In retaliation to growing political pressure and financial sanctions, Russia has not conceded on its position in the Russia Ukraine conflict and is leveraging intellectual property to dig its heels in. To date, the world has seen Russia release Decree 299, allowing for compulsory licensing of third parties’ patents in Russia without compensation, the citing of countries’ antagonistic stance against Russia as justification for the misappropriation of trade mark proprietors’ rights and, finally, changing its stance as it relates to ‘grey’ goods, allowing for parallel imports.
Based on the nature of our firm’s work, our intellectual property, transactional and international structuring departments focus on drawing value from our clients’ intellectual property portfolios. To a large extent, this involves licensing arrangements, which comprise three main elements: protection of legacy and future intellectual property; value realisation; and enforceability. Should any of these three elements be lacking, it can prove fatal for the licensor, as well as impact negatively on trust in a particular market. This article considers Decree 299, as it relates to compulsory licensing in general, and its possible impact on patent proprietors, the particular market and the broader investment community.
6 March 2022 saw Decree 299 of the Government of the Russian Federation provide Russian companies and individuals the right to use inventions, utility models and industrial designs of third parties without owner permission or compensation, provided the patent stems from a country listed by the Russian Federation as an “unfriendly country”. In other words, compulsory licensing. This decree came on the heels of many businesses withdrawing from the Russian market, countries blacklisting Russia and imposing financial sanctions on Russia and its residents.
Compulsory licensing is not a new concept and is allowed in terms of the Trade Related Aspects of Intellectual Property Rights Agreement (“TRIPS“), administered by the World Trade Organisation. As background, TRIPS provides the minimum standards relating to intellectual property to be implemented by each of its member states and is binding on those members. In terms of Article 28 of TRIPS, the owner of a patent has exclusive rights in the patent, to the exclusion of all others. However, Article 30 and 31 of TRIPS allows member states to leapfrog these patent owners and to provide a member state’s government, or a third party appointed by the government, the right to exercise these patents, thereby side-stepping the exclusive rights to patent owners. This is intended as an access solution in cases of extreme emergency or states of disaster and are subject to strict conditions, such as limited scope and duration, remuneration to patent owners and strict supply of the domestic market.
Based on Russian Decree 299, however, Russia has secured itself the option to issue compulsory licences for any patent registered in Russia by a patent owner who is a resident of an ‘unfriendly country’, thereby allowing any Russian resident to use that patent without compensation to the patent owner and without limitation to duration or scope, leaving patent owners with little to no recourse.
Irrespective of whether the reasons substantiating compulsory licensing in Russia are justifiable and whether it is fair to only issue such licences for patents stemming from ‘unfriendly countries’, Decree 299 goes further than TRIPS allows, especially as the patent owners are not being remunerated. It will very soon be known whether these licenses are for the supply of the domestic market, or for sale of products to the highest bidder instead. In a world where compulsory licenses are rarely granted, we are seeing a deviation from what TRIPS intended, which can possibly be interpreted as piracy rather than privilege.
Practically, we may start to see more businesses exit the Russian market and a decrease in patent registrations in Russia. It has been noted that existing patent holders in Russia will have to consider whether it is better to continue paying patent maintenance fees in the hopes that Russia will soon reverse this decree, or abandon their patent maintenance fees entirely, thereby allowing the patent to lapse and become available to use in Russia.
From a South African perspective, we have seen an emerging trend whereby international investors urge South African businesses to offshore before the investor will consider an investment. The reason? The South African environment is prone to over-regulation, especially when it comes to intellectual property. I fear that under-regulation will be met with a similar attitude from the investment community, possibly urging Russian businesses themselves to offshore. Even though it is Russian residents who secure the right to commercialise patents and design rights in Russia, it is questionable whether they will be able to build confidence outside of their local environment. Successful investment requires security through protection, skill and expertise behind commercialisation, and investor confidence in the product, service and company trajectory. Because compulsory licenses are by their nature for a limited period of time, a holder of the right will not be able to guarantee the length of the commercialisation window. Furthermore, it is questionable whether Russia will be able to bridge the knowledge gap needed to implement the patents. Should Russia incentivise skilled and qualified non-residents to relocate to Russia for assistance, the backlash from countries may continue – which, coupled with the uncertainty of the correct know-how behind the commercialisation, may impact negatively on investor confidence. Finally, investing in a Russian entity that aims to usurp rights to patents (and any intellectual property for that matter) could see the investor being pressurised or face backlash from the investor’s group or from its existing or future investees that form part of the investor’s portfolio. If this position becomes the status quo for Russia or remains for longer than is needed, I expect investor confidence to wane.
The short-term effect of allowing Russian residents the right to commercialise patents, designs and utility models could initially create a bustling micro market. However, I do not believe that this will benefit Russia in the long run, especially seeing that investment is a crucial ingredient of a company’s scalability. Investor confidence will decline as a result of this approach and it is foreseeable that the longer this position remains, the more difficult it will be to rebuild that confidence. Following the recent COVID pandemic, it is self-evident that local residents and businesses will take the hardest knock and that a weighing up of the long- and short-term benefits should be reconsidered.