TWN Info Service on WTO and Trade Issues (Jun13/12)
28 June 2013
Third World Network
friends and colleagues,
are pleased to share with you an analysis by Prof. Carlos Correa of
South Centre, on how bilateral trade agreements may threaten access
to medicines as shown by a recent legal suit by Eli Lilly, a major
UN pharmaceutical company, against Canada for invalidating a patent.
Third World Network
Agreements: A New Threat to Health and TRIPS Flexibilities?
By Carlos M. Correa
No. 64, 27 June 2013
bilateral investment treaties (BITs) may be a threat to access to
medicines as shown by a recent legal suit by a drug multinational
against Canada for invalidating a patent.
Recent complaints based on bilateral investment treaties (BITs) demanding
a compensation for the alleged damage caused by anti-tobacco policies
adopted in Uruguay and Australia, have illustrated the pervasive implications
that such treaties may have on public policies. If successful, those
complaints will undermine the States’ right to adopt measures to protect
The North American Free Trade Agreement (NAFTA), like other free trade
agreements (FTAs) signed in the last twenty years, includes a detailed
chapter on investment protection with a scope and obligations similar
to those found in BITs. The notification of a complaint against
Canada under such chapter in connection with the invalidation of a
patent raises new concerns about the power given to investors under
investment agreements (Ias).
Eli Lilly, a major US pharmaceutical company, has notified an investment
complaint as the result of a 2010 Federal Canadian court decision
to invalidate, five years before its expiry, a patent it had obtained
in Canada. In accordance with generally accepted principles of international
law, the courts of the country of grant of a patent enjoy exclusive
jurisdiction to address issues of invalidation. Eli Lilly, however,
wants an arbitral tribunal that will operate outside the Canadian
jurisdiction and whose decision would not be appellable before Canadian
courts, to award it an economic compensation for the alleged losses
caused by the patent invalidation. Eli Lilly claims it has suffered
damages of at least 100 million Canadian Dollars.
Patents as an investment
The broad definition of ‘investment’ typically contained in Ias is
the starting point of Eli Lilly’s complaint.
NAFTA, as well as BITs and the investment chapters in FTAs, incorporate
an all-encompassing concept of “investment” that includes any kind
of tangible or intangible asset. All assets of an enterprise, such
as movable and immovable property, equity in companies, claims to
money, contractual rights, intellectual property rights (IPRs), mining
concessions, licenses and similar rights are generally included.
Some Ias generally refer to IPRs, while others explicitly indicate
the types of IPR covered, such as copyrights and related rights, patents,
rights in plant varieties, industrial designs, rights in semiconductor
layout designs, trade secrets, trade and service marks, and trade
names. In some Ias reference is also made to “technical process” or
“know how” and “goodwill”.
NAFTA does not mention explicitly IPRs. However, in accordance with
article 1139(g), ‘investment’ includes ‘real estate or other property,
tangible or intangible, acquired in the expectation or used for the
purpose of economic benefit or other business purposes’. A patent
and other IPRs would fall under the category of ‘intangible’ property.
In addition to the broad definition of ‘investment’, a particular
feature of Ias is that, unlike in the case of WTO disputes, Ias grant
‘investors’ the right to directly sue the State where the investment
was made. Eli Lilly’s decision to sue the Canadian government, thus,
follows its own assessment of the pros and cons of engaging in litigation.
It would be interesting to know whether the US government would have
shared the company’s opinion.
The US government was sued under chapter 11 of NAFTA by APOTEX, a
Canadian company, which claims that wrong decisions by US courts
in applying federal law violate NAFTA Article 1102 (national treatment)
and Article 1105 (minimum standard of treatment under international
law), and that the decisions amounted to an expropriation of the company’s
investments under NAFTA Article 1110. The US Department of State has
indicated its intention to defend against this claim ‘vigorously’.
Data on patent invalidation in the USA show a growing court’s tendency
to invalidate patent claims. US District courts invalidated patent
claims in 86% of the cases they decided in 2007-2011; between 2002
and 2012 the Federal Circuit confirmed 70% of the invalidation decisions
by lower courts.
