Can a business recover compensation if a state fails to protect its intellectual assets? The decision in Eli Lilly & Co. v Canada suggests "maybe".

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Jane Lambert

Case No. UNCT/14/2 Eli Lilly & Co. v Government of Canada, (16 March 2017) ICSID

At 10:00 on 17 Aug 2017 I shall give a talk to the IP Summer School at Cambridge entitled Bilateral Investment Treaties & Exporters' Rights Post-Brexit.  If you want to hear it there is still space on the course.  There are lots of distinguished speakers who will speak on many other interesting topics. There will also be an exhibition, reception and other social events.  You can book your place here.

Why this is topical
The reason I have been asked to speak on the topic is that "securing new trading agreements with other countries" is one of the objectives announced in the Brexit white paper. Unfortunately, many of the countries that we might wish to approach are on the US Trade Representative's watch list or even its priority watch risk (see Office of the United States Trade Representative 2017 Special 301 Report). There are various reasons why countries are on those lists. In some cases, it is because there is no or inadequate legal protection for certain categories of intellectual assets. In other cases, it is because enforcement proceedings are too slow or too expensive. Sometimes judges lack an understanding or experience of IP. Other times, the difficulty is that a nation's judges are anything but impartial. The problem for British businesses is that their intellectual assets are at much greater risk in those markets than they are when trading in the EU.

TRIPS (Agreement on Trade-Related Aspects of Intellectual Property Rights) was supposed to put an end to those problems. Unfortunately, not all countries perform their obligations under that agreement. That is one of the reasons why the US Congress enacted legislation requiring the US Trade Representative to make an annual report.  The difficulty for any business that suffers from a government's failure to implement TRIPS is there is no right of action under TRIPS against defaulting governments. Complaints of non-implementation have to be resolved through consultations between governments followed by a form of arbitration if those consultations do not lead to a satisfactory conclusion. Those processes take time and taking up business owners' complaints is not always a priority for any government.

A Possible Solution
When I first read the final award in Metalclad Corporation v United Mexican States  16 ICSID Rev.—FILJ 168 (2001); 40 ILM 36 (2001); 26 Y.B. Com. Arb. 99 (2001) (excerpts); 119 I.L.R. 618 (2002); 5 ICSID Rep. 212, it occurred to me that the provisions for resolving disputes between investors and governments that are to be found in most bilateral investment treaties ("BITs") and multilateral free trade agreements might offer an answer. I wrote a number of articles and gave several talks on the subject even before there were any IP related cases under those provisions (see Jane Lambert Claims against States: Czech Republic v European Media Ventures SA 9 Dec 2007 NIPC Law). After claims under such provisions were launched by two IP owners, I wrote  Bilateral Investment Treaties: A Remedy for SME? (Dec 2013) [2013] EIPR 759 and Bilateral Investment Treaties: Claiming Compensation from Foreign Governments under Bilateral Investment Treaties for failing to provide adequate IP Protection 27 July 2013 NIPC Law.

The Philip Morris and Eli Lilly Decisions
We now have decisions in those cases which I mentioned briefly in Falling to BITs: the Eli Lilly and Philip Morris Cases 8 April 2017. Although both cases went against the IP owners they offer hope that the right sort of claim could succeed.  Philip Morris's claim for compensation for plain packaging legislation for tobacco products that prevented it from benefiting from its trade mark registrations failed on procedural grounds (see  Philip Morris Asia Limited v. The Commonwealth of Australia, UNCITRAL, PCA Case No. 2012-12). Eli Lilly's claim, on the other hand, very nearly succeeded.

Significance of Eli Lilly v Canada
Eli Lilly's claim was not against a third world state that had failed to protect intellectual assets. Canada has as comprehensive and sophisticated a set of IP laws as any country in the world. Nobody doubts that its judges are highly skilled, experienced in IP law and scrupulously fair and impartial. The claimant sought compensation for expropriation of its IPR on the grounds that Canada's Supreme Court had refused to hear appeals against findings of invalidity of two of its patents for want of utility. To base a complaint of expropriation on two judgments that had been upheld by an advanced country's highest court was bold in the extreme. As it happened, it proved to be a step too far. Nevertheless, the award contains much helpful matter for those who might one day seek compensation under a BIT for losses resulting from a state's failure to take reasonable measures to suppress counterfeiting, piracy or some other type of IP infringement.

The Invalidated Patents
In Novopharm Ltd v. Eli Lilly & Co 2010 FC 915 Mr Justice Barnes 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 the application 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 that that patent was invalid for want of utility. 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 but, again, leave was refused.

