Bilateral Investment Treaties: Claiming Compensation from Foreign Governments under Bilateral Investment Treaties for failing to provide adequate IP Protection

In Novopharm Ltd v. Eli Lilly & Co 2010 FC 915 Mr. Justice Barnes of the Federal Court of Canada declared that Canadian patent no. 2,209,735 for the second medical use of the drug atomoxetine to treat attention deficit hyperactivity disorder in adults was invalid for inutility. His judgment was upheld by the Federal Court of Appeal in Eli Lilly & Co. v. Teva Canada Ltd 2011 FCA 220. Eli Lilly & Co. applied for leave to appeal to the Canadian Supreme Court but that was refused on 8 Dec 2012.

Similarly, in Eli Lilly Canada Inc. and Others v Novopharm Ltd 2011 FC 1288 Mr. Justice O'Reilly threw out Eli Lilly's claim against Novopharm for infringement of its Canadian patent no. 2,041,113 for olanzapine on the ground of invalidity. Again, Eli Lilly appealed but the Federal Court of Appeal upheld the court below in Eli Lilly Canada Inc v Novopharm Limited, 2012 FCA 232. Again, Eli Lilly sought leave to appeal to the Supreme Court and, again, it was refused.

End of story one might think.

Well possibly not because Eli Lilly served on the 13 June 213 a notice of intent to claim C$500 million damages from the Canadian government for the loss and damage that it claims to have sustained from the invalidation of its patents by the courts of Canada.

Canada, the United States and Mexico are party to an agreement to set up the North American free trade area known as "NAFTA". Chapter 11 of NAFTA requires each party to that agreement to respect investments in their territories by the nationals of the other.   

Art 1102 (1), for instance, requires each party to

"accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments."

Art 1105 (1) further requires parties to

"accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security."

Finally, art 1110 (1) protects investors from appropriation of their investments:

"No Party may directly or indirectly nationalize or expropriate an investment o f an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment ("expropriation"), except:
(a) for a public purpose;
(b) on a non-discriminatory basis;
(c) in accordance with due process of law and Article 1105(1); and
(d) on payment of compensation in accordance with paragraphs 2 through 6."

The term "investment" is defined very broadly by art 1139 NAFTA and specifically includes

"(g) real estate or other property, tangible or intangible, acquired in the expectation or used for the purpose of economic benefit or other business purposes;"

Art 1116 (1) of  NAFTA enables an investor of any of the parties to the agreement to submit to arbitration a claim that another party to the agreement has breached an obligation under the agreement whereby the investor has incurred loss or damage.   The first step is for the aggrieved investor to serve notice of intent to submit a claim to arbitration under art 1119 at least 90 days before the submission of the claim.   If the dispute is not resolved within that time the complainant can institute proceedings in ICSID ("the International Centre for the Settlement of Investment Disputes"), an adjunct of the World Bank in Washington.

Eli Lilly claims that the invalidation of its patents by the Canadian courts amounts to expropriation of its investment in Canada:

"Through the measures in issue, Canada has directly expropriated Lilly's exclusive rights conferred by the the Strattera and Zyprexa patents. Canada took away these rights with respect to Strattera on September 14, 2010 and with respect to Zyprexa on November 10, 2011. The effect of the measures was to void the patents ab initio, thereby depriving Lilly of its exclusive rights to prevent third parties from making, using or selling its patented products during the patent term or to enforce those rights. In the alternative, Canada has indirectly expropriated Lilly's exclusive rights conferred by the Strattera and Zyprexa patents through the measures in issue. The foremost consideration when an indirect expropriation is alleged is the effect of the measures complained of and whether they have deprived the investor of substantially all of the value of its investment. The measures in issue have had the effect of destroying the value associated with Lilly's investments, namely, the exclusive rights to prevent third parties from making, using or selling the patented product during the patent term and to enforce those rights."

The company also contends that the Canadian government has infringed other provisions of Chapter 11 including arts 1102 and 1105 as well as an obligation under art 1709 NAFTA to

"make patents available for any inventions, whether products or processes, in all fields of technology, provided that such inventions are new, result from an inventive step and are capable of industrial application. For purposes of this Article, a Party may deem the terms "inventive step" and "capable of industrial application" to be synonymous with the terms "non-obvious" and "useful", respectively."

As a result of those alleged breaches, Eli Lilly claims to have suffered losses of at east 500 million loonies.

