International Law

Fitting Marrakesh into a Consequentialist Copyright Framework

Fitting Marrakesh into a Consequentialist Copyright Framework
Download a pdf version of this article here. The Marrakesh Treaty to Facilitate Access to Published Works by Visually Impaired Persons and Persons with Print Disabilities entered into force on September 30, 2016. The treaty aims to alleviate what has been described as the “book famine,” and has been lauded as a significant achievement in advancing the rights of and promoting equal opportunity for the visually disabled. Contracting states are required to implement copyright limitations and exceptions to facilitate access to copyrighted material for the global print-disabled community. This note will argue that, notwithstanding the treaty’s strong rights-based underpinnings, the treaty aligns comfortably with U.S. consequentialist copyright justifications. This note will also demonstrate the limitations of other copyright justificatory theories while discussing their incompatibility with the treaty’s philosophy.

Tomato, Tamatie? Revising the Doctrine of Foreign Equivalents in American Trademark Law

Tomato, Tamatie? Revising the Doctrine of Foreign Equivalents in American Trademark Law
Download a pdf version of this article here. The growing specter of globalization impacts industries from communication to transportation, resulting in an unparalleled proliferation of cultural diffusion unmatched throughout history. Naturally, this cultural diffusion has familiarized American consumers with foreign brands and foreign languages despite the obvious English dominance domestically, resulting in a trademark quagmire. Under the current American doctrine of foreign equivalents, trademark examiners and courts translate non-English words into English to determine whether they meet the general United States Patent & Trademark Office (USPTO) registration requirements. However, by treating English and non-English words alike, the pool of source-identifying marks is unnecessarily restricted. This note argues that a clear rule-like form that relaxes restrictions of registering descriptive foreign language marks through offering ‘descriptive’ foreign-language a presumption of eligibility for protection would mitigate inconsistent application of the doctrine. Such a rule would also limit costs on consumers and producers that are caused by restricting the range of available marks and inhibiting creative and communicative branding.

A Framework for Assessing Technology Hubs in Africa

A Framework for Assessing Technology Hubs in Africa
Download a pdf version of this article here. This article explains the importance of technology hubs as drivers of innovation, social change, and economic opportunity within and beyond the African continent. It includes a thorough review and synthesis of findings from multi-disciplinary literature, and integrates insights from qualitative data gathered via interviews and fieldwork. It identifies three archetypes of hubs—clusters, companies, and countries—and discusses examples of each archetype using Kenya as a case study. The article then discusses potential collaboration, conflicts, and competition among these archetypes of hubs, and concludes with recommendations for future researchers.

Antitrust Treatment of the No Challenge Clause

Antitrust Treatment of the No Challenge Clause
By Thomas K. Cheng* Download a PDF version of this article here.
 

Introduction

One of the anomalies in U.S. antitrust law, despite its comparatively vast jurisprudence, is that courts seem to have never ruled on the legality of no challenge clauses. These clauses generally prohibit a licensee from challenging the validity of the patent being licensed. Thus far, no challenge clauses have only attracted the attention of patent law and have been dealt with largely as a question of enforceability.[1] Different appellate courts have expressed diverse views on the enforceability of no challenge clauses, depending on the nature and timing of the agreement in which they are incorporated.[2] To the extent that these clauses are enforceable, it leads to the question of how they should be treated under antitrust law.

In the circuits in which they are unenforceable, no challenge clauses may be viewed as a non-binding agreement by licensees that they will not challenge the validity of the patent. In such cases, there is a legitimate question as to why licensees would make such a commitment, what enticements have been offered by the patentee to secure such a commitment, and what this tells us about the patentee’s own belief in the likelihood of patent validity.

In circuits in which no challenge clauses are enforceable, these clauses can exert anticompetitive effects by preventing challenges to invalid patents. No challenge clauses do not seem so competitively benign that one can conclusively assert that they do not inflict harm on consumers.

A focus on no challenge clauses is further justified by the attention that other jurisdictions have paid to them in recent years. In 2015, a Chinese enforcement authority fined Qualcomm close to $1 billion over the imposition of no challenge clauses, among other offenses.[3] Moreover, no challenge clauses are one of the areas in which the U.S. and the European Union (“EU”), the two leading antitrust jurisdictions in the world, have diverged. While U.S. antitrust law has largely left these clauses untouched, the EU, to the extent its view is embodied by the European Commission, has taken a fairly hostile attitude toward them.[4] In fact, largely due to the Commission’s view, these clauses have mostly been expunged from European licensing agreements.[5] In light of the international divergences, it is worth exploring how these clauses should be approached.

This Article fills an important gap in the U.S. antitrust academic literature by exploring antitrust treatment of no challenge clauses. As far as this author is aware, no academic article thus far has examined this issue. The only notable exception is an article by Miller and Gal, which focused on the enforceability of no challenge clauses from a patent law and total welfare perspective.[6]

This Article is divided into seven sections. Following this introductory section, Section I provides an overview of no challenge clauses and sets forth a taxonomy for these clauses. Section II surveys the jurisprudence on no challenge clauses in the three main antitrust jurisdictions in the world; the U.S., the EU, and China, highlighting the differences among them. Section III explains the circumstances under which no challenge clauses can create consumer harm and identifies the relevant factors for analyzing and predicting such harm. Section IV enumerates the various justifications for no challenge clauses and rebuts them. Section V summarizes the main ideas in the preceding Sections and outlines an analytical framework for analyzing no challenge clauses under antitrust law. The conclusion is the final section.

I. Overview of No Challenge Clauses

A. Definition of No Challenge Clauses

No challenge clauses are inserted in patent licensing agreements to prohibit the licensee from challenging the validity of the patent for a period of time, usually the duration of the contract.[7] Patentees incorporate such clauses into their licensing agreements to forestall potential validity challenges by the licensees. According to Orstavik, “[t]he object of a no-challenge clause is to fortify a position granted by law.”[8] These clauses, however, do not provide patentees with fool proof defenses against validity challenges; because they only govern licensees, they have no effect on the conduct of unrelated third parties.[9] Therefore, the patent could still be subject to challenges by third party actors. The degree of protection offered by these clauses therefore depends on the likelihood and willingness of unrelated third parties to challenge the patent. If there is a third party that is likely and willing to challenge the patent despite the clause, the degree of protection afforded to the patentee will be limited. However, if most of the possible challengers have already been recruited as licensees and are subject to the no challenge clause, the patentee can be assured of the continual validity of its patent.

In spite of the no challenge clause, the likelihood of third party challenges to the patent bears upon the continual validity of the patent and its competitive effects. Ultimately, this likelihood is circumstance-specific and requires detailed examination. The courts and commentators, however, have opined that licensees are the parties with the greatest economic incentives to challenge the validity of patents. In Lear, Inc. v. Adkins, the U.S. Supreme Court declared that “[l]icensees may often be the only individuals with enough economic incentive to challenge the patentability of an inventor’s discovery.”[10] To the extent that this is true, no challenge clauses will effectively forestall validity challenges, which may allow an invalid patent to persist.

B. Different Types of No Challenge Clauses

There are different types of no challenge clauses, which can be classified into two main categories. The first category consists of outright prohibitions of validity challenges in the licensing agreement, which Miller and Gal have called no contest clauses.[11] Whether the clause in fact achieves outright prohibition depends on the willingness of the courts to grant injunctions or to bar validity challenges to enforce these clauses. To the extent that courts eschew injunctions for enforcing no challenge clauses, the patentee will only obtain damages. In that case, outright validity challenge prohibitions will only impose a financial penalty, which places them in the second category. Miller and Gal call these challenge penalty clauses.[12]

There is a wide variety of challenge penalty clauses. The penalty may be in the form of a financial penalty or a loss of contractual privileges, which ultimately will result in financial losses for the licensees. The financial penalty can be in the form of liquidated damages or higher royalties. For instance, in Rates Technology Inc. v. Speakeasy, Inc., LLC, the no challenge clause stipulated liquidated damages of a value of over twenty-four times the license fee.[13] One might argue that if the liquidated damages are so substantial that it would have a serious financial impact on the licensee, or perhaps even bankrupt the licensee, the challenge penalty clause effectively functions as an outright prohibition. The financial penalty may also exist in the form of elevated royalty.[14] In such case, the challenge penalty clause would stipulate that the royalty rate would increase in response to a validity challenge launched by the licensee.[15] A slight variation of an elevated royalty clause is a clause that provides for a higher royalty rate only when the validity challenge turns out to be unsuccessful.[16] A further variation is a clause that establishes three tiers of royalty rates, “with the rate increasing once a challenge is mounted, and providing for an even higher royalty if the challenge is not successful.”[17] These various types of clause create financial disincentives for the licensees to challenge a patent.[18]

Another kind of arrangement that similarly creates financial disincentives for licensees to challenge a patent is royalty front-loading.[19] Strictly speaking, this type of arrangement need not entail a financial penalty. If the royalty that is required of the licensee over the duration of the licensing agreement is the same as the amount that the licensee is liable to pay without front-loading, there is no financial penalty on the licensee. However, the licensee would be similarly deterred from challenging the patent as compared to a royalty increase upon challenge. This is because under current patent law, a licensee cannot recover the royalty that has been paid to the patentee prior to invalidation if the patent turns out to be invalidated, even though the licensee arguably should have never had to pay royalty to the patentee if the patent had always been invalid.[20] Therefore, if a patentee front-loads the royalty, the licensee will lose the incentive to challenge the patent because she will achieve little savings in terms of aggregate royalty payment. Even though the arrangement does not entail a financial penalty, it would achieve a similar result as a challenge penalty clause.[21]

The remaining type of challenge penalty clause is the termination-upon-challenge clause, which stipulates a termination of the licensing agreement upon the launch of a validity challenge by a licensee. This type of clause functions mainly by threatening the licensee with damages claims from the patentee if the licensee continues to deploy the licensed technology to produce the product. Upon the launch of a validity challenge, the licensing agreement either automatically terminates or gives the patentee an option to terminate the agreement.[22] Once the agreement is terminated, the licensee would be infringing the patent if she chose to continue to use the technology. If the patent is eventually upheld, the patentee can sue the licensee for patent infringement. The licensee may even be liable for trebled damages if the patentee can prove that the infringement is willful.[23] This gives the licensee a significant disincentive to bring validity challenges, at least unless she is quite confident of her chance of success. This may serve the laudable purpose of deterring frivolous validity challenges,[24] but the deterrent effect may be so great that it discourages meritorious challenges that are short of a slam-dunk.

Because of the mixed effects of termination-upon-challenge clauses, there are differing views as to whether they actually impose a penalty. Some commentators have argued that termination-upon-challenge clauses merely level the playing field between the patentee and the licensee in the course of litigation and will help promote innovation by protecting the patentee’s investment.[25] According to Taylor, “[d]uring litigation, the licensee profits from the product without paying royalties or incurring competition from other licensees. The licensor, on the other hand, must incur litigation without collecting royalties and, if the licensee holds an exclusive license, without the right to license the patent to another.”[26] Short of repudiating the licensing agreement, the licensee could continue to produce the product using the patentee’s technology while challenging the patent and holding the patentee bound by the agreement. Some critics argue that this is unfair to the patentee.[27] Meanwhile, other commentators have contended that termination-upon-challenges may have a deleterious effect on welfare and should be subject to scrutiny by the courts.[28] Regardless of whether the patentee is in a disadvantageous bargaining position vis-à-vis the licensee in the course of a validity challenge, it is clear that termination-upon-challenge clauses produce significant deterrent effect on licensees. Especially if willful infringement can be proved, the effect of these clauses could be similar to that of no challenge clauses with hefty liquidated damages, as in Rates Technology.[29]

The treatment of these various types of outright no challenge and challenge penalty clauses under U.S. patent law is still subject to debate. While most believe that an outright no challenge clause in a licensing agreement would be unenforceable, there is case law that suggests otherwise.[30] The situation is likewise unclear for termination-upon-challenge clauses.[31] Furthermore, while some commentators believe that the Supreme Court would invalidate no challenge clauses after MedImmune, Inc. v. Genentech, Inc,[32] others believe that the issue is still wide open.[33] With respect to the various royalty adjustment mechanisms, given the latitude that is usually given to the patentees to structure their royalty, it is unlikely that they will be deemed unenforceable.

Nonetheless, enforceability under patent law and legality under the antitrust law are two distinct issues. When determining whether a certain licensing practice should be enforceable under patent law, courts usually look to patent policy, which aims to encourage innovation by generating sufficient incentives.[34] When assessing the legality of the same practice under antitrust law, courts pay heed to antitrust policy and the overriding objective of the protection of consumer welfare.[35] Antitrust law emphasizes substance over form. If an outright no challenge clause and the various challenge penalty clauses exert the same effect on the licensee’s incentive to launch a validity challenge, they should result in similar impact on consumer welfare and therefore should be accorded the same treatment. The form in which the deterrent effect on licensees is achieved should not be dispositive from an antitrust perspective.

C. Timing of the Agreement

Apart from the form in which they take, no challenge clauses also may differ in the timing between when the agreement is entered and when the validity challenge commences and concludes. There are generally three time settings for the entry of the agreement. The first is a pure licensing agreement that is entered in the absence of any threat of litigation. The second is a settlement agreement that is entered when litigation is imminent or has commenced and has proceeded to various stages prior to conclusion. The third is consent decree, which concludes litigation by the agreement of both parties with the court’s approval. The question, therefore, is whether the timing of the agreement affects the enforceability of the no challenge clause under patent law and should affect the legality of the clause under antitrust law.

Overall, the timing of the agreement has had a bearing on judicial attitude toward no challenge clauses, although there is no clear consensus among the appellate courts.[36] Courts seem to have treated no challenge clauses in licensing agreement with the greatest hostility.[37] Most seem to agree that no challenge clauses incorporated in licensing agreements are unenforceable as a matter of patent law.[38] However, the Supreme Court has never expressly decided the issue. The Federal Circuit, which is the most important appellate court for patent issues, has indicated that a clear and unambiguous no challenge clause should be enforceable even in the absence of a threat of litigation.[39]

No challenge clauses in settlement agreement seem to have received more lenient treatment from the courts.[40] Again, consensus eludes the various appellate courts. The Second and the Ninth Circuits have struck down no challenge clauses in settlement agreements,[41] while the Sixth and the Federal Circuits have upheld them under specific circumstances.[42] More recently, the Second Circuit has held that a no challenge clause contained in a settlement agreement entered into after discovery would be upheld.[43] A similar circuit split is also observed with respect to the enforceability of no challenge clauses incorporated in consent decrees. The Second and the Seventh Circuits have refused to enforce no challenge clauses contained in consent decrees[44] whereas the Federal Circuit has largely enforced them.[45]

Courts have offered a range of reasons for offering disparate treatment to no challenge clauses contained in different types of agreements. For consent decrees, the Federal Circuit has argued that the doctrine of res judicata favors the definitive disposition of legal disputes, and parties should not be allowed to reopen the validity issue later.[46] For settlement agreements, there seems to be a predominant view that discovery affords parties the opportunity to fully inform themselves of the issues. Thus a no challenge clause incorporated in a settlement agreement entered into after discovery should represent an informed, binding decision by the parties.[47]

Whether no challenge clauses contained in licensing and settlement agreements should be treated differently from an antitrust perspective will be discussed subsequently. For now, suffice it note that consent decrees present slightly different issues from the other two types of agreements. While some courts have admittedly refused to enforce no challenge clauses contained in consent decrees, attaching antitrust liability to the clause is a different matter.[48] Even though the basis of a consent decree is an agreement between the two litigating parties, judicial supervision would suggest that the court approves of the provisions in the agreement.[49] It would be quite remarkable to assert that a clause that has been approved by the court should turn out to be illegal, giving rise to trebled damages and other liability. Therefore, no challenge clauses contained in consent decrees should be beyond the purview of antitrust law. Instead, the focus should be on licensing and settlement agreements.

II. Treatment of No Challenge Clauses in Different Jurisdictions

The treatment of no challenge clauses varies widely across the major jurisdictions. In the U.S., no court seems to have ruled on the legality of no challenge clauses under antitrust law or held them to constitute patent misuse.[50] As mentioned earlier, the various appellate courts have expressed different views on their enforceability under patent law. In the EU, the position on no challenge clauses under the Technology Transfer Block Exemption Regulations (“TTBER”) has evolved over time. The current position under the 2014 TTBER is that all no challenge clauses, including termination-upon-challenge clauses, fall within what are known as excluded restrictions.[51] Apart from a limited number of exceptions, these clauses will not benefit from the block exemption and will need to be justified under Article 101(3) of the Treaty on the Functioning of the European Union (“TFEU”) in order to be lawful under EU competition law. For all intents and purposes, most parties avoid clauses that are excluded restrictions in their licensing agreements, partly because justification under Article 101(3) is generally perceived to be difficult.[52] In other words, commercial parties practically treat no challenge clauses as illegal.

In China, one of the relatively recent but nonetheless important jurisdictions, no challenge clauses also seem to be practically illegal per se, as indicated by the one case in which they were examined. In the February 2015 decision on Qualcomm’s licensing practices, the National Development and Reform Commission (“NDRC), one of the Chinese enforcement authorities, effectively deemed no challenge clauses as illegal per se. In the IP-Competition Regulations issued in April 2015 by the State Administration of Industry and Commerce (“SAIC”) (another Chinese enforcement authority), Article 10 proscribes the use of no challenge clauses absent legitimate justifications.[53] The Regulations are silent on what constitutes a legitimate justification. The following sections provide a detailed overview of the status of no challenge clauses under U.S., EU, and Chinese law.

A. The United States

1. Lear, Inc. v. Adkins

U.S. courts have suggested that no challenge clauses would be illegal if they were incorporated into a market allocation agreement.[54] It has also been held that the use of reciprocal dealing to force a counterparty not to challenge a patent is an antitrust violation.[55] However, it seems that no courts have ruled on the legality of no challenge clauses on their own; instead, much of the action regarding no challenge clauses has been under patent law. Any exposition of the law on no challenge clauses must start with the 1969 Supreme Court case of Lear, Inc. v. Adkins. Prior to this case, the doctrine of licensee estoppel, which was first applied by the Supreme Court in 1856 in Kinsman v. Parkhurst,[56] had prevailed in the U.S.[57] The doctrine essentially states that once a licensee accepts a licensing agreement from a patentee, the licensee is deemed to have acquiesced to the validity of the patent underlying the agreement and is estopped from launching validity challenges later.[58] The doctrine was largely based on equitable considerations and paid little heed to the social harm of upholding an invalid patent.[59]

In Lear, Inc. v. Adkins, the U.S. Supreme Court ruled on whether the licensee estoppel doctrine estopped Lear, Inc. from pleading patent invalidity in the suit. In language that has been cited repeatedly by the lower courts ever since, the Supreme Court declared that the public policy of clearing invalid patents overrides the equitable considerations favoring the patentee:

Surely the equities of the licensor do not weigh very heavily when they are balanced against the important public interest in permitting full and free competition in the use of ideas which are in reality a part of the public domain. Licensees may often be the only individuals with enough economic incentive to challenge the patentability of an inventor’s discovery. If they are muzzled, the public may continually be required to pay tribute to would-be monopolists without need or justification. We think it plain that the technical requirements of contract doctrine must give way before the demands of the public interest in the typical situation involving the negotiation of a license after a patent has issued.[60]

This paragraph is notable for developing the law on no challenge clauses in two respects. First, although the case did not in fact involve a no challenge clause,[61] lower courts have cited the balance of public policy in favor of the removal of invalid patents as justification for invalidating no challenge clauses of various kinds.[62] Some commentators have argued that Lear does not require this result at all.[63] Second, subsequent courts and commentators alike have cited with approval the court’s observation that licensees are often the only parties with economic incentives to mount a validity challenge.[64] The circumstances that affect a licensee’s incentive to challenge will be discussed subsequently.

Appellate courts applied Lear’s holdings to no challenge clauses in the ensuing decades.[65] There is quite a divide between the courts on their treatment of no challenge clauses. By and large, the Federal Circuit, unsurprisingly, has taken a pro-patentee approach and allowed these clauses to be enforced under various circumstances.[66] The other circuits have tended to take a more hostile attitude toward these clauses.[67] However, most cases from these courts tend to be of an older vintage, and judicial attitude may have since evolved.[68] The courts seem to distinguish between no challenge clauses based on the agreement they are embodied in. The exposition below will follow this practice.

2. No Challenge Clauses in Licensing Agreements

Two years after Lear, in Massillon-Cleveland-Akron Sign Co. v. Golden State Advertising Co., the Ninth Circuit confronted a case involving an explicit no challenge clause in a settlement agreement.[69] In determining the validity of the clause, the Ninth Circuit made extensive reference to Lear. The court reiterated that the Supreme Court had struck the balance between state contract law and federal patent law, decisively in favor of promoting the federal patent policy of allowing the free flow of ideas that are not patented.[70] The Ninth Circuit was cognizant of the difference between the doctrine of licensee estoppel at issue in Lear and the no challenge clause at issue.[71] However, to the Ninth Circuit, this difference was immaterial. The court declared that “[t]he parties’ contract, however, is no more controlling on this issue than is the State’s doctrine of estoppel, which is also rooted in contract principles,”[72] and that the no challenge clause “is in just as direct conflict with the ‘strong federal policy’ referred to repeatedly in Lear, as was the estoppel doctrine and the specific contractual provision struck down in that decision.”[73] Moreover, in dicta, the Ninth Circuit declared that for the purpose of the enforceability of no challenge clauses, there is no difference between a licensing agreement and a settlement agreement.[74] The court correctly recognized that a licensing agreement can be reached under the threat of a charge of infringement.[75] It also observed that such a distinction would be “less then [sic] workable,”[76] and would open the door to easy circumvention because “it would be just as easy to couch licensing arrangements in the form of settlement agreements.”[77]

In Bendix Corp v. Balax Inc., the Seventh Circuit struck down a no challenge clause in a licensing agreement that prohibited the licensees from challenging the validity of the patent even after the agreement had been terminated or lapsed.[78] The infringement defendants in that case alleged that the patentee used the no challenge clauses in the licensing agreements to “blanket” the market.[79] Citing Lear extensively, including the passage excerpted above, the court concluded that “the right to estop licensees from challenging a patent is not part of the ‘limited protection’ afforded by the patent monopoly.”[80] More relevant to the purposes of this article, the court noted that the arrangement at issue should be struck down because “it creates a danger of unwarranted monopolization.”[81] This danger was compounded by the fact that the obligation not to challenge extended beyond the duration of the licensing agreements.

More recently, in Rates Technology v. Speakeasy, Inc.,[82] the Second Circuit struck down a no challenge clause contained in a pre-litigation settlement agreement.[83] The court noted that what it was asked to do was “to balance the policy concerns of patent articulated in Lear against countervailing policy concerns that favor requiring parties to adhere to the terms of agreements resolving their legal disputes.”[84] Citing Massillon-Cleveland-Akron Sign Co. with approval, the court observed that “allowing such no-challenges whenever a license agreement is cast as a ‘settlement’ could ‘close the doors of the courts to a large group of parties who ha[ve] sufficient interest in the patent to challenge its validity,’ [internal citation omitted] and thereby render Lear’s prohibition of licensee estoppel—a prohibition that the Supreme Court held was required by strong public policy considerations—a dead letter.”[85]

Importantly, while acknowledging that “the important policy interests favoring the settlement of litigation may support a different rule with respect to no-challenge clauses in settlements entered into after the initiation of litigation,”[86] the court held that “enforcing no-challenge clauses in pre-litigation settlements would significantly undermine the ‘public interest in discovering invalid patents.’”[87] Despite the court’s reference to the initiation of litigation, the court pronounced that the crucial watershed between enforceability and unenforceability is the conduct of discovery. No challenge clauses contained in a settlement agreement entered into after discovery would be enforceable, while those in a settlement agreement entered into prior to discovery would be void. To the court, discovery serves two important purposes:

First, it suggests that the alleged infringer has had a full opportunity to assess the validity of the patent, and is therefore making an informed decision to abandon her challenge to its validity. Second, the fact that parties have conducted discovery is evidence that they had a genuine dispute over the patent’s validity, and that the patent owner is not seeking to prevent its monopoly from being challenged by characterizing ordinary licensing agreements as settlement agreements.[88]

Because, as mentioned earlier, it is often impossible to draw the line between a pre-litigation settlement agreement and a licensing agreement,[89] the court’s conclusion effectively means that no challenge clauses in licensing agreements are unenforceable.

The position on no challenge clauses in licensing agreements would have been quite clear but for the Federal Circuit’s decision in Baseload Energy, Inc. v. Roberts.[90] The court stated in dicta that “[i]n the context of settlement agreements, as with consent decrees, clear and unambiguous language barring the right to challenge patent validity in future infringement actions is sufficient, even if invalidity claims had not been previously at issue and had not been actually litigated.”[91] The court made this statement while trying to distinguish the facts of the instant case from a prior case, Flex-Foot v. CRP.[92] In Flex-Foot, the alleged infringer had challenged patent validity, had had an opportunity to conduct discovery regarding validity, and had agreed voluntarily to dismiss the suit with prejudice in a settlement agreement containing a clear and unambiguous no challenge clause.[93] In Baseload Energy, the Federal Circuit argued that the exact factual circumstances need not be replicated for a no challenge clause to be upheld.[94] The focus seems to have shifted from the existence of prior litigation and prior opportunity to conduct discovery, which would have aligned the Federal Circuit with the Second Circuit, to the existence of clear and unambiguous language barring future validity challenges. This opens the possibility that the Federal Circuit would uphold a clear and unambiguous no challenge clause contained in a licensing agreement in the absence of any pending or ongoing litigation.

3. No Challenge Clauses in Settlement Agreements

The appellate courts have gone in different directions in their treatment of no challenge clauses contained in a settlement agreement. There seems to be some consensus that the dividing line for enforceability is whether the settlement agreement was entered into before or after discovery, or expense of substantial judicial resources. However, a number of cases deviate from this consensus. There are cases that held, or at least proclaimed, that no challenge clauses would be deemed unenforceable regardless of whether they are incorporated in a licensing agreement or a settlement agreement. There are also cases in which the court refused to enforce a no challenge clause, or at least something similar to it, contained in a settlement agreement entered into after discovery. Finally, there are also cases in which the court enforced a no challenge clause in a settlement agreement entered into prior to discovery.

A number of appellate decisions that have dealt with the enforceability of no challenge clauses in settlement agreements have upheld them so long as the settlement agreement was entered into after discovery. As mentioned, the Second Circuit in Rates Technology held that the dividing line for enforceability is discovery. In Aro Corp. v. Allied Witan Co.,[95] the Sixth Circuit enforced a no challenge clause in a settlement agreement entered into after discovery. Although the court did not explicitly designate discovery as the dividing line as the Second Circuit did in Rates Technology, it noted that Lear “cannot be interpreted so broadly as to condone a kind of gamesmanship, wherein an alleged infringer, after employing the judicial system for months of discovery, negotiation and sparring, abandons its challenge to validity, executes a license in settlement, and then repudiates the license and seeks to start the fight all over again in the courts.”[96] The Federal Circuit has also consistently upheld no challenge clauses in settlement agreements that were entered into after discovery. Hemstreet v. Spiegel, Inc. did not concern an explicit no challenge clause.[97] It instead involved a provision that required the licensee to continue to pay royalty even after the patent had been otherwise invalidated, which in monetary terms functioned similarly as a no challenge clause. The Federal Circuit upheld the provision on the grounds of furthering settlement of lawsuits, despite the fact that the patent had been found unenforceable in a separate proceeding.[98] As noted earlier, in Flex-Foot, Inc. v. CRP, Inc., the Federal Circuit upheld a no challenge clause in a settlement agreement entered into after discovery between two parties to an existing license.

The three cases that do not conform to this rough consensus were Massillon-Cleveland-Akron Sign Co. v. Golden State Advertising Co., Warner-Jenkinson Co. v. Allied Chemical Corp.,[99] and Baseload Energy, Inc. v. Roberts. However, it is possible to reconcile the first two cases with the general rule that discovery is the dividing line for enforceability. In Massillon-Cleveland-Akron Sign Co., the Ninth Circuit did indicate in dicta that no challenge clauses would be deemed unenforceable regardless of whether they are incorporated in a licensing agreement or a settlement agreement.[100] It is nonetheless important to note that the no challenge clause at issue in the case, which the court refused to enforce, was contained in a settlement agreement entered into prior to the commencement of litigation.[101]

In Warner-Jenkinson, the Second Circuit struck down a clause that prohibited a licensee from terminating the license for two years on the grounds that the licensee should be able to terminate the license if she successfully challenges the patent’s validity.[102] While the clause was contained in an agreement reached by the parties after discovery in a prior litigation, the Court nonetheless refused to uphold it. However, this does not mean that the Court’s holding is inconsistent with the general rule. In fact, the Court noted that if the agreement had contained an explicit no challenge clause, the Court may have felt compelled to give effect to it.[103] The Court merely observed that the Lear decision cautions against reading an explicit no challenge clause into an ambiguous clause such as the one at issue in the case.[104] Therefore, one may perhaps treat this case as not being applicable to explicit no challenge clauses at all.

Perhaps the one true anomaly among the three cases is Baseload Energy. In this case, the declaratory judgment defendant sought to enforce a claim release clause, under which the plaintiff has relinquished all present and future claims against the defendant, against the plaintiff.[105] The Federal Circuit ruled against the defendant, stating that the claim release clause did not specifically refer to invalidity issues and therefore could not be used to bar validity challenges.[106] However, in responding to the plaintiff’s argument that the claim release clause should not bar its declaratory judgment action because the settlement agreement was not entered into after discovery and extensive court proceeding, the Court asserted that the absence of prior dispute or litigation as to invalidity is not dispositive of the enforceability issue.[107] If there was no prior dispute concerning invalidity, there clearly would have been no discovery on the issue. The Court implicitly noted that prior discovery on patent validity is not determinative of enforceability of no challenge clauses in settlement agreements.[108]

4. No Challenge Clauses in Consent Decrees

Given that this article will not focus on no challenge clauses in consent decrees, the discussion here will be brief. A few Federal Circuit cases can be interpreted as holding that a consent decree, which stipulates patent validity, bars future validity challenges absent express reservation of the right to launch such challenges. A majority of the appellate courts, however, have held that a consent decree (or a settlement agreement accompanied by a dismissal with prejudice) that stipulates patent validity and infringement precludes future validity challenges.[109] In other words, a no challenge clause stipulated in such a consent decree would be enforceable.

5. Termination-Upon-Challenge Clauses

The courts’ attitudes toward termination-upon-challenge clauses is similar to that toward general no challenge clauses, in that the Federal Circuit holds a more lenient position than the other circuits. In Crane Co. v. Aeroquip Corp., the Seventh Circuit held termination-upon-challenge clauses to be unenforceable on the grounds that under Lear, "[d]efendant was within its rights to test validity after entering into the consent judgment of validity.”[110] However, in C.R. Bard, Inc. v. Schwartz, the Federal Circuit implicitly held that a licensor can terminate the licensing agreement when a licensee sues to declare the patent invalid and ceases to pay royalty.[111] Despite the slightly complex facts in Schwartz, commentators have argued that in so ruling, “the Federal Circuit effectively held that license provisions which give licensors the right to terminate licenses are enforceable when licensees bring validity challenges and cease making royalty payments.”[112] Taylor argues that Federal Circuit case law such as Cordis Corp. v. Medtronic, Inc. lends further support to the notion that termination-upon-challenge clauses should be enforceable.[113] The gist of the Federal Circuit’s approach is that while Lear requires the courts to allow the licensee to challenge the validity of the patent, the licensee should not be spared of the consequences of a validity challenge.[114] The licensee should not be allowed to launch a validity challenge while continually enjoying the benefit of the licensing agreement. The implication would be that the patentee should be allowed to terminate the licensing agreement, at least when the licensee also ceases to pay royalty.[115] If termination-upon-challenge clauses are more likely to be upheld by the courts and are equally effective in deterring validity challenges, one may see them incorporated in licensing and settlement agreements more often, and they may end up featuring more prominently in antitrust cases.

B. The European Union

Unlike the U.S., the EU has dealt with no challenge clauses under competition law. Given the fact that patent law is still largely national law in the EU, relegating the treatment of no challenge clauses to patent law, like it has been done in the U.S., could result in a variety of approaches. A review of the EU approach to no challenge clauses entails an examination of both the case law of the European courts and the European Commission’s TTBER. On the whole, it is fair to say that both the European courts and the European Commission have taken a fairly hardline approach toward no challenge clauses, even though their approaches, especially that of the Commission, have evolved over time.

1. The European Courts

The European Court of Justice (ECJ), now renamed the Court of Justice of the European Union (CJEU), encountered no challenge clauses in Windsurfing International v. Commission.[116] In that case, the patentee imposed an express no challenge clause on its licensees, which the European Commission challenged as being incompatible with Article 101(1) (then Article 85(1)) of the TFEU. The ECJ condemned the clause in summary fashion, without an examination of competitive effects. Although the court stopped short of ruling that no challenge clauses restrict competition by object, it did hold that no challenge clauses infringe Article 101(1) because of the overriding public interest in removing invalid patents, without any regard to possible competitive effects.[117] The court further concluded that the clause did not benefit from the exemption under Article 101(3).[118] Using U.S. antitrust parlance, commentators have remarked that the ECJ in Windsurfing condemned the no challenge clause as illegal per se.[119]

The ECJ modified its position on no challenge clauses in a subsequent case, Bayer v. Süllhöfer.[120] The court began its discussion by rejecting the Commission’s two arguments. First, the court rejected the argument that no challenge clauses are, in principle, to be considered a restriction of competition under Article 101(1). Second, the court disagreed with the Commission’s argument that these clauses can be compatible with Article 101(1) if they are incorporated in a settlement agreement and some further conditions are met. The ECJ held that as far as no challenge clauses are concerned, it makes no difference whether they are in a licensing agreement or a settlement agreement.[121] Instead, the court held that one must take into account “the legal and economic context” in determining the legality of these clauses.[122] The court proceeded to enumerate two circumstances in which no challenge clauses would be permissible: (1) when the license that contains a no challenge clause is free, which means that the licensee does not suffer from the competitive disadvantage of royalty payment, and (2) “when the licence relates to a technically outdated process which the licensee undertaking did not use.”[123]

In the more recent Huawei Technologies v. ZTE Corp. case,[124] the CJEU had another opportunity to discuss the importance of the right of a licensee to challenge the validity of the licensed patent. In this case, Advocate General Wathelet stated in his opinion that:

[I]t is in the public interest for an alleged infringer to have the opportunity, after concluding a licensing agreement, to challenge the validity of an SEP (as ZTE did). As the Commission has pointed out, the wrongful issue of a patent may constitute an obstacle to the legitimate pursuit of an economic activity. Moreover, if undertakings supplying standard-compliant products and services cannot call into question the validity of a patent declared to be essential to that standard, it could prove effectively impossible to verify the validity of that patent because other undertakings would have no interest in bringing proceedings in that regard.[125]

This case has the added dimension of involving standard-essential patents (“SEPs”), which have more serious competitive implications because they tend to possess substantial market power. Echoing the U.S. Supreme Court’s observation in Lear, Advocate General Wathelet speculated that licensees may be the only party with the incentive to challenge the validity of a patent.[126] The CJEU agreed with Advocate General Wathelet, and stated in its judgment that:

[H]aving regard, first, to the fact that a standardisation body such as that which developed the standard at issue in the main proceedings does not check whether patents are valid or essential to the standard in which they are included during the standardisation procedure, and, secondly, to the right to effective judicial protection guaranteed by Article 47 of the Charter, an alleged infringer cannot be criticised either for challenging, in parallel to the negotiations relating to the grant of licences, the validity of those patents and/or the essential nature of those patents to the standard in which they are included and/or their actual use, or for reserving the right to do so in the future.[127]

Particularly noteworthy is the Court’s observation that standard setting organizations (“SSOs”) do not necessarily check the validity or essentiality of the patents seeking to be included in the standards.[128] In fact, most SSOs do not check the validity of the included patents.[129] Given the fact that standardization would give patents a great deal of market power, the harm of allowing an invalid SEP to persist is much greater than for a non-SEP.

2. The European Commission

The European Commission has had significant influence over the licensing practices of European patent holders. Patentees usually try to steer clear of what the Commission deems to be impermissible licensing practices to take advantage of the legal certainty provided by the TTBER.[130] The Commission’s view of no challenge clauses has evolved over time. In 2014, the European Commission issued the most recent set of TTBER.[131] In these regulations, the Commission revised its position on no challenge clauses, which continue to be an excluded restriction, meaning they will not automatically benefit from the block exemption and their compatibility with the Treaty will have to be individually assessed.[132] However, termination-upon-challenge clauses are now classified as an excluded restriction as well, which previously were not under the 2004 TTBER, except when incorporated in an exclusive license and the market share thresholds provided in Article 3 of the TTBER are met.[133] In the accompanying guidelines, the Commission asserted that no challenge clauses are likely to fall within Article 101(1) when the licensed technology is valuable, and therefore creates a competitive advantage for the licensees.[134] In such a case, a no challenge clause is unlikely to meet the conditions for Article 101(3).[135] This means that it would be outright illegal, which is reminiscent of the ECJ’s position in Windsurfing. Finally, the Commission incorporated the two exceptions provided by the ECJ in Bayer v. Süllhöfer.[136]

In the 2014 TTBER, the Commission made two major changes to its position on no challenge clauses. First, it took a slightly more cautious approach to no challenge clauses in settlement agreements.[137] After repeating its previous position that no challenge clauses in settlement agreements generally fall outside Article 101(1), it proceeded to caution that these clauses nonetheless could be anticompetitive under specific circumstances.[138] Second, the Commission included termination-upon-challenge clauses, except in exclusive licenses, as an excluded restriction. The Commission explained this change of position by saying that: “[s]uch a termination right can have the same effect as a non-challenge clause, in particular where switching away from the licensor’s technology would result in a significant loss to the licensee . . . or where the licensor’s technology is a necessary input for the licensee’s production.”[139] The key factor to consider is whether the loss of profit would act as a sufficient deterrent to challenges, which, according to the Commission, will need to be assessed on a case-by-case basis.[140]

C. China

1. Regulations and Draft Guidelines

Of the three jurisdictions surveyed in this article, China appears to take the strictest approach to no challenge clauses, as evidenced in the decisional practices of Chinese enforcement authorities. This may reflect a strategic concern that most of China remains a net importer of foreign technologies.[141] A more pro-licensee approach would stand to benefit Chinese companies. The three Chinese enforcement authorities, the NDRC, the SAIC, and the Ministry of Commerce,[142] are reportedly drafting the IP-Competition Guidelines under the auspices of the Anti-Monopoly Commission, which is an advisory body in the State Council overseeing and coordinating enforcement activity by the three authorities.[143] This article will make reference to the approach to no challenge clauses in the consultative drafts released by the NDRC and the SAIC. It will also refer to the Regulation on the Prohibition of Conduct Eliminating or Restricting Competition by Abusing Intellectual Property Rights released by the SAIC in April 2015 (“the “SAIC Regulation”).[144] The SAIC Regulation also contains some discussion of no challenge clauses.[145] Lastly, and most importantly, in February 2015, the NDRC found that Qualcomm had abused its dominance through a variety of licensing practices, including imposing no challenge clauses on its licensees.[146] Qualcomm was fined RMB6 billion (approximately USD1 billion).[147] An examination of the decision will shed light on the prevailing Chinese approach to no challenge clauses.

Article 10 of the SAIC Regulation stipulates that a business operator with a dominant market position should not, without legitimate reasons, prohibit transaction counterparties from raising doubts about the validity of its intellectual property rights, thereby eliminating or restricting competition.[148] Although the article uses the phrase “raising doubts about”, it probably refers to launching a validity challenge. Otherwise, the language is so impermissibly broad that the SAIC could not have reasonably contemplated that interpretation.

