TRIPS flexibilities under threat from investment disputes: a closer look at Canada’s “win” against Eli Lilly

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IP Watch | 27 April 2017

TRIPS flexibilities under threat from investment disputes: a closer look at Canada’s “win” against Eli Lilly

By Cynthia M. Ho

In the first known investment dispute regarding patents, Eli Lilly & Co v. Canada, Canada recently prevailed over the pharmaceutical giant Eli Lilly. Although Canada won in a unanimous decision, the ruling does not, however, guarantee domestic discretion going forward, contrary to the suggestion of some.

Why is Canada’s “win” troubling? It is true that Eli Lilly ultimately failed to persuade the investment tribunal that Canada’s invalidation of two patents, based on its interpretation of “useful,” compromised guarantees under NAFTA’s investment chapter. But, it should be noted, this failure was principally evidentiary in nature. That is, Eli Lilly failed to provide adequate evidence in support of its claims, all of which were premised on its assumption that there was a dramatic change in the law. The tribunal, however, never questioned whether IP rights that were invalidated consistent with domestic law could constitute a violation of international investment law. Even more importantly, the tribunal never questioned whether patent laws consistent with TRIPS could nonetheless be challenged as compromising investment agreements. In addition, although some have suggested that Eli Lilly could not win, the tribunal explicitly stated that the claim was not frivolous.

Since investment claims represent a serious threat to TRIPS flexibilities, a better understanding of the existence and impact of these claims is critical. Notably, although Eli Lilly brought its dispute under NAFTA’s investment chapter, NAFTA is just one of over 3000 international agreements that permit foreign investors to bring a dispute against a country in so-called “investor-state disputes.” To secure more foreign direct investment, these agreements were originally designed to protect and provide recourse to foreign companies whose investments were taken by developing nations with weak rule of law. These agreements were not, however, intended to protect IP and, in fact, IP rights are already well protected by TRIPS and other international agreements.

Although pharmaceutical companies have claimed that Canada’s interpretation of “useful” to require adequate disclosure of promised use of an invention (i.e., the “promise doctrine”) is inconsistent with TRIPS, no country has initiated a WTO dispute suggesting impropriety. This makes sense. After all, although Canada’s interpretation of “useful” is atypical, it is entirely consistent with the notion of TRIPS flexibilities that permit countries to interpret undefined patentability standards of TRIPS.

Eli Lilly nonetheless challenged these well-established flexibilities with an investment dispute. In particular, it claimed its two patents were improperly “expropriated” and denied “minimum standard of treatment” when Canada revoked the patents based on the “promise doctrine” interpretation of what is “useful.” This doctrine, Eli Lilly claimed, was a dramatic and unexpected change in the law, entitling it to $500 million in compensation. Although Eli Lilly lost, a PhRMA press release suggests that the pharmaceutical industry was hoping for the tribunal to discuss consistency with NAFTA patent laws, which are identical to TRIPS. In other words, PhRMA was hopeful that the case would erode TRIPS flexibilities.

Eli Lilly also fundamentally challenged typical practice in patent law. In particular, it is routine for issued patents to be later invalidated due to changes in common law. Although this is of no moment to patent attorneys, it was not clear that a tribunal would agree since investment tribunals are usually comprised of commercial lawyers with no knowledge of patent law. Notably, although some have suggested Eli Lilly’s claims were unfounded, a 2009 article by a commercial lawyer was sympathetic to this position. In addition, if the tribunal had reached the actual merits of investment claims, it is possible that Canada could have lost, as I have previously explained.

Another yet unanswered threat to TRIPS flexibilities and domestic discretion is the concern that ISDS tribunals are becoming, in effect, supranational courts of appeal. First, the tribunal stated that a judicial decision could form the basis of an investment claim without any actual denial of justice. In addition, while the Eli Lilly tribunal stated that it is inappropriate for ISDS tribunals to serve as an “appellate tier” over domestic decisions, it would be premature to assume, as some have suggested, that this single decision obviates any such concern. Importantly, there is no precedent in investor-state disputes and, unlike the WTO system where panel decisions tend to be consistent and uniformity is promoted with a standing appellate body, there are often inconsistent investor-state rulings with no current mechanism to promote uniformity.

There is also a serious danger in assuming that this single case is predictive. This is especially true because the only other tribunal decision that addressed an investment claim based on alleged violation of IP rights was not as favorable. In particular, although Uruguay was successful in defending against Philip Morris’ claim challenging domestic laws that limit trademark use on tobacco packaging, the majority premised its ruling under the state’s police power – which would not seem to necessarily apply to judicial decisions, and especially ones that don’t involve immediate public health harms – and the dissent was even less deferential. Although Uruguay prevailed, the lack of unanimity about the ability of a state to regulate a known carcinogen using WHO Guidelines of how to comply with the Framework Convention on Tobacco Control is concerning.

