Million Dollar Mistake? The Cost of Limiting or Canceling IP Rights

Guest post by  Cynthia M. Ho, Clifford E. Vickrey Research Professor, Loyola University of Chicago School of Law.

Philip Morris and Eli Lilly think that they are entitled to millions in compensation from countries that limit or deny desired intellectual property rights.  These companies are the first to challenge IP issues pursuant to international agreements protecting investments of foreign companies. However, they join a trend of companies increasingly suing states before a panel of private arbitrators pursuant to investor-dispute settlement (ISDS).  The substantial financial stakes may have a chilling effect on traditional domestic laws and policies.

Although there are only two IP related ISDS disputes so far, IP policy makers should be concerned and oppose pending fast-track legislation that would permit President Obama to easily conclude more agreements with these problematic provisions.  Indeed, pending agreements have been criticized by a diverse group of individuals and countries including Nobel Prize winner Joseph Stiglitz, Elizabeth Warren, the Cato Institute and countries such as France and Germany.  The USTR recently issued a fact sheet, which was promptly debunked.

What is ISDS?

ISDS is a mechanism in over 3000 international agreements that permit foreign investors to seek compensation against countries.  The agreements guarantee freedom from discriminatory measures, a guarantee of being treated no less favorably than domestic companies, compensation for expropriation of investments, and “fair and equitable treatment.”  If these rights are allegedly violated, investors can bring a dispute before a tribunal of private (usually commercial) lawyers chosen by the parties to the dispute. There is not only no independent judiciary, but also no binding precedent and no appellate review, such that there can be inconsistent and unpredictable results.

Historically, these provisions were first added to international agreements promoting investments after World War II when newly independent nations wanted to encourage foreign investment.  ISDS was intended to provide protection to companies that lacked any legal recourse against unlawful state action.  ISDS was conceived as an improvement over “gunboat diplomacy” that nations used to protect their companies.

Why is ISDS relevant to IP?

Although ISDS was not originally designed to protect IP, companies are trying to use it for this purpose.

Most agreements providing ISDS do so only for investments of foreign companies.  These investments can include not only tangible, but also intangible property, which would seem to include IP.

Is a Canceled IP Right an “Investment” Subject to ISDS?

Even if IP is within the scope of covered investments, a critical question is whether this should include canceled IP.  IP lawyers and even students know that IP is at most presumptively valid, such that it can and often is canceled when found to not meet basic requirements.  Although canceled IP has never been considered to provide rights, Eli Lilly assumes it has rights.  In particular, it is seeking $500 million from Canada after failing to convince both a trial and appellate court that two of its patents were valid.

Highlights of Existing ISDS Claims Regarding IP

Eli Lilly’s case involves a challenge to Canada’s “promise doctrine” for assessing utility of patents and applications that make certain promises.  The promise doctrine is unusual as a utility requirement, but similar to disclosure and other patentability  requirements of other countries.  Eli Lilly claims that because this doctrine developed after its patents were granted (a point that is contested, even by some lawyers), it is improper to retroactively apply it to invalidate its patents, such that its patents have been improperly “expropriated,” which is roughly similar, but broader than US takings.  However, patents are routinely invalidated after common law modifications to laws, such as the scope of patentable subject matter with no claims of takings.

Eli Lilly seems to assume both that an issued patent is a state representation that it will remain forever valid and also that a nation can not modify its laws without violating legitimate expectations.  The supposed violation of its legitimate expectations figures prominently in a claim for denial of the amorphous condition of “fair and equitable treatment.”

Problematically, although a patent lawyer would readily reject the idea that patents are always valid and untouchable by subsequent law, they will not be deciding Eli Lilly’s case. Notably, when I presented a forthcoming article about this case to an international law colloquium, I was surprised that the audience resisted the basic principle that patent rights can and should be invalidated when found not to satisfy fundamental requirements.

Philip Morris also claims its legitimate expectations were violated, but in a different way.  Philip Morris asserts that it had a legitimate expectation that Australia would uphold its obligation to comply with TRIPS requirements for trademarks.   This suit fundamentally challenges the process for resolving alleged TRIPS violations.  Only countries, not companies, have standing to adjudicate alleged violations under TRIPS.  Thus far, countries have been cautious in doing so since there are often political implications for their actions. Moreover, permitting violations of TRIPS to be litigated outside of the WTO forum would seem wholly inconsistent with the WTO dispute settlement process that is intended to be the only forum for litigating such disputes.  In addition, there could be conflicting results; indeed, there is a pending WTO case.

ISDS for IP Threatens Flexibilities Under TRIPS

Eli Lilly’s case poses a serious threat to the minimum standard approach of TRIPS (and NAFTA).  Although these agreements have been widely understood to permit nations flexibility to define key terms, such as what is “new” or what counts as “useful,” Eli Lilly falsely claims that Canada’s definition is impermissible.

Ironically, these cases are arising at a time when many academics and policy makers (Eastern Europe, South Africa) have been encouraging countries to take greater advantage of their already limited flexibilities under TRIPS.  The present disputes may have chilling effects at a time when countries such as South Africa and Brazil have been considering modifying patent laws.

Future Problems

In the near future, companies may use ISDS to challenge patent provisions, such as compulsory licensing and India’s patent law designed to prevent “evergreening” of drugs that have attracted criticism, but no WTO dispute.  Moreover, regulatory provisions are also ripe for challenge.  For example, countries that fail to provide data exclusivity desired by the pharmaceutical industry could be subject to challenge.  In addition, a pending EU law hailed by public health advocates for increasing transparency concerning data of approved drugs is also at risk.

Given the wide range of issues at the intersection of intellectual property and public health that are potentially threatened by ISDS, this should be an issue of major concern.  Those who want to preserve policy space for countries should oppose pending agreements that permit ISDS, such as the pending Trans Pacific Partnership Act, especially because there is no public access to draft text of pending agreements except through sources such as Wikileaks, which just released the secret investment chapter of the TPP, that permits ISDS.   Public opposition is important; the EU has now delayed consideration of ISDS in its pending Transatlantic Trade and Investment Partnership (TTIP) agreement with the US.  In addition, although “fast-track” legislation is presently stalled, it should be opposed if re-introduced mid-April.  In the meantime, you can join  a petition to Congress, or directly contact your Congressman to oppose fast track bills.

Cynthia is a Law Professor at Loyola University of Chicago School of Law.