A few distinctions are key to understanding Article 10. First, the provision refers to transactional counterparty and not licensee. Therefore, it probably has a broader reach than the EU TTBER, and could potentially cover buyers of products that incorporate the patented technology in addition to licensees. Second, the provision is worded in such a way that it seems to require a demonstration of a restriction of competition before a no challenge prohibition will be outlawed. If this is true, it appears that the SAIC has not adopted a per se approach to no challenge clauses, and may be more lenient with them than the European Commission. However, it is not clear how much importance should be attached to the language “elimination or restriction of competition”. There have been cases in the past in which the enforcement authorities’ guidelines indicated that the conduct at issue requires a showing of competitive effects, but the authorities did not make such a showing in their decisions. Third, the provision does provide for the possibility of justification by way of “legitimate reasons,” even though it stops short of defining these reasons. This may be further evidence that the SAIC does not adopt a per se approach. Finally, the provision refers only to a prohibition of challenges by transactional counterparties. At least on a literal interpretation, it does not seem to cover provisions such as termination-upon-challenge clauses or higher royalty-upon-challenge clauses that stop short of outright prohibiting challenges, but merely create hurdles for them. The seventh consultative draft of the IP-Competition Guidelines issued by the SAIC by and large repeats the same language as the SAIC Regulation regarding no challenge clauses.[149]

The NDRC draft IP-Competition Guidelines (“NDRC Guidelines”) provide more detail on no challenge clauses.[150] The first notable feature about these guidelines is that no challenge clauses are discussed under both the restrictive agreements section and the abuse of dominance section.[151] In the restrictive agreements section, the guidelines provide a relatively detailed discussion about these clauses. Article 2(1)(3) begins by acknowledging that no challenge clauses can serve the useful purposes of preventing excessive litigation and improving transactional efficiency.[152] The section then proceeds to assert that these clauses can also restrict competition, which is to be determined with reference to a number of factors, including: (1) whether the patentee imposes the no challenge clause on all licensees, (2) whether the underlying patent is being licensed for royalty and whether the patent may constitute entry barriers into the downstream market, (3) whether the underlying patent blocks the implementation of other competing patents, (4) whether the patentee obtained the patent by providing false or misleading information, and (5) whether the patentee compels the licensee to accept the no challenge clause through improper means.[153] In the abuse of dominance section, Article 3(2)(4) merely lists the prohibition of licensees from challenging the licensor’s patent as a prohibited unreasonable licensing condition, without any explanation of the relevant factors to be considered.[154] It is not entirely clear what explains the different treatment of no challenge clauses in the two sections. It may mean that if these clauses are treated as an abuse of dominance, the analytical process is simpler and there is no need to resort to the factors listed in Article 2(1)(3). Alternatively, it may simply mean that the factors listed in Article 2(1)(3) are tacitly incorporated in Article 3(2)(4). The latter explanation seems to make more sense, as there is no reason why different analytical factors are considered when no challenge clauses are treated as a restrictive agreement as opposed to an abuse of dominance.

2. The NDRC Qualcomm Decision

Apart from the SAIC Regulation and these draft guidelines, there has been one enforcement action that concerns no challenge clauses. In the NDRC’s decision against Qualcomm released in February 2015, one of the four claims raised by the NDRC is the imposition of unreasonable conditions on the sale of the baseband chips used in mobile communication terminals.[155] One of the unreasonable conditions is that Qualcomm will terminate the supply of chips if the licensee initiates litigation against it,[156] which the NDRC characterizes as a no challenge clause.[157] Because Qualcomm stopped short of outright prohibiting licensees from initiating litigation,[158] the provision was, at most, a challenge-penalty clause. However, the NDRC was convinced that cessation of supply was enough of a deterrent to Qualcomm’s customers, the terminal manufacturers, and thus, practically functioned as an outright prohibition.[159] Qualcomm admitted to the imposition of no-challenge clauses in the licensing agreements, but argued that its conduct was justified. The NDRC did not detail what the justifications were, but dismissed them as insufficient. According to the NDRC, it is within the licensee’s’ right to challenge patent validity or institute litigation with respect to the licensing agreements.[160] Qualcomm’s imposition of no-challenge clauses restricted, if not outright deprived, the licensees of this right. Moreover, the NDRC argued that competition was restricted when potential licensees that were unwilling to accept the no-challenge clauses were excluded from the market.[161]

The NDRC did not consider the competitive effects of no challenge clauses except by saying that licensees that are unwilling to accept the unreasonable licensing terms would be excluded from the market.[162] However, that would be tantamount to saying that any time Qualcomm turns away a potential licensee, there is restriction of competition. The NDRC’s alternative argument that no challenge clauses infringe upon the licensee’s right to challenge patent validity effectively means that these clauses are illegal on their face. It would therefore seem that the NDRC’s approach to no challenge clauses is stricter than that manifested in the SAIC Regulation and possibly in line with the approach taken in the 2014 TTBER.

III. Consumer Harm of No Challenge Clauses

In light of the differing approaches to no challenge clauses taken in these three jurisdictions, it is worth considering what the correct approach to these clauses should be. While the U.S. has largely regulated no challenge clauses under patent law, the EU and China have expressly subjected no challenge clauses to competition law. Nothing in U.S. antitrust law says that no challenge clauses are exempted from antitrust scrutiny. Nonetheless, as far as this author is aware, U.S. courts have not had the opportunity to rule on their legality under antitrust law. No challenge clauses also received no mention in the 1995 DOJ-FTC IP-Antitrust Guidelines.[163] There was brief mention of these clauses in the report issued by the DOJ and the FTC on IP-antitrust issues in 2007,[164] which states that “[i]nvalid patents impair competition, and as a matter of patent policy, challenges to their validity are encouraged.”[165] It is noteworthy that the report cited to Lear, Inc. v. Adkins and MedImmune Inc. v. Genentech, Inc., and not an antitrust case, as support for this statement. The report further refers to the Solicitor General’s brief in MedImmune for the observation that “public policy strongly favors ridding the economy of invalid patents, which impede efficient licensing, hinder competition, and undermine incentives for innovation.”[166] There is no allusion to consumer harm resulting from these clauses. Therefore, no challenge clauses are viewed through the lens of patent policy as opposed to antitrust policy. Meanwhile, the seemingly strict approach to no challenge clauses under EU and Chinese competition law would suggest that these two jurisdictions believe that these clauses can inflict considerable consumer harm that warrants the scrutiny of competition law.

Therefore, the first question to consider is whether no challenge clauses inflict harm on consumers. A short answer is that they do. Commentators have noted that no challenge clauses can create consumer harm under certain circumstances. Morris notes that “[t]he competitive harm associated with a no-challenge clause involves the risk that invalid intellectual property rights give their holders market power that is not justified by the policies underlying those rights. Such concentration of market power may lead to higher prices or lower output.”[167] Likewise, Orstavik observes that under a no challenge clause, a “licensee may be obliged to pay royalties when none are justified, or the agreement may contain other restrictions that continue to apply even if the original right is invalid, thus restricting competition. Because of the obligation to pay royalties, the no-challenge clause may contribute to an artificially high price level.”[168]

A. A Comparison with Reverse Payments

Reverse payments, in which the infringement plaintiff agrees to pay the defendant compensation, usually a very large sum of money, to settle the infringement suit, share important similarities with no challenge clauses. They both arise in the context of patent settlements (in no challenge clauses, also in licensing agreements), both entail the infringement defendant acknowledging the validity of the contested patent, and the legality of both practices hinge on patent validity. There are admittedly crucial differences between them, one of which being that, while reverse payments entail a large transfer from the infringement plaintiff to the infringement defendant, that need not be the case with no challenge clauses.[169] Therefore, if reverse payments have been roundly perceived to have serious anticompetitive potential—in fact, notable commentators have urged that they be held presumptively illegal[170]—no challenge clauses should at least deserve some antitrust scrutiny.

While acknowledging the similarities between reverse payments in pharmaceutical settlements[171] and licensing agreements, which may contain no challenge clauses, Miller and Gal justify their disparate treatment under antitrust law. They highlight a number of major differences between reverse payments and no challenge clauses that justify the hands-off approach of U.S. antitrust law to the latter. First, licensing agreements “are ongoing, they may further social welfare . . . , and they are generally based on the assumption that the patent is valid, at least when the contract is signed.”[172] Second, their effect on competition is different in that “[l]icensees already operate in the market, albeit with restrictions contained in their licences, so the anticompetitive harm stems from restricting the entry of third parties into the market. By contrast, in pay-for-delay agreements [reverse payments] the harm includes the prevention of entry of the potential patent challenger.”[173]

There are a number of problems with Miller and Gal’s arguments. First, it is not clear how distinct reverse payment agreements are from licensing agreements containing no challenge clauses. Both types of agreements are ongoing, and their legal obligations persist for the duration of the agreements. The difference is that reverse payment agreements involve ongoing inaction, where the obligation is to abstain from the market, whereas licensing agreements with no challenge clauses involve ongoing action. Here, the ongoing activity is the commercialization of the patented technology through licensing and the ongoing obligation is to refrain from mounting a validity challenge. Even if licensing agreements could be construed as more more ongoing in nature than reverse payment agreements, it is not clear what the relevance of that is to consumer harm, so long as the harm is continuous under both agreements.

Second, licensing agreements may further social welfare by encouraging the commercialization of technology, whereas the only conceivable social benefit of reverse payments is the minimization of litigation. However, the correct comparison with reverse payments are not licensing agreements, but no challenge clauses. No challenge clauses themselves do not promote the commercialization of technology (unless one argues that the patentee will not license the technology absent these clauses, which will be addressed subsequently). The only purpose they serve, like reverse payments, is the minimization of disputes over patent validity. Furthermore, even if we were to compare licensing agreements and reverse payments, licensing agreements are not immune to anticompetitive uses. The patentee may intentionally disguise reverse payments in the form of a reduced royalty by undercharging the licensee.[174] While this mechanism would most likely be less effective than a lump sum transfer from the patentee, it has the advantage of being more difficult to detect and police. In order to show that there is a reverse payment, the court would need to establish what the royalty would be without the disguised reverse payment, which would be very difficult.[175] In the aftermath of Actavis,[176] we are already witnessing reverse payment agreements that eschew lump sum transfers but instead resort to complicated licensing, co-marketing, or delayed entry arrangements.[177]

Third, while it may be true that licensing agreements are generally premised on the validity of the underlying patent, what matters is not whether the practice at issue is premised on patent validity, which only pertains to the subjective state of mind of the parties, but whether the legality of the practice turns on patent validity. That is the relevant issue as far as antitrust analysis is concerned. The legality of reverse payments would turn on the validity of the underlying patent. Reverse payments are only objectionable as a matter of antitrust law if the underlying patent is invalid.[178] If the patent was invalid, the patentee would be effectively splitting with the potential infringer the monopoly profit, which she does not deserve. The patentee and the potential infringer are both better off than if the potential infringer enters the market after invalidating the patent. Monopolist profit is always higher than the profit redounding to two competing duopolists.[179] Furthermore, invalidating the patent would expose the potential infringer to further entry by third parties. Meanwhile, if the patent were valid, the patentee would have no reason to pay the potential infringer anything, but would be free to split its monopoly profit as she sees fit. In this situation, the reverse payment may be irrational from the patentee’s perspective, but certainly would not be illegal. The patentee is entitled to exclude a potential infringer by exercising its patent right anyway. Similarly, no challenge clauses are only problematic if the underlying patent is invalid. By protecting an invalid patent, no challenge clauses augment the likelihood that invalid patents persist in the market and cause supra-competitive prices. If, however, the underlying patent were valid, the only consequence of no challenge clauses would be to eliminate needless litigation that would result in affirmation of patent validity anyway. This would be a socially beneficial outcome.

Lastly, Miller and Gal argue that reverse payment agreements exclude both the potential infringer and third parties, whereas licensing agreements with a no challenge clause only restrict the entry of third parties into the market.[180] Whether a licensing agreement with a no challenge clause truly excludes third parties depends on whether the underlying patent is perceived to be valid. If the patent is perceived to be valid, third parties are excluded from the market, to the extent that access to the patented technology is essential to market entry. However, what excludes the third parties is not the licensing agreement or the no challenge clause, but the patent—or the perception of the patent—itself. If the patentee does not quantitatively restrict the number of licensees, nothing stops a potential market entrant from reaching a licensing agreement with the patentee and entering the market. If, however, the patent is perceived to be weak, third party entries are restricted to the extent that a third party entrant does not have the economic incentive or the requisite knowledge to challenge the patent. This could be because the litigation costs are prohibitively high in relation to the potential gains from market entry, or the knowledge required to launch a successful challenge can only be gained through commercialization of the technology, which can only take place after a licensing agreement has been reached. Otherwise, third parties would be free to challenge the patent despite the no challenge clause. Meanwhile, a reverse payment agreement will exclude both the potential infringer and third party entrants, especially under the Hatch-Waxman Act.[181]

While it may seem that reverse payment agreements are more anticompetitive because they exclude more rivals, this need not be the case. For example, if the patentee does not produce the final product and only licenses the technology to a licensee on an exclusive basis, there will be only one firm selling products incorporating the patented technology in the market. This arrangement is akin to when a patentee enters into a reverse payment agreement with a potential infringer. In the former case, if the technology grants the patentee monopoly power due to a lack of reasonable substitutes, the monopoly profit will be split through the royalty mechanism. The patentee presumably will only extract part of the monopoly profit through royalty, leaving some monopoly profit to the exclusive licensee. In the latter case, the patentee shares the monopoly profit with the licensee directly through a lump sum payment. In both cases, there is only one producer in the market. Competitive harm is not confined to situations in which the patentee only grants an exclusive license. Even if the patentee grants multiple licenses, she can still maintain its monopoly profit through a variety of licensing practices such as territorial exclusivity, customer exclusivity, or a GE-style price fixing arrangement.[182] Therefore, the number of excluded rivals is a poor proxy for the amount of consumer harm resulting from a patent exploitation practice. What determines whether a particular patent exploitation practice should fall within the ambit of antitrust law should not be the number of excluded rivals, but the amount of possible consumer harm that may result from the practice.

In sum, attempts to distinguish reverse payments and no challenge clauses, and conclude that the latter should be beyond the purview of antitrust law, fail. No challenge clauses can cause consumer harm under certain circumstances. There is no strong justification for excluding no challenge clauses from antitrust scrutiny, as Miller and Gal have argued. One may then wonder why U.S. antitrust law has not addressed no challenge clauses, contrary to the situation in the EU and China. One possible explanation is that the various Courts of Appeals have generally taken a fairly hostile attitude toward no challenge clauses in licensing agreements, notwithstanding the more lenient approach of the Federal Circuit. The Second, Seventh, and Ninth Circuits have by and large held no challenge clauses to be unenforceable as a matter of patent law.[183] Given that the case law suggests that it is usually licensees that challenge the validity of no challenge clauses, it would be more straightforward for the licensee to seek to invalidate the clause under patent law than to attempt to challenge it under antitrust law. This is particularly the case given that the Rule of Reason, as opposed to the per se rule, most likely applies.[184] The relative attractiveness of patent law as an avenue for invalidating no challenge clauses probably explains the lack of case law under antitrust law.

B. Probabilistic Patents and Patent Validity

Having established that no challenge clauses should fall within the ambit of antitrust law, it remains to be determined exactly under what circumstances these clauses cause consumer harm A concept highly relevant to the determination of legality of no challenge clauses is the “probabilistic patent.” The idea is that unlike real property such as land, where there is much less uncertainty as to the boundary or even the existence of the property right, the validity and scope of a patent are often shrouded in uncertainty.[185] This uncertainty is underscored by statistics that show the failure rate of patentees in defending their patents. Allison and Lemley find that 46% of patents that were litigated to judgment were found to be invalid.[186] A later study found that patentees have their patents invalidated approximately 70% of the time.[187] In the specific context of litigation between generic manufacturers and branded manufacturers, it was found that the patentee loses 48% to 73% of the cases.[188] This is despite the fact that, under the Patent Act, a patentee is entitled to a presumption of validity and a challenger must show by clear and convincing evidence that the patent is invalid.[189] In fact, the success rate is even lower for patent assertion entities, otherwise known as “patent trolls.” According to one study, patent trolls win only 8% of the cases in which patent validity is litigated to judgment.[190]

A number of commentators have noted the probabilistic nature of patent rights. Pittman notes that “patent validity is an extremely slippery concept. Because the criteria regarding patent validity are so subjective, it is often unclear whether a patent is valid.”[191] To underscore the uncertain nature of patent rights, Carl Shapiro famously asserted that a patent does not confer the right to exclude, but only the right to try to exclude.[192] In fact, the U.S. Supreme Court itself expressed skepticism toward the the strength and prevalence of patents.[193]

There are a number of implications from the probabilistic nature of patents. First, a patent is a “bundle of uncertain and imperfect rights,”[194] which are “typically far less valuable than would be idealized ‘ironclad’ patent rights.”[195] This means that patent rights should be calibrated to reflect the probability that a patent will be held valid and infringed, which in turn depends on the scope of the patent.[196] Second, recall that whether no challenge clauses result in consumer harm crucially depends on whether the underlying patent is valid. If the patent is valid, all that a no challenge clause does is to eliminate needless litigation. If, however, the patent is invalid, a no challenge clause may help bolster an invalid patent and preserve the market power and monopoly profit that a patentee does not deserve. Therefore, it would seem that an assessment of the legality of no challenge clauses from an antitrust perspective would require a determination of patent validity. This would introduce a great deal of complexity to antitrust proceedings and would need to be addressed with care. Nevertheless, commentators have discussed the relevance of patent validity to legality under antitrust law at length in the context of reverse payment agreements.[197] Given the apparent similarity between no challenge clauses and reverse payment agreements, this discussion will shed light on how the issue of patent validity should be dealt with in the context of no challenge clauses.

C. No Challenge Clauses and Consumer Harm

1. Direct Consumer Harm

No challenge clauses, on their own, do not distort competition or inflict harm on consumers. Only when combined with the right to exclude of a patent and the various competition-distorting licensing practices permissible under patent law do no challenge clauses raise antitrust concerns. As mentioned earlier, if the underlying patent is valid, the patentee is entitled to the supra-competitive prices and the various licensing practices as permitted by patent law.[198] These may result in consumer harm, but this is part of the bargain struck under patent law to sacrifice short-run consumer welfare for long-run dynamic efficiency gains. Antitrust law should accept the implications of the bargain and not intervene. However, if the underlying patent is invalid, then the patentee does not deserve the supra-competitive prices and other profits that may result from the various licensing practices. This is where antitrust law should intervene.

Patent law gives a patentee the right to exclude, or at least the right to try to exclude. This right to exclude, however, need not result in higher prices for consumers if there are reasonable substitutes available in the relevant market. There was a time when the ownership of a patent created a presumption of market power.[199] But that presumption was overturned by the Supreme Court in Illinois Tool Works, Inc. v. Independent Ink, Inc. in 2006.[200] This decision stemmed from a realization that where there are reasonable substitutes in the market for the patented product, the patent will not wield market power, and the patentee will not be able to charge supra-competitive prices.[201] And without supra-competitive prices, the no challenge clause will not create consumer harm. Therefore, the patentee possessing market power is a prerequisite for antitrust intervention against no challenge clauses.[202]

The main problem with no challenge clauses is that they prevent licensees from challenging the validity of the patent. The preclusion of licensee challenge would not be of such grave concern if third party challenges were equally probable and likely to succeed. However, there are many reasons to think that licensees are often best positioned to mount a validity challenge, as the Supreme Court noted in Lear.[203] Not only do licensees, for myriad reasons, have greater economic incentives to mount a validity challenge, but they also enjoy an advantage in knowledge that increases the likelihood of success of their challenges.[204] First, licensees have more economic incentives than third parties because they are currently paying royalties; which can be avoided if the patent is invalidated. Second, third parties do not have as much incentive to enter the market as licensees because the market is already populated by the existing licensees. The market would be quite competitive by the time they enter, after invalidation of the patent. Third parties also do not have first mover advantage, which gives a competitor cost and marketing advantages over late comers to the market. In a market with homogeneous product and Bertrand competition, even a firm that is equally efficient as existing licensees would not enter the market.[205] Lastly, third party challengers would suffer from the free-rider problem. Each potential third party challenger would want to wait for someone else to shoulder the costs of challenge, because once a patent has been invalidated, it is invalid vis-à-vis all parties.[206] Of course, licensees may also suffer from the same problem. However, licensees have an advantage in overcoming the free-rider problem because they are aware of each other’s identity, and can organize more easily to share litigation costs. In contrast, potential third party challengers may not even be aware of each other and may have greater difficulty coordinating.

Licensees also have an informational advantage over potential third party challengers. They may have gained special knowledge about the patented technology through the license negotiation process,[207] and commercialization of the technology.[208] This is, in no small part, because the licensees will have physical possession of the patented invention, which significantly aids in their understanding of the technology.[209] Licensees will likely also have a good understanding of the prior art based on their experience with the industry in general, and will likely have dealt with similar technology or products in the past.[210] With respect to the specific requirements of patentability, “[a] licensee is likely able to understand, based on its own use, whether the invention falls within the broad scope of patentable subject matter and has a specific and substantial utility. The licensee’s use similarly provides a better understanding of whether the patent’s written description fully describes the invention and is sufficient to enable one to make and use it without undue experimentation.”[211] Therefore, licensees should be better positioned to furnish evidence to challenge patent validity.

If the underlying patent is invalid, no challenge clauses, by precluding licensee challenges, may artificially prolong the exclusion period of a patent, and compel consumers to pay supra-competitive prices for longer than necessary.[212] Therefore, to determine whether a no challenge clause has resulted in consumer harm, one needs to compare the “licensing exclusion period,”[213] that would obtain under the licensing agreement with a no challenge clause, with the “expected exclusion period”[214] that would materialize if the licensing agreement did not contain a no challenge clause.

Under normal circumstances, the licensing exclusion period would be at most the duration of the license, as most no challenge clauses last for the length of the license itself. However, it is possible for the no challenge clause to last longer than the length of the license. An example is the licensing agreement in Bendix Corp v. Balax Inc., which prohibited the licensee from ever challenging the validity of the patent, even after the agreement has lapsed.[215] In this case, the maximum licensing exclusion period would be the remainder of the patent term. The situation would be more complicated if the patentee has entered into a range of licensing agreements whose terms vary, or if the patentee, for some reason, has only imposed a no challenge clause on some licenses and not others. In this case, the licensing exclusion period will need to be weighted by the likelihood that a licensee not subject to a no challenge clause will bring a validity challenge. Licensees are not the only source of validity challenges. Unrelated third parties can also launch a validity challenge, which, if successful, will put an end to the patent term and hence the licensing exclusion period. This is likely the major source of uncertainty regarding the licensing exclusion period, as the main reason beyond the parties’ control that a license may end prematurely is a third party challenge to the patent. The exclusion period for a settlement agreement would similarly depend on the term of the agreement. If the settlement agreement is meant to remain in force in perpetuity, then the exclusion period would be again the remainder of the patent term plus taking into account third party challenges.

The “expected exclusion period” refers to the exclusion period that would be obtained absent a no challenge clause. Without a no challenge clause, there will be two sources of challenges: the licensees and unrelated third parties. The likelihood that these two groups will bring validity challenges will most likely be different, as explained above. In a world without licenses, the likelihood of a challenge would chiefly depend on the perceived validity of the patent and the resources at the disposal of the potential challengers. Once licensing agreements come into the picture, they affect the economic incentives of parties to bring challenges. When deciding whether to launch a validity challenge, a licensee will compare what she currently earns in the market as opposed to what she would earn in the post-challenge market. One main difference between the two markets is that the licensee would no longer need to pay royalties in the post-challenge market. The state of competition among the licensees may also differ due to current licensing restrictions imposed by the patentee, such as a GE-style price fixing arrangement, output restriction, or territorial exclusivity. Without a valid patent, these restrictions would most likely be illegal and dismantled.[216] A GE-style price fixing arrangement or output restriction would help to maintain supra-competitive prices, which benefit the licensees. Territorial exclusivity effectively creates regional monopolies and also benefit the licensees. Without these restrictions, a licensee would have access to the entire market, free from price, output or territorial restrictions imposed by the patentee. However, whether a licensee will stand to gain from such a situation depends on its comparative advantage vis-à-vis other licensees. If a licensee was a more efficient producer of the product due to cost advantages or superior production techniques, she would stand to capture market share from other licensees and would therefore benefit from the dismantling of the license restrictions. But if a licensee was a less efficient producer, she would be better off under the protection of license restrictions, which prevent its competitive disadvantage from being exposed by competitive pressure.

The most obvious difference between the pre-challenge market and the post-challenge market, regardless of the existence of license restrictions, is the entry of third parties. In the pre-challenge market, third parties would be deterred from entering the market to the extent that they are deterred by a perceivably valid patent, or the litigation costs or knowledge requirements of bringing a validity challenge. Once a licensee brings a validity challenge and prevails, the floodgates open for third parties to enter the market. Whether a licensee would achieve a net gain from the removal of the patent depends on its savings from the royalty payment and its competitive advantage vis-à-vis third party entrants. If the licensee was a more efficient producer than the third party entrants, she would worry less about them and would probably achieve a net gain from the removal of the patent. However, if a licensee was a less efficient producer than third party entrants, she would be better off under the existing license restrictions.

The next question is whether third parties would have the same incentives to challenge the patent with and without the no challenge clause. If they do, then the main difference between the licensing exclusion period and the expected exclusion period would be attributed to the licensees. One would think that the third parties’ incentive to challenge the patent would be the same with or without the no challenge clause. After all, the no challenge clause does not apply to them, it only affects the licensees. However, it is possible that the no challenge clause will have a signaling effect to potential third party challengers.[217] Such a challenger may think that if all these licensees are willing to accept a no challenge clause, it must mean that the licensees are fairly confident that the patent is valid. Otherwise, the licensees would not have agreed to pay royalty and give up their rights to challenge the validity of the patent. This would especially be the case if the licensees are perceived to be firms with intimate knowledge of the technology and would be in the best position to evaluate the validity of the patent. A third party challenger may be deterred from launching a challenge by the fact that a host of knowledgeable firms have willingly accepted a no challenge clause. The third party challenger may be right to put credence in the signaling effect of the licensees’ acceptance of the no challenge clause if the licensees have accepted the clause in good faith, after careful examination of the patent. If, however, it turns out that the no challenge clause is the result of a conspiracy between the patentee and the licensees, whereby the licensees would refrain from challenging a highly questionable patent and the patentee will split part of the monopoly profit with the licensees, then the no challenge clause will serve a plainly anticompetitive purpose. Unfortunately, third parties probably cannot distinguish the two situations. Therefore, whether or not the licensees accepted the no challenge clause on good faith, the mere existence of the no challenge clause would somewhat deter a potential third party challenger.

So far, we have only focused on the likelihood of challenges from various sources. A missing piece of the puzzle in determining the licensing exclusion period and the expected exclusion period is the probability that the patent will be upheld when challenged. Formally, the licensing exclusion period should equal the base exclusion period, here the full length of the licensing agreement (and if the no challenge clause prohibits the licensee from ever launching a challenge, it would be the remainder of the patent term),[218] adjusted by the expected invalidity factor, which in turn equals the probability that a third party challenge will be launched times the probability that the challenge will succeed. Let TLE stand for the licensing exclusion period, TL stand for the duration of the licensing agreement, θT stand for the probability of a third party challenge, and θIT stand for the probability that a third party challenge will succeed. The licensing exclusion period would be represented by:

TLE = (1- θT ∗θIT) TL

Likewise, the expected exclusion period needs to take into account the probability that the patent will be held invalid. Formally, the expected exclusion period should equal the duration of the licensing agreement reduced by the expected invalidity factor. This is calculated by multiplying the probability of a third party challenge by the probability that the challenge will succeed, plus the probability of a licensee challenge multiplied by the probability that the challenge will succeed. For reasons discussed previously, licensee challenges may be systematically more likely to succeed than third party challenges,[219] Thus it is important to distinguish them. The base exclusion period in this instance is also the duration of the licensing agreement, and not the full patent term, unless the licensing agreement, or the settlement agreement, lasts for the full term of the patent.[220] Let TEE stand for the expected exclusion period, θL stand for the probability of a licensee challenge, and θIL stand for the probability of success for a licensee challenge. The expected exclusion period is represented by:

TEE = [1- (θT∗θIT + θL∗θIL)] TL

The comparison will be slightly different if the no challenge clause is unenforceable in a particular jurisdiction, as in some of the circuits in the U.S.[221] If the no challenge clause is unenforceable, the licensing exclusion period and the expected exclusion period should in theory be the same, as the licensees are free to challenge patent validity. It would then seem that the no challenge clause inflicts no consumer harm. This would be true if the licensees truly deem themselves not bound by the no challenge clause.[222] It is possible, however, that despite the unenforceability of the no challenge clause, the licensees voluntarily agree not to challenge the validity of the patent, perhaps because the licensees have been offered preferential licensing terms in exchange for a promise not to challenge. In that case, the licensing exclusion period would be the same as if the no challenge clause were binding and enforceable. This would amount to a non-binding agreement by the licensees not to challenge a patent, probably in exchange for some benefit.[223] This possibility has been recognized by commentators. Miller and Gal note that “no-contest clauses may provide a method for parties to cartelize the market based on a patent that was wrongly granted.”[224] Hovenkamp, Janis, and Lemley remark that “[t]here is some risk that a patentee may seek to insulate its patent from antitrust challenge by co-opting the most likely challengers with licenses. Where co-option is a problem, the antitrust risks of a settlement are greater than where other potential defendants are likely to challenge the validity of a patent.”[225]

Where a no challenge clause is unenforceable, an agreement by the licensees to refrain from challenging the patent would be strongly indicative of a conspiracy between the patentee and the licensees to protect a questionable patent and split the monopoly profit between them, as in the case of illegal reverse payments. One may surmise that the licensees must be generously compensated in order to forego a right that they cannot bargain away under patent law. In addition, one might question why the patentee is willing to offer such generous compensation but for the fact that the patent is of highly questionable validity. The degree of consumer harm inflicted by such a conspiracy, however, would be the same as under an enforceable no challenge clause, because consumer harm is determined by the market power of the patent.[226] Regardless of the enforceability of the no challenge clause, where an agreement not to challenge patent validity exists between the patentee and the licensees, the circumstances under which such a clause would create consumer harm and the degree of consumer harm would be the same. The same analysis applies, but there would be serious reasons to question the validity of the patent.

Based on the foregoing discussion, the following factors should be considered when analyzing whether a no challenge clause results in consumer harm: (1) market power conferred by the patent, (2) the probability of a licensee challenge, which will depend on the licensee’s net gain from bringing a challenge, which in turn depends on the market structure, the licensee’s comparative advantage, the existence of further licensing restrictions, and third party entrants’ comparative advantage, (3) the probability of success for a licensee challenge, (4) the probability of a third party challenge, which may be lowered by the signaling effect of a no challenge clause, and (5) the probability of success for a third party challenge. The probability of a third party challenge and its likelihood of success will be formulated as an affirmative defense in the proposed framework in this Article and will be discussed in Section VI.A. The other three factors will be examined in detail in next Section. If the variables in the two expressions above can be accurately calculated, then a direct comparison between the licensing exclusion period and the expected exclusion period can be made. Otherwise, a qualitative assessment of the various variables will be needed.

2. Impairment of Innovation Incentives

Before moving to a more detailed examination of each of these factors, it is important to discuss some theories of harm that are premised on the impact of no challenge clauses on blocking patents and cumulative innovation. Recall that in the NDRC Guidelines, one of the factors to be considered is whether the underlying patent blocks the implementation of competing patents.[227] Presumably the concern is that if the underlying patent blocks another patent, and the underlying patent is protected by a no challenge clause, exploitation of the blocked patent will be retarded. Obviously if the underlying patent were invalid, then the impediment of the exploitation of the blocked patent would be socially wasteful. However, unless the owner of the blocked patent is itself subject to a no challenge clause, nothing prevents the owner from bringing a validity challenge. If the blocking patent is invalid, the block will be removed. If the underlying patent is found to be valid, then the block stems from the right to exclude of the underlying patent, and not the no challenge clause. The owner of the blocked patent would need to negotiate for a license from the owner of the original patent. If the owner of the blocked patent turns out to be an existing licensee subject to a no challenge clause, one would have expected the licensee to have negotiated for a cross license when entering into the initial licensing agreement. The only scenario in which no challenge clauses would hinder the implementation of a blocked patent is if the licensee subject to a no challenge clause only came up with the technology covered by the blocked patent after entering into the licensing agreement. The no challenge clause would be particularly damaging if the existence of this blocked patent increases the licensee’s incentive to challenge the patent, either because the invention process gave him or her new information about the patentability of the blocking patent, or the potential to commercialize the blocked patent provides new financial incentives to bring challenges.

The same argument can be made about cumulative innovation. If a cumulative innovation is premised on the underlying patent and cannot be used without a license to the patent, one may be tempted to think that exploitation of the cumulative innovation is retarded when the patent is protected by a no challenge clause. Again, the answer to this argument is that so long as the developer of the cumulative innovation is free to challenge the patent, the no challenge clause should not have any restrictive effect on cumulative innovation. However, that may not always be the case. It is entirely possible, and in fact likely, that the cumulative innovation comes from one of the licensees that developed the improvement during the process of commercialization of the patented technology. However, given that existing licensees already have a license to the patented technology, the innovating licensee should face no obstacles in making use of its improvement (even though the patentee will probably request a license for the improvement), unless the existing license has restricted uses. Therefore, in general, implementation of the cumulative innovation should not be hindered by the existence of a no challenge clause.[228]

D. Factors to Consider When Assessing Consumer Harm

This section examines four factors in determining the likelihood of consumer harm of no challenge clauses. The first factor is what constitutes a no challenge clause for the purpose of antitrust; that is, whether the myriad variations of no challenge clauses should be treated the same in the eyes of antitrust, and whether the kind of agreement which contains the clause alters the analysis. After defining the proper object of analysis, this section moves on to the second factor, market power, which is a prerequisite for consumer harm. A no challenge clause that applies to a patent with no market power will not cause consumer harm. This section then examines the factor of patent validity. A no challenge clause will not cause consumer harm if the underlying patent is valid. Lastly, this section analyzes the factor of market structure. Market structure creates different incentives for the licensees to challenge or not to challenge the patent. Licensee incentives matter for two reasons. First, they serve as a proxy for patent validity. A patentee that is unsure about a patent may want to offer the licensees more incentives not to challenge. Second, they tell us how much harm is being done by the no challenge clause; that is,how many potential challenges are being blocked.[229] If no challenge would be forthcoming from the licensees anyway, the no challenge clause would be relatively harmless.

1. Types of Agreements

The first question to consider is whether the analysis should differ based on the type of agreement at issue, be it licensing or settlement, and on the kind of clause at issue, whether it is an outright prohibition, termination-upon-challenge, or other kinds of challenge-penalty clauses.

A number of commentators have correctly observed that there should be no difference between a licensing agreement and a settlement agreement as far as antitrust analysis is concerned.[230] Shapiro observes that “a wide range of commercial arrangements involving intellectual property can be regarded as settlements of intellectual property disputes, either literally or effectively. Virtually every patent license can be viewed as a settlement of a patent dispute: the royalty rate presumably reflects the two parties’ strengths and weaknesses in patent litigation in conjunction with the licensee’s ability to invent around the patent.”[231] While a settlement agreement that is reached after litigation has commenced is clearly consummated in the shadow of ultimate judicial findings on patent validity and infringement, a settlement agreement that is entered into after a dispute has arisen but before litigation has begun likewise falls within the same shadow, albeit a slightly longer one. As Shapiro further notes, “both types of settlements raise the same antitrust issues.”[232]

There is no qualitative difference between a pre-litigation settlement agreement and a licensing agreement, especially one that incorporates a no challenge clause, which suggests that patent validity was within the parties’ contemplation and represents an implicit concession of validity on the part of the licensee. The Supreme Court has held in FTC v. Actavis, 570 U.S. 756 (2013), that settlement agreements are not immunized from antitrust scrutiny.[233] Recall that the Rates Technology court noted that if no challenge clauses in pre-litigation agreements were enforceable, parties could easily circumvent the ban on no challenge clauses in licensing agreements through creative drafting.[234] This is a tacit acknowledgement that the line between pre-litigation settlement agreements and licensing agreements is very thin, if not non-existent.

What about the distinction drawn by some courts concerning the enforceability of no challenge clauses in a settlement agreement that depends on whether discovery on patent merit has taken place? The argument made by those courts is that after discovery on patent merit, the parties have the ability to make a well-informed decision.[235] Presumably, the settling party would not accept a no challenge clause in the settlement agreement if it has grounds to doubt the validity of the patent. If the issue is enforceability of the clause, this argument should carry great weight. However, if the issue is whether the clause is anticompetitive, whether the parties entered into the agreement with full information should not be dispositive. There remains the possibility that the parties have entered into a conspiracy to split the monopoly profit despite both having serious doubts about the validity of the patent, and such an agreement can be anticompetitive even in the absence of a reverse payment.[236] The most that the courts could infer from a post-discovery settlement agreement is that there is a greater probability that the patent is valid.

Whether various kinds of no challenge clauses should be treated differently depends on whether the clause at issue creates a sufficient deterrent to the licensee to mount a challenge. This is because the effectiveness of a no challenge clause is determined by the deterrent effect it creates. Recall that even an outright prohibition in the agreement will only result in damages for breach of contract unless the court enforces it with an injunction.[237] Therefore, most of these clauses ultimately operate on financial incentives, and only differ in degree. That is certainly true of the challenge-penalty clauses. For example, the liquidated damages clause in Rates Technology probably provided a powerful deterrent to challenge even though it stopped short of being an outright prohibition.[238] Meanwhile, if the challenge penalty is insubstantial, the deterrent effect will be smaller, and the courts may not want to analyze the clause as an outright prohibition.

The controversy regarding the enforceability of termination-upon-challenge clauses notwithstanding, the practical consequence of termination of a licensing agreement is likely to be coercive enough on a licensee that it functions as an outright prohibition. So long as the licensee has made a substantial investment to commercialize the technology, and has not recouped its investment, the licensee is unlikely to be willing to cease production, which it would be required to do upon termination of the agreement. If the licensee has already recouped its investment and the fixed costs of production are not high, the licensee may be willing to cease production, but probably not for a long period of time. Given that a patent infringement suit can easily last for years, cessation of production is unlikely to be a viable option for most licensees. The alternative would be to keep producing and risk an infringement suit should the patent prove to be valid. If the damages are substantial enough—as they will be if willful infringement is proved—the licensee would only launch a validity challenge if she is highly confident of invalidity.

While it is possible to offer some predictions about the potential coercive effect of some of these challenge-penalty clauses and termination-upon-challenge clauses, in the end, whether a certain clause amounts to an outright no challenge clause will require a case-by-case analysis. This will be the first step in the analysis by a court facing these clauses.

2. Market Power

As explained previously, no challenge clauses will only harm consumers if they allow the owner of an invalid patent to continue to charge supra-competitive prices at the expense of consumers. A patentee will only be able to charge supra-competitive prices if the patent confers market power, which requires there to be few or no reasonable substitutes for the patented product. While determining whether a patent confers market power requires case-by-case analysis, a distinction can be made based on the correspondence between the scope of the patent and product boundary. Patent and antitrust law has long proceeded on the assumption that one patent results in one product, and hence there is a one-on-one correspondence between patent and product boundary.[239] While that may be true in the pharmaceutical industry, where the final drug product may only incorporate one patent, this is certainly not true in other sectors such as information technology, where products often incorporate hundreds, if not thousands, of patents.[240] The market power analysis will need to be conducted differently in these two scenarios. In the latter case, even if there were no reasonable substitutes for the final product, the market power of that product could not be facilely attributed to a single patent at issue in a case.

In fact, Sidak has gone one step further and argued that no challenge clauses applicable to standard-essential patents (“SEPS”) in a patent portfolio are never anticompetitive. This is because the presence of a handful of invalid patents in the portfolio will be inconsequential, and no challenge clauses in such a situation only serve to reduce transaction costs and deter opportunistic behavior by licensees.[241] According to Sidak, the socially optimal number of invalid patents in a portfolio of SEPs is not zero.[242] When the patentee and a licensee negotiate for a license to a portfolio of SEPs, both parties are aware that some of the patents in the portfolio, which may number in the hundreds or the thousands, may be invalid.[243] Parties do not invest the time or the resources to verify the validity of each patent in the portfolio because that would be too costly from a transaction cost perspective.[244] Instead, the parties will assess the value of the portfolio as a whole.[245] The final royalty will reflect the fact that some of the patents may be invalid.[246] Given that the existence of a handful of invalid patents may not make much of a difference to the overall market power of the portfolio,[247] a no challenge clause will not artificially protect the market power of the patentee, and there will be no consumer harm. Meanwhile, allowing licensees to challenge the validity of the patents in the portfolio will give rise to opportunistic behavior:

After extensive negotiations, the licensee signs the portfolio license agreement but nonetheless challenges the validity of a few licensed SEPs and refuses to pay the agreed-upon portfolio royalty until the court decides the validity of the challenged SEPs. After the court decides the validity of the few disputed SEPs, the licensee challenges the validity of another handful of licensed SEPs and postpones even further its payment of the portfolio royalty. Suppose the licensee repeats this process again and again. That course of action would allow the licensee to postpone its portfolio royalty payments indefinitely and deprive the SEP holder of fair and timely compensation for its innovative contribution.[248]

If this strategy succeeds, the patentee will be denied the royalty it is due. This would impair patentees’ innovation incentives in the future, which would be especially damaging for cash-strapped patentees. Therefore, according to Sidak, no challenge clauses in the context of SEP portfolios do not create consumer harm and instead serve the useful purpose of preventing opportunistic behavior.[249] Thus no challenge clauses should be per se legal in the context of SEP portfolios.[250]

There are two key problems in Sidak’s arguments. First, in asserting that having a handful of invalid patents is unproblematic, he implicitly assumes that the patents in the portfolio are equally important or valuable, which may not be the case. It is entirely possible for a patent portfolio to be built upon a handful of key patents, and a large number of patents that are either dispensable or can be invented around with relative ease. In such a case, the validity of the key patents would be of central importance to the continual market power of the portfolio. If it turns out that these patents are invalid, the licensees may decide to revoke the license and invent around the remainder of the patents or seek alternatives. Therefore, a categorical statement that having a handful of invalid patents in a portfolio is inconsequential is inaccurate.

