Title
Smith Kline and French Laboratories, Ltd. vs. Court of Appeals
Case
G.R. No. 121867
Decision Date
Jul 24, 1997
A foreign pharmaceutical company challenged the grant of a compulsory license to a domestic firm for producing a patented drug, alleging violations of international law, police power, and due process. The Supreme Court upheld the license, affirming its validity under the Paris Convention and Philippine law, deeming the royalty rate reasonable and the state's action a legitimate exercise of police power for public health.
compulsory license
patented pharmaceutical product
international law
A

Case Summary (G.R. No. 166494)

Factual Background: The Compulsory Licensing Petition

On 30 March 1987, private respondent filed with the BPTTT a petition for compulsory licensing to obtain authority to manufacture its own brand of medicine from Cimetidine and to market the resulting product in the Philippines. The petition was brought under Section 34 of R.A. No. 165, which authorizes compulsory licensing after the expiration of two years from the grant of a patent where, among other grounds, the patented invention relates to food or medicine, or is necessary for public health or public safety.

Private respondent alleged that petitioner’s Philippine Letters Patent No. 12207 was issued on 29 November 1978, so the statutory two-year period had already passed when the petition was filed. It further alleged that it had the capability to work the patented product or to make use of it in its manufacture of medicine. Petitioner opposed the petition on multiple grounds: it asserted that private respondent lacked a cause of action and capability to work the patented product; that the petition failed to specifically divulge how private respondent would use or improve the patented product; and that private respondent was motivated by pecuniary gain in seeking the compulsory license. Petitioner also claimed that it was capable of satisfying local market demand for the medicines covered by the patent. Finally, petitioner challenged the constitutionality of Sections 34 and 35 of R.A. No. 165 for purported violations of due process and equal protection.

Proceedings Before the BPTTT and the License Terms

After “appropriate proceedings,” the BPTTT issued its decision on 14 February 1994 granting a license to private respondent. The license was expressly non-exclusive and non-transferable and allowed private respondent to manufacture, use, and sell in the Philippines its own brands of pharmaceutical products containing the patented invention disclosed and claimed in Letters Patent No. 12207. The license was to subsist for the remaining life of the patent, subject to termination mechanisms stated in the license conditions.

Central to petitioner’s objections was the royalty rate fixed under the license. The BPTTT required private respondent to pay petitioner a royalty equivalent to two and one-half percent (2.5%) of net sales in Philippine currency for products containing the patented substance, with detailed definitions for “net sales” and computational rules when products contained admixed active ingredients. The BPTTT also required the licensee to keep sufficient records, allowed inspection and examination of books and records at the licensee’s expense through a certified public accountant acceptable to both parties, required compliance with drug and medicine laws on clinical tests and approvals, and provided for arbitration before the Director of the BPTTT or a delegated ranking official in case of disputes. The license could be terminated, including by petitioner with thirty (30) days’ notice, for defaults such as nonpayment of royalties or default in performance of covenants, and the license terms specified that termination would not deprive petitioner of accrued remedies and royalties.

Appeal to the Court of Appeals

Petitioner appealed to the Court of Appeals via a petition for review docketed as CA-G.R. SP No. 33520. Petitioner argued, among others, that the BPTTT’s decision (a) allegedly violated international law embodied in the Paris Convention, and also (b) constituted an invalid exercise of police power. It further contended that even assuming validity, the royalty rate of 2.5% was fixed without factual basis and amounted to expropriation without just compensation, thereby violating constitutional rights to due process and property. Petitioner lastly argued that the case should not have proceeded because private respondent allegedly failed to affirmatively prove publication, which petitioner treated as a jurisdictional fact required by law.

In its decision dated 4 November 1994, the Court of Appeals affirmed in toto. It held that the BPTTT’s decision was supported by substantial evidence and emphasized factual findings that at the time of filing the petition, the letters patent had been in effect for more than two years, and that the patented invention related to compounds inhibiting histamine action, making it a matter of medicine. The Court of Appeals also credited the BPTTT’s finding that private respondent had the capability to work the patented product, including through competent personnel, machines, and equipment, and the capability to manufacture medicines containing patented active ingredients. It further reasoned that compulsory licensing was meant not only to enable others to supply the public with quantity but also to prevent the build-up of patent monopolies, citing Parke Davis v. Doctors Pharmaceuticals, Inc., 14 SCRA 1053.

