Eli Lilly’s NAFTA lawsuit should prompt rethink of investor "rights" deals

It’s likely that until recently very few people in Canada knew what a Foreign Investment Protection Agreement (FIPA) was. But when the Harper government announced it had signed one of these things with China, the situation changed quickly. The FIPA attracted immediate public suspicion and an unusual amount of opposition compared to other recent trade and investment deals. A month later, a small community in B.C. had even taken the FIPA to court, claiming the federal government had a constitutional responsibility to consult with First Nations before ratifying such far-reaching international treaties.

A lot of the outrage has to do with how the FIPA appears to give foreign companies extra-legal rights to challenge and claim compensation against public policies, regulations or decisions that interfere somehow with their profits. Coincidentally, it wasn’t hard to find examples of how this works since Canada had just been threatened with two high-profile NAFTA investment disputes: one against Quebec’s moratorium on hydraulic fracturing, or fracking, for natural gas; the other a direct assault on the courts and Canada’s freedom to set patent protection laws and norms. Both potential disputes—the companies are consulting with Canada before deciding whether to move their NAFTA lawsuits forward—contradict claims by the Harper government that investment treaties are about treating foreign and national investors the same.

The latter case, a $500-million NAFTA lawsuit from Eli Lilly against the invalidation of two patents in Canada, would be so harmful to our democracy, and set such a dangerous international precedent, that it cannot be allowed to proceed. In fact, the Lilly case should trigger a radical rethink of these investor rights treaties before the government is allowed to ratify the FIPA with China or pursue similar arrangements in the Canada-European Union trade deal (CETA) and the Trans-Pacific Partnership (TPP).

THE LILLY LAWSUIT

On November 7, 2012, Eli Lilly (2012 profits: $4 billion) threatened to sue Canada for $100 million under the rules in an investment protection chapter of the North American Free Trade Agreement (NAFTA). The brand name pharmaceutical company says that Canada violated its NAFTA rights when a federal court invalidated a patent for Strattera, one of several products on the market for treating attention deficit hyperactivity disorder (ADHD). The Strattera patent, which claims the use of the compound atomoxetine for treating ADHD, was filed in Canada in 1996 and would have expired on January 4, 2016. But a generic drug company, Novopharm (now Teva Canada Ltd), challenged the validity of the patent on the grounds of inutility. On September 14, 2010, a federal court agreed with Novopharm lawyers, invalidating Lilly’s patent for not living up to the “inventive promise” of atomexetine at the time of filing for patent protection.

The company claims that this invalidation of its patent, based on a legal “promise doctrine” in Canadian courts (more on this below), violates its rights in NAFTA Articles 1110 (expropriation and compensation), 1105 (minimum standards of treatment), and 1102 (national treatment). On June 13 this year, Lilly revised its claim to include the invalidation of a second patent, this one for the anti-psychotic drug Zyprexa, which consequently lost its patent in the United States and Canada in 2011. Another federal court had invalidated the Zyprexa patent two years before it was meant to expire. Subsequent appeal courts overturned part of that decision but maintained that the Zyprexa patent was invalid on grounds of inutility since the product did not live up to Lilly's promise that it would be markedly superior to existing medication. Lilly's combined NAFTA claim says Canada owes the company $500 million in compensation for losing both patents.

This investor-state dispute has drawn international attention and condemnation. As the U.S. corporate and government watchdog Public Citizen explains in a primer on the case, “Eli Lilly’s move marks the first attempt by a patent-holding pharmaceutical corporation to use U.S. ‘trade’ agreement investor privileges as a tool to push for greater monopoly patent protections, which increase the cost of medicines for consumers and governments.” The company is trying to circumvent and subvert flexibilities in the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) and in NAFTA giving countries room to develop patent regimes that suit their social and economic needs. In its NAFTA claim, Eli Lilly interprets these international agreements, as well as the Patent Cooperation Treaty, in an extremely narrow way supportive of stricter U.S.- and EU-style patent law. It is using investor-state arbitration in NAFTA to try to enforce that interpretation onto another country – Canada.

The result of a NAFTA win for Eli Lilly, says Public Citizen, “could expose Canada to a slew of investor-state attacks from other drug companies that have had patents invalidated because their medicines have not met the promises they made to initially obtain patents.” A victory or settlement for Lilly might also embolden pharmaceutical companies to unleash a wave of challenges to patent decisions in other countries which have bilateral investment treaties with the United States or European Union.