Second, Sidak’s depiction of the opportunistic behavior by licensees assumes that a licensee can stop paying royalty upon launching a validity challenge. Under existing U.S. case law, it is not at all clear that licensees can stop paying royalties while maintaining the licensing agreement. In MedImmune Inc. v. Genentech, Inc., the Supreme Court explained that in Lear, “we rejected the argument that a repudiating licensee must comply with its contract and pay royalties until its claim is vindicated in court. We express no opinion on whether a nonrepudiating licensee is similarly relieved of its contract obligation during a successful challenge to a patent’s validity”.[251] In other words, if a licensee repudiates the licensing agreement, she is free to stop paying a royalty, but she will lose the benefit of the agreement if the patent turns out to be valid. If the licensee continues to use the patent during the litigation, the patentee will be able to sue the licensee for infringement and claim damages, including possibly trebled damages. If the patentee chooses not to terminate the agreement upon the cessation of royalty payment, the patentee will be entitled to recover all the royalty accrued during litigation.

This interpretation of Lear is echoed by the Federal Circuit in Cordis Corp. v. Medtronic, Inc., in which the court interpreted Lear as saying that while a licensee is free to stop paying royalty during the pendency of a validity challenge, the licensee is not free from facing the consequences of a cessation of payment.[252] If a licensee wishes to continue to invoke the protection of its licensing agreement, she should be required to continue paying royalty to the patentee. If the licensee stops royalty payment, she runs the risk of a breach of contract and liability for damages. Given the importance of these SEP portfolios, it is improbable that the licensee will repudiate the licensing agreement upon challenging the validity of a handful patents in order to save on royalty. The licensee will still need access to the remainder of the patents in the portfolio. Many of the cases in which the courts dealt with the issue of licensor rights and licensee obligations during a validity challenge concerned only a single or a handful of patents.[253] It would be highly unlikely for the courts to hold that a licensee can suspend royalty payment for an entire portfolio of hundreds or thousands of patents simply because she is challenging the validity of a handful of patents. This would be doubly so if the courts observe a pattern of repeated challenges over time with the goal of delaying royalty payment.[254]

While a rule of per se legality for no challenge clauses in the context of an SEP portfolio is unwarranted, it remains true that a patent, or a handful of patents, in a portfolio is less likely to wield market power than an entire portfolio of patents. Whether that is indeed the case will need to be determined on a case-by-case basis. Therefore, when facing a no challenge clause applicable to a patent portfolio, the court should first determine whether the portfolio as a whole wields market power. If it does, the court should next examine whether there is a considerable number of patents in the portfolio that are equally important or whether only a handful of patents are important. If the former is the case, then it is unlikely that the no challenge clause will contribute to artificially maintaining the market power of the portfolio, unless the licensee can prove that most of these important patents are of questionable validity. Otherwise, the clause should not be subject to antitrust scrutiny. But if the latter is the case, no challenge clauses could be problematic and antitrust scrutiny should continue.

3. Patent Validity

The legality of no challenge clauses would have been a straightforward question if patents had certain validity and scope. As no challenge clauses would only cause consumers to suffer unnecessary supra-competitive prices if the patent were invalid, and would be perfectly legitimate attempts to eliminate needless litigation if the patent were valid, legality of no challenge clauses would boil down to patent validity. Even though the issue falls under antitrust, the answer must be sought under patent law. Hovenkamp, Janis, and Lemley propound a classification of intellectual property settlement agreements into three categories.[255] The first two categories are relatively straightforward. Unfortunately, no challenge clauses fall within the third category as the competitive harm of these clauses depends on the validity of the patent. What makes matters more complicated is that the determination of patent validity alone does not answer the question of legality. No challenge clauses are not anticompetitive if the patent is valid, but the opposite is not true. It is not necessarily the case that no challenge clauses are anticompetitive whenever the underlying patent is invalid. Even if the patent is invalid, no challenge clauses would only be anticompetitive if the patent wielded market power, which in turn depends on a host of issues such as the patent-product boundary correspondence and the availability of reasonable substitutes.

This still presents a difficult issue to resolve with respect to patent validity, which is whether it should be assessed from an ex ante perspective at the time the agreement is entered or from an ex post perspective when the no challenge clause is challenged in courts. This is important because if the patentee can demonstrate that the underlying patent is valid, she should be absolved from liability. In the context of reverse payments, most commentators who have expressed a view on this issue have argued that patent validity should be assessed from an ex ante perspective.[256] An ex ante approach makes sense because if patent validity was assessed on an ex post basis, it risks penalizing patentees that in good faith believed its patent was valid and having the courts second-guess the patentee with the benefit of hindsight. This would inflict particular hardship on patentees given the often-unpredictable nature of patent trials.

Having settled on the ex ante perspective, it remains to be decided whether it should be the patentee’s subjective perception of patent validity or some objective assessment of what a reasonable patentee would believe in light of the information available to it. The former test is probably easier to administer in that it boils down to simple evidentiary proof of what the patentee herself thought. However, it would be susceptible to abuse. Once patentees know that their contemporaneous statements about patent validity would determine the legality of the no challenge clauses they want to impose, they would inflate their expectations.[257] The latter test will avoid this problem as it does not rely on the party’s subjective assessment. It will require an assessment of what a reasonable patentee’s belief about validity would be in light of the information at its disposal. For example, if the patent turns out to be invalid because of anticipation by prior art, which the patentee could not have discovered after reasonable search effort, but otherwise the patent looks valid, it would be reasonable for the patentee to believe ex ante that the patent is valid. This approach would probably entail some inquiry into the objective merits of the patent that Elhauge and Krueger warn against.[258] However, it should avoid a full-fledged trial on the merits of the patent that can be extremely costly and cumbersome.[259]

4. Market Structure at the Licensee Level

The extent of competition among licensees will shed light on the prospect of consumer harm resulting from a no challenge clause. The first issue to confront is whether there is only one exclusive licensee or multiple licensees. This is important for a variety of reasons. First, assuming that the patent provides the patentee with monopoly profit, it would be the easiest for the patentee to share its monopoly profit with one licensee, especially if the patentee does not herself engage in production.[260] The patentee and the licensee will simply negotiate for a split of the monopoly profit by structuring the royalty payment. If, however, there are multiple licensees, and the patentee is unable to restrict competition among them, the monopoly profit can be easily competed away and there would be little to share with the licensees. Therefore, an exclusive license is more conducive to profit sharing between a patentee and a licensee. An exclusive license would be especially suspicious if the no challenge clause is unenforceable under the patent law of the jurisdiction, which means that the agreement is more likely than not a conspiracy between the patentee and the licensee to split profit from a questionable patent.

A related point is whether the patentee also competes in the downstream market; in other words, whether the agreement between the patentee and the licensee is purely vertical or also contains a horizontal element. If the relationship is purely vertical, the licensee may have fewer incentives to challenge the patent, as she will have less to gain from the patent invalidation. In that case, a no challenge clause may not do much harm. If the licensee and the patentee do compete, the licensee will have greater incentives to challenge the validity of the patent, especially when the licensee does not enjoy a sufficient cost advantage to offset the royalty payment, which means that the licensee’s products will always be at a cost disadvantage in the market. Invalidating the patent will thus help to remove this cost disadvantage. In that case, a no challenge clause could preclude a likely challenge. Commentators have gone so far as to argue that it may be a good idea to exempt no challenge clauses in purely vertical relationships.[261] This may be taking the argument too far, as no challenge clauses can produce anticompetitive effects even in purely vertical relationships. Nonetheless, it remains true that the harm of a no challenge clause is likely to be smaller in a purely vertical relationship.

Having multiple licensees means that the post-invalidation market will be more competitive by virtue of the greater number of competitors. It blunts whatever comparative advantage or first-mover advantage that the licensees may enjoy over third party entrants.[262] Licensees will have less to gain in the event of a successful challenge and fewer incentives to mount a validity challenge, resulting in a lower θL. Accordingly, the licensing exclusion period is less likely to exceed the expected exclusion period. A no challenge clause in the presence of multiple licensees is hence less likely to result in consumer harm. On a related point, if there are multiple licensees, the patentee may be tempted to forestall competition among them through licensing restrictions such as price, output, or territorial restrictions. These restrictions will help to preserve the monopoly profit and will also increase the loss to a licensee in the event of a successful validity challenge. By bolstering the profit of the licensees, the patentee will discourage a licensee from mounting a validity challenge. This may suggest that the patentee has greater doubts about the validity of the patent and therefore the no challenge clause may be more suspect.

If there are no license restrictions imposed on the licensees and the licensees are highly competitive with each other, then there is less concern about the supra-competitive prices imposed by the patentee. A supra-competitive royalty would only result in higher final product prices for consumers if the market for the licensees was uncompetitive. In a competitive market, the licensees would be forced to absorb the extra cost and would not be able to pass it on to consumers.

Competition among licensees will be particularly keen if the final product is homogeneous and Bertrand competition prevails among them.[263] Consumers will also benefit more from third party entry if the market is characterized by Bertrand competition.[264] In contrast, if the final product is heterogeneous and the market is characterized by Cournot competition, the licensees will be better able to pass the royalty burden on to consumers, and the no challenge clause would be a greater concern.[265]

Moreover, the royalty structure would also have an impact on the extent to which the royalty burden will be passed on to consumers. If the patentee charges a one-time lump-sum payment, the royalty would be a one-time fixed cost that will not be passed on to consumers. It is only when the royalty is charged on a percentage basis of output, revenue, or profit that it constitutes a variable cost that will be possibly passed on to consumers.[266]

Licensee incentives to challenge may be fueled by economic incentives resulting from market structure. As mentioned earlier, licensee incentives to challenge may also be determined by advantages of a technical, cost, or commercial kind of a particular licensee over other licensees and third parties. If a particular licensee has a marked advantage over other licensees, she may benefit more from unfettered competition in a post-invalidation market. Likewise, if a licensee has an advantage over third parties, she may be less deterred by the prospect of post-invalidation third party challenges from mounting a validity challenge. In both circumstances, the licensee will have strong incentives to challenge, and a no challenge clause will be harmful by blocking likely challenges. A third party may also enjoy an advantage in technical know-how, cost, or commercial attributes. To the extent that a third party enjoys such an advantage, it will be more likely to challenge the patent, in which case the no challenge clause will not inflict much harm by precluding licensee challenges.

IV. Justifications for No Challenge Clauses

A host of arguments, some based on innovation incentives, and some on transaction costs, have been offered to justify the upholding of no challenge clauses across the board. This section examines these arguments and concludes that none of them justifies a blanket approval of no challenge clause, regardless of potential harm to consumers.

A. Dynamic Efficiency Justifications

1. Prohibiting No Challenge Clauses Would Cause Patentees Not to License the Patent

Some argue that if no challenge clauses were prohibited, patentees would be discouraged from engaging in licensing at all, which would have adverse welfare consequences.[267] It is widely agreed that licensing can be welfare enhancing.[268] A patentee may choose to license its technology to a third party producer because that producer has lower costs of production, a better distribution network, or an otherwise superior ability to commercialize the product.[269] If the patentee is forced to forego this option, she may do one of the following three things. First, she may choose to commercialize the product on her own, even though she may have to do so at higher costs. Second, she may have to choose an inferior downstream producer which may for one reason or another be less likely to challenge the patent. And the comparative advantage of licensees and their incentives to challenge are often correlated.[270] Lastly, if the technology is difficult to reverse engineer, she may choose to rely on trade secret protection instead. Society would be worse off in this case because without the disclosure mandated by the patent system, it may never benefit from the knowledge following from the invention.[271]

In a regime where no challenge clauses are prohibited if the patent is of questionable validity ex ante, prior to making the decision to license its invention, the patentee will perform the following analysis. She will examine its patent closely and decide how strong it is. If she believes that the patent is strong, she first would have much less to worry about from validity challenges. In any case, the legal framework proposed in the previous section would allow this patentee to impose a no challenge clause, so long as the belief in patent validity is reasonable. The patentee can safely proceed to license its patent. If she believes that the patent is weak, she will have to decide whether she wants to take a chance, especially when she knows that licensees will learn more about the technology from the commercialization process and be in a better position to challenge. Patentees are uniquely placed to evaluate their own patents as they may have access to unique information pertaining to patent validity.[272] They should be able to make this choice in a very well informed manner. If we allow the owner of a weak patent to impose a no challenge clause, the patentee will be able to enjoy the double benefit of profiting from a patent of questionable validity and doing so in the most cost-effective manner by deploying the most efficient downstream producers. There are good reasons to question whether owners of such a patent should be afforded such an advantage.

A related concern is whether it is fair to allow licensees to use information provided by the patentee or otherwise gleaned from the commercialization process to launch a validity challenge. A possible objection is that it is unfair to allow the licensees to use information provided by the patentee against the patentee. There are two reasons that this should not be a serious concern. First, the extent to which this is a concern is inversely related to the strength of a patent. The owner of a strong patent is unlikely to be too worried about such a challenge. Second, the patentee has control over what information to disclose, so she could presumably choose to hide incriminating information from the licensees. If it turns out that it is impossible to impart sufficient technical knowledge to the licensees to commercialize the technology without also revealing incriminating information, it would suggest that the flaw in the patent is quite fundamental. One wonders whether the law should provide assistance to facilitate the continual validity of such a patent.

2. Prohibiting No Challenge Clauses Would Allow Patentees to Protect Themselves from Erroneous Invalidation by the Courts

Due to the probabilistic nature of patents, patents may be erroneously struck down by the courts and therefore patentees are entitled to use no challenge clauses to guard against that risk. Some say that it is in the “interest” of patentees to shield their patents from challenges.[273] Others assert that “[a]n increased rate of challenges to patent applications might create a super-optimal number of false negatives . . . That, in turn, could lead to sub-optimal investment in innovation.”[274] Of course it is in the interests of patentees to protect their patent rights, just like it is in the interests of competitors to fix prices. However, the question is whether this is an interest worthy of protection under antitrust law. These arguments betray a fundamental misunderstanding of the probabilistic nature of patent rights. These rights are uncertain because of the various requirements of patentability, which do not lend themselves to application with mathematical precision, and because of the need to delineate the boundary of a patent by interpreting its claims, which has an element of subjectivity like every other interpretation exercise. Inherent in this uncertainty are two elements: (1) the same fact may be subject to different, but equally reasonable and valid, interpretations that may produce different results, (2) and the conclusion may simply be wrong. For example, reasonable people may differ on whether a particular invention is novel enough to warrant patent protection, which falls within the first kind of uncertainty. Meanwhile, whether the invention was in public use more than a year before the date of the application falls within the second kind of uncertainty, for which there is usually a definitive answer. In the ideal world, we would like to eliminate the second source of uncertainty while preserving the first, for the first source of uncertainty is inherent in the nature of patents. However, no one has devised a mechanism that will allow us to do that. No challenge clauses remove the second source of uncertainty, but unfortunately also eliminate the first.

The elimination of the first source of uncertainty results in overcompensation for the patentees. Patentees are entitled to rewards in the form of a royalty or supra-competitive prices. However, this reward should be adjusted by the probability that the patent will be held invalid. Patentees were never meant to be entitled to receive a risk-free reward for their inventions.[275] As Hovenkamp, Janis, and Lemley argue, “[a]ssertions that patentees are entitled to treat their patents as free from uncertainty, or that they will not receive the proper incentives unless allowed to exclude competitors on the basis of dubious patents, simply misunderstand the structure of the patent system.”[276] The corollary of the assertion that patentee reward is by nature risk-adjusted, is that patentees are not entitled to expunge the risk in its reward by imposing no challenge clauses.

Moreover, susceptibility to the second source of uncertainty is not unique to patents. Every property right or other kinds of economic entitlement that require court adjudication are susceptible to false negatives. No one has argued that owners of these economic entitlements, such as contractual rights, should be allowed to shield themselves from erroneous adjudication by barring legal challenges. There are no obvious reasons that patentees should be given special treatment.

3. Prohibiting No Challenge Clauses Would Reduce Incentives to Innovate

Another argument related to the one described immediately above is that prohibiting no challenge clauses and allowing licensees to mount indiscriminate challenges would bring uncertainty to patentee reward and undermine innovation incentives.[277] For the quid pro quo underlying the patent system to function properly, “inventors need to be confident that their rights will be secure. Such confidence is fundamental to providing this incentive to innovate.”[278] The same argument used to dismiss the concern about false negatives in patent validity applies with equal force here. Patentees should only be entitled to risk-adjusted reward for their invention.[279] So long as they receive such a reward, innovation incentives will be properly maintained. In fact, if all patentees, regardless of the strength of their patents, receive a risk-free reward, there will be over-compensation for weak patents.[280] Weaker patents may be less novel and have less technical merit that deserves less compensation from society. Since weak patents are presumably easier and less costly to come up with (perhaps because they are less novel or more obvious), potential inventors will rationally gravitate toward investing in inventions of more questionable merit. Because no challenge clauses produce greater consumer harm when the patent is weak, the concern that the prohibition of no challenge clauses will hamper innovation incentives is unfounded.

Other scholars raise a slightly different argument. No challenge clauses will not result in invalidation of questionable patents but will simply result in less return to patentees.[281] They describe the chain of events as follows. “At the time of a challenge, the risk that the patent will be invalidated could lead the patent holder to settle on highly unfavorable terms. In such cases, the patent will remain in force. Accordingly, society will not gain free access to the invention. The patent holder will, however, lose revenue, leading to an impairment of patent value and a decrease in incentives to invent.”[282] At first glance, this argument appears to undermine the premise that at least under some circumstances, prohibiting no challenge clauses will result in invalidation of questionable patents. Upon closer analysis, however, these arguments are unsupported. This argument poses two issues: the wealth transfer from patentees to licensees and the lack of invalidation of questionable patents. In regards to the first issue, wealth transfers between patentees and licensees are of no concern to antitrust law as long as they do not inflict harm on consumers. Wealth transfer from the patentee presumably will reduce innovation incentives, and the decrease in innovation incentives argument has been addressed above. In regards to the second issue, the lack of invalidation of questionable patents is of course a serious concern, but the problem is overstated. First, if the patent is so weak, it is unlikely that the patentee can recruit the licensee to settle the invalidity suit without offering some substantial financial incentives,[283] such as reverse payments. So long as reverse payments are carefully scrutinized by the Agencies and the courts—as they are—the patentee will have limited ability to settle these suits. Second, one would expect that if patentees are constantly forced to share a substantial portion of their surplus to get a licensee to agree to settle the invalidity suit, the return for investing in such weak patents will decrease over time and fewer and fewer patentees will pursue these patents.[284] This is likely to be beneficial to society in the long run.

B. Transaction Costs-Based Justifications

1. No Challenge Clauses Protect Patentees from Wasteful and Vexatious Litigation

One commonly invoked justification for no challenge clauses is that they protect patentees from wasteful and vexatious lawsuits from licensees.[285] Litigation costs are transaction costs in the patent system that can be avoided by no challenge clauses. There are two layers in this argument. First, the litigation costs incurred in these invalidity suits are wasteful and to be avoided if possible. Second, patentees may sometimes need no challenge clauses to protect themselves from aggressive or bad faith licensees. It is a common misconception that patentees must hold greater bargaining power than the licensees, and patentees coerce the licensees to accept oppressive contract terms. For example, in MedImmune, the Supreme Court “mistakenly characterized a licensing situation as inherently ‘coercive’ and akin to government regulatory action.”[286] On the contrary, patentees that are thinly capitalized or in emerging sectors such as biotechnology may suffer from power asymmetry problems and have poor bargaining power.[287] Occasionally, there are bad faith licensees who enter into a licensing agreement simply to challenge patent validity.[288] According to Alfaro, “licensees will [after MedImmune] seek to enter into license agreements in an attempt to cap their exposure to infringement liability and then seek a declaratory judgment on the validity of the patent in an attempt to avoid that exposure altogether.”[289]

Although an invalidity suit brings about litigations costs, these costs are not necessarily wasteful. As has been acknowledged in this article, if it was known a priori that the patent is valid, then invalidity suits would indeed be needless and wasteful, and no challenge clauses would serve a useful function. However, there is no way to know the validity of a patent until it has been adjudicated in court. Therefore, such litigation expenses are the necessary consequence of probabilistic patents and the imperfections of the patent examination system administered by the Patent and Trademark Office.[290] Moreover, not every patent will be examined judicially. Only patents that are economically valuable will be so examined. And if a patent is valuable—perhaps because it commands market power—then it may not be a bad idea for society to expend some resources to ensure that the supra-competitive prices are not borne in vain.

As for protection from bad faith or aggressive licensees, one cannot argue against protection from vexatious lawsuits, especially for patentees that have poor bargaining power or are otherwise unable to protect themselves. Such lawsuits serve no useful purpose in society and merely incur needless costs. Patentees, weak or strong, deserve protection from them. However, an invalidity lawsuit is only groundless if the validity of the patent is strong. For patents of questionable validity, such suits can no longer be called vexatious. They do in fact serve a useful social purpose. The framework proposed in this article concedes that no challenge clauses would be permissible if a reasonable patentee, ex ante, would believe that the patent is valid in light of the information available to her. Therefore, no challenge clauses would only be subject to antitrust scrutiny if the patent was of questionable validity ex ante. For such patents, invalidity suits would no longer be vexatious, and patentees should then not be shielded from them.

2. Prohibiting No Challenge Clauses Will Reduce Licensees’ Incentive to Scrutinize Patent Validity before Entering into a Licensing Agreement

It has also been argued that if no challenge clauses are allowed and enforced, they will merely force licensees to undertake careful scrutiny of the patents in advance and bring up any dispute before they enter into a licensing agreement.[291] Such validity disputes will be more easily settled when the licensees have not invested in commercializing the technology, and the patentee and the licensee are not entangled in a licensing relationship. Licensees also avoid paying unnecessary royalties. Society will be better off if invalid patents are weeded out early.

This argument would be valid if licensees had the same knowledge and economic incentives to challenge the patent before and after entering into the licensing agreement, but they do not. Pre-licensing evaluations of patent validity are unlikely to be perfect due to licensee inability to acquire information uniquely in the hands of the patentee and perhaps also third parties.[292] Licensees may acquire important information about the technology in the process of commercialization. The informational advantages of licensees over third parties discussed previously would put licensees in a much better position to challenge the patent after, as opposed to before the agreement is reached.[293] Licensees may also want to hold off mounting a challenge until they have acquired a first mover advantage in the market.[294] After the patent is invalidated, the market will likely become competitive, and a licensee with a first mover advantage will have a significant edge over potential new entrants. Recall that in a market with homogeneous product and Bertrand competition, even a firm that is equally efficient as existing licensees would not enter the market. Therefore, pre-licensing challenges are no substitute for post-licensing challenges.

C. Other Justifications

1. Prohibiting No Challenge Clauses Will Result in Higher Royalty

A number of commentators have argued that, contrary to intuitive belief, prohibiting no challenge clauses would not only fail to bring down prices for consumers, but could result in higher royalties, which could result in higher prices for consumers.[295] Their argument is that when a patentee can impose a no challenge clause, she is more assured that the patent will not be challenged, and its royalty income stream will continue.[296] However, when the no challenge clause is deemed unlawful, the patentee would charge a higher royalty for the higher risk she now assumes. This would be a very damaging charge, as it essentially predicts that antitrust regulation of no challenge clauses would be counterproductive.

This argument should not shield no challenge clauses from antitrust scrutiny for two reasons. First, not every patentee can pass on the extra risks she assumes in the form of higher royalty. This depends on the bargaining power of the patentee, which in turn depends on its market power.[297] Not every patentee wields market power ,so not every patentee will be able to pass on the extra risks to the licensees. Second, and more importantly, the effect of antitrust scrutiny should be evaluated from an aggregate perspective. In some instances, consumers may have to pay higher royalty indirectly through higher product prices when certain patentees cannot employ no challenge clauses. While in other instances, they would benefit when the absence of no challenge clauses allows licensees to challenge invalid patents and royalties are removed for technologies covered by these patents. Prices for products incorporating these technologies would presumably drop. It is difficult to conclude a priori that consumers are necessarily worse off in this new state of affairs. It is entirely possible that consumers may benefit more from the elimination of royalties in some products while suffering from slightly higher royalties in other products, especially when the patentee is unable to pass on the full costs of the extra risks to the licensees. Therefore, it is inaccurate to say that antitrust regulation of no challenge clauses would be counterproductive.

V. Proposed Analytical Framework

A. The Proposed Framework

In light of the foregoing discussion, this article proposes a new analytical framework for determining the legality of no challenge clauses. However, first it is important to clarify the implications of the algebraic expressions for the licensing exclusion period and the expected exclusion period. As explained previously, whether a no challenge clause inflicts consumer harm entails a comparison of two periods. If the licensing exclusion period exceeds the expected exclusion period, the no challenge clause should be deemed illegal. By simply looking at the two expressions, it would be obvious that under almost all circumstances, the licensing exclusion period would be longer than the expected exclusion period due to the presence of the term (θL∗θIL) in the expression for the expected exclusion period. The two periods would only be the same if this term equals zero, which is highly unlikely if there is a more than negligible chance that licensees would bring successful challenges. The implication would be that no challenge clauses should be illegal across the board.

Two clarifications are in order. First, no challenge clauses would only be an antitrust concern if the patent wields market power. Therefore, the comparison between these two expressions would not be undertaken at all for many no challenge clauses. Second, it is highly unlikely that an actual calculation of these two periods will be attempted in judicial proceedings. Many of the variables in these two expressions are difficult to ascertain and any offer of estimation results for these variables is likely to be challenged by the opposing party. In practice, judicial proceedings will likely boil down to a qualitative evaluation of the various indicators of the probability and likelihood of success of challenges and hence consumer harm. No challenge clauses are unlikely to be condemned unless they substantially increase the licensing exclusion period above the expected exclusion period.

Four factors have been enumerated for consideration in determining the likelihood of consumer harm: types of agreement, market power, patent validity, and market structure at the licensee level. Two of them can be dealt with here. For the purpose of the legality of no challenge clauses, no distinction should be drawn between licensing agreements and settlement agreements. Meanwhile, consent decrees should be beyond the reach of antitrust law. Whether the myriad variations of no challenge clauses should be treated the same depends on the deterrent effect on challenges wrought by the clause at issue. This would entail a case-by-case analysis. The foregoing discussion should make it clear that, unsurprisingly, no challenge clauses should be subject to the Rule of Reason, and not a per se treatment.[298] The extent of consumer harm of these clauses is so circumstance-specific that an individual examination is necessary. One cannot categorically say in advance that they are always legal or illegal. And as no challenge clauses will not create consumer harm absent market power, the first part of the analytical framework would be a market power screen.[299] If the plaintiff fails to show that the patent at issue wields market power, the case should be dismissed right away.[300]

Another feature to be considered early in the analysis is whether the no challenge clause is enforceable in the jurisdiction at issue, to the extent that it can be ascertained. This is relevant because if no challenge clauses are unenforceable, but licensees still voluntarily agree to abide by them, it is valid to question why the licensee would do so. However, it may not be possible to tell whether a licensee refrains from challenging because of a conspiracy between itself and the patentee or because the licensee genuinely believes that the patent is valid. It then becomes important to examine whether the licensee has been offered unusually generous licensing terms or other financial incentives. One obvious reason that the patentee will offer such generous incentives is because she wants to protect a weak patent. Therefore, the unenforceability of the clause together with unusually generous financial incentives could be viewed as a strong indication of likely consumer harm. Of course, if the agreement is accompanied by generous reverse payments by the patentee to the licensee, it should attract antitrust scrutiny, as it would under Actavis.[301] However, even in the absence of a reverse payment, the licensee could still be offered an advantageous royalty rate, which may indicate an attempt by the patentee to recruit the licensee into a conspiracy.

Next, the defendant should be given the opportunity to offer two affirmative defenses. The first is based on the notion that no challenge clauses will not inflict harm on consumers if the patent turns out to be valid because the clauses only serve to avoid needless litigation expenses. Therefore, if the defendant can prove that a reasonable patentee with the information accessible to the defendant ex ante would believe that the patent is valid, the case should be dismissed. The second is premised on the idea that a no challenge clause would not help to defend an invalid patent if in spite of it, a third party with a similar level of knowledge as the licensees was likely to launch a validity challenge. This defense is necessary because the remainder of the analysis focuses on the licensee challenges. This is the only place in the analytical framework where third parties are considered. This defense has two components: the probability of a third party challenge and the probability of success of a third party challenge. Recall from previous discussion that two of the factors that need to be considered in analyzing the extent of consumer harm of no challenge clauses are the probability of a third party challenge, and the probability of success for a third party challenge.[302] These factors are the focus of this second affirmative defense.

Determining the probability of a third party challenge necessitates a consideration of the signaling effect of no challenge clauses in licensing agreements; that is,the extent to which third parties are deterred from mounting validity challenges due to the existence of no challenge clauses. Another relevant factor is whether a third party enjoys technical, cost, or commercial advantages over the licensees and other third parties that it would be likely to bring a challenge. The proof of a similar level of knowledge is important because licensees usually enjoy informational advantages over third parties in mounting validity challenges. The level of knowledge serves as a proxy for the probability of success of a third party challenge. The probability of third party challenge and the probability of success required can be adjusted depending on the magnitude of probable consumer harm. If the patent wields a substantial degree of market power or perhaps even is monopolistic, the courts should only let a defendant off if a third party challenge is highly probable and likely to succeed. If the magnitude of probable consumer harm is lower, showing a lower degree of likelihood and probability of success may suffice. This defense admittedly may be difficult to establish given the knowledge requirement. However, this requirement is necessary to ensure that the challenge that may materialize would be effective.

If the plaintiff manages to prove market power and the two affirmative defenses are unavailable, then the analysis moves to a holistic assessment of the relationship between the patentee and the licensees and the market structure at the licensee level. These are relevant for determining what kind of economic incentives are present, which determines the probability of a licensee challenge.[303] As discussed earlier, economic incentives are relevant because they tell us both how hard the patentee is trying to entice the licensees not to challenge and how much harm is being done by the no challenge clause as indicated by how likely challenge is being blocked. If the assessment shows that the market structure is such that licensees have substantial incentives to challenge, then the no challenge clause will be blocking a probable challenge. Likewise, if there are indications that the patentee is offering licensees substantial financial incentives, then there are grounds to question the validity of the patent, which means that the no challenge clauses do artificially extend the period during which consumers are saddled with supra-competitive prices. In both cases, the no challenge clause should be struck down. One final aspect of the market structure to consider is whether competition is keen at the licensee level. If it is so, then the licensees would have limited ability to pass on the royalty payment onto the final consumers, in which case consumers suffer little harm even if the patent turns out to be invalid. Lastly, one also needs to consider whether a licensee enjoys technical, cost or commercial advantages over other licensees such that she has strong incentives to bring a challenge. If such a licensee exists, a no challenge clause will be more damaging.

Finally, to account for the competitive harm of no challenge clauses in hindering the exploitation of a blocked patent, the plaintiff should be required to show that the blocked patent is commercially valuable and was only created after the second inventor had entered into a licensing agreement with a no challenge clause with the initial patentee. The proof of commercial value is important because blocking a patent of little commercial value will not result in significant harm to consumers.

B. An Evaluation of the Approaches Taken by the Three Jurisdictions

It should be obvious that none of the three jurisdictions surveyed currently take a suitable approach to no challenge clauses. To the extent the lack of case law on these clauses in the U.S. is a reflection of per se legality under antitrust law, the current standard is clearly too lenient. It has been amply illustrated in this article that no challenge clauses can cause consumer harm under certain, albeit somewhat narrow, circumstances. Therefore, a per se legality approach is unwarranted.

Meanwhile, the EU approaches (to the extent that the Commission’s approach under the TTBER differs from the court’s approach) in some places are fairly consistent with the analysis in this article. Arguably the part of the EU jurisprudence on no challenge clauses most consistent with the reasoning in this article is Bayer v. Süllhöfer, in which the ECJ declared that there is no reason to treat licensing and settlement agreements differently and a determination of the legality of these clauses entails an examination of the legal and economic contexts.[304] This is consistent with the general direction of this article’s framework that there needs to be a Rule of Reason-type analysis of the economic incentives created by the market structure. The European Commission’s approach is stricter than warranted by the economics of no challenge clauses. There are no good reasons to treat no challenge clauses as an excluded restriction, at least not without a proof of market power. The Commission’s continual permissive attitude toward no challenge clauses in settlement agreements is unjustified, but its increasingly cautious attitude is a step in the right direction. Meanwhile, by saying that the focus is on whether the loss of profit would serve as a sufficient deterrent to licensee challenges, the Commission was spot on in its analysis of termination-upon-challenge clauses.

To the extent that the reference to “eliminate or restrict competition” in Article 10 of the SAIC Regulation entails a detailed analysis of competitive effects and market conditions, the SAIC’s approach would be consistent with the analysis in this article.[305] The NDRC has manifested two approaches to no challenge clauses, one in its draft guidelines and the other in the Qualcomm decision. The enumeration of a number of factors to be considered in Article 2(1)(3) of the draft guidelines is a step in the right direction, especially in comparison to the practically per se approach taken in the Qualcomm case. However, the factors listed are not exactly the relevant factors and fail to focus on the economic incentives of the licensees to challenge, which may depend on the market structure on the licensee level among other factors. The NDRC approach taken in the Qualcomm case is clearly problematic in light of the foregoing analysis. The NDRC’s focus on the right of the licensees to challenge is misguided. And the complete lack of attention to the fact that the no challenge clauses in that case were applied to an SEP portfolio may have overstated the practical impact of these clauses. It is entirely possible that the invalidity of a handful of patents in Qualcomm’s portfolio would make no difference to its market power. In that case, the claim should have been dismissed.

Conclusion

This article examines a patent licensing practice that has long escaped the attention of U.S. antitrust law. It analyzes the circumstances under which no challenge clauses can cause consumer harm and rejects the approach prevailing in Europe and in U.S. patent law that no challenge clauses are harmful because they frustrate the public policy of the removal of invalid patents. If that were the main policy consideration behind the analysis of no challenge clauses, it would result in a per se rule against them, which would be unduly harsh. Instead, it proposes an analytical framework that would allow the courts to approach these clauses in a systematic manner, giving due regard to the fact that many no challenge clauses do not pose consumer harm. The framework provides for a number of devices and defenses to help screen out cases in which consumer harm is unlikely, so that courts only need to get to the complex Rule of Reason analysis when it is truly necessary and likely to be fruitful. This article further explains how different elements in the market structure should illuminate the analysis and makes the important observation that market structure is relevant because it affects the economic incentives of licensees to challenge the patent. Importantly, this article rejects a number of dynamic efficiency-based justifications for no challenge clauses, and illustrates that not every licensing practice that enhances patentee reward is justified from an innovation incentives perspective.

Finally, this article provides an overview of how the approach to these clauses in the major jurisdictions diverges from each other and from the analysis in this article. This divergence could be problematic because licensing is often done on a global basis, and divergent rules will result in a patchwork of licensing practices. This is doubly unfortunate, as this means that the applicable rules will instead be determined by the location of the licensees, even though most of the goods produced by them are traded globally. This will result in an unnecessary distortion in the global market for many technological goods, an unfortunate outcome that is wholly avoidable by greater convergence in the regulation of patent licensing practices.


* Associate Professor, Faculty of Law, University of Hong Kong; thomas.cheng@hku.hk. The Author would like to thank Joshua Kanjanapas, Allison Wong, and Joel Lee for their able research assistance.

[1] See discussion infra Section II.A.

[2] See discussion infra Section II.A.

[3] See discussion infra Section II.C.2.

[4] See discussion infra Section II.A.2.

[5] See Sophie Lawrence, The Competition Law Treatment of No-Challenge Clauses in License Agreements: An Unfortunate Revolution?, 9(10) J. Intell. Prop. L & Prac. 802, 810 (2014).

[6] Alan D. Miller & Michal S. Gal, Licensee Patent Challenges, 32 Yale J. on Reg. 122, 127 (2015).

[7] Inger B. Orstavik, Technology Transfer Agreements: Grantbacks and No Challenge Clauses in the New EC Technology Transfer Regulation, 36(1) Int’l Rev. Intell. Prop. & Competition L. 83, 87 (2005).

[8] Id.

[9] Id.

[10] Lear, Inc. v. Adkins, 395 U.S. 653, 670 (1969).

[11] Miller & Gal, supra note 6, at 127.

[12] Id. at 131.

[13] Rates Tech., Inc. v. Speakeasy, Inc., 685 F.3d 163 (2d Cir. 2012).

[14] Lorelei Ritchie, Reconciling Contract Doctrine with Intellectual Property Law: An Interdisciplinary Solution, 25 Santa Clara Computer & High Tech. L.J. 105, 146 (2008).

[15] Id.

[16] Rochelle Cooper Dreyfuss & Lawrence S. Pope, Dethroning Lear? Incentives to Innovate After MedImmune, 24 Berkeley Tech L.J. 971, 1001 (2009).

[17] Id.

[18] To the extent that the royalty increase kicks in only after the patent has been validated, Rochelle Dreyfuss and Lawrence Pope argue that the clause does not impose a penalty at all; the royalty increase merely reflects the increased value of a patent that has survived a challenge. Id. at 1002. There is a general perception that a patent that has been validated by the courts is more valuable than an untested patent. While a validated patent is no doubt more valuable to the patentee, it is not entirely clear why the patent would become more valuable to the licensee. To the licensee, a license is valuable because it allows the licensee to use the patented technology. This right to use the patented technology should not change in value after validation. Validated or not, what is valuable to the licensee is not the right to exclude granted by the patent, but the underlying technology, which does not change after the patent has been validated. A license to an invalidated patent will be worth less (or perhaps nothing) because everyone is now free to use the technology. But a license to a validated and an invalidated (a patent that has not been subject to a validity challenge) patent should be worth the same to the licensee. The only way in which a license to a validated patent may be worth more to a licensee is if the current market is not entirely competitive and the licensee is able to charge a somewhat supra-competitor price, and a validated patent will be able to exclude third parties without a license with certainty.

[19] Lawrence, supra note 5, at 810.

[20] See Nellie A. Fisher, The Licensee’s Choice: Mechanics of Successfully Challenging a Patent under License, 6 Tex. Intell. Prop. L.J. 1, 31-43 (1997).

[21] Dreyfuss & Pope, supra note 16, at 994. Commentators, however, have noted the limitations of royalty front-loading. In particular, it has been argued that front-loading may not be feasible if the licensee is cash strapped or if the commercialization of the technology requires substantial upfront investment. See id. at 983, 992-996; Miller & Gal, supra note 6, at 150. In that case, the licensee may be unable or unwilling to pay a substantial part of the royalty upfront.

[22] Christian Chadd Taylor, No-Challenge Termination Clauses: Incorporating Innovation Policy and Risk Allocation into Patent Licensing Law, 69 Ind. L.J. 215, 230 (1993).

[23] Patent Act § 284, 35 U.S.C. § 284 (2011).

[24] Taylor, supra note 22, at 234 (1993).

[25] Id. at 232.

[26] Id. at 243.

[27] Id.

[28] Miller & Gal, supra note 6, at 154.

[29] See generally Rates Tech., Inc. v. Speakeasy, Inc., 685 F.3d 163 (2d Cir. 2012).

[30] See discussion infra Section II.A.2.

[31] See discussion infra Section II.A.5.

[32] See M. Natalie Alfaro, Barring Validity Challenges Through No-Challenge Clauses and Consent Judgments: MedImmune’s Revival of the Lear Progeny, 45 Hous. L. Rev. 1277, 1309 (2008).

[33] See Dreyfuss & Pope, supra note 16, at 1004-05. (“In some ways, the best way to deal with MedImmune is for the patent holder to bargain for the right to terminate the license should the licensee choose to challenge the validity of the patent. With respect to litigation risks, this would fully restore the parties to the pre-Medlmmune situation.”).

[34] Herbert Hovenkamp et al., IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law § 1.3.

[35] Id.

[36] See discussion infra Section II.A.

[37] See discussion infra Section II.A.2.

[38] See discussion infra Section II.A.2.

[39] Baseload Energy, Inc. v. Roberts, 619 F.3d 1357, 1363 (Fed. Cir. 2010) (“In the context of settlement agreements, as with consent decrees, clear and unambiguous language barring the right to challenge patent validity in future infringement actions is sufficient, even if invalidity claims had not been previously at issue and had not been actually litigated.”).

[40] See discussion infra Section II.A.3.

[41] Massillon-Cleveland-Akron Sign Co. v. Golden State Advert. Co., 444 F.2d 425 (9th Cir. 1971) (striking down no challenge clauses in the 9th Circuit); Warner-Jenkinson Co. v. Allied Chemical Corp., 567 F.2d 184 (2d Cir. 1977) (striking down no challenge clauses in the 2nd Circuit).

[42] Aro Corp. v. Allied Witan Co., 531 F.2d 1368 (6th Cir. 1976) (enforcing no challenge clause in settlement agreement entered into after discovery); Flex-Foot, Inc. v. CRP, Inc., 238 F.3d 1362 (Fed. Cir. 2001) (enforcing no challenge clause where alleged infringer had challenged patent validity, had had opportunity to conduct discovery regarding validity, and had agreed voluntarily to dismiss suit with prejudice).

[43] Rates Tech., Inc. v. Speakeasy, Inc., 685 F.3d 163 (2d Cir. 2012) (enforcing no challenge clause in settlement agreement entered into after discovery).