The Claim
Eli Lilly complained that its patents had been invalidated under a doctrine known as “the promise utility doctrine” that the Canadian courts had developed after the grant of its patents. It contended that such doctrine was radically new and arbitrary, that it discriminated against pharmaceutical companies and their products and that it was contrary to the Canadian government's obligations under Chapter 17 of NAFTA. It also argued that the retroactive application of the doctrine to Claimant’s patents had resulted in the unlawful expropriation of its investments under art 1110of NAFTA and a breach of the Canadian government's obligation to provide the minimum standard of treatment under art 1105. The company claimed damages for direct and consequential losses estimated at not less than C$500 million plus reimbursement of consequential expenses together with accumulated and continuing interest, reimbursement of any tax that it might have to pay, further or other relief and costs.

The Response
The Canadian government denied the claim in its entirety and asked for it to be dismissed with costs.  It contended that the only basis upon which a judgment of a national court could give rise to a claim for compensation was a denial of justice and that had not been alleged. It argued that the complaint was out of time, that there had been no dramatic change in the Canadian courts’ interpretation of the utility requirement between the granting of the patents and their invalidation and that the invalidation of the patents did not constitute a breach of NAFTA or any other international obligation. In that regard, the government submitted that consideration of Canada’s compliance with Chapter 17 of NAFTA or its other international obligations fell outside the scope of the investor-state dispute resolution provisions of NAFTA.

The Arbitrators
Eli Lilly submitted its claim to arbitration in accordance with art 1116 (1) of NAFTA and each party appointed arbitrators in compliance with art 1123. Eli Lilly appointed Gary Born of WilmerHale while the Canadian government appointed Sir Daniel Bethlehem KCMG QC of 20 Essex Street. The presiding arbitrator was Prof Albert Jan van den Berg of Hanotiau & van den Berg. The parties chose to conduct the arbitration under the UNCITRAL Arbitration Rules.

The Issues
At para [110] of their award, the arbitrators identified the following issues:
"(i)   What is the scope of the Tribunal’s jurisdiction, if any? 
(ii)    Is denial of justice the only basis of liability for judicial measures under NAFTA Chapter Eleven? 
(iii)   Has there been a dramatic change in the utility requirement in Canadian patent law? 
(iv)   Is the utility requirement in Canadian patent law, as applied to the Zyprexa and Strattera Patents, arbitrary and/or discriminatory?
(v)    If (iii) and/or (iv) is answered in the affirmative, did the invalidations of the Zyprexa and Strattera Patents breach Respondent’s obligations under NAFTA Article 1110 and/or Article 1105?"

What was the scope of the Tribunal’s jurisdiction, if any? 
There were really three points on jurisdiction though the second and third were intertwined. 

The first was could the arbitral tribunal consider whether the Canadian government had discharged its obligations under art 1709 (1).  That provision requires states 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."

The arbitrators held at para [101] that their jurisdiction was "limited, in the circumstances of this case, to claims of a breach of obligations under Section A of NAFTA Chapter Eleven." They concluded:

"A NAFTA Chapter Eleven tribunal is not a tribunal of general jurisdiction with competence to adjudicate claims of a breach of other provisions of NAFTA."

However, they added at [102]:

"Without prejudice to this appreciation, the Tribunal notes, as will be evident from the discussion that follows on the question of applicable law, that the proper limitation of the Tribunal’s jurisdiction to alleged breaches of Section A of NAFTA Chapter Eleven does not require the Tribunal to ignore other provisions of the NAFTA, other agreements between the NAFTA Parties, or other relevant and applicable rules of international law, for purposes of assessing the claims before it."

The second issue was whether Eli Lilly had brought its claim within 3 years as required by art 1116 (2) while the third was whether Canada has taken that limitation point in time. 

The Canadian government argued that as Eli Lilly had complained of a change in the law, time started to run when the law changed and not when its patents had been invalidated.  Eli Lilly had pleaded that the law changed between 2002 and 2008 and one of the cases upon which it relied was Eli Lilly Canada Inc. v. Apotex Inc., 2009 FCA 97 to which it had been a party.  Since the claim had not been brought within 3 years of that decision, the government submitted that the arbitrators had no jurisdiction to entertain the claim.

The difficulty for the government was that art 21 (3) of the Unictral Rules requires pleas that the arbitral tribunal lacks jurisdiction to be raised no later than in the defence. In this case, the government had pleaded that defence in a rejoinder.

The tribunal did not consider the art 21 (3) point as it found that the claim had been brought in time. In the arbitrators' view, time ran from the exhaustion of the legal process which was when leave to appeal to the Supreme Court against invalidation of the patents was refused.

