In a compulsory license, the government forces the holder of a patent, copyright, or other exclusive right to grant use to the state or others. Usually, the holder does receive some royalties, either set by law or determined through some form of arbitration.

Examples in copyright law

A compulsory copyright license is an exception to copyright law that is usually philosophically justified as an attempt by the government to correct a market failure.

Some compulsory licenses protect those who wish to use a work for educational or non-commercial purposes. In cases when it is judged too burdensome for scattered or small-scale buyers and sellers to find one another and negotiate a price, governments sometimes issue a compulsory license for the use so that the relative difficulty of obtaining permission for it does not extinguish it. For instance, the copyright law of Canada has a compulsory license scheme for orphaned works (not to be confused with orphan drugs, which often get more protection). In these types of cases, the license must often pass the Berne three-step test.

United States copyright law establishes compulsory licenses as purchase methods or strong market influences in the entertainment industry, such as playing popular music on a radio station or webcast, and for many television transactions, like the use of broadcasted audiovisual works (such as TV shows) in cable television systems.

The Electronic Frontier Foundation and other downloader advocacy groups have suggested forms of compulsory licensing as one possible solution to the legal conflicts surrounding file sharing. In a typical scenario, those who hold the copyrights for the music traded between network users would be legally barred from suing the infringers. In return, the government would extract payments from listeners, perhaps electronic pay-per-song fees or perhaps sales taxes on peer-to-peer file-sharing software, blank storage media, or even Internet access itself. Assisted by some form of P2P "charts," music industry groups would theoretically distribute these royalties to the rights holders.

Examples in patent law

Compulsory licensing of patents is sometimes used to increase the deployment of beneficial new technology. Some countries will force an inventor to sell the rights to his work at a government-specified price if he fails to "work" his patent or is seen as gouging the prospective buyers. The U.S. Clean Air Act weakens patent protection on technology that makes it easier to meet air pollution standards. When someone develops new technology funded by U.S. government grants, the inventor may hold the patent, but the state retains the right to force a license to its own choice of manufacturer.

In other cases, the compulsory license is used as a seizure power akin to eminent domain. Governments often appropriate the patent rights to technologies they intend to incorporate into infrastructure, civil engineering, new weapons, or government-funded science projects. By law, the U.S. government can declare an atomic-energy invention or discovery "affected with the public interest." The researcher is still compensated, but he will sell the rights, and for a state-determined amount.

These licenses are also used as a tool for resolving antitrust disputes by counteracting the monopolistic use of patents.

In some countries, health care is so heavily subsidized that a significant portion of a government's budget is spent on medication. The threat of compulsory licensing helps negotiate a lower price for patented drugs. But in policy responses to health threats posed by serious infectious disease, compulsory licensing can become a highly charged political issue.

When Western pharmaceutical companies develop and manufacture drugs effective against malaria, HIV/AIDS, tuberculosis, and other common Third World ailments, poor countries and activist NGOs often target their intellectual property for seizure. For example, Mozambique, Zambia, and Zimbabwe all issued compulsory licenses for antiretroviral drugs in 2004, allowing generic manufacturers in India and Africa to produce AIDS drugs without buying the patent rights to do so. The patent holder typically gets royalties in the 0-2.5% range, in order to keep the final price as low as possible. International disputes sometimes break out between the patent holder's government and the compulsory licensee's government, each trying to protect its own biotech industry.

In designing defenses against pandemics or bioterrorism, planners sometimes seek huge supplies of antibiotics. Here, the issue is not so much the cost per dose as the number of doses on the market. Many modern drugs have long production cycles, sometimes as long as a year, so the drug companies must always estimate future demand for their patented drugs and vaccines. The number of victims in a flu pandemic or anthrax attack could exceed any reasonable prediction, and for the original maker to increase production could itself be a lengthy process. Disaster response plans often call for compulsory licenses to drastically increase the supply, with the patent holder's royalties usually in the 4-6% range.