[44] Addressograph-Multigraph Corp. v. Cooper, 156 F.2d 483 (2d Cir. 1946) (refusing to enforce no challenge clause in consent decrees); Bus. Forms Finishing Serv. v. Carson, 452 F.2d 70 (7th Cir. 1971).

[45] Foster v. Hallco Mfg., 947 F.2d 469 (Fed. Cir. 1991); Diversey Lever, Inc. v. Ecolab, Inc., 191 F.3d 1350 (Fed. Cir. 1999).

[46] Foster, 947 F.2d at 474-75.

[47] Dylan Pittman, Allowing Patent Validity Challenges Despite No-Challenge Clauses: Fulfilling the Will of King Lear, 48 Ind. L. Rev. 339, 356 (2014); Melissa Brenner, Comment, Slowing the Rates of Innovation: How the Second Circuit’s Ban on No-Challenge Clauses in Pre-Litigation Settlement Agreements Hinders Business Growth, 54 B.C. L. Rev. Supp. 57 (2013).

[48] See, e.g., Addressograph-Multigraph, 156 F.2d 483; Bus. Forms Finishing Serv., 452 F.2d 70.

[49] Judith Resnik, Judging Consent, 1 U. Chi. Legal F. 43, 45 (1987).

[50] In Bendix, the Seventh Circuit did rule on the issue of whether a no challenge clause can constitute patent misuse during and after the term of the license. Bendix Corp. v. Balax, Inc., 421 F.2d 809 (7th Cir. 1970). It held that such a clause during the term of the license did not constitute patent misuse. The Court decided the case largely on the policy articulated in Lear, Inc. v. Adkins, and did not consider antitrust policy. The Court did hold that a post-expiration no challenge clause may constitute a patent misuse under Brulotte v. Thys Co., which had held that collection of royalty post expiration is patent misuse. Again, the decision was not made on antitrust grounds. A number of courts have reached a similar conclusion regarding pre-expiration no challenge clauses. See Congoleum Ind., Inc. v. Armstrong Cork Co., 366 F. Supp. 220 (E.D. Penn. 1973); Wallace Clark & Co., Inc. v. Acheson Ind., Inc., 401 F. Supp. 637 (S.D.N.Y. 1975); Panther Pumps & Equipment. Co. v. Hydrocraft, Inc., 468 F.2d 225 (7th Cir. 1972).

[51] Commission Regulation (EU) 316/2014 of Mar. 21, 2014, The Application of Article 101(3) of the Treaty on the Functioning of the European Union to Categories of Technology Transfer Agreements, OJ L93/17 [hereinafter “2014 TTBER”], art. 5(1)(b).

[52] Lawrence, supra note 5, at 2.

[53] Guanyu Jinzhi Lanyong Zhishi Chanquan Paichu, Xianzhi Jingzheng Xingwei de Guiding (关于禁止滥用知识产权排除、限制竞争行为的规定) [Provisions on Prohibiting the Abuse of Intellectual Property Rights to Exclude and Restrain Competition] (promulgated by State Administration of Trade and Commerce, Apr. 7, 2015, effective Aug. 1, 2015), http://www.saic.gov.cn/zcfg/xzgzjgfxwj/xxb/201504/t20150413_155104.html.

[54] In Jack Winter, Inc., the Court held that a mere agreement not to challenge the validity of a patent without an accompanying market division agreement does not constitute an illegal per se market allocation agreement under the Sherman Act. Jack Winter, Inc. v. Koratron Co., Inc., 375 F. Supp. 1 (N.D. Cal. 1974). The Court also held that the agreement was not an unreasonable restraint of trade based on a variety of reasons that did not focus on the competitive harm of the agreement.

In Nachman Spring-Filled Corp., the Court held that a clause in an agreement whereby a party acknowledged the validity of a patent is illegal under the Sherman Act. Nachman Spring-Filled Corp. v. Kay Mfg. Co., 139 F.2d 781 (2d Cir. 1943). However, the agreement at issue also contained a market allocation agreement whereby one party agreed to cease production. And the Court’s holding that the validity acknowledgement clause is illegal is closely tied to the legality of the market allocation agreement. “Accordingly defendant’s covenant acknowledging the patent’s validity constitutes, in effect, an undertaking that, if sued by plaintiff for enforcement of that agreement, defendant will not assert the defense that the agreement is illegal. Such a raising-by-one’s-boot’s-straps undertaking, of course, cannot be enforced.” Id. at 784.

[55] In W.L. Gore & Assoc., the Court held that the use of reciprocal dealing to coerce an alleged infringer to not challenge the validity of a patent to be patent misuse and an antitrust violation. W.L. Gore & Assoc. v. Carlisle Corp., 381 F. Supp. 220 (E.D. Penn. 1973). However, the Court’s emphasis was clearly on the infringement plaintiff’s use of reciprocal dealing, and not the no challenge clause per se. Moreover, there was no agreement of any kind between the two parties. The case merely concerned a threat against the other party not to challenge the patent. Id.

[56] Kinsman v. Parkhurst, 59 U.S. 289 (1855).

[57] However, as the Court itself noted in Lear, the Court had never consistently applied the doctrine since Parkhurst. In a few subsequent decisions, the Court refused to apply the doctrine to estop licensee validity challenge without much effort to distinguish the instant case from Parkhurst. In the first half of the 20th century, the Court had created so many exceptions to the doctrine that “the estoppel doctrine had been so eroded that it could no longer be considered the ‘general rule’". Lear Inc. v. Adkins, 395 U.S. 653, 664 (1969).

[58] ABA Section of Antitrust Law, Intellectual Property and Antitrust Handbook 233 (2007).

[59] See Lear, 395 U.S. at 669-70 (discussing whether the doctrine applies based on equities of licensor).

[60] Id. at 670-71.

[61] Miller and Gal, however, argue that one of the contractual provisions in the case effectively functioned as a no challenge clause because it “required the licensee to continue paying royalties during the pendency of the patent challenge.” Miller & Gal, supra note 6, at 131. It is unclear whether the practical effect of this clause is such that it functions as a no challenge clause. The clause effectively reduces the payoff to the licensee for a successful challenge by the amount of royalty due during the litigation. Assuming that the patent is not nearing expiration (in which case the licensee would have few incentives to challenge the patent anyway), and the ratio between the litigation period and the remainder of the patent term (assuming that the licensee intends to renew the licensing agreement all the way up to patent expiration) is not very high, there is no reason to believe that the reduction in payoff should have a significant effect on the licensee’s incentive to mount a validity challenge. Most other commentators tend to agree that Lear did not concern a no challenge clause. E.g., Taylor, supra note 22, at 231; Brenner, supra note 47, at 62; Alfaro, supra note 32, at 1286. Miller and Gal, however, argue that one of the contractual provisions in the case effectively functioned as a no challenge clause because it “required the licensee to continue paying royalties during the pendency of the patent challenge.” Miller & Gal, supra note 6, at 131. It is unclear whether the practical effect of this clause is such that it functions as a no challenge clause. The clause effectively reduces the payoff to the licensee for a successful challenge by the amount of royalty due during the litigation. Assuming that the patent is not nearing expiration (in which case the licensee would have few incentives to challenge the patent anyway), and the ratio between the litigation period and the remainder of the patent term (assuming that the licensee intends to renew the licensing agreement all the way up to patent expiration) is not very high, there is no reason to believe that the reduction in payoff should have a significant effect on the licensee’s incentive to mount a validity challenge. Most other commentators tend to agree that Lear did not concern a no challenge clause. E.g., Taylor, supra note 22, at 231; Brenner, supra note 47, at 62; Alfaro, supra note 32, at 1286.

[62] See, e.g., Massillon-Cleveland-Akron Sign, 444 F.2d at 428 (“If a patent holder can exact from another a promise not to infringe, and thereby recover from one inducing the breach of that promise, in the absence of a valid patent, the patent holder is afforded more protection than the patent laws allow. The patent holder acquires this additional protection ‘merely because he (MCA here) chose one remedy (inducement to breach a contract not to infringe) rather than another (inducement to infringe) on the same substantive issue.’ Federal policy favoring free competition in ideas not meriting patent protection cannot be so easily subverted.”) (internal citations omitted); Bendix Corp. v. Balax, Inc., 421 F.2d 809, 821(7th Cir. 1970) (“From all this we can only conclude that the right to estop licensees from challenging a patent is not part of the ‘limited protection’ afforded by the patent monopoly.”).

[63] Taylor, supra note 22, at 231; Brenner, supra note 47, at 62; Alfaro, supra note 32, at 1286.

[64] Bendix, 421 F.2d at 809; Rates Tech. v. Speakeasy, Inc., 685 F.3d 163 (2d Cir. 2012); Miller & Gal, supra note 6, at 137 (“Patent licensees are in a special position to perform this role. Their practical experience with the subject matter of the patent often places them in a good position to evaluate the novelty of the invention. They might also have an incentive to challenge the patent to avoid paying royalties to the patent holder.”).

[65] See generally Taylor, supra note 22, at 235-41.

[66] E.g., Baseload Energy, Inc. v. Roberts, 619 F.3d 1357 (Fed. Cir. 2010); Flex-Foot v. CRP, 238 F.3d 1362 (Fed. Cir. 2001).

[67] Massillon-Cleveland-Akron Sign Co. v. Golden State Advertising Co., 444 F.2d 425 (9th Cir. 1971); Bendix, 421 F.2d 809; Warner-Jenkinson Co. v. Allied Chemical Corp., 567 F.2d 184 (1977).

[68] Massillon-Cleveland-Akron Sign, 444 F.2d 425; Bendix, 421 F.2d 809; Warner-Jenkinson, 567 F.2d 184.

[69] Massillon-Cleveland-Akron Sign, 444 F.2d 425. The two parties to the case had been involved in a patent infringement dispute, which they settled in an agreement in 1962. In the agreement, the alleged infringer acknowledged the validity of the patent and that its action had infringed the patent. It further agreed not to challenge, directly or indirectly, the validity of the patent and not to infringe the patent again in the future. The agreement did not concern any licensing activity between the patentee and the alleged infringer.

[70] Id. at 425.

[71] Id. at 426.

[72] Id. at 427.

[73] Id.

[74] Id.

[75] Id.

[76] Id.

[77] Id.

[78] Bendix Corp. v. Balax Inc., 421 F.2d 809 (7th Cir. 1970).

[79] Id. at 820.

[80] Id.

[81] Id.

[82] Rates Tech., Inc. v. Speakeasy, Inc., 685 F.3d 163 (2d Cir. 2012).

[83] The patentee plaintiff discovered an alleged infringement by the defendants and entered into a settlement agreement styled as a “Covenant Not to Sue” in 2007. After the entry of the agreement and a series of corporate transactions, the plaintiff patentee discovered continual infringement by the defendants and brought suit. In response one of the defendants sought a declaratory judgment action declaring that the plaintiff’s patents were invalid. In a suit that eventually led to the appeal to the Second Circuit, the plaintiff alleged breach of contract by the defendants for violating the no challenge clause. See generally id.

[84] Id. at 171.

[85] Id.

[86] Id. at 172.

[87] Id.

[88] Id.

[89] While the timing between a pre-litigation settlement agreement and a licensing agreement may be difficult to distinguish, one may argue that the two differ by the presence or absence of a licensing arrangement. There need not be a licensing arrangement in a settlement agreement; the alleged infringer may merely agree to cease infringing activities. Meanwhile, a licensing agreement by definition must contain a licensing arrangement. This attempt at differentiation would be highly problematic for two reasons. First, settling parties that desire to enter into a licensing arrangement can easily circumvent the rule by inserting the no challenge clause in a settlement agreement while entering into a separate licensing agreement. Second, as a matter of policy, once one repudiates the rationale of licensee estoppel, it is unclear why the presence or absence of a licensing arrangement should have any bearing on the enforceability of a no challenge clause. Therefore, a better argument is that for the purpose of enforceability of no challenge clauses, pre-litigation settlement agreements and licensing agreements are to be treated the same.

[90] Baseload Energy, Inc. v. Roberts, 619 F.3d 1357 (Fed. Cir. 2010).

[91] Id. at 1363.

[92] Flex-Foot v. CRP, 238 F.3d 1362 (Fed. Cir. 2001).

[93] Id. at 1363-64.

[94] Baseload Energy, 238 F.3d at 1363.

[95] Aro Corp. v. Allied Witan Co., 531 F.2d 1368 (6th Cir. 1976).

[96] Id. at 1373. The Court did not emphasize the fact that discovery gave the settling parties sufficient information to make an informed decision. Instead, the Court believed that defendant had taken up so much judicial resources that it should not be given a second chance. Id.

[97] Hemstreet v. Spiegel, Inc., 851 F.2d 348 (Fed. Cir. 1988).

[98] Id. at 350.

[99] Warner-Jenkinson Co. v. Allied Chemical Corp., 567 F.2d 184 (2d Cir. 1977).

[100] Massillon-Cleveland-Akron Sign Co. v. Golden State Advertising Co., 444 F.2d 425, 427 (9th Cir. 1971).

[101] Id.

[102] Warner-Jenkinson, 567 F.2d at 188.

[103] Id.

[104] Id.

[105] Baseload Energy, Inc. v. Roberts, 619 F.3d 1357 (Fed. Cir. 2010).The parties had entered into a joint venture to develop some wind energy projects. The parties had reached an oral agreement concerning the terms of operation, but the joint venture broke down and one of the parties brought suit claiming breach of contract, fraud, and promissory estoppel. The parties settled the suit with an agreement which stipulated that both parties would release all claims against each other arising from any aspect of the venture. Their relationship broke down again, and one of the parties brought a declaratory judgment action, claiming that the patent that was to form the basis of the venture was invalid.

[106] Id. at 1363 (holding that clause did not contain clear and unambiguous language barring future validity challenges).

[107] Id.

[108] Id. (“In the context of settlement agreements, as with consent decrees, clear and unambiguous language barring the right to challenge patent validity in future infringement actions is sufficient, even if invalidity claims had not been previously at issue and had not been actually litigated.”)

[109] Wallace Clark & Co. v. Acheson Indus., 532 F.2d 846, 849 (2d Cir. 1976) (“We conclude that the interests of litigants and the public in general will be best served by according res judicata effect to consent decrees adjudicating a patent’s infringement as well as its validity.”); American Equipment Corp. v. Wikomi Manufacturing Co., 630 F.2d 544, 548 (7th Cir. 1980) (noting that enforcing no challenge clauses in consent decrees is “the most effective way to enforce the Lear policy of facilitating competitive access to ideas”.); Schlegel Mfg. Co. v. USM Corp., 525 F.2d 775, 780 (6th Cir. 1975) (noting that “there is a significant difference between the effect of a consent decree and the doctrine of licensee estoppel” in upholding no challenge clauses in consent decrees); Kraly v. National Distillers & Chem. Corp., 502 F.2d 1366, 1370 (7th Cir. 1974) (noting that federal patent policy “must occupy a subsidiary position to the fundamental policy favoring the expedient and orderly settlement of disputes and the fostering of judicial economy”).

[110] Crane Co. v. Aeroquip Corp., 504 F.2d 1086, 1092 (7th Cir. 1974).

[111] C.R. Bard, Inc. v. Schwartz, 716 F.2d 874 (Fed. Cir. 1983).

[112] Taylor, supra note 22, at 249.

[113] Id. at 250-51.

[114] Miller & Gal, supra note 6, at 133.

[115] It would be interesting to see is whether a patentee can contractually stipulate a right to terminate the licensing agreement when a licensee launches a validity challenge while still paying royalty. That would give the patentee an unqualified right to terminate the licensing agreement, as opposed to under Schwartz, where the licensee could still try to maintain the licensing agreement by continuing to pay royalty.

[116] Case C-193/83 Windsurfing Int’l, Inc. v. Commission, 1986 E.C.R. 611.

[117] Id. at 663.

[118] The result in this case is all the more remarkable because the validity of the patent at issue had been closely examined by the German courts and no licensees had brought a validity challenge after the clause had been dropped in response to Commission action. Orstavik, supra note 7, at 103. In other words, the ECJ condemned a no challenge clause when the underlying patent was in all likelihood valid and when it was clear that none of the licensees had been prevented by the clause from bringing challenges as none had the incentive to do so. Windsurfing Int’l, E.C.R. 611 at 664. This is practically tantamount to saying that no challenge clauses are illegal even though their incorporation into a licensing agreement has no impact on eventual patent validity or licensee incentive to challenge.

[119] Orstavik, supra note 7, at 103; P. Sean Morris, Patent Licensing and No Challenge Clauses: A Thin Line Between Article 81 EC Treaty and the New Technology Transfer Block Exemption Regulation, 3 Intell. Prop. Q. 217, 221-22 (2009).

[120] Case 65/86, Bayer AG v. Süllhöfer, 1988 E.C.R. 5249.

[121] Id. at 5286. However, the ECJ reserved the question of whether no challenge clauses are illegal if they are incorporated in a consent decree.

[122] Id.

[123] Id. The ECJ’s articulation of the first exception reveals a misunderstanding of the competitive harm of no challenge clauses and represents a peculiar and unexplained departure from the rationale articulated in Windsurfing for condemning no challenge clauses. The ECJ seemed to believe that no challenge clauses harm competition because they prevent licensees from extricating themselves from a royalty payment obligation if the patent turns out to be invalid. They deprive the licensees of an opportunity to challenge the patent. However, that is not the reason why no challenge clauses harm competition. Instead, they harm competition because they allow the patentee artificially to maintain the market power that it may have obtained from an invalid patent, when the patentee should be entitled to no such market power. In Windsurfing, the rationale for invalidating no challenge clauses is the public interest in clearing the market of invalid patents. Here, the rationale seems to have shifted to protecting licensees from unjustified royalty payments.

[124] Case C-170/13, Huawei Technologies Co. v. ZTE Corp., 2015 Curia ECLI:EU:C:2015:477 (July 16, 2015).

[125] Case C-170/13, Huawei Technologies Co. v. ZTE Corp., 2014 Curia ECLI:EU:C:2014:2391 *95 (Nov. 20, 2014).

[126] Id. at *64.

[127] Id.

[128] Case C-170/13, Huawei Technologies Co. v. ZTE Corp., 2015 Curia ECLI:EU:C:2015:477 *69 (July 16, 2015).

[129] National Research Council (U.S.) Comm. on Intell. Prop. Mgm’t in Standard-Setting Processes, Patent Challenges for Standard-Setting in the Global Economy: Lessons from Information and Communications Technology § 7.2 (2013).

[130] Lawrence, supra note 5, at 811.

[131] Id. at 810.

[132] 2014 TTBER, supra note 51, at art. 5(1)(b).

[133] Id. Article 3 provides that the exemptions provided in the TTBER apply when the aggregate market share of parties to an agreement which share a horizontal relationship is no more than 20%, and that of parties which share a vertical relationship is no more than 30%.

[134] Guidelines on the Application of Article 101 of the Treaty on the Functioning of the European Union to Technology Transfer Agreements, 2015 O.J. C89/3, art. 114 [hereinafter “Guidelines on the 2014 TTBER”].

[135] Id. at 134.

[136] Id.

[137] It is important to note that the TTBER only applies to licensing agreements. Therefore, the TTBER would only apply to a settlement agreement that includes licensing provisions.

[138] Guidelines on the 2014 TTBER, supra note 134, at 243. The Commission raised the example of when the intellectual property right was granted following the submission of incorrect or misleading information and when the technology rights are a necessary input in the licensee’s production.

[139] Id. at art. 136.

[140] Id. As examples of such a possible case, the Commission mentioned situations when the patents being licensed are standard-essential and when the licensed technology has a very significant market position.

The Commission further justified the special treatment for termination-upon-challenge clauses in an exclusive licensing agreement on the grounds that “the incentives for innovation and for licensing out could be undermined if, for example, the licensor were to be locked into an agreement with an exclusive licensee which no longer makes significant efforts to develop, produce and market the product (to be) produced with the licensed technology rights.” Id. at 139. An alternative to allowing termination-upon-challenge clauses is to allow the patentee to cancel the exclusivity provision, which would solve the problem of a patentee being locked in by an uncooperative licensee.

[141] Hejing Chen & John Whalley, China’s Post-1978 Growth Process and Earlier Growth Processes of Europe, US, Japan, and Korea, in World Scientific Reference on Asia and the World Economy Vol. 2, 44 (Manmohan Agarwal & John Whalley eds).

[142] MOFCOM is responsible for merger reviews and therefore probably has less to do with no challenge clauses. The NDRC and the SAIC share responsibility in conduct enforcement.

[143] The current approach is that each of the authorities will come up with its own draft and the Anti-Monopoly Commission will be responsible for combining them. As of the time of writing, the NDRC and SAIC have released consultative drafts, which are likely to be similar to their final drafts. The expectation is that the final combined product will be released in June.

[144] Provisions on Prohibiting the Abuse of Intellectual Property Rights to Exclude and Restrain Competition, supra note 53.

[145] Id. at art. 10.

[146] National Development and Reform Commission Administrative Penalty Decision [2015] No. 1, Feb. 9, 2015, http://jjs.ndrc.gov.cn/fjgld/201503/t20150302_666170.html (hereinafter “Qualcomm Decision”).

[147] Id.

[148] Id. at art. 10. One notable feature about SAIC’s approach to no challenge clauses is that instead of treating them as a potential restrictive agreement, the focus is on treating them as an abuse of dominance. The implicit recognition seems to be that no challenge clauses would not cause competitive harm unless they are imposed by a firm with substantial market power. Whether the amount of market power necessary to create competitive harm must reach the level of dominance is open to debate, but it will be clear from subsequent discussion that market power is necessary for no challenge clauses to inflict competitive harm.

[149] Guanyu Lanyong Zhishi Chanquan de Fanlongduan Zhifa Zhinan (Guojia Gongshang Zhongju Diqigao) (关于滥用知识产权的反垄断执法指南(国家工商总局第七稿)) [Guidelines on Anti-Monopoly Enforcement against Abuse of Intellectual Property Rights (SAIC Seventh draft) (released by State Admin. of Trade and Com., Feb 4, 2016) (on file with author).

[150] Guowuyuan Fanlongduan Weiyuanhui Guanyu Lanyong Zhishi Chanquan de Fanlongduan Zhinan (Zhengqiu Yijiangao) (国务院反垄断委员会 关于滥用知识产权的反垄断指南 (征求意见稿) [State Council Anti-Monopoly Commission Anti-Monopoly Guidelines on Abuse of Intellectual Property Rights (consultative draft)] (released by Nat’l Dev. and Reform Comm’n, Dec. 31, 2015) (on file with author) (hereinafter “NRDC Guidelines”).

[151] Id. at art. 2(1)(3) & art. 3(2)(4).

[152] Id. at art. 2(1)(3).

[153] Id.

[154] Similar to the SAIC Regulation, Article 3(2)(4) of the draft NDRC Guidelines only refers to outright prohibition. Therefore, it is again not clear whether it encompasses challenge-penalty clauses. In contrast, Article 2(1)(3) refers to no challenge clauses in general. Although the NDRC Guidelines do not define no challenge clauses, the general reference means that it may encompass challenge-penalty clauses as well.

[155] Qualcomm Decision, supra note 146.

[156] Id.

[157] Id.

[158] Id.

[159] Id.

[160] Id. (noting that initiating litigation over licensing agreement is licensee’s right).

[161] This characterization of restriction of competition is highly problematic. Restriction of competition cannot be established simply on the grounds that Qualcomm offered some licensing terms which were unacceptable to some licensees. The corollary of this argument would be that Qualcomm would be expected to accept whatever terms its licensees are willing to offer. This certainly cannot be the case. What stops a potential licensee from arguing that competition is restricted when it fails to obtain a license because the licensee is unwilling to pay the license fee Qualcomm demands? Whether there is restriction of competition crucially depends on whether the licensing term demanded by Qualcomm is itself anticompetitive, which is what needs to be established in the analysis. The NDRC merely states that the clause denies the licensees their right to challenge the validity of the licensing agreements. Such a right-based argument fails to consider the competitive effects of the clause. The NDRC’s analysis is thus found wanting.

[162] Qualcomm Decision, supra note 146 (noting that those unwilling to accept Qualcomm’s licensing terms were excluded from market).

[163] US Dep’t of Justice & Federal Trade Comm’n, Antitrust Guidelines for the Licensing of Intellectual Property (1995), http://www.justice.gov/sites/default/files/atr/legacy/2006/04/27/0558.pdf.

[164] US Dep’t of Justice & Federal Trade Comm’n, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition (2007), http://www.justice.gov/sites/default/files/atr/legacy/2007/07/11/222655.pdf.

[165] Id. at 90.

[166] Id. at 90-91.

[167] Morris, supra note 119, at 220.

[168] Orstavik, supra note 7, at 102.

[169] Einer Elhauge & Alex Krueger, Solving the Patent Settlement Puzzle, 91 Texas L. Rev. 283, 284 (2012)

[170] Herbert Hovenkamp, Mark Janis & Mark A. Lemley, Anticompetitive Settlement of Intellectual Property Disputes, 87 Minn. L. Rev. 1719 (2003); Elhauge & Krueger, supra note 169; Michael A. Carrier, Unsettling Drug Patent Settlements: A Framework for Presumptive Illegality, 108 Mich. L. Rev. 3 (2009).

[171] Reverse settlements, also known as pay-for-delay agreements, are settlement agreements, usually arising in the pharmaceutical industry, in which the patentee pays the potential infringer to settle the lawsuit. Because of the unusual direction of payment—one would usually expect the potential infringer to pay the patentee in a normal settlement agreements, reverse payments have received considerable attention from the courts and commentators over the years. The Supreme Court finally decided in FTC v. Actavis that reverse payments are subject to antitrust law and are to be analyzed under the Rule of Reason. Fed. Trade Comm’n v. Actavis, 570 U.S. 756 (2013). For academic commentary on the appropriate treatment of reverse payments under antitrust law, see Carl Shapiro, Antitrust Limits to Patent Settlements, 34(2) RAND J. Econ. 391 (2003); Murat C. Mungan, Reverse Payments, Perverse Incentives, 27 Harv. J. L. & Tech. 1 (2013); Daniel A. Crane, Exit Payments in Settlement of Patent Infringement Lawsuits: Antitrust Rules and Economic Implications, 54 Fla. L. Rev. 747 (2002); Thomas F. Cotter, Commentary, Refining the “Presumptive Illegality” Approach to Settlements of Patent Disputes Involving Reverse Payments: A Commentary on Hovenkamp, Janis & Lemley, 87 Minn. L. Rev. 1789 (2003).

[172] Miller & Gal, supra note 6, at 136, n. 76.

[173] Id.

[174] Crane, supra note 171, at 776.

[175] Damien Geradin, Douglas Ginsburg & Graham Safty, Reverse Payment Patent Settlements in the European Union and the United States, Geo. Mason U. Legal Studies Res. Paper Series LS 15-22 8, http://www.law.gmu.edu/assets/files/publications/working_papers/LS1522.pdf.

[176] Fed. Trade Comm’n v. Actavis, 570 U.S. 756 (2013).

[177] William O. Kerr & Cleve B. Tyler, Measuring Reverse Payments in the Wake of Actavis, 28 Antitrust 29, 30 (2013). See also King Drug Co. of Florence, Inc. v. Smithkline Beecham Corp. d/b/a GlaxoSmithKline, et al., 791 F.3d 388 (3d Cir. 2015); In re Loestrin 24 Fe Antitrust Litig., 45 F.Supp.3d 180 (D.R.I. 2014). In King Drug, GSK, the branded manufacturer, and Teva, the generic manufacturer, reached a settlement agreement that permitted Teva to enter the market for lamotrigine chewables 37 months early and the market for lamotrigine tablets 6 months early. The former agreed to stay out of the authorized generic market for lamotrigine during Teva’s exclusivity period from July 2008 to January 2009. In return, Teva dropped its challenge to GSK’s Lamictal patents. In In re Loestrin, Watson, the generic manufacturer, agreed to halt its patent validity challenge and abstain from the market for a time in exchange for the branded manufacturer Warner Chilcott’s promise that, when Watson finally did enter, Warner Chilcott would refrain from competing with its own authorized generic version for six months.

[178] Shapiro, supra note 171, at 397.

[179] Mungan, supra note 171, 30-31.

[180] Miller & Gal, supra note 6, at 136, n. 76.

[181] Hovenkamp, Janis & Lemley, supra note 170, at 1757.

[182] U.S. v. General Electric Co., 272 U.S. 476 (1926).

[183] See supra Section II.A.

[184] As the Supreme Court stated in Topco Associates, “[i]t is only after considerable experience with certain business relationships that courts classify them as per se violations . . . ” U.S. v. Topco Assoc., 405 U.S. 596, 607-08 (1972). Given that the antitrust courts have had so little experience with no challenge clauses, and that these clauses are not so obviously anticompetitive and lacking in redeeming virtues that they should be summarily condemned, it is highly unlikely that courts would apply the per se rule to no challenge clauses.

[185] The uncertainty of the boundary, or scope, of patent rights is extensively discussed in James Bessen & Michael J. Meurer, Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk 46-72 (2008).

[186] John R. Allison & Mark A. Lemley, Empirical Evidence on the Validity of Litigated Patents, 26 AIPLA Q.J. 185, 205 (1998).

[187] Paul M. Janicke & LiLan Ren, Who Wins Patent Infringement Cases?, 34 AIPLA Q.J. 1, 20-22 (2006).

[188] Susan DeSanti et al., Fed. Trade Comm’n, Generic Drug Entry Prior to Patent Expiration: An FTC Study vi (2002); Adam Greene & D. Dewey Steadman, Pharmaceuticals: Analyzing Litigation Success Rates 1, RBC Capital Mkts. (2010).

[189] Patent Act, 35 U.S.C. § 282 (2011).

[190] John R. Allison et. al., Patent Quality and Settlement Among Repeat Patent Litigants, 99 Geo. L.J. 677, 694 (2011).

[191] Pittman, supra note 47, at 347-48.

[192] Shapiro, supra note 171, at 395.

[193] See Dreyfuss & Pope, supra note 16, at 972, 980 n. 44 (noting that Supreme Court either reversed or vacated Federal Circuit decisions in favor of patentee between 2006 and 2007).

[194] Shapiro, supra note 171, at 395.

[195] Id.

[196] Hovenkamp, Janis & Lemley, supra note 170, at 1761.

[197] See, e.g., id.; Elhauge & Krueger, supra note 169; Carrier, supra note 170.

[198] Hovenkamp et al., supra note 34, at § 1.3.

[199] Int’l Salt Co. v. United States, 332 U. S. 392, 398 (1947).

[200] Ill. Tool Works, Inc. v. Independent Ink, Inc., 547 U.S. 28, 31 (2006) (The question presented to us today is whether the presumption of market power in a patented product should survive as a matter of antitrust law despite its demise in patent law. We conclude that the mere fact that a tying product is patented does not support such a presumption.).

[201] Hovenkamp et al., supra note 34, at § 4.2.

[202] Elhauge & Krueger, supra note 169, at 323 (“Further, there can be no harm to consumer welfare without market power, which is by definition the power to raise prices above competitive levels.”).

[203] Lear Inc. v. Adkins, 395 U.S. 653, 670 (1969) (“Licensees may often be the only individuals with enough economic incentive to challenge the patentability of an inventor’s discovery.”).

[204] It should be noted that licensees also suffer from some specific financial disadvantages in mounting validity challenges. Licensees may be subject to the various penalties stipulated in the licensing agreement over validity challenges. And if the agreement provides for automatic termination upon challenge, licensees may be exposed to trebled damages if they continue to produce and the infringement is found to be willful. Given that the licensees have already invested heavily in the production process, it would be very costly for the licensees to cease production. Lastly, licensees have to bear reputation costs, especially as a repeat player in the industry.

[205] Shapiro, supra note 171, at 406. This is because the market price post-entry would be driven down to the marginal cost. Given the fixed costs of entry, no entry would occur. Only if the entrant enjoys a significant cost advantage would entry occur. The cost advantage would not only need to enough to allow the entrant to recoup the fixed costs of entry, it would also need to allow the entrant to cover the litigation costs of invalidating the patent.

[206] Blonder-Tongue Labs. v. U. of Ill. Found., 402 U.S. 313 (1971).

[207] Orstavik, supra note 7, at 101.

[208] Morris, supra note 119, at 220.

[209] Nicholas Roper, Limiting Unfettered Challenges to Patent Validity, Upholding No-Challenge Clauses in Pre-Litigation Patent Settlements Between Preexisting Parties to a License, 35 Cardozo L. Rev. 1649, 1675 (2014).

[210] Miller & Gal, supra note 6, at 137.

[211] Roper, supra note 209, at 1676.

[212] Elhauge & Krueger, supra note 169, at 288.

[213] Despite the term, the same concept obviously also applies when the no challenge clause is contained in a settlement agreement. For ease of reference, this Article will use licensing exclusion period to refer to the exclusion period under licensing agreements and settlement agreements. Consent decrees are excluded from this discussion because, as it has been argued earlier, it is inappropriate to apply antitrust scrutiny to an agreement that has been judicially approved.

[214] Elhauge & Krueger, supra note 169, at 290.

[215] See Bendix Corp. v. Balax, Inc., 471 F.2d 149, 153 (7th Cir. 1972).

[216] See Hovenkamp, Janis & Lemley, supra note 170, at 1746-49.

[217] Note, however, that in Jack Winter, Inc., the Court held that the fact that the defendant in that case extended its indemnification program to its customers to cover potential infringement suits from the patentee, even though the defendant had reasons to doubt the validity of the patent, does not render an agreement an unreasonable restraint of trade. Jack Winter, Inc. v. Koratron Co., Inc., 375 F. Supp. 1, 54 (N.D. Cal. 1974).

[218] The same would be true for a settlement agreement without a finite term.

[219] See discussion supra Section II.C.1.

[220] This is because the purpose of the exercise is to compare the exclusion period that is affected by the no challenge clause versus the but-for exclusion period. If the full patent term is used as the base exclusion period, then a patentee can easily game the rule by adopting very short licenses, in which case the expected exclusion period will almost always be longer than the licensing exclusion period.

[221] See, e.g., Rates Tech., Inc. v. Speakeasy, Inc., 685 F.3d 163 (2d Cir. 2012); Massillon-Cleveland-Akron Sign Co. v. Golden State Advert. Co., 444 F.2d 425 (9th Cir. 1971); Bendix Corp. v. Balax, Inc., 421 F.2d 809 (7th Cir. 1970).

[222] Even then, there could still be a difference between the licensing exclusion period and the expected exclusion period if third parties are nonetheless deterred by the existence of a no challenge clause from challenging the patent.

[223] While one may argue that a licensee accepting a no challenge clause where such a clause is enforceable is also an agreement by the licensee not to challenge the patent, there is a difference between the two situations. In the former situation, the right to challenge a patent is something that could legally be bargained away. In the latter situation, a bargain over the right to challenge a patent is something that the patent law will not enforce. The licensee will be free to renege on its earlier promise as it sees fit. For the licensee to give up such a right probably requires more generous compensation.

[224] Miller & Gal, supra note 6, at 156.

[225] Hovenkamp, Janis & Lemley, supra note 170, at 1743.

[226] Hovenkamp et al., supra note 34, at § 3.1.

[227] Id. at §34.2 (“Patents may be said to be in a blocking relationship when there is a product or set of products that infringes at least one claim of one party’s patent while also infringing at least one claim of another party’s patent.”); Suzanne Scotchmer, Innovation and Incentives 127-132 (2004) (cumulative innovation refers to innovation that builds on other previous innovation).

[228] Even though no challenge clauses probably will not hinder the deployment of cumulative innovation, there is a scenario in which the emergence of cumulative innovation will increase the licensee’s incentive to challenge the original patent. This is if the cumulative innovation is valuable and patentable, but the licensee has serious doubt that the original technology is not patentable. In that case, the licensee can basically take over the exclusivity of the original patentee over the market by patenting its cumulative innovation while invalidating the original patent. The license would thus have significant incentives to challenge, but will be blocked by the no challenge clause. However, consumers are likely to be indifferent between the two scenarios as what will transpire is essentially one patent monopoly replacing another one. If both the original technology and the cumulative innovation are valued by consumers and do not face significant competition in the market, the consumers will have to pay a supra-competitive price either way.

[229] If we know the validity of the patent, the amount of potential challenges being blocked would not matter. If we know that the patent is valid, the inquiry would end. However, because we do not know patent validity, every potential challenge is an opportunity to unearth an invalid patent, and by extension consumers’ needlessly paying supra-competitive prices. Every potential challenge blocked therefore increases the probabilistic consumer harm of the no challenge clause.

[230] See Orstavik, supra note 7, at 107; Roper, supra note 209, at 1678.

[231] Shapiro, supra note 171, at 392.

[232] Id.

[233] See Fed. Trade Comm’n v. Actavis, 570 U.S. 756 (2013).

[234] See Rates Tech., Inc. v. Speakeasy, Inc., 685 F.3d 163, 171 (2d Cir. 2012).

[235] See, e.g., Rates Tech., 685 F.3d at 171-72; Flex-Foot Inc. v. CRP, Inc., 238 F.3d 1362, 1369-70 (Fed. Cir. 2001).

[236] Elhauge & Krueger, supra note 169, at 312-19.

[237] See discussion supra Section I.B.

[238] See Rates Tech., 685 F.3d at 166 (agreement provides for liquidated damages of $12 million).

[239] Hovenkamp, Janis & Lemley, supra note 170, at 1739.

[240] Dan L. Burk & Mark A. Lemley, Policy Levers in Patent Law, 89 Va. L. Rev. 1575, 1590-91 (2003).

[241] See J. Gregory Sidak, Evading Portfolio Royalties for Standard-Essential Patents through Validity Challenges, 39 World Competition (forthcoming 2016), https://www.criterioneconomics.com/docs/evading-portfolio-royalties-for-seps.pdf.

[242] Id. at 3.

[243] Id. at 10.

[244] Id.

[245] Id.

[246] Id.

[247] Id. at 12-13.

[248] Id. at 14.

[249] Id. at 13-15.

[250] Id. at 15-16.

[251] MedImmune, Inc. v. Genetech, Inc., 549 U.S. 118, 124 (2007).

[252] Cordis Corp. v. Medtronic, Inc., 780 F.2d 991, 995-96 (Fed. Cir. 1985). In ruling that a licensee could not avoid facing the consequences of its breach of its license agreement in the course of bringing a patent challenge, the Cordis court echoed the view previously expressed in Morton-Norwich that “permitting the licensee to unilaterally and offensively ignore his contract obligation to make payments required under the contract, and at the same time denuding the licensor of the remedy of declaring a breach and seeking relief against the licensee as an infringer, . . . does violence to contract principles” in a manner that “might encourage more validity litigation, but at too high a price.” Morton Norwich Prods v. Int’l Salt Co., 183 U.S.P.Q. 748, 750 (N.D.N.Y. 1974).

[253] See, e.g., Precision Shooting Equip. Co. v. Allen Archery, Inc. 646 F.2d 313 (7th Cir. 1981); Cordis Corp., 780 F.2d 991; Gen-Probe v. Vysis 359 F.3d 1376 (2004); MedImmune, 549 U.S. 118.

[254] See Sidak, supra note 241, at 15. Sidak’s characterization of holders of SEP portfolios as cash-strapped is also unlikely to reflect the reality. Many of the holders of SEP portfolios, at least in the ICT industry where SEPs have the greatest salience, are the likes of Nokia, Ericsson, Motorola, Apple, Samsung, Qualcomm, and Google. These companies are hardly cash-strapped. Moreover, if a company is able to invest in the enormous volume of innovation in order to build an SEP portfolio, it is unlikely to be cash-strapped or otherwise liquidity constrained. It should have no problem borrowing from the capital markets while riding out the opportunistic behavior by licensees.

[255] Hovenkamp, Janis & Lemley, supra note 170, at 1720-21. The three categories are (1) agreements that are legal even if the patent is invalid and not infringed, (2) agreements that are illegal even if the patent is valid and infringed, and (3) agreements whose legality depend on the validity of the patent.

[256] Hovenkamp, Janis, and Lemley assert that reverse payments should be presumptively illegal unless the defendant can show, among other things, that “the ex ante likelihood of prevailing in its infringement lawsuit is significant”. Id. at 1759. Crane argues the same. Crane, supra note 171, at 750. The Department of Justice also shares a similar view. Brief for the United States in Response to the Court’s invitation at 10, 22, 28-32, Ark. Carpenters Health & Wealth Fund, 604 F.3d 98 (2d Cir. 2010) (Nos. 05-2851-cv(L), 05-2852-cv (CON), 05-2863-cv (CON)), 2009 WL 8385027, at *10, *22, *28-32.

[257] Elhauge & Krueger, supra note 169, at 289.

[258] Id.

[259] Id. at 288.

[260] If the patentee itself also engages in production of the final product, the patentee must be able to coordinate output with the licensee to maintain output at the monopolist level. Otherwise, excess production will pushes prices below the monopolist level. This would not be too difficult to achieve if the patentee produces the key input incorporating the technology itself and the input is used at a fixed ratio to the final product. In that case, the patentee can control the final product output level of the licensee by restricting the supply of the input. If, however, these two fairly restrictive conditions do not hold, the patentee may need to impose some sort of direct restriction on the final output level, which may run afoul of antitrust law.

[261] Orstavik, supra note 7, at 108.

[262] Miller & Gal, supra note 6, at 149.