The fate of the case is perhaps even more important for Canada because the Harper government is engaged in trade and investment negotiations with the European Union and in the Trans-Pacific Partnership (TPP) that promise to expand monopoly protections for brand name pharmaceutical companies. Leaked chapters from the Comprehensive Economic and Trade Agreement (CETA) negotiations with the EU show that Canada is attempting to exempt WTO-consistent legal decisions like the invalidation of Strattera and Zyprexa from investment arbitration but the EU is resisting this.

THE “PROMISE DOCTRINE”

Lilly's NAFTA challenge—one of eight current disputes against Canada worth at least $2.5 billion—takes direct aim at Canada's “promise doctrine.” In very basic terms, Canadian courts sometimes look beyond the Patent Act when deciding whether a patented compound or product can be said to be “useful” – one of the hurdles a company must pass to be granted a patent. Courts have linked utility to the promises a firm makes, at the time of filing for a patent, about how the product will work and how it is different from existing drugs. Lilly says in its first NAFTA notice of intent that, “This nonstatutory ‘promise doctrine’ is not applied in any other jurisdiction in the world,” and that it “contravenes TRIPS Article 27(1) and NAFTA Article 1709(1) by imposing onerous and additional utility requirements that have had the effect of denying patent rights for inventions which meet the conditions precedent to patentability.”

More onerous requirements for proving a drug’s utility can hardly be seen as a bad thing when the consequences could mean, in some circumstances, a sharp drop in the price of medication as cheaper generic versions come onto the market. It wasn’t so long ago that Canada had a ten-year patent instead of the internationally mandated 20-year period of the WTO. If public and private drug plans must pay the higher brand name price for longer, we should be sure the patentees are not taking advantage. If anything, the “promise doctrine” makes Canada’s patent regime arguably more rigorous than those of the United States and Europe, which Lilly claims to represent the global standard. The company challenges the Canadian patent policy framework as “discriminatory, arbitrary, unpredictable and remarkably subjective.” Instead, the company says Canada must issue a patent and allow a drug firm to charge monopoly prices if a medicine has a “mere scintilla” of utility.

COMPANIES ABOVE THE LAW

As in most recent NAFTA and many international investor-state disputes, Lilly’s lawsuit can hardly be said to be about discrimination between a national and foreign firm, although it is an element of the company’s case. Instead, Lilly leans on the added, extra-legal protections in investment treaties to claim rights that national companies simply don’t have under Canadian law.

Lilly claims that courts’ decisions to invalidate its patents for Strattera and Zyprexa violate minimum standards of treatment guaranteed in NAFTA's Chapter 11, and that their investments have been directly and indirectly expropriated. The company argues in its second (revised) claim that the effect of the courts' rulings, and the government’s unwillingness to overturn those legal decisions, “was to void the patents ab initio, thereby depriving Lilly of its exclusive rights to prevent third parties from making, using or selling its patented products during the patent term or to enforce those rights.” Alternately, or as well as being a direct expropriation, the firm argues the decisions have “indirectly expropriated Lilly’s exclusive rights conferred by the Strattera and Zyprexa patents through the measures in issue.”

Importantly, the firm claims the Government of Canada is responsible for implementing the intellectual property rights guarantees in the TRIPS, NAFTA and Patent Cooperation Treaty, and that in failing to overturn the court decisions, Canada has violated its positive law treaty obligations and “the reasonable investment-backed expectations of the investor.” In other words, Lilly is directly challenging Canada’s legal system in an effort to undermine the flexibilities protected in all of the above-mentioned treaties which give government some space to decide how patents are issued and under what circumstances they are revoked. The company charges that Canada was bound by treaty to overturn the decision of the Canadian courts to invalidate its patents. If an otherwise constitutionally valid and legal decision can trigger an investor-state dispute, it is hardly surprising that in the their legal case related to the Canada-China FIPA, lawyers for the Hupacasath First Nation argued that a federal or provincial action upholding Indigenous treaty rights could also result in arbitration outside the courts.