In addition, these first two investment awards on IP suggest that unique IP laws may be unduly questioned in an investment dispute even if well within the boundaries of TRIPS flexibilities. For example, the dissent to the Uruguay case stated that it was notable that “no other country in the world” had a similar requirement to Uruguay. Similarly, the Eli Lilly tribunal did entertain Eli Lilly’s claim that the uniqueness of Canada’s law relative to other countries was relevant, which is contrary to the fundamental notion of TRIPS flexibilities. Although the tribunal appropriately noted that this would not necessarily seem relevant, it did not completely dismiss the idea. Rather, it considered it relevant that among the three NAFTA countries, only the US had suggested in a single report that Canada’s law was a problem. Although this was enough for Canada to win, what happens in future cases if more countries complain and do so more vociferously? After all, just because a country has a complaint does not mean it is well founded.

Chilling Effect

Even though Canada ultimately prevailed, this suit may nonetheless have a chilling effect on whether nations embrace the very types of TRIPS flexibilities that policy makers have repeatedly recommended. Notably, although Canada was willing to litigate this case, it has previously jettisoned proposed domestic laws based on investment dispute threats on a variety of issues including plain package tobacco laws in the 1990s. Considering that a developed country like Canada is vulnerable to such threats, developing countries who most need to adopt TRIPS flexibilities are likely hesitant to do so.

The vulnerability of developing countries to such disputes is far from hypothetical. For example, Novartis reportedly initiated an investment dispute against Colombia just days after Colombia had suggested a price cut and alluded to a possible compulsory license. The possible compulsory license was on Novartis’ cancer drug sold as Glivec/Gleevec, priced at over $15,000 a year, which was nearly double the gross national income per capita. This incident is an important counterpart to any presumptions that Canada’s “win” against Eli Lilly ensures that domestic IP decisions are safe. Of course, the investor-state dispute was not the only issue; there was also substantial US pressure. However, it is troubling that a nation is subject to an investment claim for negotiating drug costs, which is actually completely consistent with TRIPS requirements for compulsory licenses. It is also problematic that the legal basis for an investment claim for Novartis’ claim is not publicly available, as is often the case with investment claims. In addition, since Colombia used price cuts instead of a compulsory license in December 2016, it may be subject to yet another investment dispute; indeed, Novartis has already threatened to do so.

Investor-state disputes have been broadly criticized in recent years as the number of these cases have exploded, yet attention to their impact to TRIPS flexibility is minimal. For example, although the UN High Level Panel Report reflects awareness of the Eli Lilly dispute with Canada, its general recommendations to embrace TRIPS flexibilities seem to ignore the fact that doing so may not be realistic for countries fearful of an expensive investor-state dispute. In addition, although the initial investor-state cases have not resulted in an actual collision with TRIPS norms, that could be an issue in the near future. After all, Philip Morris previously asserted that Australia violated the fair and equitable treatment standard by allegedly failing to comply with TRIPS rules on trademark law in its notice of arbitration. This dispute was dismissed on jurisdictional grounds, but clearly signals the distinct possibility that TRIPS issues could be evaluated outside the WTO’s dispute settlement system that is intended to be the sole forum for adjudicating TRIPS claims. This means that a country could comply with TRIPS and even a WTO panel ruling, yet still be vulnerable to an expensive investment dispute. After all, an investment tribunal is not bound to WTO rulings. This is not a theoretical issue. For example, the WTO is expected to issue a decision on TRIPS (and other WTO) consistency of plain package tobacco laws. There is nothing that precludes tobacco companies from bringing investment disputes against countries that have similar laws.

Although investment disputes challenging domestic decisions on IP consistent with TRIPS are still in their infancy, these initial state “wins” should not lull countries or policy makers into complacency. Although no state has yet had to pay money for TRIPS-consistent action, the decisions to date have nonetheless left the door open to this possibility in the future. These initial disputes should be viewed as a troubling regime shift that has a serious chilling effect on proper use of TRIPS flexibility. Accordingly, greater attention to this threat and how to combat it are needed.

Cynthia Ho is the Clifford E. Vickrey Research Professor at Loyola University Chicago School of Law, where she is also the Director of the IP program. Her research focuses on the intersection of patents and public health and includes the book “Access to Medicine in the Global Economy: International Agreements on Patents and Related Rights (Oxford University Press 2011),” as well as articles available on ssrn.com.

source: IP Watch