Smith Kline & French Laboratories, Ltd. vs. Court of Appeals

The grant of a compulsory license over a patented invention relating to medicine or public health under Section 34(e) of Republic Act No. 165 is a valid exercise of police power and does not constitute an unlawful taking without just compensation, as the patentee is entitled to a protective period of exclusive rights followed by the payment of adequate royalties. The Court held that such compulsory licensing is consistent with the Paris Convention and that the Director of Patents exercises sound discretion in fixing royalty rates within the statutory ceiling.

Petitioner Smith Kline & French Laboratories, Ltd., a foreign corporation, owns Philippine Letters Patent No. 12207 issued by the BPTTT on November 29, 1978, for the drug Cimetidine. On March 30, 1987, more than two years after the patent's issuance, private respondent Doctors Pharmaceuticals, Inc., a domestic corporation, filed a petition for compulsory licensing with the BPTTT. Private respondent sought authorization to manufacture its own brand of anti-ulcer medicine from Cimetidine and to market the resulting product in the Philippines, invoking Section 34 of Republic Act No. 165, which allows compulsory licensing for inventions relating to medicine or public health after the expiration of two years from the grant of the patent. Petitioner opposed the petition, contending that private respondent lacked the capability to work the patent and that petitioner itself satisfied local market demand.

• The Patent and the Petition: Petitioner owns Philippine Letters Patent No. 12207 for the drug Cimetidine, issued on November 29, 1978. On March 30, 1987, private respondent filed a petition for compulsory licensing with the BPTTT pursuant to Section 34 of R.A. No. 165, seeking to manufacture and sell its own brand of anti-ulcer medicine using Cimetidine. The petition was filed beyond the two-year protective period mandated by the statute.
• BPTTT Proceedings: Petitioner opposed the petition, asserting that private respondent lacked the capability to work the patent and that petitioner adequately supplied the local market. Petitioner also challenged the constitutionality of Sections 34 and 35 of R.A. No. 165.
• The BPTTT Decision: The BPTTT Director found that private respondent possessed the capability to work the patent, citing its competent personnel, machinery, and permits to manufacture other drugs. On February 14, 1994, the BPTTT granted private respondent a non-exclusive, non-transferable compulsory license for the remaining life of the patent, subject to a royalty of 2.5% of net sales in Philippine currency, with specific terms on computation, record-keeping, and termination.

• Petitioner argued that the BPTTT decision violates international law embodied in the Paris Convention for the Protection of Industrial Property and the GATT Treaty, Uruguay Round.
• Petitioner maintained that the grant of a compulsory license constitutes an invalid exercise of police power, as there was no evidence of an overwhelming public need or abuse on the part of the patentee.
• Petitioner contended that the BPTTT's fixing of the royalty at 2.5% of the net wholesale price was without factual basis and amounted to expropriation of private property without just compensation, violating the due process clause.
• Petitioner asserted that the BPTTT's action was null and void for private respondent's failure to affirmatively prove the jurisdictional fact of publication as required by law.

• Respondent Court of Appeals found that the BPTTT decision was supported by substantial evidence and that the grant of compulsory license under Section 34(1)(e) of R.A. No. 165 was a valid exercise of police power to prevent the building up of patent monopolies on medicine necessary for public health.
• Respondents argued that the royalty rate of 2.5% was just and reasonable, falling within the Director of Patents' sound discretion and the statutory ceiling of 5% under Section 35-B of R.A. No. 165, as amended, and that the patentee was not deprived of property without just compensation because royalties constitute adequate remuneration.

• Procedural Issues:
  • Whether the BPTTT's action was null and void for failure of private respondent to prove the jurisdictional fact of publication.
• Substantive Issues:
  • Whether the grant of a compulsory license under Section 34(e) of R.A. No. 165 violates international law, specifically the Paris Convention and the GATT Treaty.
  • Whether the grant of a compulsory license over a patented medicine, absent evidence of abuse by the patentee, is an invalid exercise of police power.
  • Whether fixing the royalty at 2.5% of the net wholesale price amounts to expropriation without just compensation and violates due process.

