Investment Treaties and Intellectual Property: Eli Lilly v. Canada and Philip Morris v. Uruguay

Vol. 10 No. 5

H. Jared Doster is an associate in the IP department at Baker Botts L.L.P. in Houston, Texas. He attended Vanderbilt University Law School as a Robert L. Sullivan IP scholar.

Daniel J. Gervais is the Milton R. Underwood Chair in Law and director of the Vanderbilt Intellectual Property Program. He focuses on international IP law and served as an expert for Canada in the Eli Lilly case.



Philip Morris v. Uruguay
and Eli Lilly v. Canada are two international investor-state cases that may reveal an emerging trend in international investment law: if a state creates laws that reduce the financial value of an investor’s domestic intellectual property (IP) rights, then the investor might use the state’s international IP obligations against it in order to obtain compensation for the lost value of the IP or even force the state to consider reversing course.

Let us first situate these disputes and the difference between trade and investment law.

Background

International trade law governs the barriers to trade that states create, such as tariffs. The World Trade Organization (WTO), with 164 members, is the main intergovernmental organization that administers international trade law. The WTO administers a full state-to-state dispute settlement system, which includes both first instance ad hoc panels of trade experts and a standing “Appellate Body.” WTO members found to be in violation of their trade obligations must implement the reports (decisions) of the panels and Appellate Body or else face trade-based sanctions. Standing before the WTO tribunals is available only to members of the WTO, most of which are states and not individuals or private entities. Through this process of state-to-state dispute settlement, the WTO has developed jurisprudence on the international IP law that arises from the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement).1

International investment law governs the rights of foreign investors within “host states” into which they invest. Unlike trade law, there is no centralized administrative body arising from a single multilateral treaty. Instead, investment law arises from thousands of independent treaties, the most common of which is a “bilateral investment treaty” (BIT) signed between two countries. Investment agreements are also found as provisions within larger free-trade agreements, such as chapter 11 of the North American Free Trade Agreement (NAFTA). Most investment treaties contain similar provisions, the most common of which involve rules governing the expropriation of foreign investments and standards for the “fair and equitable treatment” of foreign investments.

Investment treaties provide for a mandatory process, available to foreign investors that have a dispute with a host state, known as investor-state dispute settlement (ISDS). ISDS disputes arise when a foreign investor claims that the host state violated specific provisions of an investment treaty. Investment law jurisprudence arises from numerous ad hoc, independent arbitral tribunals that hear claims under the various treaties. Many of these tribunals operate under the aegis of the International Centre for Settlement of Investment Disputes (ICSID) located at the World Bank in Washington, D.C. ICSID is considered a reasonably transparent investment law tribunal for three reasons: (1) it keeps a public registry of claims; (2) briefs, expert reports, and most submitted evidence are typically available while a case is pending; and (3) awards (decisions) are published.2 As a result, ICSID rulings are now the largest publicly available body of investor-state jurisprudence.

Historically, trade law and investment law developed separately and the differences between the two were clear. States filed trade claims with the WTO; private investors filed investment claims with ad hoc arbitral tribunals governed by the relevant treaties. However, there is a growing overlap between the two regimes. One overlap is the combination of both regimes into the same trade treaty, as is the case with NAFTA. This mixture may lead arbitral tribunals to import legal concepts from one regime into another when interpreting these mixed treaties. Even in the case of investment treaties that do not form part of a broader trade agreement, ISDS tribunals sometimes borrow legal concepts from the WTO’s trade jurisprudence to serve as gap fillers in investment jurisprudence.3 Recently, investors have embraced this rapprochement in their litigation strategy and legal arguments. We see this clearly in Philip Morris v. Uruguay and Eli Lilly v. Canada, as we explain below.

What Is International Intellectual Property Law?

The structure of international IP law is defined by the fact that there are no international IP rights per se; all IP rights arise from domestic laws. International IP law harmonizes the numerous domestic regimes up to a point but leaves a significant degree of flexibility in the implementation and application of IP rules and standards. IP owners usually bring IP claims (claiming that some IP right has been infringed) before a domestic court. Even if private parties agree by contract to settle an infringement claim through a commercial arbitration tribunal, the tribunal’s award must be enforced through the domestic courts, often pursuant to the New York Arbitration Convention.

Having said this, there are “hooks” in some treaties that allow private parties to use the international IP obligations of a state against that state. In trade treaties, the hooks are provisions that require states to provide for a minimum level of IP rights protection within their own domestic laws. However, a private IP owner must convince its home state to file a case before a state-to-state dispute settlement body to enforce the treaty. In investment treaties, the hooks tend to be provisions that define IP rights as an investment protected from unlawful expropriation. More recently, some IP owners have attempted to merge these hooks by arguing that a host state failed to protect an investment in IP because the state’s domestic IP regime failed to satisfy the minimum level of protection as required by international IP law. To date, however, the persuasiveness of such arguments is unclear.