[263] Daniel F. Spulber, Bertrand Competition When Rivals’ Costs Are Unknown, 43 J. Indus. Econ. 1 (1995).

[264] See Shapiro, supra note 171, at 401. Bertrand competition refers to an oligopolistic market in which firms produce homogenous product and compete on price. Competition will eventually drive the price to the level of marginal cost and firms earn no supra-competitive profit. David Besanko & Ronald R. Braeutigam, Microeconomics 533-34 (4th ed. 2010).

[265] Cournot competition refers to an oligopolistic market in which firms produce differentiated products and compete on output level. Prices will exceed marginal cost and firms will exhibit some market power. Besanko & Braeutigam, supra note 264, at 535-40.

[266] A final remark is in order. The foregoing discussion may seem to exhibit a degree of inconsistency in that in some instances, a reduced incentive to challenge as a result in market conditions points to legality, while in some other instances it suggests illegality. The reason this is the case is because one needs to look deeper to see what are the reasons for the reduced incentive. If the reduced incentive is due to sharing or bolstering of monopoly profit by the patentee, for example, by way of favorable royalty or license restrictions, it suggests that the patentee has serious doubts about the validity of the patent and needs to induce licensees to accede to a no challenge clause with increased profit. In that case, reduced incentive points to illegality. If, however, the reduced incentive is due to competitive pressure in the market, for example, because of the existence of multiple licensees or a homogeneous product in the market, then reduced incentive is a positive indication that the no challenge clause does not foreclose likely challenges. In that case, reduced incentive to challenge suggests legality.

[267] See Miller & Gal, supra note 6, at 148, Taylor, supra note 22, at 233.

[268] Morris, supra note 119, at 229.

[269] See id.

[270] Miller & Gal, supra note 6, at 148 (The patentee may choose to license the patent to a less efficient licensee “that does not have the resources, stamina, or knowledge to challenge the patent. In particular, P may choose a firm that lacks a significant comparative advantage over other potential producers, since it is often the comparative advantage that propels a licensee to challenge the patent and capitalize on first-mover status.”).

[271] Id.

[272] Dreyfuss & Pope, supra note 16, at 991. For example, only the patentee is likely to know the true date of invention and the identity of the inventor.

[273] Orstavik, supra note 7, at 101.

[274] Crane, supra note 171, at 756.

[275] Shapiro, supra note 171, at 435.

[276] Hovenkamp, Janis & Lemley, supra note 170, at 1761.

[277] Crane similarly argued that prohibiting reverse payments would undermine innovation incentives. See Crane, supra note 171, at 751.

[278] Roper, supra note 209, at 1662.

[279] Shapiro, supra note 171, at 395.

[280] Elhauge & Krueger, supra note 169, at 294.

[281] Dreyfuss & Pope, supra note 16, at 974.

[282] Id.

[283] How substantial the financial incentives will be will depend on how lucrative the market is and how much market power the patent wields.

[284] Elhauge & Krueger, supra note 169, at 294.

[285] Taylor, supra note 22, at 216, 227.

[286] Ritchie, supra note 14, at 142.

[287] Dreyfuss & Pope, supra note 16, at 988.

[288] Taylor, supra note 22, at 216.

[289] Alfaro, supra note 32, at 1304.

[290] Allison & Lemley, supra note 186, at 205.

[291] Dreyfuss & Pope, supra note 16, at 988.

[292] See supra note 269.

[293] See discussion supra Section I.A.

[294] Miller & Gal, supra note 6, at 153.

[295] Id. at 150; Taylor, supra note 22, at 233; Brenner, supra note 47, at 58, 66-68.

[296] Miller & Gal, supra note 6, at 150; Taylor, supra note 22, at 233; Brenner, supra note 47, at 58, 66-68.

[297] Dreyfuss & Pope, supra note 16, at 987.

[298] Hovenkamp, supra note 34, at § 5.6.

[299] Recall that under the NDRC draft guidelines, no challenge clauses are treated as both a potential restrictive agreement and an abuse of dominance. Transposed to the U.S., it means they would fall under both Section 1 and Section 2 of the Sherman Act. Given the necessary existence of an agreement, no challenge clauses would definitely fall under Section 1. No challenge clauses could probably qualify as a monopolization offense under Section 2 provided monopoly power. However, given the substantially higher market power threshold under Section 2, in reality, it is likely that most plaintiffs would invoke Section 1 rather than Section 2, just as in the case of tying and exclusive dealing (although in the case of the latter, Section 3 of the Clayton Act is also invoked).

[300] The application of this market power screen would be more complicated if the case concerns a portfolio patents, and as is often the case, a portfolio of SEPs. If the case concerns an SEP portfolio, on one level it is simpler because market power is obvious. On another level, it is more complicated because no challenge clauses will only have an anticompetitive potential with respect to a patent portfolio if it can be shown that there are a small number of highly important patents in the portfolio while the rest are subsidiary. Otherwise, if the patents in the portfolio are of roughly equal importance, Sidak was right that the invalidation of a handful of patents would not make much of a difference. Therefore, if the case concerns a patent portfolio, it is incumbent on the plaintiff to show that the invalidation of a small number of patents will have a decisive impact on the amount of market power wielded by the portfolio.

[301] Fed. Trade Comm’n v. Actavis, 570 U.S. 756 (2013).

[302] There was also market power, which has already been dealt with.

[303] (2) is not examined in this analytical framework because whatever the probability of success for licensee challenges is, it represents the best chance we have to invalidate the potentially invalid patent. It is important to consider the probability of third party success because we need to ensure that third party challenges can serve as a substitute for licensee challenges. But given the licensee challenges are the best chance we have, the analysis will simply have to take it as a given depending the factual circumstances of each case.

[304] Case 65/86, Bayer AG v. Süllhöfer, 1988 E.C.R. 5249.

[305] Provisions on Prohibiting the Abuse of Intellectual Property Rights to Exclude and Restrain Competition, supra note 53, at art. 10.

Foreword: The International Evolution of Intellectual Property Rights

Foreword: The International Evolution of Intellectual Property Rights
By Richard A. Epstein* Download a PDF version of this foreword here.  

Foreword

Two of the papers included in this issue of the NYU Journal of Intellectual Property and Entertainment Law illustrate, in the context of intellectual property law, a tension that exists across all areas of international law. To what extent should the rules of different countries be harmonized? Or, alternatively, to what extent should these laws be adapted to the local conditions within any given country? A moment’s reflection should indicate why there is no pat answer to this challenge in any area of substantive law. On the one side, a stout commitment to uniformity of law facilitates the cross-border transactions that are the life-blood of international trade and cooperation. The ability of private parties and government officials to know that the rules of the game are constant in all arenas should lead to a massive simplification of the overall operation of the international legal order. The gains from such simplification should be substantial even in transactions requiring harmonization between only two legal systems. But with intellectual property, nothing is more common than for key transactions to have a global reach that could easily require cooperation among dozens of nations. The greater the variation in local laws, the harder it becomes to do business in multiple jurisdictions simultaneously. To be sure, this proposition is subject to one key qualification. It should be taken as a matter of course that routine ministerial functions such as recordation will require that different formalities be observed in first one state and then the other. But so long as these requirements do not actually conflict, small differences on ministerial matters will not retard international transactions any more than they block interstate commerce within the United States or, indeed, within any nation governed by federalist principles. The stakes are considerably higher, however, with rules governing the substantive legality of particular transactions. For example, consider the intersection between antitrust and intellectual property law. In this context, the tension is omnipresent because the central purpose of all intellectual property rights (IPRs) is to create a limited monopoly as a spur to innovation within a given area. Yet difficulties arise when the holders of IPR seek to attach conditions to the use of their property, or to cross-license them, or in the patent context to incorporate them as part of standard essential patents.[1] On this substantive front, we have already witnessed serious difficulties when the European Union applies more stringent standards to mergers than does the United States.[2] In this context, because merger approval is needed in each and every country where the various parties plan to do business, the case for uniformity becomes quite powerful indeed. Yet deep substantive disagreements block that needed convergence, which accordingly gives the bargaining advantage to the nation that wishes to impose the most stringent standard, for it alone has a blocking position on any proposed transaction. Yet on the other side, there are strong forces that push nations to wish to develop their own distinctive regimes for different forms of intellectual property. One such conflict takes place between large nations with sophisticated research facilities, which are more likely to be exporting intellectual property, and developing nations, which are more likely to be using or consuming such property. The problem is most acute in the patent area, especially for pharmaceuticals, where the developed nations continue to push hard for strong protection of IPR, while the developing nations work hard to limit the scope of patents in order to increase the sale of generic drugs that can be sold at a fraction of the price of branded drugs under patent protection. Ironically, the shoe is often on the other foot in the area of copyright. Now many nations with strong indigenous cultures seek to extend copyright protection for those group works that, by definition, lack the authorship of original works required under traditional copyright conceptions.[3] Instead, they want protections for tribal and other cultural works that evolve collectively over time, for which there is a strong desire for protection. The difficulty here is that it is not sufficient to protect such intangibles as poems and dances solely in their country of origin, if they can be freely performed in mass markets elsewhere, where they receive no property protection. Oddly enough, therefore, recognizing these cultural claims also requires uniformity, in the willingness of other nations to pay a tax on productions that they could otherwise make for free. In this case, the developed nations enjoy the benefit of the blocking position. In dealing with these issues, it should be clear that there are only two ways in which uniformity can be achieved. The first is for different nations to adopt parallel rules independently. That outcome is not so far-fetched as it sounds because there are good reasons to think that the basic trade-offs in IPR are the same everywhere. The point here is a modern instantiation of the earlier natural law tradition, dating from Gaius and Justinian, which treats the basic institutions of property (as acquired by first possession), tort (as protecting liberty and property from the use of force and fraud), and contract (as facilitating joint ventures and the transfer of property) as largely universal.[4] Under this view, local differences are largely confined to matters of form, such as those needed to complete a contract or to transfer property. Differences in registration systems for IPR fall comfortably within the basic tradition. The second, and cleaner way is to enter into a set of bilateral, or preferably multilateral, agreements to set the standards for judging international transactions dealing with IPR, or indeed any other form of right. On the substantive front, however, uniformity in IPR is more elusive. In one sense, this field is unified because the same basic trade-offs have to be negotiated in all countries. No matter where one looks, general mathematical theorems, ordinary words, and natural elements all fall into the public domain, leaving open for dispute the correct treatment of certain claimed inventions that apply particular transformations of various inputs in order to create directions for medical diagnosis[5] or financial investing.[6] Just how far these protections should extend is a subject of hot controversy within the United States, and in other counties. What is less clear is whether the ideal solution should vary across countries, when the same trade-offs occur in all places. Similarly, a strong system of IPR protection will encourage innovation, but simultaneously it will prevent the movement of technology and literary works into the public domain where in most instances they can be more effectively utilized. Yet once again, it is not clear that the ideal patent or copyright length should differ across countries. But even if uniformity is the ideal, there is ample room for healthy disagreement as to the ideal length of patents and copyrights, even if there is widespread agreement that copyright terms should be on average longer than patent terms. But even that basic position does not preclude criticism that patent protection on pharmaceuticals may be too short (given the time that patented goods are tied up before the FDA) or that copyright terms (following the Copyright Term Extension Act of 1998)[7] are too long, lasting as long as 50 years after the death of the original author. These basic difficulties provide a convenient entrée into two of the papers contained in this volume: Addressing Climate Change: Domestic Innovation, International Aid and Collaboration,[8] Joy Xiang and Towards a New Dialectics: Intellectual Property, Public Health and Foreign Direct Investments[9] by Valentina Vadi. In her paper, Addressing Climate Change: Domestic Innovation, International Aid and Collaboration,[10] Joy Xiang asks two key questions: “(1) Is IPR a major barrier to the international transfer of clean technologies, and (2) why has the international transfer of clean technologies to the developing nations been limited?” I agree with her basic position that IPR does not form such a barrier. Indeed, I would go further and argue that climate change issues are not an exception to the general rule that strong IPR acts as a spur to innovation. To be sure, the owners of IPR will charge for the use of their technologies, as in any other field. But before such charges could be regarded as a barrier to exchange, it must be remembered that without IPR protection, these new technologies may never have emerged in the first place. In general, the strongest protection against monopoly power is not price controls, but the emergence of competitive technologies, which will themselves emerge only if IPRs obtain strong protection. Xiang is surely correct to insist that a strong patent system is not a sufficient condition for the diffusion of technological issues needed for patent control. Setting up cooperative business arrangements depends on a whole host of other government regulations that could either impede or propel the elaborate contractual schemes that are needed to develop an efficient system of tech transfer. The task is surely formidable owing to the high level of global cooperation needed to make good on these schemes. But the clearer the initial property rights in technology, the more likely it is that these beneficial arrangements can take place. In her article Towards a New Dialectics: Intellectual Property, Public Health and Foreign Direct Investments[11] Valentina Vadi claims that international arbitral commissions should take into account public health considerations in adjudicating patent cases in the pharmaceutical area. In order to do so, she claims that it is imperative to avoid the “excessive protection” of private interests at the expense of public ones. I agree that there is surely good reason to worry about how patent protection intersects with public health considerations. Nonetheless, it is less clear to me that these two should be regarded as necessarily in tension with each other. To be sure, at the time of some health crisis, the widespread availability of patented pharmaceuticals could be critical to the welfare of a nation. It need not, however, follow from this observation, that it is appropriate to weaken the level of patent protection provided for in the various treaties that regulate these issues. One possible response to Vadi’s claims is to build some public health exception into the basic treaties that govern the use of these patented drugs, thereby eliminating the need to renegotiate or arbitrate these treaties down the road. Another possibility is for the state to exercise its eminent domain powers, which could allow it to purchase these drugs for its own citizens who may not be able to afford the price. That alternative will not shrink the supply of new drugs, because it will not dull the incentives to invest by the drug companies who are called upon to supply the drugs in question. With these challenges in mind, does it ever make sense to take separately into account public health considerations when adjudicating patent cases.[12] In this area, as in so many others, it is not possible to ignore the ex ante effects of ex post redistribution, whether it be through arbitration or adjudication. In looking at these papers, therefore, it is useful for the reader to ask over and over again, the extent to which it is possible to develop a single overarching theory of IPR that works across subject matter areas and across national boundaries. In the end, the ability to achieve substantive uniformity on key issues may be the greatest boon to the technological improvements that are so needed in dealing with copyright, global warming, and pharmaceutical products.
* Laurence A. Tisch Professor of Law, The New York University School of Law, the Peter and Kirsten Bedford Senior Fellow, The Hoover Institution and the James Parker Hall Distinguished Service Professor of Law Emeritus and Senior Lecturer, the University of Chicago School of Law. My thanks to Craig Fligor and Manuel Valle, the University of Chicago Law School, Class of 2017 for their valuable research assistance.
[1] The literature on these topics is vast and is divided between those who think that market ingenuity is sufficient to respond to these risks and those who think that the holdout question is serious and needs explicit legislative or judicial intervention. For an exhaustive review of in support of the former view, see Jonathan M. Barnett, The Anti-Commons Revisited, 29 Harvard J.L. & Tech. 127 (2015); for the most well known statements on the other side, see, for example, Michael A. Heller, The Gridlock Economy: How Too Much Ownership Wrecks Markets, Stops Innovation, and Costs Lives (2008); Michael A. Heller & Rebecca S. Eisenberg, Can Patents Deter Innovation? The Anticommons in Biomedical Research, 280 Science 698 (1998). For my critique, Richard A. Epstein, Heller’s Gridlock Economy In Perspective: Why There is Too Little, Not Too Much Private Property, 53 Ariz. L. Rev. 51 (2011); Richard A. Epstein & Bruce Kuhlik, Is There a Biomedical Anticommons?, 27 Regulation 54 (2004).
[2] For one recent discussion, see, for example, Eur. Parliamentary Res. Services, Briefing 27/03/2014, EU and US Competition Policies: Similar Objectives, Different Approaches (2014), http://www.europarl.europa.eu/RegData/bibliotheque/briefing/2014/140779/LDM_BRI(2014)140779_REV1_EN.pdf. For an account of the EU rejection of the 2001 GE/Honeywell merger, see Donna E. Patterson & Carl Shapiro, Transatlantic Divergence in GE/Honeywell: Causes and Lessons, Antitrust, Fall 2001, at 18, http://faculty.haas.berkeley.edu/shapiro/divergence.pdf.
[3] World Intell. Prop. Org., Booklet No. 1, Intellectual Property and Traditional Cultural Expressions/Folklore (2001), http://www.wipo.int/edocs/pubdocs/en/tk/913/wipo_pub_913.pdf.
[4] For discussion of this theme, see Richard A. Epstein, The Utilitarian Foundations of Natural Law, 12 Harv. J.L. & Pub. Pol’y 713 (1989); Richard A. Epstein, The Uneasy Marriage of Utilitarian and Libertarian Thought, 19 Quinnipiac L. Rev. 783 (2000).
[5] See Ass’n for Molecular Pathology v. Myriad Genetics, Inc., 133 S. Ct. 2107 (2013) (denying patent eligibility for naturally occurring genetic sequences, but allowed them for gene sequences created by synthetic processes).
[6] See Alice Corporation Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347 (2014) (treating as patent ineligible a scheme for mitigating “settlement risk” in complex business transactions).
[7] Copyright Term Extension Act of 1998, Pub. L. No. 105-298, 112 Stat. 2827 (codified as amended in 17 U.S.C. §§ 108, 203(a)(2), 301(c), 302, 303, 304(c)(2)).
[8] Joy Xiang, Addressing Climate Change: Domestic Innovation, International Aid and Collaboration, 5 N.Y.U. J. Intell. Prop. & Ent. L. 196 (2015).
[9] Valentina Vadi, Towards a New Dialectics: Intellectual Property, Public Health and Foreign Direct Investments, 5 N.Y.U. J. Intell. Prop. & Ent. L. 113 (2015).
[10] Xiang, supra note 8.
[11] Vadi, supra note 9.
[12] See Richard A. Epstein & F. Scott Kieff, Questioning the Frequency and Wisdom of Compulsory Licensing for Pharmaceutical Patents, 78 U. Chi. L. Rev. 71 (2011), for a discussion of the dangers of compulsory arbitration.

Addressing Climate Change: Domestic Innovation, International Aid and Collaboration

Addressing Climate Change: Domestic Innovation, International Aid and Collaboration
By Joy Y. Xiang* Download a PDF version of this article here.
 

Introduction

“[T]he question before us is no longer the nature of the challenge — the question is our capacity to meet it.”

– Barack Obama[1]

In December 2009, at the 15th global climate change conference in Copenhagen, leaders from 115 nations gathered to negotiate an international agreement for addressing climate change.[2] The agreement was expected to include provisions to enhance the international transfer of technologies capable of adapting to or mitigating climate change.[3] Unfortunately, the talks stalled. Developed and developing nations disagreed on a host of issues, especially the treatment of intellectual property rights “IPR” protecting clean technologies.[4] Even before the Copenhagen conference, developing nations proposed to exclude clean technologies held by developed nations from patent protection.[5] Developed nations, meanwhile, considered that IPR should not be part of the global climate change negotiations and proposed to remove provisions dealing with IPR from the negotiations.[6] The Copenhagen conference resulted in a non-binding agreement[7] that did not reference IPR issues.[8] Nevertheless, the debate regarding IPR persisted through the subsequent global climate change negotiations. The global climate change conference, held in Lima in December 2014, presented both developed nations’ and developing nations’ positions regarding IPR as equal options to be negotiated at the next global climate change conference in Paris in December 2015.[9] The agreement resulting from the 2015 Paris conference, however, did not mention IPR issues; just as in the Copenhagen conference, the preference of developing nations was not reflected.[10] The debate regarding the treatment of IPR in the climate change context breaks down as follows: developed nations[11] insist on strong IPR for clean technologies, viewing IPR as indispensable for incentivizing the development of such technologies and facilitating their deployment. Conversely, developing nations[12] have sought to weaken or even remove IPR for clean technologies, viewing the existence of IPR as a major barrier to the international transfer of clean technologies. Hence, an ongoing divide exists between developing and developed nations regarding the role of IPR in the international transfer of clean technologies for addressing climate change. International agencies such as the World Trade Organization “WTO”, the World Intellectual Property Organization (‘WIPO”, the United Nations Environmental Programme “UNEP”, the World Meteorological Organization, and the World Bank have all initiated discussions to resolve the divide.[13] The stakeholders in this discussion include governments, public entities, and commercial entities from developed and developing nations, and those with interests in combatting climate change. To date, these shareholders are still searching for effective solutions. This article joins the search by exploring whether the existence of IPR is a major barrier to the international transfer of clean technologies, and the possible reasons behind the currently limited transfer of clean technologies to developing nations. After analyzing evidential data available on clean technologies and reviewing current scholarship on international technology transfer, this article concludes that IPR has been a major barrier to the international transfer of clean technologies, and that successful and sustainable international transfer of clean technologies needs certain conditions, which require efforts from both developing and developed nations. To create such conditions, and continue advancing the effort of leveraging clean technologies to address climate change, this article proposes a solution based on domestic innovation, international aid, and international technology collaboration, instead of the international transfer of clean technologies. This article proceeds as follows. Part I reviews climate change, the role of clean technologies in addressing climate change, the reality of international transfer of clean technologies, and the disagreement between developed and developing nations over how to improve international transfer of clean technologies to developing nations. Part II explores whether the existence of IPR is a major barrier to the international transfer of clean technologies to developing nations and what may be the reasons for the currently limited international transfer of clean technologies to developing nations. Based on Part II’s analysis and findings, Part III proposes the solution summarized above. Part IV discusses the advantages and concerns regarding the solution.

I. Groundwork: Climate Change, Clean Technologies, and International Transfer of Clean Technologies

The development and deployment[14] of clean technologies are a central part of the response to climate change. Because of developing nations’ need for clean technologies, and because developed nations own the majority of the existing clean technologies, transfer of clean technologies from developed nations to developing nations has been the focus of the global effort in leveraging clean technologies to address climate change. However, despite this focus, such transfers have been limited in the past two decades, with the majority going to the emerging economies,[15] and little being transferred to the other developing nations. Meanwhile, developed and developing nations continue to disagree on how to improve the situation.

A. Climate Change

Climate change is occurring, and its impact is global. Human activities using high-carbon technologies have been deemed the main cause of climate change. In the context of this article, the term “climate change” refers to change in global or regional climate patterns, such as increasing global temperature and the rising sea level, which have become particularly apparent from the mid to late 20th century onwards.[16] The Intergovernmental Panel on Climate Change “IPCC”,[17] the leading international scientific organization for assessing climate change, concluded that the period spanning from 1983-2012 was likely the warmest period of the past 1,400 years.[18] The IPCC also concluded that greenhouse gases “GHG” present in the atmosphere are at levels unprecedented in at least the past 800,000 years.[19] The effect of climate change on human and natural environments is global. The IPCC found that changes in climate have impacted natural and human systems on all continents and across the oceans.[20] These impacts include alteration of ecosystems, disruption of water supply, reduction of crop yields that result in increased food price and food insecurity, excess heat-related human mortalities, and infectious disease patterns.[21] According to a 2009 report by the Global Humanitarian Forum, climate change costs 300,000 human lives each year, and leaves 300 million people vulnerable to its effects, a number set to double by 2030.[22] The United Nations Framework Convention for Climate Change “UNFCCC”,[23] the main global agreement designed for addressing climate change, attributes climate change “directly or indirectly to human activity that alters the composition of the global atmosphere.”[24] In its latest assessment report, the IPCC once again confirmed that, using statistical qualification methods on the scientific data collected, “it is extremely likely that human influence has been the dominant cause of the observed warming since the mid-20th century.”[25] The human influence or activities referred to involve the use of fossil fuel,[26] e.g., by developed nations’ coal-fired industries since the Industrial Revolution and today’s hydro-carbon fueled transportation industries. These human activities account for the 70% increase in GHG emissions from 1970 to 2004.[27] Technologies relying heavily on fossil fuel — such as steam-engine locomotives, ships, airplanes, and power grids — were the backbone of these human activities. These high-carbon technologies attributed to the increased GHG emissions, leading to climate change.

B. Clean Technologies

Going forward, clean technologies[28] play a critical role in the solution for climate change. These technologies produce low GHG emissions and enable us to mitigate or adapt to climate change. Rapid development and deployment of clean technologies is needed to address climate change and to make clean technologies viable market alternatives to traditional high-carbon technologies. Stakeholders in climate change have agreed that the ability for humans to survive climate change largely depends on the rapid development and global deployment of a wide variety of clean technologies.[29] The UNFCCC recognized clean technologies as an important route for addressing climate change.[30] The United Nations General Assembly also adopted resolutions recognizing the fundamental role played by innovative clean technologies in addressing climate change.[31] Discussions about addressing climate change have generally focused on mitigation and adaption. The UNFCCC defines mitigation as human intervention to reduce the production or enhance the removal of GHGs, and adaptation as adjustment in natural or human systems in response to actual or expected climatic change, which moderates harm or exploits beneficial opportunities brought by climate change.[32] Mitigating climate change is crucial. Assessments have suggested that to avoid the catastrophic effects of climate change, global average temperature should rise no more than 2°C above pre-industrial level “the 2°C goal”.[33] In order to limit temperature increase, GHG concentrations in the atmosphere need to be stabilized so that they will not continue to cause further atmospheric warming. Nations that are parties to the UNFCCC have committed to limit GHG emissions in a way to achieve the 2°C goal.[34] However, achieving this goal would require the development and deployment of a wide range of clean technologies.[35] For example, the IPCC determined that the necessary mitigation technologies include technologies that utilize renewable energy sources — e.g., solar, wind, biomass, geothermal and hydro energy — to produce electricity, clean coal technologies that reduce GHG emissions from fossil fuel burning, and technologies to improve energy efficiency.[36] While mitigation is crucial, adapting to the impact of climate change is also an important, long-term effort. Many GHGs stay in the atmosphere for a hundred years or more.[37] Even if we were to completely stop GHG emissions now, the existing GHG concentration in the atmosphere would still cause a certain amount of future rise in global average temperature. Like mitigation, adaption will also require the development and deployment of certain technologies, such as seeds that can survive flooding caused by rising sea levels, irrigation technologies for resisting droughts, and early-warning or defense systems for extreme weather.[38] Clean technologies have developed significantly in the past decades. For example, technological advancements have reduced the production cost of wind energy by 80% over the last twenty years and solar power by 90% since the 1970s.[39] However, even with these achievements, there remains a considerable gap between current efforts to develop clean technologies and the level of investment required. First, multiple sectors of clean technologies will require breakthroughs in development. The UNFCCC indicates that further breakthroughs are needed in the areas of carbon capture and storage, hydrogen and fuel cells, biofuels, power storage systems and micro-generation, clean energy technologies, early warning systems for extreme weather events and biotechnology.[40] For example, waves of retiring fossil-fuel-based power plants are ready to adopt clean coal technologies, such as carbon capture and sequestration.[41] However, carbon capture and sequestration technologies have advanced slowly.[42] In order to meet the 2°C goal, carbon capture and sequestration technologies must double their capture and storage rates by 2025.[43] Second, further technical advancements are needed to reduce the price of clean technologies and make them viable alternatives to traditional high-carbon technologies. Currently, clean technologies are often more expensive than existing fossil-fuel-based technologies.[44] For example, renewable energy technologies still need significant innovation to compete with traditional hydrocarbon-based technologies at similar price level.[45] The World Bank indicated that energy storage would need further cost reduction and performance improvement for large-scale deployment of solar and wind power and electric vehicles.[46] In 2012, the global energy demand for fossil fuels was 82% while the demand for renewable energies was a mere 13%.[47] The consumption of modern renewable energies has risen at an annual growth rate of 4%, while an annual growth rate of 7.5% is needed.[48] Third, the deployment of clean technologies needs to accelerate. To meet the 2°C goal, the net volume of global anthropogenic GHG emissions will need to be reduced 60% by 2050, using the 2000 global anthropogenic GHG emissions as a base line.[49] However, the traditional model of technology deployment may be too slow to achieve a 60% reduction in global GHG emissions by 2050. Studies show that inventions in the energy sector generally take 20-30 years to reach mass markets, which normally start first in the nations where the inventions are developed.[50] Under the traditional model of deployment, developed nations develop new technologies, which reach developing nations via commercial roll-outs.[51] To accelerate the development and deployment of clean technologies, one possible approach is for both developing and developed nations to develop and deploy clean technologies independently and collaboratively, instead of relying on the traditional model of deployment. The recent rapid R&D efforts for clean technologies in Brazil, China, India, and a few other developing nations illustrate the independent effort by developing nations, and the Mediterranean Solar Plan illustrates the collaboration between developed and developing nations on a large scale.[52] However, these exemplary practices are yet to become common practice.

C. International Transfer of Clean Technologies to Developing Nations

While rapid development and deployment of clean technologies is important, widespread transfer of clean technologies to developing nations has been deemed as much so, if not more, important. Developing nations are increasingly in need of clean technologies due to rising energy consumption and the corresponding environmental impact. Since developed nations currently own the majority of the existing clean technologies, transfer of clean technologies from developed nations to developing nations has become a focus of the global climate change efforts. However, during the past two decades, actual transfer of clean technologies to developing nations has been limited.
1. Transferring Clean Technologies to Developing Nations Has Been an Important Focus of International Climate Change Efforts
International instruments such as the IPCC and the UNFCCC have emphasized the transfer of clean technologies from developed to developing nations. This emphasis seems appropriate, given developed nations’ ownership of most existing clean technologies under IPR protection and the growing need of developing nations to employ clean technologies to address climate change and to develop their economies.[53] In developing their economies, developing nations have increased their demand for energy resources, and have thus increased their impact on the environment. For example, in 2014, China became the world’s largest overall energy consumer, followed by the U.S., the EU, and India.[54] Historically, developed nations dominated in GHG emissions.[55] However, starting in 2004, developing nations’ GHG emissions from energy use surpassed those of developed nations;[56] by 2010, the GHG emissions from developing nations exceeded those of developed nations by about 40%.[57] Much of this increase may be traced to the rapid growth of China, India and other emerging economies. This figure is expected to increase to 130% by 2040.[58] Therefore, to prevent further aggregation on the climate, it is important that developing nations fully utilize clean technologies in the pursuit of economic development. On the other hand, developed nations currently own most of the existing clean technologies that are protected by IPR.[59] For example, according to a 2008 international survey, developed nations owned 80% of patents covering relevant clean technologies (though the percentage was a significant reduction from ten years ago, where developed nations owned 95% of the patents on clean technologies.)[60] Consequently, global climate change technology efforts have focused on the transfer of clean technologies from developed nations to developing nations. As early as 1992, the IPCC pointed out that “as the GHG emissions in developing nations are increasing with their population and economic growth, rapid transfer, on a preferential basis to developing nations, of technologies which help to monitor, limit or adapt to climate change, without hindering their economic development, is an urgent requirement.”[61] The UNFCCC, signed in 1992, subsequently listed technology transfer as a main method for addressing climate change. The UNFCCC requires developed nations to take “all practicable steps to promote, facilitate and finance, as appropriate, the transfer of or access to environmentally sound technologies and know-how” to other nations, particularly developing nations.[62] The WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights “TRIPS Agreement”, signed in 1994, also asks developed nations to promote and encourage technology transfer to the least developed countries “LDCs” members.[63] Specifically, the TRIPS Agreement asks developed nations to “provide incentives to enterprises and institutions in their territories” so as to promote and encourage technology transfer to the LDCs to “enable them to create a sound and viable technological base.”[64] To facilitate the transfer of clean technologies, the UNFCCC has set up several mechanisms. The first mechanism is a technology transfer framework established in 1992, when the UNFCCC was signed. The framework has several components,[65] including a Technology Needs Assessment component wherein parties of the UNFCCC identify and prioritize the clean technologies needed, as well as determine the major barriers for the inbound transfer of clean technologies.[66] The second is the Clean Development Mechanism (CDM) and Joint Implementation (JI) mechanism established by the UNFCCC Kyoto Protocol[67] in 1997. The CDM and JI mechanisms allow a nation with an emission-reduction or emission-limitation commitment under the Kyoto Protocol to implement an emission-reduction or emission-removal project in developing nations. Such projects can earn scalable emission reduction credits that are counted toward the Kyoto commitment of the providing nation.[68] The third is the Technology Mechanism established by the 2010 Cancun climate change conference, to help nations develop and transfer clean technologies.[69] The Technology Mechanism aims to support and accelerate clean technology diffusion via a nation-driven approach, based on national circumstance and priorities of developing nations.[70]
2. Technology Transfer Defined
The IPCC defines technology transfer as “a broad set of processes covering the flows of know-how, experience and equipment for mitigating and adapting to climate change” among and between all nations.[71] The IPCC considers technology transfer to include the adaptation of the transferred technology, “the process of learning to understand, utilize, and replicate the technology, including the capacity to choose and adapt to local conditions and integrate it with indigenous technologies.”[72] The Kyoto Protocol of the UNFCCC also has a broad definition of technology transfer, which includes providing developing nations the know-how and best practices associated with a transferred technology.[73] Channels for technology transfer can be market-based, such as trade, foreign direct investment and technology licensing.[74] Transfer can also be informal. Organizations or individuals may engage in unsanctioned imitation and technical and managerial personnel may bring “know-how” with them as they change employment.[75] Technology transfer can be initiated by the commercial sector or the public sector. In practice, most technology transfer occurs in the commercial sector.[76] Nevertheless, the role of the public sector is important. Technology transfer normally is neither an automatic nor a costless process, and it can become subject to market failures; in such cases, public interventions such as legal and policy incentives are necessary.[77]
3. International Transfer of Clean Technologies to Developing Nations Has Been Limited
In spite of the support mechanisms provided by the UNFCCC system and TRIPS Agreement, the international transfer of clean technologies to developing nations has been limited. In particular, extensive surveys conducted in the past two decades reveal that foreign clean technologies are not reaching developing nations adequately, especially the LDCs.[78] In 2011, researchers from the London School of Economics and Political Science and the Organization for Economic Cooperation and Development “OECD” published a global survey on the invention and transfer of climate change mitigation technologies “Study A”.[79] Study A analyzed the geographic distribution of thirteen classes of climate mitigation technologies during 1978-2005, and was based on patent data from over eighty national and international patent offices.[80] As the figure below shows, Study A found that international transfer of clean technologies mostly occurred between developed nations (73% of the overall exported inventions).[81] It also noted that exports of clean technology inventions from developed nations to emerging economies — such as China, Brazil, and India — were growing rapidly (22% of the overall exported inventions).[82] The study further found that the flow of clean technology inventions from developing nations to developed nations made up 4%, while the flow between developing nations was much less, a mere 1% of the overall flow.[83] This implies that the transfer of clean technologies from developed nations to developing nations that are not emerging economies was almost nonexistent.
X
A different global patent survey confirms the findings of Study A. In 2010, the UNEP, the European Patent Office and the International Centre for Trade and Sustainable Development conducted a study[84] of the patenting landscape and licensing practices of key clean energy technologies[85] “Study B”. This study discovered that 58% of its respondents (entities based in developed nations) reported they had not entered into licensing agreements with entities based in a developing nation during the three years before 2010, the time when Study B was conducted.[86] Conversely, Study B found that the owners of clean technologies were willing to transfer the technologies. Of the respondents in Study B, 73% believed it was important to seek opportunities to license out their technologies, and 82% viewed IPR as vital to licensing transactions.[87] This data indicates that clean technology owners do want to transfer the technologies, and the existence of IPR is critical to facilitating such transfers. Study B also found that clean technology owners, especially academic and public organizations, were generally open to providing flexible licensing terms to entities based in developing nations with limited financial resources.[88] Similar to Study A, Study B also found that emerging economies such as China, Brazil, India and Russia were the main beneficiaries of licensing flows from developed nations.[89] Study B indicated that companies from developing nations experienced some difficulties in obtaining clean technologies from entities based in developed nations, [90] resulting from the high cost of licensing the foreign clean technologies and/or having to resort to obtaining less-advanced substitutes.[91] A third survey, a 2009 United Nations report, assessed the effect of the CDM — one of the technology transfer mechanisms mentioned in Part I.C.1 “Study C”. [92] The study noted that only 36% of the 3,296 documented CDM projects involved the transfer of clean technologies.[93] Study C also noted that the CDM projects had been concentrated in only a few developing nations, e.g., Brazil, China, India, Mexico.[94] These, again, are emerging economies. The rest of developing nations had taken up only 25% share of the overall CDM projects.[95] In summary, the available empirical evidence shows that the international transfer of clean technologies occurs mainly between developed nations. The more infrequent, but growing transfer of clean technologies from developed nations to developing nations flows mainly to emerging economies, such as China, Brazil, India, Mexico, Russia and South Africa. Little transfer occurs between developed nations and the rest of the developing nations, or among developing nations themselves.

D. How to Increase Transfer of Clean Technologies to Developing Nations — An Ongoing Debate

Developing and developed nations have been discussing how to increase the international transfer of clean technologies to developing nations. However, they disagree over the means to achieve this goal. Developing nations claim that IPR is a major barrier to the international transfer of clean technologies and ask for the reduction or elimination of IPR protections on clean technologies. Developed nations, on the other hand, insist that IPR facilitates development and deployment of clean technologies and assert that the barrier to the international transfer of clean technologies is developing nations’ lack of capacity to attract foreign clean technologies.
1. Developing Nations
Developing nations regard IPR as an inherent barrier to the international transfer of, and affordable access to, clean technologies in a rapid time frame.[96] According to this view, IPR of clean technologies keeps prices of clean technologies high and limits access. Developing nations have pointed to specific instances to support this view. For example, firms and R&D institutions in developing nations have indicated that commercial firms and public institutions in developed nations refused to license important technologies related to fuel-cells.[97] Local firms in India indicated that they were refused licenses for patented technologies on ozone reduction.[98] Several developing nations have also criticized a small group of multinational companies “MNC”s) owning clean technologies needed by developing nations. These MNCs were criticized for using their ownership of clean technologies as a means to control production, therefore limiting their transfer to the developing nations who needed these clean technologies.[99] During recent UNFCCC climate change conferences, developing nations suggested limiting or eliminating IPR for clean technologies. Specifically, Brazil, South Africa, China, India, and Russia have suggested rethinking the existing IPR regime, excluding clean technologies from patent protections, introducing a compulsory licensing scheme for clean technologies, and pushing for technology transfer, flexible licensing mechanisms, and institutional mechanisms.[100] The president of Bolivia likewise commanded that “innovation and technology related to climate change must be within the public domain, not under any private monopolistic patent regime that obstructs and makes technology transfer more expensive to developing countries.”[101] In 2013, the WTO TRIPS Council[102] organized a discussion on IP, Climate Change, and Development. Ecuador submitted a proposal “Ecuador 2013 proposal”.[103] In the proposal, Ecuador argued that IPR could “create a monopolistic situation characterised by high prices and a restriction of the dissemination of knowledge” for adapting to climate change and use of clean technologies.[104] Ecuador proposed to exclude clean technologies from patentable subject matter, include in the TRIPS Agreement a new provision on the transfer of expertise or know-how, implement compulsory licensing, and reduce the life term of patents on clean technologies.[105] A number of developing nations such as Cuba, Bangladesh, Bolivia, Brazil, India, Indonesia, Nepal, Rwanda and the Dominican Republic supported Ecuador’s proposal.[106] India especially supported the proposal’s stance regarding compulsory licensing and reduction of patent life term.[107] India stated:
On any principle of equity, industrialized countries have to bear a large share of the burden. They are historically responsible for the bulk of the accumulated greenhouse gas emissions and this alone suggests a greater responsibility. They also have high per capita incomes, which give them the highest capacity to bear the burden. They are technically the most advanced, and to that extent best placed to provide environmentally sound technology to developing countries at fair and favourable terms and conditions.[108]
India’s statement captured the essential position of developing nations toward the proposal.
2. Developed Nations
Meanwhile, entities in developed nations have insisted that IPR is not a barrier, but a facilitator for development and deployment (e.g., international transfer) of clean technologies. Their arguments focus on the incentives and legal certainty that IPR provides. For example, General Electric, a large producer of clean technologies, argues that IPR helps incentivize R&D investments in clean technologies, especially by the commercial sectors, which account for 70% of the overall R&D investments.[109] Industry associations, such as Alliance for Clean Technology Innovation, assert that strong IPR protection provides “legal certainty” for technology owners to engage in “voluntary, market-based technology transfer in all its possible forms.”[110] Researchers for the International Centre for Trade and Sustainable Development “ICTSD” stated that IPR provides incentives for clean technology innovations, especially in sectors such as wind, solar, carbon capture and storage, and biofuels that need major R&D investments.[111] Consequently, governments of developed nations — such as the U.S., Australia, Japan, and the EU — have insisted on strong IPR protection for clean technologies.[112] Todd Stern, the U.S. Special Envoy for Climate Change, stated: “we must make the development and dissemination of technology a top priority in order to help bring sustainable, low-carbon energy services to people around the world, AND we must do so in a way that recognizes the importance of protecting and enforcing intellectual property rights.”[113] The EU, Japan, Canada, New Zealand have expressed similar views.[114] Australia denied that IPR could be a significant barrier to technology cooperation or use. Instead, Australia argued, greater incentives should be provided so that the commercial sectors—responsible for 86% of overall global investment and financial flows—can engage in technology transfer.[115] Responding to Ecuador’s 2013 proposal, which gained support from quite a few developing nations, several developed nations countered with the position that IPR encourages the development of clean technologies and allows their transfer at accessible prices.[116] The EU’s response noted that a large quantity of key clean technologies are already in the public domain, the LDCs offer market values insufficient to attract commercial businesses in developed nations, and the LDCs do not provide IPR; therefore the LDCs can use foreign clean technologies for free.[117] Further, the EU argued that without patent protection for products and processes, companies owning the clean technologies in developed nations may be reluctant to engage in technology transfer and associated investments.[118] The EU stated: “IPR, particularly patents, will be a catalyst, not a barrier, to creating and deploying low-carbon technologies….Threat[s] to strong IPR, such as easily-obtained compulsory licensing, are likely to be a strong disincentive to invest.”[119] The EU’s position likely represents the essential view of developed nations on IPR’s role in the international transfer of clean technologies to developing nations.