Was Denial of Justice the only Basis of Liability for judicial measures under NAFTA Chapter Eleven?
The tribunal did not think it necessary to decide this issue in view of its finding on the next but it made some helpful observations. It noted that the judiciary is an organ of a state and that governments must take responsibility for judges' decisions. The tribunal could envisage circumstances other than a denial of justice that might fall within the scope of art 1105 and it did not wish to rule out the possibility that a judicial decision could amount to expropriation. However, such a decision would have to be far more egregious than the allegations in this case.

Had there been a dramatic change in the utility requirement in Canadian patent law?
The arbitrators decided that there had not. The basic requirement that an invention will do what its specification promises that it will do was propounded by Mr Justice Dickson in Consolboard Inc. v. MacMillan Bloedel (Sask.) Ltd., [1981] 1 SCR 504, 1981 CanLII 15 (SCC). That requirement had been mentioned in other cases that predated the grant of Eli Lilly's patents. At para [324] of their award the arbitrators noted:

"While the promise standard may not have played a significant role in the Canadian jurisprudence before 2005, and courts looked to the disclosure for the promise in relatively few cases, the rule was clearly “out there”, to be ignored at a patentee’s peril."

It followed that Eli Lilly's argument that the promise standard constituted a dramatic change in the law failed.

The arbitrators also considered two connected rules of Canadian law, namely the exclusion of post grant evidence to prove that an invention lived up to its promise and a requirement that an applicant for a patent should set out the basis for any prediction that the patent will work in his or her application. They found that those rules derived from authority that predated Eli Lilly's applications for the invalidated patents. The arbitrators were not impressed by the updating of the examiners' practice manuals or by statistical evidence that there had been a surge of invalidations on utility grounds. They concluded at [387] that the claimant had not demonstrated a fundamental or dramatic change in Canadian patent law. As Eli Lilly had conceded that it must demonstrate such a dramatic change in the law in order to succeed on its claims under arts 1105 and/or 1110, its failure to do so effectively disposed of its claim.

Was the Utility Requirement in Canadian Patent Law, as applied to the Zyprexa and Strattera Patents, arbitrary and/or discriminatory?
The tribunal was not persuaded that the promise utility doctrine was arbitrary as applied to second medical use patents as it was intended to ensure that the public would get something in return for the monopoly that it would grant to the patentee. Nor did it find any evidence that the doctrine was discriminatory either against pharmaceutical inventions generally or pharmaceutical inventions of foreign companies in particular.

Did the Invalidations of the Zyprexa and Strattera Patents breach Respondent’s Obligations under NAFTA Article 1110 and/or Article 1105?
As the tribunal had found for the Candian government on the two previous issues it did not need to consider the last.

Eli Lilly was ordered to pay the arbitrators' fees and expenses which amounted to US$749,697.97. For those who are interested, Prof van den Berg received US$259,734.75, Sir Daniel US$114,359.20 and Mr Born US$138,872.07. As Eli Lilly had failed on all issues except the plea as to limitation it was ordered to bear its own and pay 75% of the Canadian government's costs which amounted to C$4,448,625.32 plus its disbursements of US$1,352,239.50. It is worth noting that Eli Lilly incurred costs and disbursements of US$8.13 million of which Covington & Burling's fees were nearly US$6.3 million and Gowing WLG's just over US$1.5 million. It also had experts and witnesses fees and expenses amounting to US$832,562. Clearly, such proceedings are not cheap but neither are they off the scale when compared to the cost of some of the litigation in our new Business and Property Courts.

So what lessons can be drawn from this?  Well. first of all intellectual property is definitely an investment and if it expropriated within the meaning of art 5 of the draft British BIT there is no reason in principle why it cannot be claimed back. Even from countries like China, India, Indonesia and Russia which feature so prominently in the USTR Special 301 Report? Why not? We have treaties with investor state dispute resolution provisions with all those countries. What amounts to expropriation is rather less certain. It was agreed on all sides that "denial of justice" which has a technical meaning in public international law would do and, as I said above, there is useful dicta in the discussion of the second issue that equally egregious conduct would also do. I would respectfully suggest failing to comply with TRIPS through absence or inadequacy of legislation or scandalous court delays or indeed any conduct that would come to the attention of the USTR might also be enough. Claimants would have to get their tackle in order procedurally. With the benefit of hindsight, the objection to Philip Morris's claim seems obvious.

I think this is a fascinating topic and I look forward to exploring it with better minds than mine at Cambridge next month. If you can't make it to my talk or you wish to discuss this topic generally, call me during office hours on +44 (0)20 7404 5252 or send me a message through my contact form.


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