Sources of International IP Law

The majority of international IP law is found in treaties (as opposed to customary law). Over time, multilateral instruments may generate customary rules, although there is no presumption that this will occur.4 The first major IP treaties still in force today are the Paris Convention for the Protection of Industrial Property (1883) and the Berne Convention for the Protection of Literary and Artistic Works (1886). Both were updated for the last time in 1967, and an appendix for developing countries was added to the Berne Convention in 1971. These two treaties were largely incorporated into the WTO TRIPS Agreement. As stated previously, these IP treaties require signatory states to adopt a specified minimum level of IP protection for trademarks and patents within the domestic legal regimes of the signatory states.

Another source of international IP law are judicial decisions. The most important international IP jurisprudence comes from cases before the WTO Dispute Settlement Body arising from alleged breaches of the TRIPS Agreement.5 Some jurisprudence also is starting to emerge from investor-state arbitral tribunals, as we see in both Philip Morris v. Uruguay and Eli Lilly v. Canada. Domestic courts hear the majority of cases discussing international IP law, but such decisions are not sources of international law proper, unless perhaps considered to illuminate some “general principle of law recognized by civilized nations.”

The Typical Fact Pattern

The fact pattern in cases involving international IP rights, in an ISDS context, typically revolves around a change in the legal regime of the host state (such as a new regulation, judicial decision, statute, etc.) that a foreign investor believes decreases the financial value of that investor’s IP rights in that host state. In response, the investor files claims against the host state arguing that the change in the host state’s law constitutes a violation of the host state’s obligations under an investment treaty. Alternatively, the investor can ask its “home state” to espouse its concerns and file claims against the host state at the WTO, arguing that the new change in the host state’s law constitutes a violation of the host state’s obligations under the TRIPS Agreement or another WTO instrument, such as the Technical Barriers to Trade Agreement (TBT).

Tobacco Trademarks and Tobacco Regulation (Philip Morris v. Uruguay)

There is a global resurgence in the regulation of tobacco, particularly cigarette packaging. Some states have introduced or passed legislation mandating “plain packaging”; that is, requiring logos, images, and colors to be removed such that the wordmark only may appear alone and in block letters against a plain background. In addition, many states are instituting enhanced health warning regulations that require graphic images, such as gangrenous limbs, to be printed on cigarette packs. The thinking on the part of policymakers is that the plainness or grotesqueness of the cigarette pack will dissuade people, particularly the young, from smoking. Many countries, including Uruguay, adopted such health warning laws. In 2011, Australia enacted strict plain packaging laws, and in recent years, a number of other countries, especially in the European Union, have considered following the same path.

Parallel WTO Proceedings

Since 2010, the tobacco industry, spearheaded by Philip Morris International Inc. (PMI), has launched a global litigation campaign to limit the spread and depth of anti-tobacco regulations by filing or supporting claims filed under trade law, investment law, and domestic law. The IP argument often is that the enhanced health warnings and plain packaging regulations reduce, or even eliminate, the use and sometimes the very presence of one or more trademarks on cigarette packs. This, in turn, reduces the value of the trademark.

The industry worked with five WTO members (Indonesia, Cuba, the Dominican Republic, Ukraine, and Honduras) to file claims against Australia in the WTO, claiming that Australia’s plain packaging laws violated the TRIPS Agreement and the TBT by interfering with the companies’ ability to use their trademarks.6 In May 2017 it was reported that the WTO upheld Australia’s laws,7 but the final dispute ruling had yet to be publicly released as of early May 2018.8

PMI also brought BIT claims against Australia and Uruguay. In Philip Morris v. Australia, the tribunal declined jurisdiction because it believed that PMI’s Hong Kong subsidiary, which filed the claims, was a corporate vehicle created to gain standing under the Australia-Hong Kong BIT of 1993.9 Thus, the proceeding did not progress to the merits of the case. However, Philip Morris v. Uruguay, issued in July 2016, is the first international arbitration case in this global litigation campaign to reach an award on the merits.