• Procedural: The Court held that petitioner is estopped from assailing the BPTTT's jurisdiction based on the alleged failure to prove publication. Citing Pantranco North Express, Inc. v. Court of Appeals, the Court ruled that a party cannot raise the issue of jurisdiction for the first time on appeal on the ground of laches or estoppel, and this rule applies with equal force to quasi-judicial bodies like the BPTTT.
• Substantive: The Court held that Section 34 of R.A. No. 165 is consistent with the Paris Convention. Article 5, Section A(2) of the Convention explicitly respects the right of member countries to adopt legislative measures providing for compulsory licenses to prevent abuses resulting from exclusive patent rights, such as the growth of monopolies. The time limitations under Article 5, Section A(4) apply only to grounds of "failure to work," not to grounds relating to food, medicine, or public health under Section 34(1)(e). The Court held that the GATT Treaty, Uruguay Round, has no retroactive effect. Because the BPTTT decision was rendered on February 14, 1994, prior to the Philippine Senate's concurrence and the President's ratification in December 1994, the treaty's provisions cannot be invoked by the petitioner. The Court held that the grant of a compulsory license is a valid exercise of police power. The legislative intent of R.A. No. 165 is not merely to supply the quantity of a patented article but also to prevent the growth of monopolies on medicines necessary for public health. The Court held that the compulsory license does not violate the due process and eminent domain clauses. The patentee is not unduly deprived of property because the law grants a two-year protective period of complete monopoly and ensures just compensation in the form of adequate royalties. The 2.5% royalty rate was within the Director of Patents' sound discretion under Section 35-B of R.A. No. 165, which caps royalties at 5%, and the Court of Appeals' factual findings on the reasonableness of the rate are conclusive and binding.

• Compulsory Licensing as an Exercise of Police Power — The State, in the exercise of its police power, may grant compulsory licenses over patents relating to food or medicine to prevent monopolies and promote public health, even without a showing of patent abuse by the patentee. The patentee's property right is not unduly taken because the law provides a protective period of exclusive monopoly and guarantees the payment of reasonable royalties as just compensation.
• Estoppel by Laches on Jurisdictional Challenges — A party who actively participates in proceedings before a quasi-judicial body is estopped from challenging that body's jurisdiction for the first time on appeal. The rule on laches or estoppel applies with equal force to administrative agencies exercising quasi-judicial functions.

• "The right to exclude others from the manufacturing, using, or vending an invention relating to, food or medicine should be conditioned to allowing any person to manufacture, use, or vend the same after a period of three [now two] years from the date of the grant of the letters patent. After all, the patentee is not entirely deprived of any proprietary right. In fact, he has been given the period of three years [now two years] of complete monopoly over the patent. Compulsory licensing of a patent on food or medicine without regard to the other conditions imposed in Section 34 [now Section 35] is not an undue deprivation of proprietary interests over a patent right because the law sees to it that even after three years of complete monopoly something is awarded to the inventor in the form of bilateral and workable licensing agreement and a reasonable royalty to be agreed upon by the parties and in default of such an agreement, the Director of Patents may fix the terms and conditions of the license."

• Parke, Davis & Co. v. Doctors' Pharmaceuticals, Inc., 14 SCRA 1053 (1965) — Followed. The Court reiterated the ruling that compulsory licensing of patents on food or medicine is not an undue deprivation of property because the patentee enjoys a period of complete monopoly and is awarded a reasonable royalty.
• Price v. United Laboratories, 166 SCRA 133 (1988) — Followed. The Court cited this case to support the holding that a 2.5% royalty rate for a compulsory license without technical assistance from the patentee is just and reasonable, and that the payment of royalties precludes a claim of deprivation of property without just compensation.
• Pantranco North Express, Inc. v. Court of Appeals, 224 SCRA 477 (1993) — Followed. The Court applied the principle that a party is estopped from challenging a tribunal's jurisdiction for the first time on appeal, extending the rule to quasi-judicial bodies.
• Tañada v. Angara, G.R. No. 118295 (May 2, 1997) — Cited. Referenced for the historical fact that the Philippine Senate concurred in the ratification of the GATT Treaty on December 14, 1994, establishing that the treaty could not apply retroactively to the BPTTT decision rendered in February 1994.

• Section 34, Republic Act No. 165 (Patent Law) — Enumerates the grounds for compulsory licensing. The Court specifically applied paragraph 1(e), which allows any person to apply for a license after two years from the grant of the patent if the invention relates to food or medicine or is necessary for public health or public safety. The Court held that this provision is consistent with the Paris Convention and is a valid exercise of police power.
• Section 35-B, Republic Act No. 165, as amended by Presidential Decree No. 1267 — Prescribes the terms and conditions of a compulsory license, capping royalty payments at 5% of the net wholesale price. The Court applied this provision to uphold the Director of Patents' discretion in fixing the royalty rate at 2.5%, finding it to be within the statutory limit and supported by substantial evidence.
• Article 5, Section A(2) and (4), Paris Convention for the Protection of Industrial Property — Respects the right of member countries to provide for the grant of compulsory licenses to prevent abuses resulting from the exclusive rights conferred by a patent. The Court held that Section 34 of R.A. No. 165 fits within this framework, and that the time limitations in paragraph (4) apply only to "failure to work," not to public health grounds.

Narvasa, C.J., Melo, Francisco, and Panganiban, JJ.