Now the basis of the claim is that the Canadian courts have developed a doctrine whereby the utility of a pharmaceutical invention is judged by reference to the promise made in the specification.   Eli Lilly contends that this doctrine, which is known as "the promise doctrine", exists nowhere else in the world and results in the invalidation of patents that would be allowed elsewhere.   It says that the Canadian courts had no business to develop doctrines at variance with US and European patent law, that if the courts of Canada don't see the error of their ways then the Parliament of Canada should change the law and, in the meantime, the Canadian taxpayer should pay Eli Lilly C$500 million at the very least.

If this sounds like chutzpah then remember that this case is the latest in a spate of claims by private companies against sovereign governments that followed a claim by the US waste disposal company Metalclad Insulation Corp.against the Mexican government for compensation for the refusal of the state and local governments to grant planning permission to use a landfill site that Metalclad had acquired in the small town of Guadalcázar, San Luis Potosi for the disposal of toxic waste.  Metalclad's claim was based on the same provisions of NAFTA as Eli Lilly's.  In the arbitration, the tribunal which consisted of Professor Sir Elihu Lauterpacht, QC, CBE, Mr Benjamin R. Civiletti and Mr José Luis Siqueiros sitting in Vancouver, British Columbia held at paragraph [101] of its award of 30 Aug 2000 that Metalclad had not been treated fairly or equitably under NAFTA and succeeded on its claim under art 1105.and at paragraph [112] that Mexico had indirectly expropriated Metalclad’s investment without providing compensation to Metalclad for the expropriation and had thereby violated art 1110.  The arbitrators awarded Metalclad damages of US$16,685,000.  The award was reduced slightly on appeal to the British Columbia courts but generally the result was seen as a success for the comparatively little chap against foreign governments.

"What's all that got to do with us?" I hear you say. "We are not yet part of NAFTA though there have been calls by politicians and journalists on both sides of the Atlantic for us to join it (see, for example, Ian Murray and James Bennett "Britain's Future Lies With America, Not Europe" 29 Dec 2011, Wall Street Journal).  However, we do have bilateral investment treaties ("BITs") with 102 governments around the world and each of those agreements contains provisions that are very similar to those of Chapter 11 of NAFTA. Many of those agreements are with countries that supply clothing, electronic gizmos and all sorts of other goodies to Western consumers.   A complaint that I often hear from small and medium enterprises ("SME") in this country is that they subcontract the manufacture of their product to South East Asia only to find unlicensed copies flooding back to them because nobody in those countries respects foreigners' (or at least their) IP.  Furthermore they add, there doesn't seem to be anything anybody can do about.

Well maybe now there is. If the refusal of planning permission by the council of a little town in Mexico  and the invalidation of a US company's Canadian patent amounts to expropriation then surely it can be argued with equal force that the failure to provide a proper remedy to a British company for the infringement of its IP rights amounts to expropriation of that company's rights.  If the local legislation is inadequate, if IP infringement proceedings are slow, uncertain or expensive, if officials are corrupt then maybe you should claim compensation from the government of the country concerned through arbitration in ICSID.
Main Street, Salinas California  Source Wikipedia

For the SME a claim in ICSID is nothing like as daunting as might be supposed.   Metalclad was
represented very effectively not by well known Wall Street or Los Angeles attorneys but by a Mr. Clyde C Pearce who practises on his own account in Salinas which is a town that is about the same size as Huddersfield.

If you want to know more about the topic I have developed my ideas in an article which I have just submitted to the EIPR for publication and I have just had a very nice email back from Hugh Brett which suggests that it will be accepted.   I shall also try to catalogue as many materials about the Eli Lilly claim and other materials on IP claims relating to BITs and NAFTA as possible.  You can give me a ring on 020 7404 5252 during office hours, fill out my contact form, send me a tweet, write on my wall or send me a message through G+, Linkedin or Xing.

Further Reading

Jane Lambert "Eli Lilly and Co. v Government of Canada: Latest Developments" 24 Nov 2014
Jane Lambert "Dispute Resolution in the Proposed North Atlantic Free Trade Area" 25 May 2014
Jane Lambert "Bilateral Investment Treaties: Eli Lilly and Co. v Government of Canada" 2 Jan 2014
Jane Lambert "Bilateral Investment Treaties: A Remedy for SME?" (Dec 2013) [2013] EIPR 759
Jane Lambert  "The UAE's Bilateral Investment Treaties" 28 July 2013 NIPC-Gulf
Jane Lambert  "Claims against States: Czech Republic v European Media Ventures SA" 9 Dec 2007


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