Philip Morris v. Uruguay

PMI, by way of two Swiss subsidiaries and a Uruguayan sub-subsidiary named Abal Hermanos (Abal), exported cigarettes and sold cigarettes from and in Uruguay.10 In 2002, Uruguay granted tax exemptions and credits to Abal to help it “supply the Paraguayan market with Philip Morris products.”11 In Uruguay, Abal sold cigarettes under six different brand families (Marlboro, Fiesta, Philip Morris, Premier, Galaxy, and Casino), each brand having multiple variants (e.g., Marlboro Fresh, Marlboro Red, etc.), totaling 13 variants in all.12 Each variant was a separate trademark under Uruguayan law. In 2005, Uruguay initiated a tobacco control campaign and promulgated several measures to that effect.13 In 2010, PMI filed claims against Uruguay on two of these measures.14 First, the “single presentation” regulation required that each brand family be limited to a single variant.15 Second, the “80/80” regulation required that the lower 80 percent of both faces of every cigarette pack be covered with health warnings and pictograms.16 As a result of the regulations, PMI lost the ability to market seven of its 13 variants and had to limit the branding of the remaining six variants to the 20 percent of free space on the packs.17

In response, PMI’s two Swiss subsidiaries (which, for simplicity, will be referred to as “PMI” as well) filed five claims against Uruguay before an ICSID tribunal claiming that the single presentation and 80/80 regulations were violations of the Switzerland-Uruguay BIT of 1988.18 The tribunal found jurisdiction under the BIT and the ICSID Convention.19 Two of the claims go to the heart of the IP issue: BIT article 5 (expropriation) and BIT article 11 (observance of commitments).20 Two other claims are also relevant, though more tangentially related to the core IP issue: BIT article 3(2) (fair and equitable treatment) and BIT article 3(1) (impairment of use).21 The last claim, “denial of justice,” is not directly relevant to the IP issue but is related in part to the functioning of the Uruguayan justice system.22 One of the three arbitrators dissented on the issue of “denial of justice” and on the BIT article 3(2) claim.23

Preliminary Findings: Uruguay’s Trademark Regime and Legal Obligations

The tribunal accepted that trademarks are property under Uruguayan law and that Uruguayan law determines the scope of those rights.24 The tribunal assumed that PMI legally owned the trademarks in question.25 It was undisputed that trademarks, and goodwill associated with the use of those trademarks, were “protected investments” under BIT article 1(2)(d).26 Also, the tribunal took the view that Uruguay promulgated its anti-tobacco regulations according to the spirit of its international obligation under the World Health Organization’s Framework Convention on Tobacco Control (FCTC) and under its constitutional duty to “legislate in all matters appertaining to public health and hygiene.”27 We will return to this last point later when discussing the scope of Uruguay’s police powers.

Preliminary Issue: The Inherent Nature of the Trademark Right

An issue that cuts across multiple claims is whether a trademark confers a “right to use” or only a “right to protect against use by others” (a right to exclude).28 The tribunal ruled as follows:

The Tribunal concludes that under Uruguayan law or international conventions to which Uruguay is a party the trademark holder does not enjoy an absolute right of use, free of regulation, but only an exclusive right to exclude third parties from the market so that only the trademark holder has the possibility to use the trademark in commerce, subject to the State’s regulatory power.29

In its reasoning, the tribunal first turned to international trade law and pointed out how the Paris Convention is clear in that patents grant a right to exclude but is silent as to the type of right inherent in a trademark.30 However, TRIPS Agreement article 16, dealing with “rights conferred,” provides only for a right to exclude; nowhere does the TRIPS Agreement provide for an explicit “right to use.”31 Additionally, as the tribunal noted, the Spanish original of MERCOSUR Protocol article 11 refers to trademarks as having “the right of exclusive use.”32

Second, the tribunal seemed to turn to “the general principles of law recognized by civilized nations.” The tribunal pointed out that most countries restrict the use of trademarks, especially tobacco trademarks, to some extent.33 The tribunal stated that granting such a right to use would go against basic public policy concerns because the right “would guarantee the sale of any trademarked product, without regard to other considerations.”34 Therefore, it found that PMI does not have a “right to use” its trademark and must have a “reasonable expectation” that its trademarks will be regulated.35

One could argue that the tribunal’s ruling is a narrow reading of the object and purpose of trademark law under the TRIPS Agreement and the TBT because it allows states to interfere with a foreign company’s ability to use its trademarks.36 As one of the coauthors of this article wrote with Professor Susy Frankel, that analysis is not entirely convincing:

Use of marks is, to use a WTO analogy, like free trade. There is no full explicit right to trade freely in any WTO document, and there are real limits to a member’s ability to trade freely with other members. Public health may justify restrictions to trade under GATT Article XX for example. Yet, liberalizing trade (in order to increase trade) is the core normative underpinning of the WTO system and of the GATT before it. Members do not negotiate tariffs or try to limit nontariff barriers just so that they can be registered on schedules. Though the analogy is imperfect, the same may be said of use in trademark law. There is no explicit right to use, and members can impose limits on such use, but use of marks in commerce is the basis for trademark laws—unlike other intellectual property rights, in particular copyright and patents, which can be protected for their full term of protection (life of the author plus 50 years for copyright; 20 years from filing for patents) without any use of the copyrighted work or patented invention. The first sentence of [TRIPS Agreement] Article 20 demonstrates that trademarks are normally used in commerce. Otherwise, there would be no need to limit the power of WTO members to “encumber” such use.37