This means that, if Eli Lilly were successful, the USA (as well as
other countries parties to Ias) may face an increasing risk of being
sued and eventually obligated to pay compensations when their courts
invalidate wrongly granted patents. This may be particularly troublesome
in the light of the large number of sub-standard patents granted as
a result of lax patentability requirements, or the poor quality of
the examination conducted by patent offices.
Patents are granted by States to achieve certain objectives including,
in the case of WTO members, to comply with the obligation imposed
by the TRIPS Agreement. They are granted as result of a deliberate
policy decision, and not because inventors enjoy a ‘natural’ right
over the invention. Thomas Jefferson, fervent advocate of the patent
system, observed, in a famous letter to an inventor in 1813, that
inventions ‘cannot, in nature, be a subject of property. Society may
give an exclusive right to the profits arising from them, as an encouragement
to men to pursue ideas which may produce utility, but this may or
may not be done, according to the will and convenience of the society,
without claim or complaint from anybody’.
A patent is generally granted after an examination by the patent office
to establish whether the claimed invention meets the patentability
standards (novelty, inventive step and industrial applicability or
utility). The decisions to grant a patent are often based on incomplete
information, or on incorrect judgments. For instance, a publication
that anticipated the invention and, hence, destroys its novelty, may
be found after the patent was granted, particularly when competitors
affected by the patent undertake detailed patent searches with tools
more sophisticated than those available to the patent office.
Given the limitations inherent to examination, a patent only provides
a precarious title to the invention. Although patents are generally
presumed to be valid, some patent laws clarify that patents are issued
without any guarantee by the State. Even the US Federal Trade Commission
has alerted against a strong presumption of validity. It noted that
“[O]nce an application is filed, the claimed invention is effectively
presumed to warrant a patent unless the [US Patent and Trademark Office]
PTO can prove otherwise…The PTO’s procedures to evaluate patent applications
seem inadequate to handle this burden”. The report concluded that
“[T]hese circumstances suggest that an overly strong presumption of
a patent’s validity is inappropriate…It does not seem sensible to
treat an issued patent as though it had met some higher standard
As a result, revocation (by the same patent office) or invalidation
of a patent by a court is not something exceptional or that would
be unexpected to patent owners. Claiming that invalidation implies
a loss of an ‘investment’ suggests a gross misconception on the fundamentals
and operation of the patent system. An invalid patent only has an
appearance of validity; a finding of invalidity means that a legitimate
right over the invention never existed.
Significantly, article 32 (Revocation/Forfeiture) of the TRIPS Agreement
left a wide room for Member countries to determine the grounds and
conditions for the revocation or forfeiture of a patent, including
situations of invalidity. During the negotiations that led to the
Agreement, India proposed to establish that a patent could be revoked
when ‘used in a manner prejudicial to the public interest’. The USA,
on its side, wanted to permit revocation only where the invention
were found to be non patentable. The adopted text simply stipulates:
‘An opportunity for judicial review of any decision to revoke or forfeit
a patent shall be available’.
In the Eli Lilly’s case, the Canadian court held that the patented
invention had failed to deliver the benefits promised when the application
was made. Eli Lilly questions the so-called ‘promise doctrine’ developed
by the Canadian courts, and argues that this new, more stringent approach
to patent invalidation applied after 2005, is contrary to the company’s
expectations “at the time of its investment”. The company also argues
that the ‘promise-doctrine’ has become a national standard as a result,
for instance, of its recognition in the guidelines issued by the Canadian
Intellectual Property Office and, therefore, questions Canada’s right
to determine how “utility” is defined for the purpose of granting
or not a patent. Eli Lilly contends that the questioned judicial practice
is not only inconsistent with various obligations provided for in
Chapter 11 of NAFTA, but also with the TRIPS Agreement.
However, as noted, the only obligation the TRIPS Agreement imposes
in relation to revocation relates to the availability of a judicial
review. No substantive conditions are provided for. Further, Members
can determine how they define and apply the patentability standards
set out in article 27.1 of the Agreement. This is, in fact, one of
the most important flexibilities in the TRIPS Agreement: it determines
which standards need to be applied to establish patentability, but
does not define them. Hence, WTO Members can adopt the criteria they
consider adequate to implement such standards, including rigorous
requirements to prevent the proliferation of patents on minor developments
that, as it is the case in pharmaceuticals, may unduly block legitimate
competition and increase prices for consumers. Section 3(d) of the
Indian Patent Act is one example of how this flexibility can be used.
