[G.R. No. 121267.

October 23, 2001]

SMITH KLINE & FRENCH LABORATORIES, LTD. plaintiff-appellee, vs.
COURT OF APPEALS and DANLEX RESEARCH LABORATORIES, INC., defendant-appellant.

FACTS:
In August 1989, Danlex Research Laboratories petitioned before Bureau of Patents, Trademarks
and Technology Transfer (BPTTT) that it may be granted a compulsory license for the use and
manufacture of the pharmaceutical product Cimetidine. Cimetidine is originally patented to
Smith Kline and French Laboratories, Ltd. in 1978, and the said patent is still in force at the
time of application by Danlex Research.
The BPTTT granted the application of Danlex Research together with a provision that Danlex
Research should be paying 2.5% of the net wholesale price as royalty payment to Smith Kline.
This was affirmed by the Court of Appeals.

Petitioners argument:
 that the same is an invalid exercise of police power because there is no overwhelming
public necessity for such grant considering that Smith Kline is able to provide an
adequate supply of it to satisfy the needs of the Philippine market; that a provision in
the Philippine Patent Laws is violative of the Paris Convention to which the Philippines
is a signatory.
• Second contention, Smith Kline states that the Paris Convention only allows compulsory
licensing if the original licensee (patent holder) has failed to work on the patent; that
therefore, the provision in the Philippine Patent Laws which adds other grounds for the
granting of compulsory license i.e. monopoly, is invalid and contrary to the Paris
Convention.
• It is also contended that the grant of a compulsory license to private respondent will
allow the latter to liberally manufacture and sell medicinal products
containing Cimetidine without even extending to petitioner due recognition for
pioneering the development and worldwide acceptance of said invention, and will
unreasonably dilute petitioners right over the patent
• Petitioner likewise asseverates that the rate of royalty fixed by the BPTTT at 2.5% of net
sales is grossly inadequate, taking into consideration its huge investments of money,
time and other resources in the research and development, as well as marketing
of Cimetidine. It is further alleged that such rate has no factual basis since the appellate
court and the BPTTT relied solely on analogous cases and did not explain how such rate
was arrived at.
Issues:
• 1st: Whether or not it is an invalid exercise of Police power.
• 2nd: Whether or not , the provision in the Philippine Patent Laws which adds other
grounds for the granting of compulsory license i.e. monopoly, is invalid and contrary to
the Paris Convention.
• 3rd: Whether or not the grant of compulsory license to respondent prevents recognition
on the part of petitioner.
 • 4th: Whether or not 2.5% of net sales is grossly inadequate.

RULING: SC RULED IN FAVOR OF RESPONDENT

1st contention ruling:

SC argued that CA was correct in affirming BPTTT’s ruling because it is accordance with SECTION
34 (1)(e) and SECTION 34(2).
Furthermore, The granting is a valid exercise of police power. Cimetidine is medicinal in nature,
and therefore necessary for the promotion of public health and safety.
2nd contention ruling:
Section A(2) of Article 5 [of the Paris Convention] unequivocally and explicitly respects the right
of member countries to adopt legislative measures to provide for the grant of compulsory
licenses to prevent abuses which might result from the exercise of the exclusive rights
conferred by the patent.
The phrase “failure to work;” however, as such, is merely supplied by way of an example,
The main purpose of the provision was to prevent growth of monopolies
3rd contention ruling:
SC does not agree with petitioner because by the grant of the compulsory license, private
respondent as licensee explicitly acknowledges that petitioner is the source of the patented
product Cimetidine. Also the disadvantage is far outweighed by the benefits resulting from
the grant of the compulsory license. Therefore there is no deprivation of petitioners
property.
4th contention ruling:
In connection with SECTION 35, because there was absence of agreement, the Director of the
BPTTT may fix the terms thereof, including the rate of the royalty payable to the licensor. The
law explicitly provides that the rate of royalty shall not exceed five percent (5%) of the net
wholesale price.