Claim 1: Indirect Expropriation of Trademarks That Are Considered “as a Whole”

This claim turned on the issue of whether Uruguay’s anti-tobacco regulations constituted an “expropriation” of PMI’s trademarks in violation of BIT article 5.38 The tribunal ruled that Uruguay did not expropriate PMI’s trademark assets.39 BIT article 5 provides:

Neither of the Contracting Parties shall take, either directly or indirectly, measures of expropriation, nationalization or any other measure having the same nature or the same effect against investments belonging to investors of the other Contracting Party, unless the measures are taken for the public benefit as established by law, on a non-discriminatory basis, and under due process of law, and provided that provisions be made for effective and adequate compensation.40

The tribunal began by stating that trademarks, in principle, can be expropriated.41 The tribunal stated that only “indirect” expropriation or de facto expropriation was at issue because PMI remained the legal owner of its trademarks.42 The tribunal ruled that the appropriate legal test, as mentioned by other investment decisions, was that “the State’s measures should amount to a ‘substantial deprivation’ of [the trademark’s] value, use or enjoyment, ‘determinative factors’ to that effect being ‘the intensity and duration of the economic deprivation suffered by the investor as a result of such measures.’”43

Regarding the 80/80 regulation, the tribunal accepted that only 20 percent of the front and back of a cigarette pack remained available for displaying the trademark.44 Yet, the tribunal ruled that this was not even a prima facie case of indirect expropriation because the logos and “other distinctive elements” continued to appear on cigarette packs in Uruguay after the 80/80 regulation went into effect and the logos were still recognizable as such.45

Regarding the single presentation regulation, the tribunal accepted the fact that the regulation “effectively banned” seven of PMI’s 13 trademarks.46 Yet, the majority of the tribunal ruled that the single presentation regulation did not constitute an indirect expropriation because “sufficient value” remained in PMI’s Uruguayan sub-subsidiary, Abal.47 This is because “[a]s confirmed by investment treaty decisions, a partial loss of the profits that the investment would have yielded absent the measure does not confer an expropriatory character on the measure.”48 To arrive at this ruling, the tribunal decided to consider Abal’s assets as a whole rather than as a collection of separate assets.49 PMI admitted that, as a whole, Abal remained profitable after the regulations took effect, even though individual brands were destroyed.50 Thus, the tribunal ruled that the trademark assets were not indirectly expropriated.51

There is a split in investment law cases on whether, in the expropriation analysis, multiple assets should be considered separately or together.52 Although the tribunal ruled that the multiple trademarks should be considered a single asset, the tribunal provided little if any significant legal reasoning for its decision.53 It “confirmed” its decision with the fact that “to mitigate [the single presentation regulation’s] effects, Abal resorted to countermeasures involving its business as a whole,” specifically by adjusting its prices across all of its products.54

Claims 1, 2, and 3: Uruguay’s Inherent Police Powers

In an alternative ruling to PMI’s indirect expropriation claim under BIT article 5, the tribunal ruled that the regulations did not constitute an expropriation of PMI’s trademarks because the regulations were valid exercises of Uruguay’s “police powers” under customary international law and pursuant to the requirements of the Uruguayan Constitution.55 Specifically, the tribunal applied the following standard of review to the regulations.

The tribunal began by giving the relevant BIT provisions their plain meaning, in light of their object and purpose, while being viewed in light of international custom.56 Then, the tribunal stated that the BIT contains no provisions that prevent Uruguay from exercising its sovereign powers to regulate harmful products to protect public health.57 The tribunal reviewed a long series of sources to conclude that Uruguay has the sovereign power, under international custom, to regulate public health through inherent police powers.58 The tribunal relied on its police power reasoning for PMI’s second and third claims under BIT article 3(1) and (2).

Claim 3: The Arbitrariness of State Regulations

For the article 3(2) claim on fair and equitable treatment, the tribunal considered the additional issue of whether the anti-tobacco regulations, promulgated under Uruguay’s police power, were arbitrary. The tribunal adopted the following standard of review.

[R]espect is due to the “discretionary exercise of sovereign power, not made irrationally and not exercised in bad faith . . . involving many complex factors.” As held by another investment tribunal, “[t]he sole inquiry for the Tribunal . . . is whether or not there was a manifest lack of reasons for the legislation.”59

Using this standard, which appears to be a rational basis standard, the tribunal reviewed the manner in which the regulations were promulgated and ruled that Uruguay’s anti-tobacco regulations were reasonable.60

Claim 4: Failure to Observe Commitments

PMI’s fourth claim turned on the issue of whether Uruguay’s anti-tobacco regulations constituted a failure for Uruguay to observe its “commitments” under BIT article 11.61 The tribunal ruled that a trademark in itself is not a “commitment” of any kind, as contemplated by the meaning of BIT article 11, by the state to the investor.62 BIT article 11 provides: “Either Contracting Party shall constantly guarantee the observance of the commitments it has entered into with respect to the investments of the investors of the other Contracting Party.”63

Clauses such as these are difficult to interpret and are the subject of extensive academic commentary.64 In its reasoning, the tribunal relied on the view “repeatedly held by investment tribunals” that the term “commitments” does not refer to general commitments imposed by the law (including legislative acts) of the host state but refers only to specific commitments made to the investor.65

Summary of Philip Morris v. Uruguay

The following rulings from the tribunal are relevant to international IP jurisprudence.