On the royalty issue, the Court of Appeals rejected petitioner’s expropriation theory. It quoted Paragraph 3, Section 35-B of R.A. No. 165, as amended by P.D. No. 1267, which limited compulsory licensing royalty rates to not exceeding five percent (5%) of the net wholesale price. It held that the Director of Patents had exercised discretion in fixing 2.5% and relied on jurisprudence recognizing the reasonableness of that rate, including Parke Davis & Co. vs. DPI and Tiburcio, and Price v. UNILAB, where royalty of 2.5% was considered just and reasonable. The Court of Appeals also invoked the administrative-law principle that findings of fact of quasi-judicial agencies are respected unless there is no evidence or the evidence is clearly insubstantial.

Issues Raised in the Supreme Court

After the denial of petitioner’s motion for reconsideration, petitioner elevated the matter to the Supreme Court. Petitioner assigned errors that, in substance, reasserted: (i) the alleged violation of international law under the Paris Convention and the GATT obligations; (ii) the alleged invalid exercise of police power due to absence of showing of overwhelming public need; (iii) the alleged absence of factual basis for the royalty rate and the claimed violation of due process and prohibition against uncompensated expropriation; and (iv) the alleged nullity of the BPTTT decision for failure of private respondent to prove publication as a jurisdictional fact.

The Court’s Treatment of the Paris Convention

The Supreme Court rejected petitioner’s reliance on the Paris Convention. It identified the relevant provision as Article 5 and quoted Article 5, Section A establishing that member countries may adopt legislative measures providing for compulsory licenses to prevent abuses resulting from the exclusive rights conferred by patents, and that compulsory licenses are non-exclusive and non-transferable (subject to limited exception) unless the relevant circumstances are met. The Court explained that Section A(2) of Article 5 explicitly respects the right of member countries to adopt laws for compulsory licensing to prevent abuses, with “failure to work” given as an example. It held that this did not prohibit the inclusion of other categories of abuses.

The Court then held that Section 34 of R.A. No. 165 fits the Paris Convention’s framework. It noted that R.A. No. 165 had been enacted prior to Philippine adherence to the Convention but found that its compulsory licensing scheme harmonized with Article 5. The Court also found that congressional intent behind R.A. No. 165 included preventing monopolies, which it treated as among the abuses foreseen by Article 5 and targeted by the statute. It further clarified that the timing limitation in Article 5, Section A(4) concerns only compulsory licenses grounded on “failure to work or insufficient working,” and not other grounds that states may reasonably determine.

The Court’s Treatment of the GATT Uruguay Round Argument

The Supreme Court likewise rejected the GATT-based argument. It treated petitioner’s reference as the Uruguay Final Act and the Agreement Establishing the World Trade Organization and related instruments. It observed that the Philippines ratified the relevant GATT/WTO obligations only in December 1994 through a Senate concurrence and presidential ratification. It held that the treaty had no retroactive effect, and therefore could not govern the BPTTT decision dated 14 February 1994.

Substantial Evidence Review and Deference to Administrative Findings

The Supreme Court treated petitioner’s remaining errors largely as challenges to factual determinations and administrative appraisal. It restated the settled principle that findings of fact of the Court of Appeals are conclusive unless exceptions apply, such as speculation, manifest absurdity, grave abuse of discretion, misapprehension of facts, conflicting findings, or findings going beyond issues contrary to admissions. The Court held that petitioner failed to show that the exceptions applied.

It agreed with the Court of Appeals that the BPTTT conducted full-blown adversarial proceedings before it and that the BPTTT exhaustively studied facts and reached findings supported by substantial evidence. It rejected petitioner’s claim that the licensing decision deprived it of property rights without due process. The Court emphasized the statutory scheme: the patent holder receives a protective period of two years of exclusivity, and afterwards the law provides for royalties as just compensation in the form of workable licensing terms fixed by agreement or, failing agreement, fixed by the Director of Patents under the statute’s authority.

In support, the Supreme Court invoked Parke, Davies & Co. v. Doctors’ Pharmaceuticals, Inc., explaining that the right to exclude others for patents relating to food or medicine is conditioned on allowing compulsory licensing after the protected period. The Court held that compulsory licensing without disregard of statutory conditions was not an undue deprivation of proprietary interests because t

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