Another one is the set of guidelines for the examination of pharmaceutical
patents adopted by the Argentine government in 2012.
The admissibility of Eli Lilly’s claims under NAFTA is also doubtful.
In accordance with NAFTA article 1110.7, the provision mandating compensation
in cases of direct or indirect nationalization or expropriation ‘does
not apply to the issuance of compulsory licenses granted in relation
to intellectual property rights, or to the revocation, limitation
or creation of intellectual property rights, to the extent that such
issuance, revocation, limitation or creation is consistent with Chapter
Seventeen (Intellectual Property)’. This means that, in principle,
an investor’s compensation cannot be claimed in cases of invalidation
of a patent. This is, as noted above, a logical consequence of the
nature of the rights conferred. Such a claim could only be made in
case of inconsistency with the rules contained in NAFTA Chapter 17.
NAFTA’s article 1709.8 stipulates, in this respect, that a Party ‘may
revoke a patent only when La) grounds exist that would have justified
a refusal to grant the patent; or
(b) the grant of a compulsory
license has not remedied the lack of exploitation of the patent’.
The Canadian Federal Court decision regarding the patent for Strattera
is based on one of the grounds that would have justified the rejection
of the patent application (lack of utility); hence, it seems consistent
with paragraph (a) of article 1709.8. It would be difficult for an
arbitral tribunal to ignore this provision, even in the light of Eli
Lilly’s argument that the ‘promise doctrine’ was not applied prior
to 2005 when its alleged ‘investment’ took place.
Interestingly, the USA Model BIT contains a provision that carves
out an exception for compulsory licenses –reflecting the US government
interest in protecting its extensive use of these measures – as well
as for revocation. Article 6.5. on ‘Expropriation and Compensation’
stipulates that this provision ‘does not apply to the issuance of
compulsory licenses granted in relation to intellectual property rights
in accordance with the TRIPS Agreement, or to the revocation, limitation,
or creation of intellectual property rights, to the extent that such
issuance, revocation, limitation, or creation is consistent with the
TRIPS Agreement’. The TRIPS Agreement, as noted, does not provide
for any substantial standard for revocation; inconsistency could only
be found if an opportunity for judicial review were not offered.
A large number of developing countries entered into Ias with the promise
that the protections conferred to investors will increase FDI and
boost their economies. There is no evidence, however, suggesting that
such promise has been realized. The Sixth Annual Forum of Developing
Country Investment Negotiators concluded, for instance, that ‘there
was no clear correlation between the number of BITs and FDI, and that
there was a need to shift towards a more balanced investment treaty
regime that would take into account developing countries’ sustainable
development objectives’. FDI has primarily flown to countries with
large markets and attractive growth prospects. Brazil has opted not
to sign any BIT; it has been, however, one of the main recipients
of FDI amongst developing countries.
While Ias have not been critical in attracting FDI, they have become
platforms for multi-billion compensation complaints. The investors’
right to directly sue the host States, in particular, has allowed
unprecedented challenges to governmental action. In the view of the
implications of BITs and other Ias, Ecuador has decided to denounce
all BITs it had entered into. South Africa decided not to sign any
new BIT and will attempt to exit from or re-negotiate existing ones.
Australia announced that it would not agree on investor-state dispute
settlement provisions in new Ias, and India is reviewing its BITS,
especially their dispute resolution component.
One of the worrying dimensions of the Eli Lilly’s complaint is that
it involves matters that the TRIPS Agreement has left to the discretion
of the WTO Members. Deciding on which grounds a patent can be invalidated
and how the patentability requirements are applied are among the important
flexibilities allowed by that Agreement. If Eli Lilly prevailed in
this case, investor–state litigation could become a new, possibly
more friendly, venue than the WTO dispute settlement mechanism for
right-holders to question the interpretation and implementation of
the TRIPS Agreement. Although the commented complaint may ultimately
fail, its systemic implications may be very significant and would
just add one more reason to seriously review the benefits and costs
of being a party to or signing new Ias.
Author: Professor Carlos M. Correa is Special Advisor on Trade
and Intellectual Property of the South Centre.
This article was published in the South Bulletin (13 May 2013).
is a service of the South Centre to provide opinions and analysis
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