  • A trademark can constitute an “investment” under the Switzerland-Uruguay BIT of 1988.
  • According to international trade law and the laws of most states, trademarks confer a “right to exclude” but not an actual “right to use.”
  • ICSID tribunals may consider multiple trademarks as a single asset by a tribunal. If a corporation responds to regulations against its trademarks with countermeasures that involve the business as a whole, then the tribunal is likely to consider the trademarks as a single asset.
  • Under customary international law, a state’s exercise of its police powers in such a way as to decrease the value of trademarks is not an “expropriation” of the trademark.
  • Under BIT provisions on fair and equitable treatment, regulations promulgated under the state’s police powers must be rationally connected to a legitimate policy. Legitimate policies include upholding the state’s international and constitutional obligations.

Pharmaceutical Patents and Judicial Invalidation (Eli Lilly v. Canada)

Eli Lilly pushed arbitral jurisprudence into unchartered territory, as evidenced by its unusually large number of expert reports and amicus curiae submissions.66 Eli Lilly and Company is an Indiana corporation that owned two Canadian patents for pharmaceutical drugs: an ADHD drug named Strattera (filed in 1996) and an antipsychotic drug named Zyprexa (filed in 1991).67 The Canadian government approved both drugs for use in 2004 and 1996, respectively, and both are commercially successful.68 In 2010–2011, the Canadian courts ruled that both claimed inventions lacked utility because both patent disclosures made “promises” to produce specific results, and neither invention fulfilled its respective promise.69 Although the Supreme Court of Canada had clearly imported this “promise utility doctrine” from British law into Canadian law in 1981, the doctrine had seldom been used in cases until the two Lilly invalidations.70

In 2013, after unsuccessful attempts to appeal both decisions, Eli Lilly filed two claims under NAFTA chapter 11 against Canada before an ICSID tribunal. Eli Lilly claimed that the Canadian courts’ application of the promise utility doctrine to Eli Lilly’s patents resulted in (1) the unlawful expropriation of Eli Lilly’s investments under NAFTA article 1110, and (2) a breach of Canada’s obligation to provide the minimum standard of treatment under NAFTA article 1105.71 The parties framed the dispute into the following two issues:

  1. Has there been a dramatic change in the utility requirement in Canadian patent law?
  2. Is the utility requirement in Canadian patent law, as applied to the Zyprexa and Strattera patents, arbitrary and/or discriminatory?72

This article will address each issue in turn.

Preliminary Issue: Reviewability of Judicial Decisions

An issue that cuts across the case was “whether [judicial] conduct that does not constitute a denial of justice may nonetheless be capable of qualifying as” an unlawful expropriation or a breach of the minimum standard of treatment.73 Typically, investor-state tribunals review judicial decisions only for “denial of justice” claims where the claimant already attempted to file suit against an expropriation in the state’s judicial system. But here, Lilly claimed that the disputed judicial decisions were, in themselves, acts of expropriation. The tribunal ruled against Eli Lilly and dismissed its claims.74

That is not the end of the story, however. The tribunal implicitly ruled that it had the authority to review judicial decisions and that judicial acts are attributable to the state under customary international rules of state responsibility.75 Thus, “it is possible to contemplate circumstances in which a judicial act (or omission) may engage questions of expropriation under NAFTA Article 1110.”76 In light of this authority, the tribunal emphasized that “a NAFTA Chapter 11 tribunal is not an appellate tier in respect of the decisions of national judiciaries” and that “considerable deference is to be accorded to the conduct and decisions of such courts.”77

If a tribunal is to review judicial decisions, then it should have a standard of review. The tribunal accepted Canada’s statement that “as long as it is possible to say that a court acted on a reasoned and rational basis, no question of liability could arise, whether, for present purposes under either NAFTA Article 1105 or Article 1110.”78 Thus, the tribunal seems to have adopted this “rational basis standard” when it reviewed any judicial decision in this case.79

In its analysis, the tribunal paid very close attention to the reasoning of the Canadian courts and to the record before the courts, even to the point of analyzing the importance of particular citations in the rulings.80 The tribunal applied estoppel against Eli Lilly by pointing out that one of its arguments before the tribunal contradicted one of its previous arguments before a Canadian court.81

Issue 1: Has There Been a Dramatic Change in Canada’s Utility Requirement?