II. Analysis: Possible Reasons for the Limited International Transfer of Clean Technologies to Developing Nations

One may ask: why has transfer of clean technologies to developing nations been limited? Is the existence of IPR in fact a major barrier to the international transfer of clean technologies? After reviewing and analyzing currently available data on clean technologies and scholarship regarding international technology transfer, this article finds that the existence of IPR has not been a major barrier to the international transfer of clean technologies. This article also finds that for a nation to attract inbound transfer of foreign technologies, it needs to offer: sufficient IPR protection, the capacity to absorb and adopt foreign technologies, sufficient market size, policy certainty, and transparency.[120]

A. Is the Existence of IPR a Major Barrier for Transfer of Clean Technologies to Developing Nations?

Examining IPR’s role in the development and deployment of clean technologies, and assessing IPR’s impact on developing nations in attracting international transfer of clean technologies, this section concludes that the existence of IPR has not been a major barrier to the international transfer of clean technologies.
1. IPR and Its Role
IPR has been viewed as an important tool to incentivize investments in innovation; it has also been viewed as increasing the cost of accessing IPR innovation. Though both climate and public health are public goods, IPR has different impacts in corresponding technology industries. Due to the specific nature of the clean technology industries, IPR plays less of a defining role in clean technology industries than in pharmaceutical industries. Therefore, solutions for IPR issues in pharmaceutical industries may not apply directly to IPR issues in clean technology industries. The term “intellectual property” refers broadly to creations of the human mind.[121] Intellectual property rights “IPR” protect the interests of the creators by giving them property rights over their creations.[122] The major forms of IPR include patents, trade secrets, copyrights and trademarks. Patents generally protect innovative technical improvements, trade secrets generally protect confidential information which can include innovative business or technical know-how, trademarks generally protect the distinctive symbols identifying a product or service, and copyrights generally protect the artistic expressions of ideas. When discussing the development and deployment of technologies, patent rights are the most relevant form of IPR, followed by trade secrets, which come into play when transfer of the know-how associated with a technology or business practice is involved. From this point forward, unless indicated otherwise, the article will use the term “IPR” to refer to patent protection. Trade secret laws may be discussed in relation to the transfer of confidential business or technical know-how. Other intellectual property forms such as trademarks and copyrights will be specifically identified and discussed as needed. Patent rights are territorial, granted by individual national governments and are effective only within the particular geographic regions covered by the national governments.[123] In order to gain patent protection on an innovation in a particular nation, the owner must file for a patent right on the innovation from the government of the particular nation.[124] Therefore, when this article mentions that a technology owner has a patent on a technology, it means the technology owner has applied for patent protection from a specific nation, the nation has granted patent protection on the technology, and the technology owner can enforce the patent within the territory of the nation. As exemplified by the debate discussed in Part I.D, IPR’s role in the development and deployment of technologies has been controversial. Traditionally, IPR has been a policy tool for incentivizing investments — especially commercial investments — in innovation.[125] Once an innovation is granted patent protection by the government of a nation, the owner of the invention can exclude a third party from practicing the innovation in the nation, or grant the permission with a fee, generating license revenue. The prospect of a monopoly or profit-making on a patented invention is presumed to incentivize investments in R&D to create the invention. Meanwhile, IPR has been viewed to increase the cost for accessing the IPR-protected technologies or to increase the cost of learning them via imitation.[126] For example, when technology is protected by a patent or a trade secret in a nation, access to the technology in the nation is barred unless the owner of the technology gives permission, which may come attached with restrictive conditions and/or a higher price due to its IPR. IPR may also have the effect of diminishing the speed of innovation, as IPR is alleged to demotivate owners of -protected technologies for continuous innovation, since it grants the owners a monopoly power (albeit temporary) over the protected technologies.[127] Because both climate and public health are public goods and have global impact, there is a potential parallel between IPR issues regarding clean technologies with IPR issues regarding pharmaceutical technologies.[128] However, this parallelism may not be warranted. First, IPR may be less significant to clean technologies than to pharmaceutical technologies. Patents on many of the technologies that are fundamental to modern clean technologies have long been expired and these fundamental technologies are in the public domain.[129] Existing patents mostly protect only specific features or incremental improvements over the fundamental technologies in the public domain.[130] These specific features and incremental improvements likely would be easy to design around, and therefore would have multiple alternatives and substitutes on the market. The availability of these alternatives and substitutes will likely bring down the price that might be charged under a monopoly afforded by IPR protection.[131] Meanwhile, patents on clean technologies tend to be diffused and owned by a large number of firms.[132] Hence, the power of patent owners in clean technologies tends to be limited. In the pharmaceutical industry, IPR plays a significant role. The general assumption is that the originator pharmaceutical sector is highly dependent on strong patent protection, mainly because of the high cost involved in developing novel medicines and the low cost of reverse engineering these new medicines.[133] The owner of a new medicine needs to rely on the monopoly secured by a patent to recuperate the R&D investments and generate significant economic returns. Also, in the pharmaceutical industry, one firm usually owns the patent of a key pharmaceutical technology, which normally has no alternative or substitute technologies, granting the firm dominant market power.[134] Furthermore, unlike pharmaceutical technologies, clean technologies involve a variety of different industries, and IPR is less important in some industries than others.[135] For example, clean technologies include sophisticated bio-tech engineering, such as genetically modified seeds for drought resistance, and low-tech mechanical innovations, such as farming techniques.[136] Patent rights are likely more relevant to the drought-resistant seeds, which may require more R&D investments than the mechanical farming techniques.
2. Evidential Data
This article will now examine IPR’s influence on the development and deployment of clean technologies for developing and developed nations, through analyzing available evidential data on global investments and patenting of clean technologies. Investments such as commercial investments and R&D expenditures are a measure of the input to innovation, while patenting data is a measure of the output to innovation.[137] Meanwhile, patenting data can be one indication of international transfer of technology, as patenting data identifies the location of an invention — e.g., where the patent was filed originally, and also where the invention is transferred — by where else the patent was filed besides the location of the invention.[138] Patenting of foreign technologies likely occurs in nations that have well-enforced IPR and have a high capacity to absorb and implement the foreign technologies.[139] Going forward, this article will group developing nations into three sets according to their stages of economic development. One group is the emerging economies, such as Brazil, Russia, India, China, and South Africa. Another group is the LDCs, such as Cambodia, Nepal, Haiti, and Uganda.[140] The remaining group encompasses the rest of developing nations, whose economic developments are between those of the emerging economies and the LDCs. This article calls them the mid-tier developing nations “MDCs”; Georgia, Egypt, Cuba, and Argentina may be considered MDCs.
i. Investments for Clean Technologies
The examination of evidential data on global investments in clean technologies provides two revelations. First, commercial investments in developing nations have increased rapidly and even surpassed those in developed nations in 2012. This implies that IPR may become increasingly important to developing nations as they can leverage IPR to harvest and protect innovations that result from the increased commercial investments in clean technologies. IPR can also help sustain momentum in commercial investments in clean technologies. Second, at least in developed nations, commercial investments in clean technologies overshadow government investments. Therefore, governments in developed nations may have a difficult time relaying the developing nations’ requests for the removal or weakening of IPR protection on clean technologies to their domestic commercial sectors. This is due to the significant roles these sectors play in the investments in clean technologies and these sectors’ preference for strong IPR for clean technologies. In recent decades, investments in clean technologies have increased rapidly, especially in developing nations. The 2014 Science and Engineering Indicators[141] published by U.S. National Science Foundation “Study E” illustrates the phenomena well.[142] According to Study E, global commercial investments in clean energy technologies have risen from less than 30 billion USD to 160 billion USD from 2005-2012.[143] The figure below provides further details.
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As shown, developing nations’ commercial investments in clean technologies rose rapidly from 2004-2012. The input rose from 8 billion USD in 2004 to nearly 100 billion USD in 2012, making up over 61% of the global total. In 2012, China’s commercial investments in clean technology totaled about 61 billion USD. Other developing nations, led by emerging economies such as Brazil, India, Indonesia, and Mexico, made up about 36 billion USD. The rapid increase in commercial investments in clean technologies by developing nations indicates that IPR may be utilized to harvest the inventions from these commercial investments. Currently, governments of developing nations may prefer no or weak IPR on clean technologies. However, increased domestic holdings in clean technologies and an increased desire on the part of domestic industries to apply IPR protection to their own technologies will likely change the current preference. Meanwhile, during 2004-2012, developed nations’ commercial investments in clean technologies rose from about 19 billion USD in 2004 to about 63 billion USD in 2012, comprising 39% of the global total.[144] In 2012, the U.S. and the EU, with 27 billion USD and 29 billion USD respectively, tied as the second-largest sources of clean technology commercial investments. However, both investments were significantly less than the 61 billion USD from China, which led the commercial investments in clean technologies among developing nations. In 2012, commercial investments of the other developed nations were much lower than those of the U.S. and the EU, only amounting to a collective 7 billion USD.[145] In the meantime, commercial investments in clean technologies in developed nations far exceed investments in clean technologies by governments of these nations. As shown in the figure below, in 2011, the governments of developed nations invested only 13 billion USD in research, development and demonstration “RD&D” for clean technologies, compared to the total 110 billion USD spent by the commercial sectors in developed nations.[146] Specifically, the U.S. government and the Japanese government invested the most, with each spending 4 billion USD for RD&D in clean technologies in 2011; the EU was the next largest, with 2.6 billion USA. The governments of Canada, Australia, and South Korea each spent 1 billion USD, 600 million USD, and 500 million USD respectively.[147]
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As shown in the figure, the distance between government RD&D investments and commercial investments in clean technologies in developed nations has increased consistently over the past years; the ratio (as shown under the horizontal axis of the figure) changed from 1:2 in 2004 to 1:9 in 2011. In general, there are two types of government support for the development and deployment of technologies. One is the enforcement of private rights, such as IPR, for incentivizing commercial investments.[148] Another is direct government funding of innovation.[149] The data above reveal the significant role commercial investments play in the development and deployment of clean technologies in developed nations. It thus implies that incentives such as IPR, which motivate commercial investments in clean technologies, probably should not be easily abridged. The governments of developed nations will have a difficult time supporting proposals to remove or weaken IPR on clean technologies, as such a proposals likely would not be accepted by the commercial sectors in developed nations.
ii. Patent Ownership for Clean Technologies
The examination of global patenting data on clean technologies identified three specific findings. First, developed nations own a majority of the patents on existing clean technologies. Second, the emerging economies are catching up rapidly in the number of clean technology patents, though patents on foreign clean technologies have taken up a significant share of these clean technology patents, Third, the rest of the developing nations have had few patents of clean technologies by domestic or foreign entities. The findings imply that IPR may be an issue for emerging economies’ access to some foreign clean technologies due to the existence of local patents, but not an issue for the rest of the developing nations’ access, since there are few local patents on foreign clean technologies. Study A, cited in Part I.C, examined the original filings of patents during 1978-2005 in thirteen climate change mitigation technologies.[150] Original filings of patents typically indicate where the patented inventions were developed. Study A found that 60% of the inventions patented worldwide in 1978-2005 originated from three developed nations: Japan, the U.S., and Germany.[151] Emerging economies represent 15% of the total inventions covered by Study A.[152] A 2009 study on patent ownership of clean technologies by European economic consultancy Copenhagen Economics “Study F”[153] confirms the pattern found by Study A. As shown in the figure below, Study F found that from 1998 to 2008, the ratio between developing and developed nations’ patent holdings on seven key clean technologies[154] grew from 1:20 to 1:5.[155] The improvement is significant, though the gap in patent ownership of clean technologies between developing nations and developed nations remains considerable.
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A closer look at the data in Study F reveals a larger contrast of patent ownership between the emerging economies and the other developing nations — i.e., the MDCs and the LDCs. Study F found that in 2008, the emerging economies accounted for 99.4% of all protected patents filed by developing nations in the seven key clean technology areas reviewed, while the MDCs and the LDCs accounted for only the remaining 0.6%.[156] As shown in the figure below, this means that emerging economies owned 19.88% of the patents filed globally in the seven clean technology areas in 2008, while the MDCs and the LDCs owned a mere 0.12%. Furthermore, Study F found that two thirds of these patents owned by the emerging economies were filed by foreigners and one third by local residents.[157]
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The above-identified findings of Study F are consistent with findings from Study B, which was discussed in Part I.C. Study B also found that patents on clean energy technologies in low-income nations — e.g., the LDCs and at least some MDCs — are relatively rare.[158] Study B further found that six developed nations — Japan, the U.S., Germany, South Korea, the United Kingdom, and France — accounted for almost 80% of patent filings in clean energy generation technologies.[159] Some of the emerging economies, such as Argentina, Brazil, China, India, Russia, the Philippines, and the Ukraine, have dramatically increased their patenting on clean technologies to such an extent that some of them filed 4,000 patent applications on clean technologies annually.[160] Meanwhile, current scholarship also indicates proprietary clean technologies do not enjoy protection in a number of jurisdictions, particularly in the most vulnerable economies.[161] The fact that the MDCs and the LDCs held few patents in clean technologies indicates that owners of foreign clean technologies were not filing patents in these developing nations. This is consistent with the finding in Part I.C that the MDCs and the LDCs had little inbound transfer of foreign clean technologies. The fact that emerging economies have had the most share of the clean technology patents filed in developing nations and that two thirds of these patents were filed by foreigners has at least two implications. First, emerging economies have developed and owned certain clean technologies, and second, owners of foreign clean technologies value the emerging markets and thus applied for patent protections for clean technologies there.
3. Assessment
This article will now assess IPR’s impact on the international transfer of clean technologies to developing nations, based on the evidence identified above, the author’s professional experience in global IPR practice, and current scholarship on IPR and technology transfer. Multiple factors impact the international transfer of clean technologies. The existence of proper IPR protection in a receiving nation is a positive factor; other factors include the market and policy conditions in the receiving nation. As of now, the existence of IPR in the emerging economies has helped to attract foreign clean technologies to the emerging economies. The lack of IPR or weak IPR may have further deterred foreign clean technologies from dispersing to the remaining developing nations. IPR systems in developed and developing nations possess varying levels of maturity and sophistication. Developed nations have developed their IPR systems over a long time.[162] The emerging economies likely have established the formal structures of an IPR system within the past century, and can improve upon IPR enforcement.[163] The MDCs and especially the LDCs in general tend to have limited or non-existent IPR systems.[164] Patents may, at best, be one of many factors encouraging investment in technology research and development.[165] Studies have found that in most circumstances, the promise of patent protection is not an important ex ante inducement to investments in technologies, though firms do register patents ex post to protect their inventions.[166] Evidence indicates that commercial investment in developing new clean technologies depends on more factors than just IPR, such as anticipated market demand, relative prices of alternative energy sources, regulatory demands, the costs of investment, and public research subsidies and tax inducements.[167] However, patents play a stronger role in international technology transfer. Foreign technology owners want to be sure that the technologies will be protected from unwanted leaks caused by unsanctioned imitation or movements of personnel.[168] Empirical studies have shown that the volume and technology content of licensing contracts from U.S.-based firms to partners with developing nations rises significantly when developing nations strengthen their patent rights.[169] Furthermore, strong patent reforms in developing nations have been demonstrated to bring more imports of capital goods and high-tech goods from developed nations.[170] Meanwhile, studies further suggest that the ability of IPR to support international technology transfer may depend on other factors such as the market and policy conditions in the receiving nations.[171] This explains why positive impacts of IPR on international technology transfer have been found only in emerging economies, but not in the MDCs and especially not in the LDCs. Technology owners tend not to transfer technologies to the LDCs, because the LDCs tend to have small domestic markets along with relative low capacity for local absorption of technologies, skilled labor, weak governance, and infrastructure.[172]
i. The Emerging Economies
Though IPR may have increased the cost for the emerging economies to access foreign clean technologies, that does not justify why IPR has been a major barrier for emerging economies to access foreign clean technologies. In contrast with the MDCs and the LDCs, the emerging economies have established more mature IPR systems. [173] Therefore, owners of clean technologies from developed nations may prefer to apply for patent protection for their clean technologies in the emerging economies than in the MDCs or the LDCs.[174] The cost of transferring such clean technologies from developed nations may include the cost of securing IPR on these technologies in the emerging economies. However, IPR that protects foreign clean technologies in the emerging economies should not pose an overwhelming threat to the emerging economies’ access to clean technologies. As discussed in Part II.A.1, the basic technical solutions of climate change have long expired from patent protection; rather, incremental improvements or individual features are being patented.[175] Second, a clean technology tends to have different alternatives and substitutes in the market; weakening a single patent holder’s control over the market.[176] Both facts imply that a singular IPR-protected clean technology may not have significant dominance in the relevant market. Meanwhile, the emerging economies benefit from IPR for clean technologies. First, given the emerging economies’ increasing commercial investments in clean technologies,[177] they need IPR for clean technologies to capture these investments and build up their own IP portfolios in the clean technologies. In addition, in order for the emerging economies to attract more inbound transfer of foreign clean technologies and to stimulate local innovations, they need to enhance their IPR systems rather than weaken them. International trade flows respond positively to increases in patent protections in the emerging economies, especially in industries that rely heavily on patent protection.[178]
ii. The LDCs
IPR should not be a major barrier for the LDCs to access foreign clean technologies. Few foreign clean technology owners have applied for patents in the LDCs.[179] Conversely, as the above review of data on global patenting of clean technologies shows, the LDCs administer few patents on clean technologies.[180] These consequences are likely multiplied by factors such as limited market sizes and potential profit returns that the LDCs offer to foreign firms, and/or their lack of confidence in the investment environment offered by the LDCs.[181] On the contrary, the LDCs’ lack of or limited IPR protection may be one of the reasons for the almost non-existent rate of inbound transfer of foreign clean technologies. Lack of or limited IPR protection in the LDCs enables users in the LDCs to imitate, reverse engineer, and use foreign clean technologies for free. Hence, foreign firms owning clean technologies may choose not to transfer the technologies to the LDCs voluntarily, fearing the loss of control over the technologies.[182]
iii. The Other Developing Nations — i.e., the Mid-tier Developing Nations
When an MDC is building up its economy to become more like an emerging economy, IPR will likely help the MDC attract owners of foreign clean technologies to apply for IPR protection of their technologies in the MDC. In such a situation, IPR may increase the price of the MDC’s access to the IPR-protected foreign clean technologies. On the other hand, IPR should not be part of the cost for an MDC’s access to foreign clean technologies, especially if the MDC remains at status quo or recedes to become more like an LDC. As data on the global patenting of clean technologies have shown, the MDCs along with the LDCs owned few clean technology patents.[183] Lack of or limited IPR protection in the MDCs may be one reason for this phenomena.

B. What Are the Potential Underlying Reasons for the Limited Transfer of Clean Technologies to Developing Nations?

While the existence of IPR has not been a major barrier to the international transfer of clean technologies to developing nations, this begs the question: what is? To find the answer, this article analyzes available evidential data such as data supplied by developing nations themselves on what constitutes major barriers to the inbound transfer of clean technologies. This article then supplements the analysis with a review of current scholarship regarding international technology transfer.
1. Evidential Data
Data from developing nations collected by the United Nations identify a number of barriers to the inbound transfer of foreign clean technologies. Though IPR was initially listed as a barrier, it has not been considered one since 2009. Data from different surveys on international transfer of clean technologies suggest that IPR helps a developing nation to attract foreign clean technologies. Such data also indicates that IPR is not the sole determinant; other conditions include a developing nation’s market size and its capacity to absorb and implement foreign clean technologies.
i. Developing Nations’ Own Assessments
As introduced earlier in Part I.C, one mechanism that the UNFCCC established via its international technology transfer framework is the Technology Needs Assessment “TNA” reports. These reports are for developing nations that are parties to the UNFCCC, to identify both their needs for specific clean technologies and the barriers these nations perceive to the inbound transfer of clean technologies.[184] Thus far, these nations have submitted three sets of TNA reports: the first in 2006 with 23 participating developing nation parties, the second in 2009 with 70 participating developing nation parties, and the third in 2013 with 31 participating developing nation parties.[185] The TNA reports by developing nations from 2006 to 2013 identify a number of barriers for inbound transfer of foreign clean technologies. Whereas IPR is listed as a barrier in the 2006 TNA reports, it is not in later reports. The TNA reports do not seem to support the claim that the existence of IPR has been a major barrier to the transfer of clean technologies to developing nations. The three sets of TNA reports identified very similar patterns on what constituted major barriers to the inbound transfer of clean technologies to developing nations. In all the three sets of TNA reports, developing nations highlighted economic and market barriers as one of the major barriers to the inbound transfer of clean technologies.[186] Specifically, 83%, 82%, and 90% of the reporting nations in the 2006, 2009, and 2013 TNA reports did so, respectively.[187] The figure below ranks the major barriers reported in 2006, according to the percentage of reporting nations who cited these major barriers in their 2006 TNA reports.[188]
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In these three sets of TNA reports, the reporting nations also identified what constituted economic and market barriers. The figure below shows such data from the 2006 TNA reports.[189] As shown, here, IPR issues were identified as one of the barriers, though by the fewest reporting nations.
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However, the 2009 and 2013 TNA reports made no mention of IPR issues. The 2009 report, for instance, as shown below, identified “underdeveloped economic infrastructure,” “lack of support from national banks, “low affordability by population,” and “high costs/limited state resources” as economic and market barriers, and did not include IPR on the list.[190]
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One possible reason for the disappearance of IPR issues from the TNA reports is that the reporting nations no longer considered IPR issues a barrier to the international transfer of clean technologies. Alternatively, the reporting nations may have merged IPR issues with another barrier, for instance the barriers relating to high costs or incompatible prices. Only high costs consistently appeared in all three sets of TNA reports. Developing nation parties of the UNFCCC have consistently cited high costs and/or lack of financial resources as an economic and market barrier to the inbound transfer of clean technologies and it has consistently ranked the highest in term of the number of reporting nations citing it as a barrier.[191] These reports, however, did not identify what caused the high investment cost or high cost for transfer for clean technologies. They also did not mention IPR an element of these high costs. Could IPR price be a necessary part of the cited high costs or high investment cost for inbound transfer of clean technologies for developing nations? The answer depends on a developing nation’s ability to attract technologies with IPR. If a developing nation is able to attract foreign firms to apply for and obtain IPR locally on the firms’ clean technologies, the high cost of technology transfer may include the price premium added by local IPR on the foreign clean technology. Otherwise, when foreign firms do not apply for IPR protection for their clean technologies in developing nation, the high cost of the transfer of clean technologies likely does not include IPR costs. The high costs facing the MDCs and the LDCs for inbound transfer of foreign clean technologies are not likely the result of IPR protection. The MDCs and the LDCs have few patents on clean technologies.[192] These nations may not have provided sophisticated IPR systems that foreign technology owners can rely on. Furthermore, foreign technology owners may choose not to transfer their technologies to these nations due to their limited market sizes and low potentials for financial profits.[193] On the other hand, IPR might have contributed to the high costs for inbound transfer of foreign clean technologies to emerging economies. As the analysis of the patent data in Part II.A shows, the emerging economies have held most of the clean technology patents in developing nations, and two-thirds of these patents were on foreign clean technologies. Because of the market size and potential profitability emerging economies can offer, foreign technology owners may be attracted to transfer their technologies to the emerging economies. Meanwhile, the emerging economies tend to have established IPR systems which allow the foreign technology owners to secure local IPR protection on their technologies.
ii. Other Evidential Data
Other evidential data[194] supplement the findings from the TNA reports, which suggest that IPR helps attract foreign clean technologies to developing nations. The data also indicates that IPR is not the sole determinant; other conditions that attract these technologies include adequate market size and the capacity to absorb and implement foreign clean technologies. The additional evidence correlates with developing nations’ TNA reports, which identified multiple domestic barriers such as economic and market, public policy, human capital, institutional, infrastructure, etc., for attracting inbound transfer of clean technologies. Surveys have found that IPR is good for the international transfer of clean technologies to developing nations. For example, a 2010 study examining factors driving international transfer of clean technologies “Study G” using patent data from sixty-six nations during 1990-2003 found that strong IPR has a positive impact on in-bound transfer of clean technologies.[195] Further, Study B (cited in Part I.C) found that the patent system can support and enhance technology transfer, because without patents to protect the foreign companies’ products and processes, the foreign companies may be reluctant to engage in technology transfer and associated investments.[196] However, studies also discovered that IPR is not the only factor in attracting foreign clean technologies to developing nations. For example, Study G finds that a nation’s capacity to absorb foreign clean technologies is determinative for local patent filing and thus the inbound transfer of foreign clean technologies.[197] For example, Study G found that patent filings on foreign technologies increase in nations that have active R&D in the same technology field,[198] and restrictions on international trade negatively affect international technology transfer.[199] Furthermore, Study B found that the main factors that impede international transfer of clean technologies include access to trade secrets, developing nations’ ability to provide suitable skilled staff, scientific infrastructure, and favorable market conditions.[200] These are collectively known as access to know-how from the foreign companies. Meanwhile, Study B enlisted necessary complementary factors such as infrastructure, effective government policies and regulations, knowledge institutions, and access to credit and venture capital, skilled human capital, and networks for research collaboration.[201] These factors correlate with the major barriers identified by developing nations in the TNA reports discussed above.
2. Assessment
The analysis below examines what impacts the transfer of clean technologies to developing nations via each of the three market-based venues i.e., international technology licensing, FDI, and international trade. The analysis leverages current scholarship on international technology transfer, finding that IPR protection, capacity to absorb and adopt foreign technologies, market size and policy certainty and transparency are likely conditions for a nation attracting inbound transfer of foreign technologies. Further, although IPR helps attract foreign technologies, strong IPR likely stifle the development of local industries for some developing nations — such as the LDCs — that are at the beginning stages of technology development and rely on learning via duplicative imitation.
i. International Technology Licensing
Technology licensing occurs when an owner of a proprietary technology consents to another party’s use of the technology in exchange for value.[202] International technology licensing is a particularly important source for the transfer of standalone technologies, e.g., technical information or know-how that is not embodied in equipment or hardware.[203]The main criteria for a nation to attract foreign technologies via international technology licensing include market size, policy certainty and transparency, capacity to absorb and implement foreign technologies, and sufficient IPR protection. For example, studies shows that nations with substantial engineering skills and R&D programs for adaptation and learning attract more international technology licensing than other nations.[204] IPR is another important factor for international technology transfer via technology licensing. When developing nations with the capacities to absorb and use foreign technologies strengthen their IPR protections, developed nations are more likely to license their technologies to these developing nations due to their low wage and production cost.[205] Study B, cited in Part I.B, also found that the state of IPR in the nation of the licensee was an important factor in a licensor’s decision to enter into a licensing agreement; and that licensing-intensive respondents viewed IPR as a more important factor than others in the nation of the licensee such as scientific infrastructure, human capital, favorable market conditions, and investment climates.[206]
ii. Foreign Direct Investment
Foreign direct investment “FDI” refers to when one nation’s commercial entity invests cross-border in another nation.[207] Such an investment can be the commercial entity establishing business operations, acquiring assets, or taking up stakes in businesses in the other nation.[208] The investment may involve the transfer of capital, management, technology, and organizational skills.[209] FDI likely contributes positively to international transfer of technologies to developing nations. Factors such as the market size, policy clarity and transparency, human capital, and availability of IPR protection of the recipient nation all would enhance inbound FDI. FDI by commercial entities, such as the MNCs, provides developing nations with more access to foreign technologies. Developing nations may also benefit from FDI’s spillover effects, i.e., the demonstrations of foreign technical and business operations, labor turnover by personnel movements, and interactions among businesses in the chain of moving a product or service to the end users.[210] Multiple factors affect a nation’s ability to receive FDI. Similar to international technology licensing, market size, policy clarity and transparency of the recipient nations affect FDI.[211] A study testing the effects of inbound FDI on growth in 69 developing nations found that inbound FDI contribute more to domestic growth than domestic investments do, but only when the recipient nation has a minimum threshold stock of human capital.[212] Multiple studies show a positive correlation between perceived strength of IPR protection in developing nations and the volume and quality of FDI they attract.[213] When developing nations failed to provide patent protection for foreign inventions, foreign firms resorted to use “less than best-practice technologies” in developing nation.[214]
iii. International Trade
International trade likely increases developing nations’ access to foreign technologies. IPR protection and the capacity to absorb and adapt foreign technologies will attract trade inflows. However, for LDCs or other developing nations that are still at the beginning stages of their domestic technology development, strong IPR will likely be restrictive for the development of local industries. International trade is the cross-border exchange of capital, goods, and services.[215] Similar to the spillover effects caused by FDI, openness in trade facilitates international technology transfer by allowing the recipient nations to access foreign technologies via exposure to new equipment, foreign business and technical operations. Besides being open to international trade, developing nations’ capacity for absorbing and adapting foreign technologies is important for foreign technologies to effect local technical change.[216] When a developing nation lacks such capacity, it may utilize open trade to learn of foreign practices and/or use FDI to acquire technology.[217] Meanwhile, IPR likely attracts the inflow of trade, at least for some developing nations. An empirical study of international trade flows from 1984, when there were still huge gaps in IPR systems among different nations, shows that stronger IPR significantly expands bilateral imports.[218] A more recent study on the impact of IPR on China’s import industries indicated that strong IPR stimulates imports, especially for knowledge-intensive products.[219] However, IPR’s positive effect on technology transfer via trade may not apply to all developing nations. Through open trade, developing nations can rise up the “duplicative imitation, creative imitation and inventing” ladder of technology development by imitating and reverse engineering advanced foreign technical and related business operations.[220] If a developing nation is in the duplicative imitation stage, in the absence of technology licensing, strong IPR would raise developing nation’s imitation costs, restrict technology diffusion, and reduce long-term incentives to innovate. Currently, many developing nations are at the duplicative imitation stage, hoping to absorb foreign technologies into labor-intensive export production and evolve into higher value-added stages such as creative imitation or inventing over time. In particular, the LDCs have barely stepped onto this ladder of technology learning.[221] Therefore, for these developing nations, differentiated IPR systems reflecting these developmental realities likely make more sense than the strong IPR systems used in developed nations. Such developing nations probably would also benefit from having access to mechanisms — e.g., international aid, subsidies or differential pricing schemes — that reduce the cost of importing IPR-protected goods or services.[222]

C. Summary

As discussed in Part I.B, addressing climate change is a pressing issue; in order to meet the 2°C goal, we need to reduce 60% of the anthropogenic GHG emissions by 2050, using 2000 as a base line.[223] Rapid development and deployment of clean technologies to meet this goal requires developed and developing nations to act independently and collaboratively. The stalemate between developing nations and developed nations regarding IPR’s role in improving international transfer of clean technologies must cease. As the analysis in Part II.A shows, the existence of IPR has not been a major roadblock for the transfer of clean technologies to developing nations.[224] Instead, lack of proper IPR protection for clean technologies may impede the international transfer of clean technologies. Commercial sectors in developed nations play a significant role in the development and transfer of clean technologies, and they are concerned about losing their control of the technologies to be transferred if developing nations do not offer proper IPR protections. Therefore, developing nations need to offer IPR in order to attract inbound transfer of clean technologies. However, developing nations should be allowed to customize their IPR protections to address the realities of their countries’ economic development. Strong IPR protections may not benefit all developing nations equally. For developing nations that currently rely on duplicative imitation of foreign practices for technology development, strong IPR protections will likely inhibit such practice and hence the growth of domestic industries. Meanwhile, IPR is just one of the conditions enabling developing nations to attract inbound transfer of clean technologies. According to the analysis in Part II.B, in order to attract inbound transfer of foreign clean technologies, a developing nation also needs to have certain capacity. Such capacity includes a good investment environment (such as market conditions, policy clarity and transparency) openness to trade for attracting international technology transfer, and domestic scientific infrastructure and human capital for absorbing and implementing foreign technologies into the local production process. Likely due to a lack of some of such capacity, most developing nations—especially the MDCs and the LDCs—have had difficulties attracting foreign clean technologies. Meanwhile, as the examination in Part I.C shows, emerging economies have been attracting most of the limited international transfer of clean technologies to developing nations. This is likely due to the fact that emerging economies have most of such capacity, e.g., market sizes and profitability, more established IPR systems and domestic ability to absorb and implement foreign clean technologies. The MDCs and the LDCs have yet to build up such capacity to attract inbound transfer of foreign clean technologies. Developed nations can help developing nations—especially the MDCs and the LDCs–build up such capacity. Because of climate change’s global impact and developed nations’ historical contributions to climate change, developed nations have the self-interest and moral duty to help developing nations address climate change, e.g., via international aid. Furthermore, the governments of developed nations can set up domestic initiatives and mechanisms to encourage their commercial sectors to transfer clean technologies to developing nations.

III. Proposal: Focus on Domestic Innovation, International Aid, and International Technology Collaboration

This article proposes that domestic innovation, international aid and international technology collaboration should be the focus, rather than international transfer of clean technologies, in order to effectively address climate change via clean technologies. The proposal aims to encourage the rapid and sustainable development and deployment of clean technologies, while addressing the factors that likely have induced the limited amount of transfer of clean technologies to developing nations during the past two decades. The proposed solution has three prongs. First, both developed nations and developing nations should stimulate domestic innovations on clean technologies by leveraging diverse tools for encouraging innovations. This includes developed nations optimizing their IPR systems to encourage advancements in clean technologies, along with developing nations building customized IPR systems reflecting their national realities. Second, developed nations and even the emerging economies should provide financial and technical aid to developing nations, especially the MDCs and the LDCs, to help them combat climate change and build the sustainable national capacity to attract, absorb and implement foreign clean technologies. Third, when applicable, developed nations and developing nations should construct collaboration platforms for clean technology developments that would benefit both parties.

A. Domestic Innovation

Both developed nations and developing nations should focus on encouraging domestic innovations in clean technologies by leveraging diverse means for cultivating innovation. Such means include optimizing existing IPR systems (e.g., in developed nations) or building up customized IPR systems that reflect the nation’s developmental realities (e.g., in developing nations). They may also include utilizing, where appropriate, open source movement, open innovation, prizes, patent pools and patent commons.
1. Developed Nations
Developed nations should focus on advancing the development of clean technologies, as discussed in Part I.B, to make the needed technical breakthroughs and provide clean technologies as attractive and affordable alternatives to the traditional high-carbon technologies. Developed nations have the resources and human capital to invest in advancing clean technology innovations, and are thus well suited to take leadership in driving them. To do so may require that developed nations optimize their existing IPR systems for rapid development and deployment of clean technologies. It also may require leveraging other tools for promoting innovations. Ideally, developed nations will optimize their existing IPR systems so as to encourage advanced development of clean technologies and facilitate outbound transfer of clean technologies to developing nations. Different proposals have been put forth regarding how to optimize the existing IPR systems to facilitate development of clean technologies.[225] Accelerated patent examination, reduction, waiver or cancellation of administration fees for patent applications on clean technologies, earlier publication of clean technology patent applications, priority for clean technology patents at the opposition and infringement stage, and better classification of the clean technologies are a few possible approaches for encouraging the patenting of clean technologies. Quite a few nations have implemented special IPR treatments for clean technologies. For example, patent offices in the U.K., the U.S., Japan, Australia, China, Korea, Israel, and Brazil have instituted fast-track examinations for clean technology patents applications.[226] Expediting the examination process for patent applications on clean technologies means less delays in granting protection to a patentable clean technology. Under the U.K. fast track program for patent applications of clean technologies,[227] the examination time is reduced from 2-3 years to 9 months – a 75% reduction of examination time.[228] Such reduced delay brings earlier awareness of and access to the patented technologies by the general public, including developing nations. Optimizing the IPR system is just one approach to advance development of clean technologies. Other means should be explored as well. For example, the open source movement for the software industry may work for fostering development in a specific clean technology field. Prizes for specific clean technology sectors may inspire the breakthrough innovations needed for these sectors. Patent pools and patent commons can also be formed to ease access to proprietary clean technologies.
2. Developing Nations
Developing nations should focus on building environments that foster domestic development of clean technologies while attracting inbound transfers of foreign clean technologies. Most importantly, for their own sustainable development, developing nations need to build up an environment fostering domestic development of clean technologies. This way, developing nations can build their own portfolios in clean technologies, empowering themselves for a low-carbon economy and to have better negotiation positions with entities from developed nations.[229] Similar to developed nations, developing nations need to leverage diverse tools for promoting domestic innovation of clean technologies. In addition, developing nation’s internal knowledge of the geographic regions, traditional technology and indigenous practice may also provide a holistic approach for addressing climate change when integrated with modern clean technologies. In order to increase inbound transfer of foreign clean technologies, developing nations need to build the national capacity identified in Part II.B for attracting, absorbing and implementing foreign technologies. Offering IPR protection is part of such national capacity. IPR may also encourage domestic innovation, when appropriately adapted to a nation’s developmental reality.
i. Building National IPR Systems That Reflect Developmental Realities
The reality of today’s global economy suggests the necessity of a domestic IPR system for a developing nation. Developed nations have had their dominant imprints on the operations of the global economy, including in integrating their IPR standards into the WTO TRIPS Agreement, with which all WTO member nations are required to comply. Further, as data on global investments in clean technologies discussed in Part II.A show, commercial sectors in developed nations far outpace governments insofar as investments in clean technologies. Such disparity means the governments of developed nations will likely have difficulties in requesting the commercial sectors to forego their preferences for strong IPR, as developing nations’ demand of weakened or no IPR on clean technologies would require. Hence, the use of IPR will most likely persist in global trade. Instead of resisting it, developing nations should utilize IPR for their long-term economic development and build domestic IPR systems that address and reflect national developmental realities. The global economy may offer developing nations additional leverage for technology development besides the traditional model of “duplicative imitation, creative imitation, and inventing.” Instead of relying mainly on imitating advanced foreign practices to jumpstart local technology development, integrating a developing nation’s local economy into the global economy and opening it up to global trade may speed up its technology development via the inflow of capital and modern business or technical practices. Such integration likely requires membership in the WTO.[230] The WTO, meanwhile, requires its member nations to comply with the TRIPS Agreement, which sets up minimum IPR requirements.[231] Joining the WTO and complying with the TRIPS Agreement probably would not prevent a developing nation from having a customized IPR system, which could reflect a developing nation’s own needs in technology development.[232] While the TRIPS Agreement establishes minimum requirements for IPR protection in a WTO member nation, it also offers flexibilities that can be leveraged at member nations’ discretions.[233] In particular, it recognizes the LDCs’ need to have “maximum flexibility” in implementing the requirements of the agreement.[234] The TRIPS Agreement provides individual WTO member nations policy space for regulating patentability of clean technologies or denying patent protection for certain technologies. For example, it does not define what constitutes an “invention” nor the criteria for patentability,[235] thus each national government can provide its own criteria regulating what inventions can be granted patent protection. The TRIPS Agreement also leaves room for each member nation to deny patent protection to technologies that are necessary to “protect ordre public or morality, including to protect human, animal or plant life or health or to avoid serious prejudice to the environment.”[236] Thus, when necessary, polluting technologies can be construed as posing serious harm to the environment, the health of human, animal or plant life and be denied patent protection, even when such technologies satisfy the patentability criteria. The TRIPS Agreement also provides a WTO member nation the means to regulate the use of a patented invention. For example, the TRIPS Agreement allows compulsory licensing.[237] However, this article recommends judicious use of compulsory licensing, as it does not bring in the know-how and trade secrets associated with the patented invention and may discourage domestic innovation, FDI, and inbound technology transfer. Further, the TRIPS Agreement provides competition measures wherein a national government can address IPR licensing practices or conditions that “may have adverse effects on trade and may impede the transfer and dissemination of technology.”[238] This means that for technologies locally protected by IPR, a WTO member nation can regulate abusive licensing practices or conditions related to such technologies, including foreign technologies. Therefore, developing nations may leverage domestic competition regulations to address anti-competition practices involving the transfer of foreign clean technologies. Furthermore, the security provision in the TRIPS Agreement enables a WTO member nation to identify threats to essential national security — e.g., famine, mass migration, and war — and to take proper actions.[239] As predicted by the IPCC, climate change has the potential to cause mass human migration, to threaten national security, and even to cause civil wars when access to key living resources such as water and food becomes an issue.[240] Developing nations may frame climate change as a threat to national security or energy security and take necessary actions to address it. Hence, even in light of the minimum IPR requirements of the TRIPS Agreement, a developing nation still has the flexibility to determine whether certain clean technologies have IPR protection, as well as whether to leverage compulsory license, competition and/or security measures to regulate the use of IPR-protected clean technologies. Meanwhile, in building a customized IPR system reflecting a developing nation’s own realities, the developing nation needs to balance stimulating domestic innovations and attracting inbound transfer of clean technologies. As indicated in Part II.B, strong IPR helps to attract foreign technologies, but unduly strong IPR may stifle a developing nation’s domestic technology development.[241]
ii. Building up National Capacity to Attract Inbound Transfer of Clean Technologies
While fostering domestic innovation in clean technologies, developing nations should also incorporate clean technologies already developed by the global community. To do so, as discussed in Part II.B, developing nations need to build up the national capacities necessary for attracting, absorbing and implementing foreign clean technologies. For example, developing nations can remove entry barriers to make technology transfer more attractive to foreign firms.[242] In practice, many nations seek to attract foreign investments through special economic zones, subsidies, tax holidays and other grants.[243] In addition, developing nations can also use subsidies or similar incentives to encourage domestic firms to adopt risky foreign clean technologies, and/or impose stricter environmental regulations to increase domestic demand for clean technologies. [244] Policy interventions, including implicit and explicit subsidies, paved the way for the miraculous economic development in South Korea and Taiwan.[245] Meanwhile, developing nations may further invest in local human capital. Human capital, such as well-trained technical staff and technology managers, are essential for local absorption and implementation of foreign clean technologies.[246]

B. International Aid

Developed nations have both an ethical imperative to and self-interest in finding ways to help developing nations combat climate change.[247] Historically, developed nations contributed largely to the climate change. As suggested by developing nations, developed nations should address such negative externality produced by their pursuit of economic development. At the same time, helping developing nations address climate change is in the interest of developed nations, as they will receive the global impact on environment by developing nations’ increasing energy consumption as a result of their economic developments. Meanwhile, developing nations — especially the LDCs and the MDCs — do need help in combatting climate change. In particular, LDCs that are most vulnerable to climate change require special assistance, since they experience the impact of climate change most acutely while contributing to climate change the least. Further, trade and investment flows to these nations are not as responsive to IPR protection as to the emerging economies.[248] Developing nations request support from developed nations to address climate change via financial aid, technology transfer and capacity building.[249] The proposal considers that developed nations are able to assist developing nations via capacity building, financial aid, and technology transfer. First, developed nations can contribute the most by helping the MDCs and the LDCs build up sustainable national capacities to attract, absorb and implement foreign clean technologies. Such assistance would benefit developed nations as well. It would enable developing nations to build low-carbon economies so as to reduce their future impact on the global climate and enhance their contributions to the global community. It would also expand the international markets that are suitable for the deployment of the clean technologies owned by developed nations’ commercial sectors. Second, developed nations should also pool resources together to help developing nations address climate change. Financial aid can be an important factor in helping developing nations to access, develop, and deploy clean technologies. The UNFCCC stipulates that developed nations must provide financial resources for developing nations to address climate change.[250] As the discussion of the TNA reports in Part II.B shows, the majority of developing nations perceive the high cost of foreign clean technologies as a barrier to accessing such clean technologies. This article therefore suggests that at a minimum, a global fund such as the Green Climate Fund “GCF” should be maintained and expanded to facilitate international transfer of clean technologies. Such a fund can be used to pay for the high costs encountered by developing nations in importing foreign clean technologies.[251] Developed nations can supply the balance of the fund to fulfill their obligations detailed in the UNFCCC and other international treaties. Other venues for funding can come from carbon tax or auction incomes in the carbon-trade systems.[252] On the financial aid front, there has been positive progress recently. The GCF reached its 10 billion USD threshold during the Lima climate change conference held in December 2014.[253] This is an encouraging step toward the ultimate goal of developed nations providing financial aid in the amount of 100 billion USD per year by 2020.[254] Thus far, both developed nations and emerging economies have contributed to the fund.[255] In 2014, the U.S. pledged 2.3 billion USD, Germany and France each pledged 1 billion USD, and China pledged 500 million USD.[256] During the latest climate change conference, which occurred in Paris in December 2015, the commitment of 100 billion USD per year by 2020 is reaffirmed, with an aspiration to go beyond this commitment by 2025.[257] The third approach for developed nations to assist developing nations involves technology transfer. Under the stipulations of international treaties such as the WTO TRIPS Agreement and the UNFCCC, developed nations have committed to facilitate technology transfer to developing nations, especially the LDCs.[258] The governments of developed nations can do so by, e.g., implementing domestic initiatives for encouraging transfer of clean technologies.[259] More specifically, the governments of developed nations can award preferential tax treatment for R&D performed in developing nations by firms from developed nations,[260] or for the firms’ transfer of clean technologies to developing nations, or making these technologies publically available.[261]

C. International Technology Collaboration

The UNFCCC requires all participating parties to “promote and cooperate in the development, application and diffusion, including transfer, of technologies” relevant to GHG emissions.[262] While international aid may focus primarily on the MDCs and the LDCs, international technology collaboration will likely occur between a developed nation and an emerging economy. The reason is that the emerging economies likely have the necessary IPR systems and national capacities to support mutually-benefiting joint development or deployment of clean technologies. As described in Part I.C, the 2010 Cancun global climate change conference established the Technology Mechanism to enhance action on clean technology development and deployment in developing nations.[263] This mechanism is expected to be a good platform for bringing developed nations and developing nations together to accelerate development and deployment of clean technologies.[264] For example, a developing nation may identify its needs for certain clean technology development. Technology Mechanism may help identify a developed nation that is interested in working with the developing nation to co-develop the clean technology needed or adapt and deploy the clean technology if the developed nation has already developed it. Meanwhile, bilateral collaborations on developing clean technologies have started among some nations and should be expanded to a larger scale. For example, the U.S. Department of Energy has established bilateral collaborations with China and India to develop clean energy technologies.[265] It is predicted that such collaboration between developed nations and the emerging economies can be a “win-win solution.”[266] Additional international collaboration for the development and deployment of clean technologies can occur at the global community level. Some examples might include the formation of global patent pools, a global clean technology information repository, or a global patent clearing house.

