Falling to BITs: the Eli Lilly and Philip Morris Cases

Jane Lambert


In anticipation of our departure from the European Union. Her Majesty's government and businesses in the United Kingdom have been exploring the possibility of developing new markets for British goods and services overseas. Only this week, the Prime Minister visited Saudi Arabia and Jordan (see Prime Minister's visit to Saudi Arabia and Jordan: April 2017 4 April 2017 HMG's website) and the Chancellor of the Exchequer was in India as part of the 9th UK-India Economic and Financial Dialogue (see UK-India economic and trade relations to take centre stage on two-day visit 4 April 2017 HMG's website).

One of the advantages of trading within the EU is that the legal systems of the member states have been harmonized over the years and supplemented with a growing body of Union law. This is as true of intellectual property as of everything else with the result that the legal protection of intellectual assets in any of the member states is substantially the same as in the United Kingdom. These rights can be enforced in the courts of any of the member states in accordance with the recast Brussels Regulation (Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters OJ L 351, 20.12.2012, p. 1–32).

Clearly, that is not the case outside the EU even though the importance of intellectual property to world trade is acknowledged by the incorporation of TRIPS into the Marrakesh Agreement establishing the World Trade Organization. In contrast to the situation within the EU where businesses can compel compliance with Union law through proceedings in the courts of the member states under the supervision of the Court of Justice of the European Union, the WTO's compliance machinery requires the intervention of national governments.

There may, however, be another option which I canvassed in Bilateral Investment Treaties - A Remedy for SME? [2013] EIPR 759 and summarized in Bilateral Investment Treaties: Claiming Compensation from Foreign Governments under Bilateral Investment Treaties for failing to provide adequate IP Protection 27 July 2013. In those articles, I noted that HM Government had entered a large number of agreements with foreign governments known as bilateral investment treaties or BITs. According to the database of the International Centre for the Settlement of Investment Disputes ("ICSID") the number currently stands at 117. Each of those agreements protects the investments of the contracting parties' nationals from expropriation and the definition of "investment" in most of those agreements connotes intellectual property. Any national of one contracting party suffering expropriation of his or her investment by the government of the other could seek compensation from that government through arbitration proceedings facilitated by ICSID.

The value of BITs to businesses of relatively modest size was shown when the US company Metalclad Corporation successfully pursued the Mexican government for nearly US$17 million for the refusal of permission by a local authority to its recently acquired Mexican company to deposit industrial waste near a human habitation which the arbitrators considered to be an expropriation of Metalclad's investment in that subsidiary (see Metalclad Corporation v United Mexican States 30 Aug 2000). Although the amount payable to Metalclad was reduced by Mr Justice Tysoe on appeal to the courts of British Columbia where the arbitration had its seat (see United Mexican States v. Metalclad Corp., 2001 BCSC 664 (CanLII) 89 BCLR (3d) 359; 14 BLR (3d) 285; 38 CELR (2d) 284; [2001] BCJ No 950 (QL); [2001] BCTC 664; 104 ACWS (3d) 940). Metalclad was followed by a spate of expropriation claims by other investors.

In my articles, I argued that the failure by a government to enforce effectively its intellectual property laws would be tantamount to expropriation of the intellectual assets of the intellectual property rights holder. There were already two cases that seemed to test that point. One was Eli Lilly and Company v. Canada (ICSID Case No. UNCT/14/2) where Lilly complained that Canada's utility requirement that had resulted in the revocation of two of that company's Canadian patents amounted to expropriation of the patents. The other was Philip Morris Asia Limited v. The Commonwealth of Australia, UNCITRAL, PCA Case No. 2012-12 where Philip Morris complained that Australia's plain paper packaging legislation amounted to expropriation of its trade mark rights. We now have awards in both of those cases and they both went against the IP rights holder. Does that mean that BITs cannot be used effectively by businesses to seek redress for the failure of a government to protect the IP of a British or other foreign business operating in its territory?

Not necessarily because the claims failed on extraneous grounds. In neither case did the arbitrators reject the principle.

In Philip Morris, the arbitrators found that the complainant company had acquired subsidiaries in Australia at least partially with a view to bringing proceedings against the Australian government under the Hong Kong-Australia bilateral investment treaty. In the arbitrators' view that constituted an abuse of rights. At para [585] of their Award on Jurisdiction and Admissibility of 17 Dec 2015, Professors Karl-Heinz Böckstiegel, Gabrielle Kaufmann-Kohler and Donald M. McRae concluded:

"In view of the above considerations, the Tribunal concludes that the commencement of treaty based investor-State arbitration constitutes an abuse of right (or abuse of process) when an investor has changed its corporate structure to gain the protection of an investment treaty at a point in time where a dispute was foreseeable. A dispute is foreseeable when there is a reasonable prospect that a measure that may give rise to a treaty claim will materialise."

They added at [588]:

"In light of the foregoing discussion, the Tribunal cannot but conclude that the initiation of this arbitration constitutes an abuse of rights, as the corporate restructuring by which the Claimant acquired the Australian subsidiaries occurred at a time when there was a reasonable prospect that the dispute would materialise and as it was carried out for the principal, if not sole, purpose of gaining Treaty protection. Accordingly, the claims raised in this arbitration are inadmissible and the Tribunal is precluded from exercising jurisdiction over this dispute."

In Eli Lilly the claim failed because the claimant could not show a sudden and dramatic change in the law that amounted to expropriation or that Canadian patent law was arbitrary or discriminatory.  At para [386] of their final award of 16 March 2017, Professor van den Berg, Sir Daniel Bethlehem QC and Mr Gary Born found that the evidence before them showed that Canada’s utility requirement underwent incremental and evolutionary changes between the time that Lilly's patents were granted and the time they were invalidated. During that period there was an increase in the number of utility-based challenges of pharmaceutical patents, which appeared to have increased the pace of the development of the law most relevant to that sector but the basic principles were already in place before the patents were granted.

Nothing in those cases puts in doubt my argument that a government's failure to enforce an IP law would amount to expropriation, especially if the investor relied reasonably on that law when investing in that government's country. There has, however, not yet been a case directly on point but when one does arise I shall eagerly report it. 

Should anyone wish to discuss this issue further, he or she can call me during office hours on 020 7404 5252 or send me a message through my contact form.