Eli Lilly argued that because of the promise utility doctrine, Canada’s utility requirement underwent a dramatic change after Canada granted the Strattera and Zyprexa patents.82 Specifically, Lilly argued that the retroactive application of the promise utility doctrine was outside the “acceptable margin of change” that a reasonable investor would anticipate.83 The tribunal found that Lilly “has not met its burden in relation to this allegation” and ruled that Canadian law “did in fact undergo a reasonable measure of change and development” over a six-year period.84 Eli Lilly presented a diverse body of evidence for this claim: analysis of the history of Canadian judicial decisions, patent office policies, patent examiner practices, and statistical evidence of patent invalidations.85 Two of Lilly’s arguments are of particular importance to international IP jurisprudence.

First, Eli Lilly argued that the promise utility doctrine diverged from the utility requirements in other NAFTA parties (actually, the United States) and from the “broader global consensus on the meaning of utility” as evidenced from negotiating documents from the World Intellectual Property Organization (WIPO).86 The tribunal pointed out that only one state has submitted a “brief criticism” of the doctrine (the U.S. Trade Representative) in all of WIPO’s work on patent harmonization.87

Second, Eli Lilly argued that the invalidation of its patents by way of a “radically new” doctrine was inconsistent with Canada’s obligations to provide “adequate and effective protection and enforcement of intellectual property rights” under NAFTA chapter 17.88 Lilly further argued that this retroactive application was inconsistent with Canada’s international IP obligations, at the time that the patents were granted, under NAFTA, the TRIPS Agreement, and the Patent Cooperation Treaty.89 To reinforce the alleged inconsistency, Lilly noted in its briefs that NAFTA article 1709 is based on a 1991 draft of the TRIPS Agreement.90 The tribunal responded to this argument in a footnote stating that Eli Lilly “failed to establish, as a matter of fact, that [Canada] breached any international obligations by invalidating the Strattera and Zyprexa Patents.”91

Although the tribunal ruled against Eli Lilly, one could argue that the tribunal also found that it had the power to determine whether the “measure of change and development” in a state’s legal doctrine was “reasonable” or even whether it occurred in an appropriate time span.92 In theory, states could thus still be held liable for patent invalidations arising from changes in their legal doctrines.

Issue 2: Is the Promise Utility Requirement Arbitrary or Discriminatory?

Eli Lilly argued that the promise utility doctrine was arbitrary because it “is unpredictable and incoherent” and “serves no legitimate public purpose.”93 The tribunal rejected this argument based on two points. First, the adversarial system followed by Canadian courts, which involves interpreting the law and applying it to differing evidence and expert testimony across cases, creates a limited but acceptable amount of inconsistency in judicial rulings.94 It is, in essence, the way common law jurisdictions operate. Second, Canada “asserted a legitimate public policy justification for the promise doctrine,” and “the promise doctrine is rationally connected to these legitimate policy goals.”95 According to Canada, the policy is that “enforcing promises contained in the disclosure helps ensure that ‘the public receives its end of the patent bargain’ . . . and that it ‘encourages accuracy while discouraging overstatement in patent disclosures.’”96 Further, “the Tribunal need not opine on whether the promise doctrine is the only, or the best, means of achieving these objectives.”97

Eli Lilly also argued that the promise utility doctrine, although facially neutral, was discriminatory against pharmaceutical patents in general and against foreign patent holders. In support, Eli Lilly offered some statistical evidence on the Canadian courts’ invalidations of pharmaceutical patents.98 The tribunal rejected the argument, stating that the statistical evidence was either insufficient or served merely to demonstrate correlation and not causation.99

Summary of Eli Lilly v. Canada

The tribunal used the following rules in its analysis.

  • Under the expropriation and fair and equitable treatment provisions of NAFTA, domestic courts should act on a reasoned and rational basis when issuing judicial decisions that affect foreign investment.
  • Judicial rulings should be coherent and consistent with a public policy interest.

Comparing Philip Morris and Eli Lilly

The two cases have similarities. First, both cases stand for the proposition that a state will not be liable for the decrease in the value of an investor’s intellectual property if the decrease is due to a new law that (1) is consistent with a legitimate public policy interest of the state, and (2) is rationally and reasonably connected to that policy interest. Second, both cases indicate that ICSID tribunals are willing to hear claims that a state’s domestic IP regime is inherently inconsistent with the state’s international obligations or divergent from the usual domestic laws found in other states.

