.

The next few months will prove very interesting for all IP lawyers – some of whom will be minting money in the next round of litigation generated by these Guidelines.