Both Canada and the U.S. argue that the definition of “minimum standards of treatment” should be limited to due process under the international customary law. They point to a clarifying note attached to NAFTA in response to several brazen abuses of this article in the investment chapter, as well as both countries' updated model investment treaties (or FIPAs) as proof that countries retain a right to regulate with certain flexibilities. But investor-state tribunals have taken liberties to push the boundaries of what constitutes fair treatment under these treaties. For example, in the recently decided case of Occidental vs. Ecuador, a tribunal decided that the definition should go beyond international law as practiced by states and that “any penalty the State chooses to impose must bear a proportionate relationship to the violation which is being addressed and its consequences.” While this ruling is not strictly speaking a precedent for future cases, it creates an expectation of similar treatment in similar cases brought by investors against non-discriminatory government measures.

In the Lilly NAFTA case, the firm claims that despite having recourse to the courts, as any other company would, the court's decision, and the Government of Canada's failure to overturn that decision by granting the patent, “contravenes Lilly's most basic and legitimate expectations of a stable business and legal environment.” Lilly says they could not have anticipated that the “promise doctrine” would interfere with their right to profit from Strattera and Zyprexa when they first made their investment in Canada based on a “mere scintilla” of utility in the patents. The firm claims it was deprived of “full protection and security,” protection normally pertaining to wars or other security issues that disrupt an investment (e.g. an infrastructure project), and that Canada had violated its national treatment rights since foreign firms (U.S. and European) are required to meet “elevated and additional standards for utility and disclosure” in Canada that are not required in other countries.

OPPORTUNITIES TO PUSH BACK AGAINST INVESTOR "RIGHTS"

In summary, Lilly’s threatened NAFTA lawsuit directly challenges Canada’s sovereign right, recognized in the WTO, Patent Cooperation Treaty and NAFTA, to set and enforce its own patent policy. It is a terrible example of the way bilateral investment treaties are used and abused by companies to challenge non-discriminatory, constitutionally and legally valid policies to meet the public interest. A settlement or loss for Canada would undoubtedly spark a wave of NAFTA claims from other pharmaceutical companies whose patents have been invalidated under Canada’s “promise doctrine.” It would also embolden brand name pharmaceutical companies to pursue similar investor-state lawsuits globally where domestic patent regimes differ from those of the United States and European Union.

The NAFTA lawsuit absolutely must fail. The online activist group SumOfUs wants Lilly to voluntarily walk away from its threat and is inviting people to help them pressure the company to do the right thing. But more than this, Lilly’s outrageous claims in its NAFTA dispute should trigger an immediate rethink in Canada of the value of investor-state arbitration to the Canadian economy, and its obvious harmful effects on democracy. Canada has paid out over $160 million in losses or settlements with firms as a result of NAFTA investment disputes. Even where Canada prevails, the sums paid to lawyers to defend the cases are a significant drain on public resources. The $500 million sought by Lilly is more than Newfoundland and Labrador received in federal health transfers in 2013.

In Australia, South Africa, India and a dozen Latin American countries, governments are rethinking and even repudiating their investment treaties with the aim of better balancing the rights and responsibilities of corporations. In Canada, there are three targets for activists to push this issue with a federal government that is reluctant to listen and provincial governments too docile to do anything about it.

The first is the Canada-China FIPA. Though a court recently dismissed Hupacasath First Nation’s case, the community is considering an appeal. They will need moral and financial support to make it happen, with the added benefit that an appeal could further postpone ratification of the treaty and draw attention to the injustices of investment arbitration. The second, equally important target is the ongoing Canada-European Union CETA negotiations. There is far more European investment in Canada, and in particular in mining, energy and other resource projects that attract an increasing number of investor-state disputes, than there is Chinese investment. If we reproduce NAFTA’s investment protections in the CETA we can guarantee many more cases like the threatened Lone Pine lawsuit against Quebec’s moratorium on fracking.

Finally, we should be turning up the volume on the Trans-Pacific Partnership. The impact on Canada of extending NAFTA-like investor “rights” to the TPP region may not be as significant as it will for the Europe and China deals. But for countries like Vietnam, Brunei, Malaysia, etc which do not have investment treaties with the United States, there will be a very negative effect on development, human rights and the environment, not to mention public resources. Latin American countries facing multi-billion dollar investment lawsuits from Canadian and U.S. mining companies can hardly afford to pay these damages and the massive legal bills that come with defending the cases. The TPP negotiations give us an opportunity to combine our outrage at Eli Lilly and our experience with NAFTA with popular struggles across the 12 countries negotiating what we should only call the world’s largest and least democratic corporate rights deal.