It seems that the most important difference between the two cases is the type of law challenged: Philip Morris essentially challenged a regulation, whereas Eli Lilly challenged a judicial decision. The ICSID tribunals in both cases tailored their review to the type of law in dispute. In Philip Morris, the tribunal analyzed statistical data proffered by Uruguay. This is the type of evidence often used in constructing administrative regulations. In Eli Lilly, the tribunal analyzed citations, arguments, and jurisprudence of Canadian case law. One would expect that if an ICSID tribunal were faced with a judicial decision from a civil law system, or a judicial decision from a religious law court, or a new statutory regime, or even a new constitutional amendment, the tribunal would tailor its standard of review accordingly.

Conclusion

Philip Morris and Eli Lilly may reveal an emerging trend: If a state creates or modifies laws, including by judicial interpretation, that reduce the financial value of an investor’s domestic IP rights, then the investor might use the state’s international IP obligations against it to obtain compensation for the regulatory “change” or even force the state to consider reversing course. This trend increases the complexity of legal reasoning in international investment claims, creating additional tensions between state power and investor rights. The state’s power to change its laws to further a valid public policy objective, or even to function in a normal common law judicial process, is now open to challenge if the state’s law is in conflict with the investor’s expectations and desires for the future. One could imagine a foreign investor challenging changes to U.S. patent jurisprudence, for instance. Major changes in case law that limit patentable subject matter or raise patentability thresholds such as nonobviousness (e.g., Alice v. CLS Bank, Myriad Genetics, Mayo v. Prometheus, and KSR v. Teleflex100) render a number of claims in preexisting patents practically unenforceable. This presents a fact pattern similar to Eli Lilly v. Canada and may explain the U.S. government’s position in Eli Lilly, which essentially supported Canada’s on the investment law part of the case. The high bar applied by the panel in the Eli Lilly case makes this type of challenge harder to contemplate, but far from impossible.

The two cases discussed in this article also increase the tension arising from simultaneous international obligations. In Philip Morris, Uruguay’s anti-tobacco measures were supported by the WHO FCTC. However, what if the anti-tobacco measures were at odds with Uruguay’s obligation to establish a minimum level of IP protection under the TRIPS Agreement? What should a state do if it were obligated to two seemingly irreconcilable treaties? We are likely to know the WTO’s position on this in the forthcoming panel report on Australia’s plain packaging law. In the context of pharmaceutical patents, as in Eli Lilly, there are academic arguments that the minimum level of IP protection established by the TRIPS Agreement is at odds with international human rights to health. This debate should remain on the radar of litigators, policymakers, and IP strategists in the years to come.

Endnotes

1. See Convention on the Settlement of Investment Disputes between States and Nationals of Other States, pt. C, reg. 22, Mar. 18, 1965, 17 U.S.T. 1270 [hereinafter ICSID Convention].

2. See id.

3. See Jürgen Kurtz, The Use and Abuse of WTO Law in Investor-State Arbitration, 20 Eur. J. Int’l L. 749, 749–55 (2009).

4. Tarcisio Gazzini, The Role of Customary International Law in the Field of Foreign Investment, 8 J. World Inv. & Trade 691, 701–02 (2007).

5. Id.

6. Roger P. Alford, The Convergence of International Trade and Investment Arbitration, 12 Santa Clara J. Int’l L. 35, 50 (2014).

7. Tom Miles & Martinne Geller, Australia Wins Landmark WTO Tobacco Packaging Case, Reuters (May 4, 2017), https://www.reuters.com/article/us-wto-tobacco-australia-idUSKBN1801S9.

8. See Communication from the Chairperson of the Panel, Australia—Certain Measures Concerning Trademarks, Geographical Indications and Other Plain Packaging Requirements Applicable to Tobacco Products and Packaging, WTO Doc. WT/DS467/22 (Sept. 21, 2017) (citing “the complexity of the legal and factual issues that have arisen in this dispute”); Bryce Baschuk, WTO Official Expects Appeal to Landmark Tobacco Logo Case, Bloomberg (May 8, 2018), https://www.bloomberg.com/news/articles/2018-05-08/wto-official-expects-appeal-to-landmark-tobacco-logo-case.

9. Philip Morris Asia Ltd. v. Australia, PCA Case No. 2012-12, Award on Jurisdiction, ¶¶ 12, 122, 508–09, 588 (Dec. 17, 2015).

10. Philip Morris Brands Sàrl v. Uruguay, ICSID Case No. ARB/10/7, Award, ¶¶ 2–6, 63, 64 (July 8, 2016).

11. Id. ¶ 66 (emphasis added).

12. Id. ¶¶ 65, 72.

13. Id. ¶ 67.

14. Id. ¶¶ 9, 15.

15. Id. ¶¶ 109–11.

16. Id. ¶ 121.

17. Id. ¶¶ 122, 145.

18. Id. ¶ 1.

19. Id. ¶ 24.

20. Id. ¶¶ 180–307, 447–82.

21. Id. ¶¶ 308–435, 436–46.

22. Id. ¶¶ 483–581.

23. Id. at annex B.

24. Id. ¶ 266.

25. Id. ¶¶ 70, 254, 457.

26. Id. ¶ 235.

27. Id. ¶¶ 302–04.

28. Id. ¶¶ 255–71.

29. Id. ¶¶ 271, 458 (emphasis added).

30. Id. ¶¶ 259–60.

31. Id. ¶ 262.

32. Id. ¶¶ 263–64.

33. Id. ¶ 269.

34. Id.

35. Id.

36. Susy Frankel & Daniel Gervais, Plain Packaging and the Interpretation of the TRIPS Agreement, 46 Vand. J. Transnat’l L. 1149, 1181–89 (2013).