IV. Appraisal: Advantage and Concerns Regarding the Proposal

As discussed throughout this Article, in spite of the emphasis by international instruments such as the UNFCCC and the TRIPS agreement, international transfer of clean technologies to developing nations has been limited in the past two decades. This article proposes that we focus on domestic innovation, international aid and international technology collaboration instead, so to facilitate the much needed rapid development and global deployment (including international transfer) of clean technologies. The proposal offers several advantages and may raise addressable concerns as well.

A. Advantages

The proposal de-emphasizes the focus on international transfer of clean technologies to developing nations, which has not been effective in the past two decades or more. Instead, the proposal addresses the possible reasons for the failure, and re-focuses attention on the critical need for a global collective effort in sustainable development and deployment of clean technologies. The proposal is based on four major insights gained from empirical analysis of evidential data on clean technologies and international transfer of clean technologies. First, rapid development and wide deployment of clean technologies is critical for addressing climate change. Second, IPR has not been a major barrier, but is a necessary element for attracting foreign clean technologies to developing nations. Third, to increase inbound transfer of clean technologies, developing nations need to have national capacities for attracting, absorbing, and implementing foreign clean technologies. Fourth, developed nations have the obligation and self-interest to aid and/or collaborate with developing nations in addressing climate change. The proposal is constructed to address the more plausible reasons that the current transfer of clean technologies to developing nations is limited. It addresses developing nations’ lack of pulling power on inbound transfer of foreign clean technologies by suggesting that developing nations build up sustainable national capacities for attracting, absorbing, and implementing foreign clean technologies. The proposal also asks that developed nations facilitate better international transfer of clean technologies by helping developing nations build up such national capacities, and by installing domestic initiatives to encourage outbound transfer of clean technologies to developing nations. The approach also explores the potential of expanding international technology collaborations that benefit both a developing nation and a developed nation. Considering the importance of rapid development of clean technologies on a global scale, the proposal further suggests all nations focus on domestic innovation of clean technologies. Realizing the significant weight commercial sectors carry in the development and deployment of clean technologies, the proposal suggests that IPR remain as one of the incentivizing tools to stimulate domestic innovation in clean technologies in each nation and to attract inbound transfer of clean technologies.

B. Concerns

One concern for the proposal is that some developing nations, such as the LDCs, lack resources such as capital and IPR assets, and therefore that they may lack the bargaining powers for meaningful technology collaboration with developed nations. The proposal addresses this concern by suggesting that developed nations provide international aid particularly to such developing nations to assist them in combatting climate change and in building up their sustainable national capacities for attracting foreign clean technologies. Developed nations have the obligation and the self-interest to provide such aid.[267] The more advanced developing nations, i.e., the emerging economies, may join developed nations in providing such aid. As the proposal suggests, international technology collaborations will likely occur between developed nations and developing nations that can offer certain resources such as established IPR systems, or human/financial capital.[268] A second concern is that some developing nations may not want to employ clean technologies, since traditional technologies may have already been in place and are cheaper to use. These nations may prefer to pursue economic development regardless of its environmental costs, since developed nations did not pay attention to environmental issues in the early stages of their own economic development. This article recognizes this concern but doubts that such developing nations will persist in this inclination. Currently, it seems like all nations are engaged in the recent global climate change conferences. For example, all 196 nations attended the Lima and the Paris climate change conferences, which occurred in December 2014 and December 2015 respectively. This attendance rate indicates that all nations are engaged with the climate change issues and are interested in addressing it together as a global community. Such an interest, coupled with persuasion, pressure, and aid from the international community would gradually push a disinclined nation toward pursuing economic development regardless of its environmental costs. A third concern is that international financial aid and government subsidies that aim to encourage the development and deployment of clean technologies may be used as a means to sustain the high costs of accessing clean technologies, therefore distorting the operations of the market economy. This article agrees with this concern. Yet, as of now, under the operation of the free market mechanism, the MDCs and the LDCs essentially are not receiving the needed clean technologies,[269] which is a market failure. When there is a market failure, intervention is necessary. Interventions such as international aid and government subsidies may help the MDCs and the LDCs to develop or gain access to the needed clean technologies. Another possible intervention is to weaken or remove IPR protection for clean technologies in general, as proposed by developing nations, but such an intervention seems unrealistic. First, the commercial sectors, whether in developing or developed nations, won’t respond well to such an intervention. As discussed in Part II.A, IPR is an important tool for incentivizing commercial investments in clean technologies. Second, also shown in Part II.A, in developed nations, commercial investments in clean technologies far overweigh government investments, which means governments in developed nations won’t be able to heavily influence their commercial sectors’ preferences on IPR, i.e., the preference for strong IPR for clean technologies.

Conclusion

The focus on the international transfer of clean technologies to developing nations in order to address climate change has not worked well during the past two decades. This article analyzes evidential data on clean technologies and their transfer and finds that the existence of IPR has not been a major barrier to such transfer, as suggested by developing nations during the debates with developed nations on how to improve the situation. This article also studies possible reasons for the currently limited transfer of clean technologies to developing nations and concludes that developing and developing nations need to work together to improve the situation. Specifically, developing nations need to improve their national capacities in attracting, absorbing, and implementing foreign clean technologies, and developed nations have the moral duty and self-interest to provide concrete and effective assistance to developing nations in building such capacities and in helping developing nations address climate change. By understanding and addressing these possible reasons, this article proposes that we focus on domestic innovation of clean technologies, international aid and collaboration, instead of international transfer of clean technologies. This approach makes possible and sustainable the needed rapid development and deployment — including international transfer — of clean technologies, which is essential for us to successfully address climate change.
* Intellectual Property Fellow, IIT Chicago-Kent College of Law. The author thanks the colleagues who contributed to this article, including participants in various conferences where the work was presented and the anonymous subject experts for Edward Elgar Publishing, which will publish the author?s book on this topic in 2017. In particular, the author thanks Richard Wilder, a former colleague, who started the author on the research, Nives Dolšak and Toshiko Takenaka at University of Washington, Edward Lee, Felice Batlan, Sungjoon Cho, David Schwaltz, Chris Buccafusco, Martin Malin, and the other faculty at IIT Chicago-Kent College of Law, for their input to the work at its different stages, Josiah Harrist for proofreading the article, and the editors at the NYU Journal of Intellectual Property & Entertainment Law for their great editorial input.
[1] Barack Obama, Speech to the Copenhagen Summit, (Dec. 18, 2009), in Guardian, http://www.theguardian.com/environment/2009/dec/18/obama-speech-copenhagen-climate-summit. There may still be skeptics of climate change, of its causes, or of the optimal timing for addressing climate change. For the purpose of discussion, this article adopts the international consensus, manifested at the United Nations, which presumes that climate change is unequivocal and that the time to address climate change is now, rather than in the future.
[2] Copenhagen Climate Change Conference – December 2009, U.N. Framework Convention on Climate Change, http://unfccc.int/meetings/copenhagen_dec_2009/ meeting/6295.php (last visited July 15, 2015).
[3] Tove Iren S. Gerhardsen, Technology Transfer Will Be Part of Copenhagen Climate Deal, Intell. Prop. Watch (Sept. 16, 2009), http://www.ip-watch.org/2009/09/16/technology-transfer-will-be-part-of-copenhagen-climate-deal/.
[4] See id.
[5] United Nations Framework Convention on Climate Change, Bangkok, Thai. / Barcelona, Spain, Sept. 28-Oct. 9, 2009 / Nov. 2-6, 2009, Report of the Ad Hoc Working Group on Long-Term Cooperative Action Under the Convention on its Seventh Session, at 156, U.N. Doc. FCCC/AWGLCA/2009/14 (Nov. 20, 2009).
[6] Hira Jhamtani, US Proposal to Remove IPRs from the Table Arouses Developing Countries’ Objections, TEBTEBBA (Aug. 11, 2009), http://www.tebtebba.org/index.php/content/137-technology-us-proposal-to-remove-IPR-from-the-table-arouses-developing-countries-objections.
[7] Copenhagen Climate Change Conference – December 2009, supra note 2.
[8] Gerhardsen, supra note 3.
[9] See United Nations Framework on Climate Change, Conference of the Parties, Twentieth Session, Lima, Peru, Dec. 1-14, 2014, Lima Call for Climate Action, U.N. Doc. FCCC/CP/2014/10/Add.1 (Feb. 2, 2015).
[10] United Nations Framework Convention on Climate Change, Twenty-First Session, Paris, Fr., Nov. 30-Dec. 11, 2015, Adoption of the Paris Agreement, U.N. Doc. FCCC/CP/2015/L.9 (Dec. 12, 2015).
[11] Developed nations are nations which rank highly in the United Nations developed indicators such as GDP, industrialization, life expectancy, and education level. The U.S., Canada, Europe, and Japan are typical examples. International groups, like the WTO, do not have an official definition. See, e.g., Who Are Developing Countries in the WTO?, World Trade Org., https://www.wto.org/english/tratop_e/devel_e/d1who_e.htm (last visited July 2, 2015).
[12] Developing nations are countries other than developed nations. Id. This article groups developing nations into three categories: the emerging economies, the least developed countries “LDC”s), and the rest of developing nations, which this article will call mid-tier developing countries “MDC”s). See Emerging Markets, Wikipedia, https://en.wikipedia.org/wiki/Emerging_markets (last visited Oct. 23, 2015); List of Least Developed Countries, United Nations (Dec. 4, 2013), http://www.un.org/en/development/desa/policy/cdp/ldc/ldc_list.pdf.
[13] E.g., Climate Change and the WTO Intellectual Property (TRIPS) Agreement, World Trade Org., https://www.wto.org/english/tratop_e/trips_e/cchange_e.htm (last visited Aug. 20, 2015); Climate Change and IP, World Intell. Prop. Org., http://www.wipo.int/policy/en/climate_change/ (last visited July 23, 2015).
[14] For the purpose of this Article, deployment of clean technologies includes both the implementation and distribution of clean technologies, as well as cross-border transfer of technologies.
[15] Emerging economies are developing nations that have experienced rapid economic growth. These countries have the potential to continue this growth, but also pose substantial political, financial, or social risk. As of 2015, typical nations that are considered emerging economies include Brazil, Russia, India, China, Mexico, Indonesia, Turkey, Saudi Arabia, Iran. Similar terms used include emerging markets and emerging market economies. See, e.g., Definition of Emerging Markets, Fin. Times, http://lexicon.ft.com/Term?term=emerging-markets (last visited Oct. 23, 2015); Emerging Economies, BusinessDictionary.com, http://www.businessdictionary.com/definition/emerging-economies.html (last visited Oct. 23, 2015); Definition of Emerging Market, Fin. Times, http://lexicon.ft.com/Term?term=emerging-markets (last visited Oct. 23, 2015); Emerging Markets, Wikipedia, https://en.wikipedia.org/wiki/Emerging_markets (last visited Oct. 23, 2015).
[16] Climate Change, Oxford Dictionaries, http://www.oxforddictionaries.com/us/definition/american_english/climate-change (last visited July 2, 2015).
[17] Organization, Intergovernmental Panel on Climate Change, http://www.ipcc.ch/organization/organization.shtml (last visited July 30, 2015) [hereinafter IPCC Organization].
[18] Lisa V. Alexander et al., IPCC 2013: Summary for Policymakers, in Climate Change 2013: The Physical Science Basis. Contribution of Working Group I to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change 5 (Stocker et al. eds., 2013), http://www.ipcc.ch/pdf/assessment-report/ar5/wg1/WG1AR5_SPM_FINAL.pdf [hereinafter IPCC Fifth Synthesis Report].
[19] Id., at 11.
[20] Christopher B. Field et al., IPCC, 2014: Summary for Policymakers in Climate Change 2014: Impacts, Adaptations, and Vulnerability. Part A: Global and Sectoral Aspects. Contribution of Working Group II to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change 4 (Christopher B. Field et al. eds., 2014), http://www.ipcc.ch/pdf/assessment-report/ar5/wg2/ar5_wgII_spm_en.pdf.
[21] Id. at 4-7.
[22] Hilary Whiteman, Report: Climate Change Crisis ‘Catastrophic,’ CNN (May 29, 2009, 1:17 PM), http://www.cnn.com/2009/WORLD/europe/05/29/annan.climate.change.human/index.html?eref=rss_world.
[23] The goal of UNFCCC is to stabilize “greenhouse gas concentration in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.” UNFCCC has become the main framework under which global negotiations on addressing climate change occur. See Background on the UNFCCC: The International Response to Climate Change, U.N. Framework Convention on Climate Change, http://unfccc.int/essential_background/items/6031.php (last visited July 2, 2015).
[24] United Nations Framework Convention on Climate Change, art 1.2, May 9, 1992, S. Treaty Doc No. 102-38, 1771 U.N.T.S. 107 [hereinafter UNFCCC Treaty].
[25] IPCC Fifth Synthesis Report, supra note 18, at 17.
[26] Intergovernmental Panel on Climate Change, Climate Change 2007: Synthesis Report 5 (2007), http://www.ipcc.ch/pdf/assessment-report/ar4/syr/ar4_syr_spm.pdf [hereinafter IPCC Fourth Synthesis Report].
[27] Id. Others have cited higher numbers. For example, WIPO Director Francis Curry stated that developed countries were responsible for 77% total GHG emissions in the past. See Francis Gurry, Dir. Gen., World Intell. Prop. Org., WIPO’s Role in Green Technology, Presentation at Conference on IP and Public Policy Issues (July 13-14, 2009), http://www.wipo.int/export/sites/www/meetings/en/2009/ip_gc_ge/presentations/gurry.pdf.
[28] Similar terms include climate friendly technology, environmentally sound technology, green technology, low-carbon technology, etc.
[29] Ahmed Abdel Latif et al., Overcoming the Impasse on Intellectual Property and Climate Change at the UNFCCC: A Way Forward, Int’l Ctr. Trade & Sustainable Dev. Policy Brief No.11, 1 (Nov. 11, 2011), http://www.ictsd.org/sites/default/files/research/2012/03/overcoming-the-impasse-on-intellectual-property-and-climate-change-at-the-unfccc-a-way-forward.pdf (“the rapid development and diffusion of these technologies is a key component of the global response to climate change”); Catherine Saez, Human Survival Depends on Shared Technology, Says New UN Climate Chief, Intell. Prop. Watch (Mar. 9, 2010), http://www.ip-watch.org/2010/09/03/human-survival-depends-on-technology-says-new-un-climate-chief/ (“survival depends on our improvement of technology”).
[30] See Background on the UNFCCC, supra note 23
[31] E.g., U.N. Secretary-General, Promotion of New and Renewable Sources of Energy, U.N. Doc. A/66/100 (Aug. 15, 2011); Protection of Global Climate for Present and Future Generations of Mankind, G.A. Res. 43/53, U.N. Doc. A/RES/43/53 (Dec. 6, 1988).
[32] Glossary of Climate Change Acronyms, U.N. Framework Convention on Climate Change, http://unfccc.int/essential_background/glossary/items/3666.php (last visited July 24, 2015).
[33] IPCCC Fourth Synthesis Report, supra note 26 ; see also Michael E. Mann, Earth Will Cross the Climate Danger Threshold by 2036, Scientific American (Mar. 18, 2014), http://www.scientificamerican.com/article/earth-will-cross-the-climate-danger-threshold-by-2036/; Jeff Tollefson, Global-Warming Limit of 2°C Hangs in the Balance, Nature (Mar. 27, 2015), http://www.nature.com/news/global-warming-limit-of-2-c-hangs-in-the-balance-1.17202; William D. Nordhaus, Strategies for the Control of Carbon Dioxide, 39-40 (Cowles Found. for Research in Econ., Discussion Paper No. 443, 1977), http://cowles.yale.edu/sites/default/files/files/pub/d04/d0443.pdf. Some scientists have argued that the current 1°C rise has had effects similar to the predicted effects of the 2°C rise, and that a 4°C rise is likely by 2050-2070. Kevin Anderson, Climate Change: Going Beyond Dangerous… Brutal Numbers & Tenuous Hope or Cognitive Dissonance? SlideShare (July 5, 2011), http://www.slideshare.net/DFID/professor-kevin-anderson-climate-change-going-beyond-dangerous.
[34] United Nations Framework Convention on Climate Change, Conference of the Parties, Fifteenth Session, Copenhagen, Den., Dec. 7-18, 2009, Copenhagen Accord, U.N. Doc. FCCC/CP/2009/L.7 (Dec. 18, 2009); see also The Cancun Agreements, U.N. Framework Convention on Climate Change, http://cancun.unfccc.int/ (last visited July 23, 2015).
[35] Hans Joachim Schellnhuber et al., Technological Options, in Avoiding Dangerous Climate Change 333, 335 (Hans Joachim Schellnhuber et al. eds., 2006).
[36] Frank Ackerman, et al., Technological and Economic Potential of Greenhouse Gas Emissions Reduction, in Climate Change 2001: Mitigation: Contribution of Working Group III to the Third Assessment Report of the Intergovernmental Panel on Climate Change (2001), http://www.ipcc.ch/ipccreports/tar/wg3/index.php?idp=90.
[37] Overview of Greenhouse Gases, U.S. Envtl. Prot. Agency, http://www3.epa.gov/climatechange/ghgemissions/gases.html (last visited Aug. 1, 2015).
[38] Climate Change Secretariat [U.N. Framework Convention on Climate Change], Technologies for Adaptation to Climate Change 9 (2006), http://unfccc.int/resource/docs/publications/tech_for_adaptation_06.pdf.
[39] Diana Propper de Callejon et al., Clean Technology: A Compelling Investment Opportunity, Lifestyles of Health and Sustainability, http://www.lohas.com/clean-technology (last visited Aug. 1, 2015).
[40] U.N. Framework Convention on Climate Change, Fact Sheet: Why Technology Is so Important 2 (2009), https://unfccc.int/files/press/backgrounders/application/pdf/fact_sheet_on_technology.pdf.
[41] ‘Clean Coal’ Technologies, Carbon Capture & Sequestration, World Nuclear Ass’n (Aug. 2015), http://www.world-nuclear.org/info/Energy-and-Environment/-Clean-Coal–Technologies/.
[42] See Energy Technology Perspectives 2014: Harnessing Electricity’s Potential, Int’l Energy Agency 5 (May 12, 2014), http://www.iea.org/media/140512_ETP_slides.pdf.
[43] Id., at 8.
[44] Fact Sheet, supra note 40.
[45] Parsons Brinckerhoff, Power the Nation Update Report 2010 (2010), http://www.pbworld.com/pdfs/regional/uk_europe/pb_ptn_update2010.pdf.
[46] World Bank, World Development Report 2010: Development and Climate Change 218 (2010), https://openknowledge.worldbank.org/handle/10986/4387.
[47] Int’l Energy Agency, Tracking Clean Energy Progress 2015 10 (2015), http://www.iea.org/publications/freepublications/publication/Tracking_Clean_Energy_Progress_2015.pdf.
[48] Sustainable Energy For all, Progress Towards Sustainable Energy – Global Tracking Framework 2015 Key Findings 5 (2015), http://www.se4all.org/wp-content/uploads/2013/09/GTF_2015-Key_Findings.pdf.
[49] IPCC Fourth Assessment Report: Climate Change 2007 – Emission Trajectories for Stabilisation, Intergovernmental Panel on Climate Change, https://www.ipcc.ch/publications_and_data/ar4/syr/en/mains5-4.html (last visited Aug. 20, 2015).
[50] Bernice Lee et al., Who Owns Our Low Carbon Future? Intellectual Property and Energy Technologies vii (Chatham House 2009), https://www.chathamhouse.org/sites/files/chathamhouse/public/Research/Energy, Environment and Development/r0909_lowcarbonfuture.pdf.
[51] World Bank, World Development Report 2010, supra note 46, at 220.
[52] Mediterranean Solar Plan Links North Africa to Europe, The Africa-EU Partnership, http://www.africa-eu-partnership.org/en/success-stories/mediterranean-solar-plan-links-north-africa-europe (last visited Dec. 12, 2015).
[53] This emphasis on the transfer of clean technologies from developed nations to developing nations seems to assume that these clean technologies are useful to developing nations, as well as easily transferred and adopted. Such assumptions are yet to be verified.
[54] Total Energy Consumption, EnerData, https://yearbook.enerdata.net/ (last visited July 20, 2015).
[55] Johannes Friedrich & Thomas Damassa, The History of Carbon Dioxide Emissions, World Res. Inst. (May 21, 2014), http://www.wri.org/blog/2014/05/history-carbon-dioxide-emissions.
[56] Wanna Tanunchaiwatana, Manager, Technology, UNFCCC Secretariat, Role of Patents in Green Technology Transfer in the Context of Climate Change, WIPO Conference on Intellectual Property and Public Policy Issues (July 13, 2009) (on file with the author.)
[57] Developing Countries’ Carbon Emissions Will Vastly Outpace Developed Nations, U.S. EIA Says, Huffington Post (July 25, 2013, 7:25 PM), http://www.huffingtonpost.com/2013/07/25/carbon-emissions-developing-countries_n_3651513.html.
[58] Id.
[59] The ownerships of IPR-protected clean technologies are identifiable because of the registration data in national IPR offices. Data on clean technologies not protected by IPR needs to be gathered and made available for the public to access.
[60] Copenhagen Economics & The IPR Company, Is IPR a Barrier to the Transfer of Climate Change Technology? 18 (2009), http://trade.ec.europa.eu/doclib/docs/2009/february/tradoc_142371.pdf [hereinafter Study F].
[62] UNFCCC Treaty, supra note 24, at art. 4.5; see also id. at art. 4.1, 4.3, and 4.7.
[63] Agreement on of Aspects of Intellectual Property Rights, art. 66.2, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, 1869 U.N.T.S. 183, 33 I.L.M. 1197 [hereinafter TRIPS Agreement].
[64] Id.
[65] Technology Transfer Framework, U.N. Framework Convention on Climate Change, http://unfccc.int/ttclear/templates/render_cms_page?TTF_home (last visited Aug. 1, 2015).
[66] Id.
[67] Kyoto Protocol, U.N. Framework Convention on Climate Change, http://unfccc.int/kyoto_protocol/items/2830.php (last visited July 24, 2015).
[68] Kyoto Protocol to the United Nations Framework Convention on Climate Change, art. 5-6, Dec. 10, 1997, U.N. Doc. FCCC/CP/1997/7/Add.1, 37 I.L.M. 22 (1998) [hereinafter Kyoto Protocol].
[69] The Technology Mechanism of the Convention, U.N. Framework Convention on Climate Change, http://unfccc.int/ttclear/templates/render_cms_page?TEM_home (last visited on July 15, 2015).
[70] United Nations Framework Convention on Climate Change, Copenhagen, Denmark, Dec. 7-15, 2009, Report of the Ad Hoc Working Group on Long-Term Cooperative Action Under the Convention on its Eighth Session, at 24-27, U.N. Doc. FCCC/AWGLCA/2009/17 (Feb. 5, 2010).
[71] Intergovernmental Panel on Climate Change, Methodological and Technological Issues in Technology Transfer 3 (Bert Metz et al. eds, 2000).
[72] Id.
[73] Kyoto Protocol, supra note 70 .
[74] Keith Maskus, Private Rights and Public Problems: The Global Economics of Intellectual Property in the 21st Century 66-69 (2012); see also Bernard M. Hoekman et al., Transfer of Technology to Developing Countries: Unilateral and Multilateral Policy Option, 33(10) World Dev. 1587, 1588-1590 (2005) (channels of technology transfer include trade in goods, FDI and licensing, labor turnover and movement of people); Bronwyn H. Hall & Christian Helmers, The Role of Patent Protection in (Clean/Green) Technology Transfer (Nat’l Bureau Econ. Research, Working Paper No. 16323, 2010), http://www.nber.org/papers/w16323.pdf; Matthew Littleton, The TRIPS Agreement and Transfer of Climate-Change-Related Technologies to Developing Countries 2 (United Nations Dep’t Econ. & Soc. Affairs, Working Paper No. 71, 2008), U.N. Doc. ST/ESA/2008/DWP/7, http://www.un.org/esa/desa/papers/2008/wp71_2008.pdf (Technology transfer includes intra-firm, inter-firm, FDI, and unsanctioned technology transfer through imitation).
[75] See generally, Maskus, Private Rights and Public Problems, supra note 74; Hoekman et al., supra note 74.
[76] Commercial investments made up at least 70% of total global investments in clean energy technologies. See General Electric, Innovation, Protection and Transfer of Green Technologies, World Intell. Prop. Org. 3, (July 13, 2011), http://www.wipo.int/edocs/mdocs/mdocs/en/wipo_inn_ge_11/wipo_inn_ge_11_ref_t.pdf.
[77] Int’l Ctr. for Trade & Sustainable Dev., Climate Change, Technology Transfer and Intellectual Property Rights 2 (2008), https://www.iisd.org/pdf/2008/cph_trade_climate_tech_transfer_ipr.pdf.
[78] Most of the surveys are based on patent data on clean technologies. Evidential studies on unpatented clean technologies are difficult to accomplish and find.
[79] Antoine Dechezleprêtre et al., Invention and Transfer of Climate Change-Mitigation Technologies: A Global Analysis, 5(1) Rev. Envtl Econ. & Pol’y 109, 109-10 (2011), http://reep.oxfordjournals.org/content/5/1/109.full.pdf+html [hereinafter Study A].
[80] Id. (These technologies include six renewable energy technologies (wind, solar, geothermal, ocean energy, biomass, and hydropower), waste-to-energy, methane destruction, energy conservation in buildings, climate-friendly cement, motor vehicle fuel injection, and energy-efficient lighting. They involve very diverse sectors such as electricity and heat production, the manufacturing industry, and the residential sector.)
[81] Id. at 122.
[82] Id.
[83] Id.
[84] U.N. Envtl. Programme, Eur. Patent Office & Int’l Ctr. for Trade & Sustainable Dev., Patent and Clean Energy: Bridging the Gap Between Policy and Evidence, Final REPORT 9 (2010), http://documents.epo.org/projects/babylon/eponet.nsf/0/cc5da4b168363477c12577ad00547289/$FILE/patents_clean_energy_study_en.pdf [hereinafter Study B].
[85] Clean energy technologies are technologies that reduce energy consumption and/or enable the transition to a renewable-based energy economy. See, Categories, MIT Clean Energy Prize, http://cep.mit.edu/structure/categories (last visited Dec. 10, 2015).
[86] Study B, supra note 84, at 58.
[87] Id.
[88] Id. at 60.
[89] Id. at 58.
[90] Id. at 23.
[91] Id.
[92] U.N. Dep’t of Econ & Soc. Affairs, World Economic and Social Survey 2009: Promoting Development, Saving the Planet, at 138, U.N. Doc. ST/ESA/319, U.N. Sales No. E.09.II.C.1 (2009) [hereinafter Study C].
[93] Id.
[94] Id. (citing Antoine Dechezleprêtre et al., The Clean Development Mechanism and the International Diffusion of Technologies: An Empirical Study. 36(4) Energy Policy 1273 (2008)).
[95] Id.
[96] Id.
[97] Methodological and Technological Issues in Technology Transfer, supra note 71.
[98] Keith Maskus, Encouraging International Technology Transfer, Int’l Ctr. Trade & Sustainable Dev. Issue Paper No. 7 (2004), http://www.iprsonline.org/resources/docs/Maskus%20-%20Encouraging%20International%20ToT-%20Blue%207.pdf.
[99] The Energy & Resources Inst., Emerging Asia Contribution on Issues of Technology for Copenhagen 30 (2009), http://www.indiaenvironmentportal.org.in/files/Paper_AEI.pdf.
[100] Matthew Rimmer, Intellectual Property and Climate Change — Inventing Clean Technologies 48 (2011) (hereinafter Rimmer, Inventing Clean Technologies).
[101] Open Letter, President Evo Morales Ayma, Save the Planet from Capitalism (Nov. 28, 2008), http://links.org.au/node/769.
[102] Work of the TRIPS Council, World Trade Org., https://www.wto.org/english/tratop_e/trips_e/intel6_e.htm (last visited on July 25, 2015) (“the Council for TRIPS is the body, open to all members of the WTO, that is responsible for administering the TRIPS Agreement”).
[103] World Trade Org., Contribution of Intellectual Property to Facilitating the Transfer of Environmentally Rational Technology — Communication from Equator (2013), https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009-DP.aspx?language=E&CatalogueIdList=115118&CurrentCatalogueIdIndex=0&FullTextSearch= (hereinafter “Ecuador 2013 Proposal”).
[104] Id.
[105] Id.
[106] World Trade Org., Extract from Minutes of Meeting Held on Oct. 10-11, 2013 of the Council for Trade-related Aspects of Intellectual Property Rights 28 (2013), https://www.wto.org/english/tratop_e/trips_e/october2013_on_climate_e.pdf.
[107] World Trade Org., Extract from Minutes of Meeting Held on June 11-12, 2013 of the Council for Trade-related Aspects of Intellectual Property Rights 32 (2013), https://www.wto.org/english/tratop_e/trips_e/june2013_on_climate_e.pdf [hereinafter TRIPS Meeting Minutes June 11-12, 2013]; see also Matthew Rimmer, WTO Debate on IP, Climate Change, and Development in the TRIPS Council, Storify, https://storify.com/DrRimmer/wto-debate-on-ip-climate-change-and-development-in (last visited July 25, 2015).
[108] TRIPS Meeting Minutes June 11-12, 2013, supra note 107.
[109] General Electric, Innovation, Protection and Transfer of Green Technologies, supra note 76 .
[110] Alliance for Clean Technology Innovation, et al., IPR-Related Demands in UN Climate Change Negotiations, U.S. Council for Int’l Bus. (Nov. 26, 2014), http://www.uscib.org/docs/2014_11_26_UNFCCC_Association_Letter.pdf.
[111] Latif et al., supra note 29.
[112] Rimmer, Inventing Clean Technologies, supra note 100, at 62.
[113] Todd Stern, Special Envoy for Climate Change, U.S. Dept’t of State, The Current State of Our Negotiations on a New International Climate Agreement, (Sept.10, 2009), http://www.state.gov/e/oes/rls/remarks/2009/129204.htm (emphasis added).
[114] Rimmer, Inventing Clean Technologies, supra note 100, at 64.
[115] Austl., Technology Cooperation: Submission to the Ad-Hoc Working Group for Long Term Cooperative Action under the United Nations Framework Convention on Climate Change (2008), http://unfccc.int/files/kyoto_protocol/application/pdf/australia_lca_technology.pdf.
[116] TRIPS Meeting Minutes June 11-12, 2013, supra note 107.
[117] Id. at 40 (EU comments on Ecuador’s 2013 proposal).
[118] Id.
[119] Id. (quoting Ian Harvey, Intellectual Property Rights: The Catalyst to Deliver Low Carbon Technologies (The Climate Group 2008), http://www.theclimategroup.org/_assets/files/intellectual-property-rights.pdf).
[120] The evidential data and scholarship cited herein are utilized to answer the above questions; the inherent limitations in the evidential data and scholarship will be identified, compensated by rational analysis, (e.g., using the author’s own experience in global IPR practice,) or left open for further research and/or to be addressed in future articles.
[121] What is Intellectual Property?, World Intell. Prop. Org., http://www.wipo.int/about-ip/en/ (last visited July 25, 2015).
[122] Id.
[123] Patents, World Intell. Prop. Org., http://www.wipo.int/patents/en/ (last visited Nov. 2, 2015).
[124] Id.
[125] Latif et al., supra note 29 , at 1.
[126] Hall & Helmers, supra note 74, at 6.
[127] Keith Maskus, Globalizing Information: The Economic of International Technology Trade 5 (2014).
[128] Study F, supra note 60, at 7.
[129] John Barton, Patenting and Access to Clean Energy Technologies in Developing Countries, WIPO Mag., (Mar. 2009), http://www.wipo.int/wipo_magazine/en/2009/02/article_0005.html; see also John Barton, Intellectual Property and Access to Clean Energy Technologies in Developing Countries: An Analysis of Solar Photovoltaic, Biofuel, and Wind Technologies, Int’l Ctr. Trade & Sustainable Dev. Issue Paper No. 2 (2007).
[130] Barton, Patenting and Access to Clean Energy Technologies in Developing Countries, supra note 129.
[131] Id.
[132] See generally id.
[133] Frederick M. Abbott, Innovation and Technology Transfer to Address Climate Change: Lessons from the Global Debate on Intellectual Property and Public Health (Int’l Ctr. For Trade note & Sustainable Dev. 2009), http://ictsd.org/i/publicatons/ 50454.
[134] Study F, supra note 60, at 7.
[135] Hall & Helmers, supra note 74, at 19.
[136] Id.
[137] Study A, supra note 79, at 111.
[138] Id.
[139] Antoine Dechezleprêtre et al., What Drives the International Transfer of Climate Change Mitigation Technologies? Empirical Evidence from Patent Data, 54(2) Eɴᴠᴛʟ. & Rᴇsᴏᴜʀᴄᴇ Eᴄᴏɴ. 161, 165 (2013) [hereinafter Study G].
[140] List of Least Developed Countries, United Nations (Dec. 4, 2013), http://www.un.org/en/development/desa/policy/cdp/ldc/ldc_list.pdf.
[141] Nᴀᴛ’ʟ Sᴄɪ. Foundation, Industry Technology and the Global Marketplace, in Sᴄɪᴇɴᴄᴇ ᴀɴᴅ Eɴɢɪɴᴇᴇʀɪɴɢ Iɴᴅɪᴄᴀᴛᴏʀs 2014 6, 6-21 (2014), http://www.nsf.gov/statistics/seind14/content/chapter-6/chapter-6.pdf [hereinafter Study E].
[142] Id. at 6-49, 6-50.
[143] Id.
[144] Id. at 6-51 (“Investment has been volatile in the aftermath of the global recession. Investment rebounded in 2010 and reached a new high of $110 billion in 2011 before plunging to $63 billion in 2012, its lowest level since 2006. After rising steadily prior to the global recession, U.S. investment fell sharply in 2008 before recovering to $32 billion in 2010, near its pre-recession level.”).
[145] Id.
[146] Id. at 6-51 to 6-52.
[147] Id. at 6-52.
[148] Nicolas Stern, The Economics of Climate Change: The Stern Review 398 (2007).
[149] Id.
[150] Study A, supra note 79.
[151] Id. at 124.
[152] Id. at 116 (demonstrating that inventions from these countries had a lower export rate, indicating lower values in these innovations).
[153] Study F, supra note 60.
[154] Id. at 4 (reviewing patent ownerships in these clean technology areas: waste and biomass energy, solar, fuel cell, ocean, geothermal and wind power.)
[155] Id.
[156] Id. at 4-5.
[157] Id. at 22.
[158] Study B, supra note 84, at 58.
[159] Id. at 4.
[160] Latif et al., supra note 29, at 4.
[161] Id.; see also Abbott, supra note 133.
[162] The first formal patent system came from the Western Hemisphere in 1474 in Venice. Patent laws in England and the U.S. were formally established in the 1620’s and 1790’s, respectively. See Daniel C.K. Chow & Edward Lee, International Intellectual Property 252-3 (2d ed. 2012).
[163] For example, the modern Indian patent law was established in 1970. See Jeffrey Colin, Coming into Compliance with TRIPS: A Discussion of India’s New Patent Laws, 25 Cardozo Arts & Ent. L.J. 877, 880 (2013). Similarly, the modern Chinese patent law was established in 1984. See Joy Y. Xiang, How Wide Should the Gate of Technology Be? Patentability of Business Methods in China, 11 Pac. Rim L. & Pol’y J. 795, 801 (2002).
[164] Understanding the WTO: Developing Countries, World Trade Org., http://www.wto.org/english/thewto_e/whatis_e/tif_e/dev1_e.htm (last visited July 25, 2015).
[165] Keith Maskus, Differentiated Intellectual Property Regimes for Environmental and Climate Technologies 16 (OECD Envir., Working Paper No. 17, 2010), http://dx.doi.org/10.1787/5kmfwjvc83vk-en [hereinafter Maskus, Differentiated IP Regimes].
[166] Levin, Richard C. et al., Appropriating the Returns from Industrial Research & Development, Brookings Papers on Econ. Activity, Special Issue, 783, 812-818 (1987), http://www.brookings.edu/~/media/projects/bpea/1987%203/1987c_bpea_levin_klevorick_nelson_winter_gilbert_griliches.pdf.
[167] Maskus, Differentiated IP Regimes, supra note 165.
[168] Keith E. Maskus, Intellectual Property Rights in the Global Economy 136-141 (2000).
[169] Lee G. Branstetter et al., Do Stronger Intellectual Property Rights Increase International Technology Transfer? Empirical Evidence from U.S. Firm-level Panel Data, 121 Q.J. Eᴄᴏɴ. 321, 321 (2006).
[170] Olena Ivus, Do Stronger Patent Rights Raise High-Tech Exports to the Developing World? 81 J. Int’l Econ. 38, 45 (2010).
[171] Maskus, Differentiated Intellectual Property Regimes for Environmental and Climate Technologies, supra note 165.
[172] Id.
[173] See discussion supra notes 163164.
[174] See supra Part II.A.2 (emerging economies have had most of the patent filings in developing nations, and patents on foreign clean technologies have taken about two thirds of the clean technologies patents owned by the emerging economies.)
[175] Barton, Intellectual Property and Access to Clean Energy Technologies in Developing Countries, supra note 129, at 13.
[176] Id.
[177] See discussion supra Part II.A.2.i.
[178] Maskus, Encouraging International Technology Transfer, supra note 98, at 10.
[179] See discussion supra Part II.A.2.ii (on patent ownership for clean technologies).
[180] See discussion supra Part II.A.2.ii.
[181] See TRIPS Meeting Minutes June 11-12, 2013, supra note 107.
[182] Study G, supra note 139, at 167.
[183] See discussion supra Part II.A.2.ii (on patent ownership for clean technologies).
[184] Synthesis of Technology Needs Assessments, U.N. Framework Convention on Climate Change, http://unfccc.int/ttclear/templates/render_cms_page?TNA_ida (last visited July 26, 2015).
[185] Data extracted from the 2006, 2009, and 2013 TNA synthesis reports. United Nations Framework Convention on Climate Change, Subsidiary Body for Scientific and Technological Advice, Twenty-Fourth Session, Bonn, Ger., May 18-26, 2006, Synthesis Report on Technology Needs Identified by Parties not Included in Annex I to the Convention, U.N. Doc. FCCC/SBSTA/2006/INF.1 (Apr. 21, 2006) [hereinafter 2006 TNA Reports]; United Nations Framework Convention on Climate Change, Subsidiary Body for Scientific and Technological Advice, Thirtieth Session, Bonn, Ger., June 1-10, 2009, Second Synthesis Report on Technology Needs Identified by Parties not Included in Annex I to the Convention, U.N. Doc. FCCC/SBSTA/2009/INF.1 (May 29, 2009) [hereinafter 2009 TNA Reports]; United Nations Framework Convention on Climate Change, Subsidiary Body for Scientific and Technological Advice, Thirty-Ninth Session, Warsaw, Pol., Nov. 11-16, 2013, Third Synthesis Report on Technology Needs Identified by Parties not Included in Annex I to the Convention, U.N. Doc. FCCC/SBSTA/2013/INF.7 (Oct. 21, 2013) [hereinafter 2013 TNA Reports].
[186] 2006 TNA Reports, supra note 185. 2009 TNA Reports, supra note 185; 2013 TNA Reports, supra note 185.
[187] 2006 TNA Reports, supra note 185. 2009 TNA Reports, supra note 185; 2013 TNA Reports, supra note 185.
[188] 2006 TNA Reports, supra note 185.
[189] Id.
[190] 2009 TNA Reports, supra note 185, at 29-30.
[191] For example, 30% of the reporting nations in the 2006 TNA reports cite high investment costs as an economic and market barrier, 50% of the reporting nations in the 2009 TNA reports cite high costs and limited state resources as an economic and market barrier; and 85% of the reporting nations in the 2013 TNA reports cite lack of or inadequate access to financial resources as an economic and market barrier to the development and transfer of mitigation technologies within the energy sector. See 2006 TNA Reports, supra note 185; 2009 TNA Reports, supra note 185; 2013 TNA Reports, supra note 185. The 2013 reports have separated reporting regarding developing nations’ needs on mitigation technologies from those of adaptation technologies. The 2006 and 2009 TNA reports did not make such a distinction.
[192] See discussion supra Part II.A.
[193] See TRIPS Meeting Minutes June 11-12, 2013, supra note 107.
[194] See Study G, supra note 139; Study B, supra note 84.
[195] Study G, supra note 139, at 180.
[196] Study B, supra note 84, at 9.
[197] Study G, supra note 139.
[198] Id. at 180.
[199] Id. at 181 (However, Study G finds that restrictions to FDI promote technology transfer. Study G reasons that this may be because the restrictions ask for technology transfer, or force foreign technology owners rely more on patents as an alternative or to secure their FDI.)
[200] Study B, supra note 84, at 50.
[201] Id.
[202] World Intell. Prop. Org., Successful Technology Licensing 5 (2015), http://www.wipo.int/edocs/pubdocs/en/licensing/903/wipo_pub_903.pdf.
[203] See Hoekman et al., supra note 74, at 1589.
[204] Guifang Yang & Keith E. Maskus, IPR, Licensing and Innovation in an Endogenous Product-Cycle Model (World Bank, Working Paper No. 2973, 2003), https://openknowledge.worldbank.org/bitstream/handle/10986/19156/multi0page.pdf?sequence=1.
[205] Maskus, Globalizing Information, supra note 127.
[206] Latif et al., supra note 29; Study B, supra note 84, at 50-58.
[207] Foreign Direct Investment Definition, Fin. Times, http://lexicon.ft.com/Term?term= foreign-direct-investment (last visited July 12, 2015).
[208] Id.
[209] Id.
[210] Hoekman et al., supra note 74, at 1588.
[211] Id.
[212] E. Borensztein et al., How Does Foreign Direct Investment Affect Economic Growth? 45(1) J. Int’l Econ. 115, 117 (1998).
[213] See, e.g., Branstetter et al., supra note 169, at 322; Jeong-Yeon Lee & Edwin Mansfield, Intellectual Property Protection and U.S. Foreign Direct Investment, 78(2) Rev. of Econ. and Stat. 181, 181 (1996); Edwin Mansfield, Intellectual Property Protection, Direct Investment, and Technology Transfer, (Int’l Fin. Corp., Discussion Paper No. 27, 1995).
[214] M. Scott Taylor, TRIPS, Trade, and Technology Transfer, 26(3) Can. J. Econ. 625, 637 (1993).
[215] Reem Heakal, What Is International Trade?, Investopedia, http://www.investopedia.com/articles/03/112503.asp (last visited Aug. 18, 2015)
[216] Hoekman et al., supra note 74, at 1588.
[217] Id.
[218] Maskus, Globalizing Information, supra note 127, at 5.
[219] Titus O. Awokuse & Hong Yin, More Bilateral Trade? Evidence from China’s Imports, 38(8) World Dev. 1094, 1104 (2010).
[220] Hoekman et al., supra note 74, at 1593.
[221] Id.
[222] Id.
[223] See IPCC Fourth Assessment Report, supra note 49.
[224] See analysis supra Part II.A.
[225] Rimmer, Inventing Clean Technologies supra note 100; Joshua D. Sarnoff, The Patent System and Climate Change, 16 Va. J.L. & Tech. 301 (2011).
[226] Antoine Dechezleprêtre, Fast-Tracking Green Patent Applications: An Empirical Analysis, Int’l Ctr. Trade & Sustainable Dev. Issue Paper No. 37 (2013), http://www.ictsd.org/downloads/2013/02/fast-tracking-green-patent-applications-an-empirical-analysis.pdf.
[227] Patents: Accelerated Processing, U.K. Intell. Prop. Office (June 13, 2014), https://www.gov.uk/patents-accelerated-processing#green-channel.
[228] Dechezleprêtre, Fast Tracking Green Patent Applications, supra note 227.
[229] Some developing nations such as the emerging economies are more or less doing so. Different national priorities and barriers such as the ones identified by developing nations in the TNA reports may have deterred other developing nations from making domestic development of clean technologies a priority.
[230] As of July 2015, there are 196 countries in the world, 161 of them are WTO member nations. See Understanding WTO, the Organization, World Trade Org., https://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm (last visited July 13, 2015).
[231] Vandana Shiva, Protect or Plunder? Understanding Intellectual Property Rights 51 (2001).
[232] The costs and benefits associated with joining the WTO are not within the scope of this Article. Instead, the discussion here is limited to whether joining the WTO would prevent a nation from having a customized IPR system reflecting the nation’s reality in technology development.
[233] Advice on Flexibilities Under the TRIPS Agreement, World Intell. Prop. Org., http://www.wipo.int/ip-development/en/legislative_assistance/advice_trips.html (last visited Nov. 3, 2015).
[234] TRIPS Agreement, supra note 63, at Preamble.
[235] Typical patentability criteria include novelty, inventiveness, and industrial utility. For example, the U.S. requires an invention to be novel and non-obvious, besides being patent eligible and useful. Note the difference between patentability and patent eligibility; the latter means patentable subject matter. TRIPS art. 27 allows “all fields of technology” to be patentable subject matter; but TRIPS did not define patentability, i.e., what is novelty, inventiveness, etc. See id. at art. 27.
[236] Id. at art. 27.2.
[237] Id. at art. 31.
[238] Id. at art. 8.2, art. 40.1.
[239] Id. at art. 73.
[240] IPCC Fourth Synthesis Report, supra note 26.
[241] See discussion supra Part II.B.
[242] Maskus, Encouraging International Technology Transfer, supra note 98.
[243] World Bank, World Development Report 2005: A Better Investment Climate for Everyone (2005), https://openknowledge.worldbank.org/handle/10986/5987.
[244] Maskus, Globalizing Information, supra note 127, at 173-176.
[245] Id.
[246] Littleton, supra note 74, at 20.
[247] Id. at 21.
[248] Id. at 15.
[249] Summary of Climate Summit 2014, Intern’l Inst. Sustainable Dev. (September 23, 2014), http://www.iisd.ca/climate/cs/2014/html/crsvol172num18e.html (for example, statements by leaders from India, Equatorial Guinea, Malaw, Guinea-Bissau, Fiji, Lesotho, Mauritania, Namibia, Sweden, Tanzania).
[250] Id. at art. 4.3.
[251] Climate Change Update: Technology, ICTSD (May 1, 2008), http://www.ictsd.org/ bridges-news/biores/news/climate-change-update-technology-ip-issues-on-the-table (“under the Montreal Protocol, the technology funds included money to pay for the necessary license fees”).
[252] Id.
[253] Green Climate Fund Exceeds $10 Billion, U.N. Framework Convention on Climate Change (Dec. 10, 2014), http://newsroom.unfccc.int/financial-flows/green-climate-fund-exceeds-10billion.
[254] United Nations Framework Convention on Climate Change, Conference of the Parties, Copenhagen, Den., Dec. 7-19, 2009, Report of the Conference of the Parties on Its Fifteenth Session – Addendum Part II: Actions Taken by the Parties at Its Fifteenth Session, U.N. Doc. FCCC/CP/2009/11/Add.1 (Mar. 10, 2013) (Green Climate Fund established in COP17, to mobilize USD100 billion per year by 2020 by developed nations to address the needs of developing nations for addressing climate change).
[255] Summary of Climate Summit 2014, supra note 251.
[256] Id.
[257] Historic Paris Agreement on Climate Change: 195 Nations Set Path to Keep Temperature Rise Well Below 2 Degrees Celsius, UNFCCC (Dec. 12, 2015), http://newsroom.unfccc.int/unfccc-newsroom/finale-cop21/.
[258] TRIPS Agreement, supra note 62, at art. 66.2; UNFCCC Treaty, supra note 24, at art. 4.1, 4.7, 4.3, 4.5.
[259] Cameron Hutchison, Does TRIPS Facilitate or Impede Climate Change Technology Transfer into Developing Nations?, 3 Univ. Ottawa L. & Tech. J. 517-537 (2006).
[260] Maskus, Encouraging International Technology Transfer, supra note 98.
[261] Littleton, supra note 74, at 20.
[262] UNFCCC Treaty, supra note 24, at art. 4.1.
[263] The Cancun Agreement, supra note 34.
[264] Latif et al., supra note 29, at 2.
[265] U.S.-China Clean Energy Research Center, U.S. Dep’t of Energy, http://energy.gov/ia/initiatives/us-china-clean-energy-research-center-cerc (last visited Nov. 13, 2015); U.S.-India Clean Energy Cooperation, U.S. Dep’t of Energy, http://energy.gov/ia/initiatives/us-india-energy-cooperation (last visited Nov. 13, 2015).
[266] Maria van der Hoeven & Didier Houssin, Energy Technology Perspectives 2015: Mobilising Innovation to Accelerate Climate Action, Intn’l Energy Agency (May 4, 2015), http://www.iea.org/newsroomandevents/speeches/150504_ETP_slides.pdf.
[267] See discussion supra Part III.B.
[268] See discussion supra Part III.C.
[269] See discussion supra Part I.C.3.