37. Id. at 1181 (emphasis added) (footnotes omitted).

38. Philip Morris, ICSID Case No. ARB/10/7, Award, ¶¶ 272–307.

39. Id. ¶ 286.

40. Agreement Between the Swiss Confederation and the Oriental Republic of Uruguay on the Reciprocal Promotion and Protection of Investments, art. 5, Oct. 7, 1988, 1976 U.N.T.S. 413 [hereinafter Switzerland-Uruguay BIT] (emphasis added).

41. Philip Morris, ICSID Case No. ARB/10/7, Award, ¶¶ 272–73.

42. Id. ¶¶ 191–92.

43. Id.

44. Id. ¶ 274.

45. Id. ¶ 276.

46. Id. ¶ 274.

47. Id. ¶ 286.

48. Id.

49. Id. ¶ 283.

50. Id. ¶¶ 284–85.

51. Id. ¶ 286.

52. Id. ¶ 280.

53. See id. ¶¶ 280–83.

54. Id. ¶ 283.

55. Id. ¶¶ 287, 301–05.

56. Id. ¶ 290; see also Vienna Convention on the Law of Treaties, art. 31, May 23, 1969, 1155 U.N.T.S. 331.

57. Philip Morris, ICSID Case No. ARB/10/7, Award, ¶ 288.

58. Id. ¶¶ 291–301.

59. Id. ¶ 399 (emphasis added) (footnote omitted).

60. Id. ¶ 410, 420.

61. Id. ¶¶ 447–82.

62. Id. ¶¶ 458, 482.

63. Switzerland-Uruguay BIT, supra note 39, at art. 11.

64. See Philip Morris, ICSID Case No. ARB/10/7, Award, ¶ 467.

65. Id. ¶ 478.

66. Eli Lilly v. Canada, UNCITRAL Case No. UNCT/14/2, Final Award, ¶¶ 28, 29, 33, 35, 44, 46 (Mar. 16, 2017).

67. Id. ¶¶ 1, 73, 88.

68. Id. ¶¶ 75, 76, 92.

69. Id. ¶¶ 5, 82–84, 93–94.

70. Id. ¶¶ 238, 316; see also Consolboard Inc. v. MacMillan Bloedel (Sask.) Ltd., [1981] 1 S.C.R. 504, 525 (Can.).

71. Eli Lilly, UNCITRAL Case No. UNCT/14/2, Final Award, ¶¶ 4, 5.

72. Id. ¶ 110.

73. Id. ¶ 219.

74. Id. ¶¶ 220, 226.

75. Id. ¶ 221.

76. Id.

77. Id. ¶¶ 221, 224.

78. Id. ¶ 218 (emphasis added).

79. Id.; see, e.g., id. ¶¶ 218, 406, 418, 423, 425, 430.

80. See, e.g., id. ¶¶ 318, 319, 321–24, 326–48.

81. Id. ¶¶ 320, 340.

82. Id. ¶¶ 227, 234.

83. Id. ¶ 269.

84. Id. ¶¶ 308, 384, 386.

85. Id. ¶¶ 228–57.

86. Id. ¶¶ 258–60.

87. Id. ¶ 378.

88. Id. ¶¶ 261, 267.

89. Eli Lilly v. Canada, UNCITRAL Case No. UNCT/14/2, Notice of Arbitration, ¶¶ 40–47 (Sept. 12, 2013).

90. Id. ¶ 42.

91. Eli Lilly, UNCITRAL Case No. UNCT/14/2, Final Award, ¶ 385 n.515.

92. Id. ¶¶ 384, 386.

93. Id. ¶ 390.

94. Id. ¶¶ 420–21.

95. Id. ¶ 423.

96. Id.

97. Id.

98. Id. ¶¶ 397, 400.

99. Id. ¶¶ 431–41.

100. Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347 (2014); Ass’n for Molecular Pathology v. Myriad Genetics, Inc., 133 S. Ct. 2107 (2013); Mayo Collaborative Servs. v. Prometheus Labs., Inc., 132 S. Ct. 1289 (2012); KSR Int’l Co. v. Teleflex Inc., 127 S. Ct. 1727 (2007).

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