Towards a New Dialectics: Pharmaceutical Patents, Public Health and Foreign Direct Investments

Towards a New Dialectics: Pharmaceutical Patents, Public Health and Foreign Direct Investments
By Valentina S. Vadi* Download a PDF version of this article here.  

Introduction

In nature we never see anything isolated, but everything in connection with something else…

Johann Wolfgang von Goethe[1]

In recent years, international investment agreements (IIAs)[2] have flourished, furthering the protection of intellectual property (IP) as a form of investment.[3] In general terms, most bilateral investment treaties (BITs) only refer to IP rights in their definitions of protected investments.[4] These treaties do not provide a detailed and specific regulation of IP rights. However, they do formally and substantively raise the level of IP protection from the pre-treaty status. In fact, by considering IP rights as protected investments, BITs enable IP holders to enjoy the substantive and procedural protections of foreign investments provided by the applicable treaty. Substantive protections granted by IIAs include fair and equitable treatment, national and most favoured nation treatment and protection against unlawful expropriation, among others.[5] Besides providing substantive protection to investors’ rights, investment treaties also provide IP owners with direct access to investor-state arbitration, which can be a powerful dispute settlement mechanism to resolve claims of alleged IP infringement.[6] This is a novel development in international law because investors are no longer required to exhaust local remedies or depend on diplomatic protection to defend their interests against the host state. The claims are heard by ad hoc arbitral tribunals whose arbitrators are selected by the disputing parties or appointing institutions. Depending on the arbitral rules chosen, the proceedings occur behind closed doors (in camera) and the very existence of the claim and the final award may never become public.[7] These arbitrations have recently been used by patent owners to challenge alleged infringements of their patents by measures of the host state.[8] Arbitral tribunals have scrutinized how domestic legal systems govern the availability, validity and scope of patents.[9] These arbitrations have involved “difficult and often elusive substantive questions” of intellectual property law,[10] and can affect a range of important public policy issues, such as public access to medicines. Despite the important social and political implications, investment treaty arbitration is lacking in transparency, expertise, and arguably, legitimacy.[11] Most arbitral tribunals are neither open to the public nor obliged to publish final decisions, and hence lack the transparency generally afforded by normal judicial proceedings, even in disputes concerning public goods. Arbitrators may not have specific expertise in international intellectual property law, as they are mostly experts in international investment law. There are even disputes over whether or not norms external to investment law, such as IP law, should be relevant in investment treaty arbitration. Finally, according to some authors, investment treaty law and arbitration face a “legitimacy crisis” as arbitral awards seem to affect public policy “in a vacuum.”[12] While arbitral tribunals consider important public policy issues, they are detached from the local polities needs. Have IIAs “become a charter of rights for foreign investors, with no concomitant responsibilities or liabilities, no direct legal links to promoting development objectives, and no protection for public welfare in the face of environmentally or socially destabilizing foreign investment?”[13] Has international investment law become a “corporate bill of rights”[14] or a “system of corporate rights without responsibility”?[15] Recent examples illustrate that investor-state arbitration can affect state autonomy in making important public policy decisions in the pharmaceutical sector, including making cheap generic medicines widely available and ensuring their safety. In 2008, Apotex, a Canadian company, filed an investor-state arbitration against the United States, claiming that the U.S. courts had erred in applying federal law violating several provisions of the North American Free Trade Agreement (NAFTA).[16] [17] According to the claimant, the erroneous application of the law prevented Apotex from commercializing generic versions of medicines, and this amounted, inter alia, to an expropriation of its investments.[18] In a parallel dispute,[19] the company sought over $1 billion in damages from the United States after the U.S. Food and Drug Administration (FDA) imposed an Import Alert on certain generic medicines that were produced in Canada, then exported to the U.S. and sold by a U.S.-based Apotex subsidiary.[20] The FDA issued the alert after its inspections of Apotex facilities in Canada found noncompliance with good pharmaceutical manufacturing practices.[21] In parallel, Eli Lilly, a major U.S. pharmaceutical company, filed an investor-state arbitration against Canada after Canadian Federal Courts invalidated a pharmaceutical patent on the ground of inutility.[22] Eli Lilly requested the Tribunal award economic compensation of at least 100 million Canadian dollars for alleged damages.[23] Not only do these cases show the clash between the national regulatory measures of the states to regulate IP in the public interest on the one hand and international investment law on the other, but they also highlight the emergence of a new form of dialectics between the private and public interests in IP governance at the international level. Have arbitral tribunals taken public health considerations into account when adjudicating pharmaceutical patent cases? If so, have they considered public health as an exception to investment treaty standards or as a part of the interpretation of the same standards? What techniques are available to avoid regime-collisions between international investment law and other fields including international intellectual property law and public health law? Is investment arbitration a suitable forum to adjudicate pharmaceutical patent-related disputes? Can investment treaty arbitration promote good governance in the pharmaceutical field? Is there a convergence or a divergence between international investment law and other branches of international law governing pharmaceuticals? Are there mechanisms to promote coherence? And is such coherence ultimately desirable? This article addresses these questions, providing a comprehensive account of current investment treaty arbitrations, highlighting their significance for global intellectual property governance. It shows that investment arbitration serves as a new avenue for the ongoing dialectics between private and public interests in IP regulation. Conflicts between private and public interests are endemic in IP regulation. These take the form of disputes before various tribunals at the national, regional and even international levels. Investment treaty arbitration constitutes a new avenue for settling IP disputes. Far from being a neutral development of the increasing pervasiveness of international law in different areas of regulation, the attraction of IP disputes by investment treaty tribunals have the potential to revolutionize the current landscape of IP governance. While a dialogue between public and private interests is intrinsic to any form of regulation and dispute resolution of IP rights, what is new in the emerging IP-related investment disputes is the articulation of private economic interests by private transnational actors against public national entities before international tribunals. In fact, while traditionally international law has only enabled states to file claims before international courts and tribunals, international investment law has empowered foreign investors to file claims against states before international tribunals. This development has the potential revolutionize IP governance at the national and international levels.[24] On the one hand, investment arbitration provides a valuable avenue for foreign investors to be heard. Although a private investor could complain through its home state, inter-state disputes concerning IP have been rare, mainly because states are careful not to initiate proceedings and advance arguments that may backfire in the future.[25] Investor-state arbitration enables nongovernmental actors such as multinational corporations to directly file claims against states before international tribunals. On the other hand, eminent scholars warn against potential abuse of this mechanism,[26] as investment arbitration could emphasize private interests at the expense of the public interest. Non-state actors may adopt a different approach to litigation than state actors. They may strategically use investment arbitration to receive monetary compensation for state regulatory action,[27] and simply by filing an arbitration claim, they may have a chilling effect on domestic policy makers. The emerging dialectics between private actors and states in investment arbitration needs to be scrutinized given the public policy implications it can have on crucial areas of IP governance. The tension between patent holders and state authorities in the governance of pharmaceutical patents is one example of a broader recurrent interplay in international law: the tension between the private interests of foreign investors and the regulatory autonomy of the host state. This article argues that arbitrators should not put excessive emphasis on the private interests in pharmaceutical patents, but must pay adequate consideration to the public interest equally embodied in these rights. Excessive protection of pharmaceutical patents can have a negative impact on the public health policy of the host state. This may seem paradoxical, as usually the protection of pharmaceuticals is associated with higher investments in the research and development of new medicines, and a corresponding broader availability of medicines that lead to positive effects on patient welfare. However, in some cases, corporations have used intellectual property to chill public health regulation. The article concludes with the argument that while investor-state arbitration constitutes a major development in international law and facilitates the access of foreign investors to justice, it may endanger the fundamental values of the international community as a whole unless arbitrators duly take into account their role as “cartographers” of international law. The article shall proceed as follows. First, it explores what are pharmaceutical patents and how they are governed at the international law level. Second, it briefly describes the basic structure of investment treaty law and arbitration. Third, it illustrates the rise of investor-state arbitrations concerning pharmaceuticals. Fourth, it highlights the emergence of a new dialectics between intellectual property and public health in international investment law and arbitration, examining recent investment disputes concerning pharmaceuticals. Fifth, it critically assesses the potential impact of such arbitrations on the public health policies of the host state, and proposes some legal mechanisms that can help adjudicators to strike a suitable balance between the protection of pharmaceutical patents and public health in international investment law and arbitration.

I. Pharmaceutical Patents and Public Health in International Law

The patent system is based on a trade-off between promoting knowledge creation and knowledge diffusion.[28] A patent is a type of intellectual property constituting a set of exclusive rights granted by a state for a limited period of time in exchange for detailed public disclosure of an invention.[29] Patents are granted for inventions that are: (1) new, (2) nonobvious (involving an inventive step), and (3) capable of industrial application (useful).[30] In the pharmaceutical sector, the invention of new medicines entails significant research and development costs.[31] The patent protection of a given medicine aims to ensure the remuneration of the inventor’s efforts and provide an incentive for the invention of new medicines.[32] Through this trade-off, pharmaceutical patent protection reflects both private and public interests. The patent system rewards the private interest and fosters the inventive efforts of the patent owner by awarding her exclusive rights for a limited period of time. At the same time, the patent system acknowledges the public interest in a two-fold manner. First, medicines invented under the incentive of patents may save lives and improve the quality of life of patients. Second, competitors may build upon existing knowledge inventing new medicines and contributing to the development of science. In addition, patients may have access to cheaper generic versions of the same medicine after the patent expires. During the patent lifespan, a balance between private and public interests is also embodied in the patent regime. The enjoyment of IP rights by the patent owner are not absolute, they are limited in consideration of the public interest. For example, certain rules provide for exceptions to the patent right;[33] some uses of the patent may be allowed without the patent owner’s consent;[34] and there are limits to patentability.[35] However, in recent years, a common criticism has been that legislatures and judges have expanded the rights of patent owners too far[36] at the expense of the global public interest.[37] An absolute protection of pharmaceutical patents has a negative impact on public well-being. Pharmaceutical patents create welfare-reducing monopoly rights, which often lead to higher prices due to a lack of competition, making medicines less affordable to the poor. Moreover, by engaging in “ever-greening” practices, pharmaceutical companies often use regulatory processes to extend their monopoly over highly profitable “blockbuster” medicines and further jeopardize access to medicines for the poor.[38] Even where a state adopts emergency measures to limit IP rights to facilitate access to medicines, the state’s compliance with international treaty obligations to protect IP rights may be disputed.[39] Pharmaceutical patents produce benefits and costs, the extent of which are country dependent.[40] The role of pharmaceutical patents in promoting research and development of new medicines depends on the amount of resources a country devotes to creating intellectual assets[41] and the country’s ratio between knowledge owned and the knowledge needed to develop the pharmaceutical sector.[42] Historical evidence suggests that strong patent protection can “kick away the ladder” to development for low- and middle-income countries,[43] and that even industrialized countries did not adopt strong pharmaceutical patent policies until recently.[44] Regulation of pharmaceuticals is a sensitive field with important public policy implications. Given that medicines and vaccines are now subject to patent protection worldwide,[45] their price increase has strained public health budgets.[46] Pharmaceutical regulation constitutes a regime complex, which involves sets of multilevel regulatory frameworks that are at times diverging and at times converging, if not overlapping.[47] As a regime complex, pharmaceutical regulation is characterized by institutional density and governed by human rights law, international intellectual property law and international health law.

A. Pharmaceuticals and Human Rights Law

The International Covenant on Economic, Social and Cultural Rights (ICESCR)[48] provides the human rights component of the pharmaceutical regime complex. Article 15 of the ICESCR identifies the need to protect both public and private interests in knowledge creation and diffusion.[49] Namely, it recognizes the right of everyone “[t]o benefit from the protection of the moral and material interests resulting from any scientific … production of which he is the author,”[50] including pharmaceutical patents, on the one hand and the “right of everyone … to enjoy the benefits of scientific progress and its applications” on the other.[51] In parallel, Article 12 of the ICESCR recognizes “the right of everyone to the enjoyment of the highest attainable standard of physical and mental health.” The right to health requires access to medicines, according to General Comment 14.[52] While general comments are not binding instruments, they are deemed to constitute authoritative interpretation of states commitments under the ICESCR and can reflect emerging norms of customary law.[53] Although conceptualized after World War II, the right to health was under-theorized due to political reasons[54] However, since the fall of the Berlin Wall, like other economic, social and cultural rights, it has had a renaissance, being understood in its “unity and complementarity” with civil and political rights.[55] Yet, the lack of a World Human Rights Court (WHRC)[56] and the fragmentation of international human rights institutions have inevitably affected the realization of the right to health.[57] States maintain the prime duty of providing access to remedies at the domestic level.[58] However, effective remedies should be available at both the national and international levels,[59] because international remedies are essential in those cases where domestic remedies are not available or inadequate.[60] Several UN bodies deal with human rights,[61] but they do not fulfill the tasks of a world court for human rights.[62] Moreover, the institutional fragmentation of the human rights system — the existence of different UN bodies and monitoring frameworks with converging and diverging competences,[63] — and its substantive fragmentation — the existence of different treaties and regimes — can create obstacles to the effective realization of the right to health.[64]

B. Pharmaceuticals and International Intellectual Property Law

Several sources of international intellectual property law govern patent regulation. The Paris Convention[65] conceptualizes intellectual property as an incentive to encourage innovation.[66] It harmonizes procedures relating to priority, registration, and licensing and requires national treatment for foreign patent owners.[67] In theory, a member that has failed to comply with its obligations under the Paris Convention could be sued before the International Court of Justice,[68] but no such cases have ever been brought.[69] Nonetheless, the Agreement on Trade-Related Aspects of Intellectual Property Rights Agreement (TRIPS Agreement) under the World Trade Organization (WTO),[70] incorporates some provisions of the Paris Convention and can be implemented through the WTO Dispute Settlement Mechanism (DSM).[71] The TRIPS Agreement is the most comprehensive international treaty setting global standards for medical knowledge governance.[72] It requires WTO member states to provide patent protection for pharmaceuticals.[73] The patent owner is given limited monopoly rights over the patented medicine for twenty years,[74] and after this patent term expires, competitors may replicate the compound. The TRIPS Agreement has been controversial since its inception. Developing countries opposed its adoption fearing that the introduction of high standards of intellectual property protection would jeopardize access to pharmaceuticals and other technology, and that the agreement would privilege the private economic interests of patent holders vis-à-vis important public policies furthering public health and developmental objectives.[75] Some scholars also doubted intellectual property’s link to trade, given its effect of restricting the market.[76] Not by chance, the General Agreement on Tariffs and Trade (GATT)[77] listed intellectual property among the general exceptions to the general commitment to free trade and lower tariffs.[78] Nevertheless, through intense negotiation and linkage bargaining – that is, linking negotiations on intellectual property to negotiations in other sectors such as agriculture – the TRIPS Agreement was signed at the Marrakesh Ministerial conference in 1994, as part of a package deal with the other Uruguay Round Agreements, and came into force in January 1995.[79] As the outcome of intense cross-sectorial negotiations, the signing of the TRIPS Agreement does not mean that it provides an optimal equilibrium between the private and public interests. Rather, countries accepted its high standards of IP protection potentially reducing their regulatory autonomy in the pharmaceutical sector in light of the overall perceived benefits of the entire WTO package. By conceptualizing IP as a commodity,[80] the TRIPS Agreement severely constrained the regulatory autonomy of states in the pharmaceutical sector. The TRIPS Agreement provides minimum standards for intellectual property protection, below which the member states cannot fall.[81] WTO Members have the right to provide for more extensive protection that is not required by the TRIPS Agreement, as long as they follow the general principles of the most-favoured-nation clause and national treatment.[82] Therefore, any intellectual property agreement negotiated subsequent to TRIPS by WTO members can only create similar or higher standards for IP protection (commonly known as TRIPS-plus).[83] Members can enforce the provisions of the TRIPS Agreement through the WTO Dispute Settlement Mechanism (DSM), which has compulsory jurisdiction over TRIPS-related disputes.[84] International investment law, the last wave of IP rights protection, considers IP as a form of investment.[85] As investment treaties broadly define the notion of investment, a potential tension exists when a state adopts measures governing pharmaceutical patents that interfere with foreign investments. This is because such regulation may be considered a violation of investment treaty provisions protecting the patent rights of foreign companies. Moreover, because investment treaties provide foreign investors with direct access to investment arbitration, foreign investors can directly challenge national measures and can seek compensation for the impact of such regulation on their business. Indeed, a number of investor-state arbitrations have dealt with pharmaceutical regulation, and the time is ripe for a comprehensive analysis and critical assessment, especially concerning their potential effect of emphasizing private property at the expense of the public interest.[86]

C. Pharmaceuticals and International Health Law

In contrast with IP protection, another component of the regime governing pharmaceuticals, international health law, has developed slowly.[87] The internationalization of public health law is not a new phenomenon. The shift from national to international governance began in the mid-19th century,[88] when states adopted a discrete number of binding international conventions dealing with various aspects of public health.[89] The cholera epidemics through Europe in the first half of the 19th century catalyzed intense international health diplomacy and cooperation.[90] Not only did the cholera epidemics show the failure of national quarantine systems to prevent the spread of the disease, but they also created discontent among merchants, whose trade had been affected by the quarantine measures.[91] The merchants urged their governments to take international action.[92] The first International Sanitary Conference was organized in 1851 “to discuss cooperation on cholera, plague, and yellow fever,”[93] and established the principle that “health protection was a proper subject for international consultations.”[94] Other international conferences followed, “focusing exclusively on the containment of epidemics.”[95] Despite these early adoptions of binding international health law instruments, since the inception of the World Health Organization (WHO) in 1946,[96] international health law has taken a less ambitious path. In fact, the WHO has favored non-legal, medical-technical approaches to health issues.[97] The WHO, mainly composed of health specialists,[98] has principally, if not exclusively, adopted medical guidelines and other nonbinding tools. It has developed “an ethos that looks at global health problems as medical-technical issues to be resolved by the application of the healing arts.”[99] Instruments such as declarations and recommendations adopted by the WHO have been described as “limited in scope and application”[100] as well as “historically, politically and structurally inadequate to do what is needed.”[101] Such instruments “are being developed … in an uncoordinated … manner” and “pale in comparison to that of other international [organizations] ….”[102] International health law has not been an effective system, due to its mainly non-legal approach, lack of enforcement mechanisms and states’ consequent failure to comply with its rules.[103] The WHO adopted its first binding convention only a decade ago.[104] The organization “rarely participate[s] in trade negotiations or the resolution of trade disputes, even when such are linked to public health.”[105] Only in 2015 has it, cautiously, started intervening in investment treaty arbitration as amicus curiae.[106] In the absence of a well-articulated international health law regime, public health protection has remained a fundamental prerogative of the states.[107] States have a right and a duty to protect public health, and the power to adopt measures to protect their population: one of the conditions of their very existence.[108] Each state has a social contract with its citizens, which prompt it to assume these public-health related burdens.[109] Given the interconnectedness of health with other global issues, including trade and foreign investments,[110] and the asymmetrical development of international health law and other fields of international law, many elements of public health governance have been affected by the actions of international bodies whose primary objectives do not concern health.[111] For instance, international investment law and arbitration has increasingly governed or impacted international public health policy. The following sections will examine this interplay, focusing on how international investment law governs pharmaceutical patents and how investment treaty arbitral tribunals have adjudicated the relevant disputes.

II. International Investment Law and Arbitration

International investment law constitutes an important part of international law governing foreign direct investment (FDI).[112] As there is still no single comprehensive global treaty, investor rights are mainly defined by almost 3,000 international investment agreements (IIAs), which encompass both bilateral investment treaties (BITs) and multilateral instruments, that are signed by participating states and are governed by public international law.[113] Under these agreements, state parties concede to provide a certain degree of protection to investors who are nationals of contracting states. These concessions include compensation in the case of expropriation, fair and equitable treatment, most favoured nation treatment, and full protection and security, among others. As IIAs are “the most important instruments for the protection of foreign investment,”[114] there is a general expectation that the conclusion of such agreements will encourage FDI among the contracting nations.[115] Host countries, generally developing and least developed countries but now increasingly developed countries,[116] assume obligations for the protection of foreign investments in order to attract foreign investments. Countries also adhere to these dealings to protect the economic interests of their nationals investing overseas. For both of these reasons, such agreements have come to play a major role in the growing competition to attract and export FDI. At the procedural level, IIAs can grant foreign investors holding patents direct access to investment treaty arbitration.[117] In doing so, they create a set of procedural rights for the direct benefit of investors.[118] This is a novelty in international law, as customary international law does not provide such a diagonal mechanism for settling disputes between foreign investors and host states.[119] The rationale for internationalizing investor-state disputes lies in the assumed independence and impartiality of international arbitral tribunals, while national dispute settlement procedures are often perceived as biased or inadequate to protect foreign investors.[120] Arbitration is also used because of perceived advantages in confidentiality and effectiveness.[121] Investor-state arbitration is procedurally similar to international commercial arbitration between private parties.[122] The parties choose the arbitrators among law scholars and practitioners.[123] Although arbitrators are expected to be both independent of the party appointing them and impartial,[124] they may permissibly share the political, economic, or legal ideals of the party that nominated them. From the offset, such appointees may be presumed sympathetic to the nominating party’s contentions and positions.[125] Confidentiality is one of the main features of arbitral proceedings as generally hearings are held in camera, and documents submitted by the parties remain confidential in principle.[126] Final awards may or may not be published, depending upon the parties’ will. Names of the parties can remain undisclosed, as do the details of the dispute, albeit to a lesser degree. Although confidentiality is well suited to private commercial disputes, the same may be problematic in investor-state arbitration, because arbitral tribunals can require states to compensate investors for regulations that hurt the latter. The lack of transparency may hamper efforts to track investment treaty arbitrations, monitor their frequency, and to assess the policy implications that flow therefrom.[127] Because investment disputes are settled using a variety of arbitral rules,[128] some of which do not even disclose the existence of arbitration claims, there can be no accurate accounting of all such disputes.[129] This should be a matter of concern given the public policy implications of such disputes. In recent years, efforts to make investment arbitration more transparent have been undertaken in various fora. In response to calls from civil society groups, the three parties to the North American Free Trade Agreement (NAFTA), Canada, the United States, and Mexico, have pledged to disclose all NAFTA arbitrations and open future arbitration hearings to the public.[130] Similarly, the International Centre for Settlement of Investment Disputes (ICSID) requires public disclosure of dispute proceedings under its auspices,[131] including the registration of all requests for conciliation or arbitration and an indication of the date and method of the termination of each proceeding. Increasingly, arbitral tribunals have allowed public interest groups to present amicus curiae briefs or to access the arbitral process.[132] However, these important developments in transparency appear in only a limited number of investment disputes. The vast majority of existing IIAs do not mandate such transparency, which means that most of the proceedings are still resolved behind closed doors. The recent adoption of the United Nations Convention on Transparency in Treaty-based Investor-State Arbitration (the “Mauritius Convention on Transparency”),[133] by which Parties to IIAs have expressed their consent to apply the United Nations Commission on International Trade Law (UNCITRAL) Rules on Transparency in agreement-based investor-state arbitrations, may increase the transparency of such disputes. Finally, awards rendered against host states are, in theory, readily enforceable against host state property worldwide due to the widespread adoption of the New York,[134] and Washington Conventions.[135] In arbitrations under the ICSID Convention, awards are only subject to an internal annulment process, enforced as a local court judgment, and exempt from the supervision of local courts.[136] In non-ICSID arbitrations, annulment is subject to the supervision of the courts at the seat of arbitration, and enforcement is governed by the New York Convention, which allows for non-recognition and non-enforcement of an award only on limited grounds.[137] Thus, if the arbitration is sited in a country other than the host state, there may be no capacity whatsoever for the host government to challenge the award in its own legal system. Given these characteristics of the arbitral process, significant issues arise in the context of disputes involving pharmaceuticals. Arbitration structurally constitutes a private model of adjudication, but arbitral awards ultimately shape the relationship between the state and private individuals.[138] Arbitrators weigh in on vital policy matters such as the legality of governmental activity, the degree to which individuals should be protected from regulation, and the appropriate role of the state.[139] In cases involving public health, one may wonder whether investment arbitration provides an adequate forum to address important non-economic concerns. Furthermore, the mere possibility of a dispute with a powerful investor can exert a chilling effect on governments’ actions to regulate in the public interest.[140]

III. The Rise of Investor-State Arbitrations Concerning Pharmaceutical Patents

Despite the economic importance of pharmaceutical patents, and the flourishing of arbitrations concerning them among private parties, known patent investment disputes have been rare.[141] Only recently has this situation started to change.[142] The few known pharmaceutical patent arbitrations have been high profile disputes that raise a number of important questions. How much does investment arbitration limit the regulatory autonomy of states? What is the interplay between investment arbitration and the parallel WTO DSM? Does investment arbitration allow adjudicators to strike an optimal equilibrium between private and public interests characterizing pharmaceutical patents? This part examines the reasons for the traditional paucity of cases and the recent rise of investor-state arbitrations concerning pharmaceuticals. Part IV explores the substantive issues raised by such arbitrations, highlighting the emergence of a new dialectics between the public and private interests embedded in intellectual property rights. Several factors may have accounted for the relative paucity of patent-related investor-state arbitrations. Firstly, the available data could represent just the tip of the iceberg, given the investment arbitration’s limited transparency. While ICSID makes the existence of all proceedings public and generally encourages the publication of awards,[143] other arbitral institutions do not necessarily disclose their dockets, and even when they do so, they do not publish the awards unless the parties so agree.[144] Moreover, the existence of ad hoc arbitrations could remain unknown. Secondly, it takes time for parties to switch to this new forum. Although the first BIT providing for investor-state arbitration was signed in 1959,[145] only during the 1990’s did investment arbitration clearly emerge as an international mechanism of adjudicative review.[146] The first investment treaty arbitration was registered in 1987.[147] Since then, the flow of investment treaty claims has increased remarkably,[148] totaling 608 as of the year 2015.[149] Traditionally, parties preferred other fora for claims concerning pharmaceutical patents. National courts are always an option to foreign investors.[150] As pharmaceutical patents are territorial in nature, they are subject to the national laws of each individual country.[151] At the regional level, the Court of Justice of the European Union (CJEU) has adjudicated several cases dealing with IP in general and pharmaceutical patents in particular. Even human rights courts can and have adjudicated IP-related cases. For instance, the European Commission of Human Rights (ECoHR) has deemed that IP is a form of property and thus protected under Article 1 of the first Protocol of the Convention.[152] Finally, at the international level, the WTO has an additional DSM for cases in which a state violates its commitments under the TRIPS Agreement.[153] Thirdly, investment disputes take many years to complete and are extremely expensive—often more expensive than dispute resolutions at national and regional fora.[154] Thus, initiating an investment dispute may prove to be a suitable option only for large corporate actors that have the resources to fund multi-year, multi-million dollar disputes. Finally, investment lawyers may lack sufficient knowledge about intellectual property.[155] For a long time, investment disputes focused mainly on tangible assets,[156] while intellectual property was considered to be a “highly technical subject.”[157] Conversely, IP lawyers may lack sufficient knowledge about international investment law. The lack of knowledge and familiarity on the part of investment and IP lawyers may disincentivize them from advising their clients to pursue investment disputes for their IP rights. However, patent holders have started filing investment treaty arbitrations to protect their rights. There are several reasons for this change. First, investment treaty arbitration allows the investor to file a claim against the host state directly without the home state’s intervention[158] The private party can control the litigation strategy,[159] and obtain compensation for the host state’s past wrongs.[160] In contrast to the mechanism afforded by investor-state arbitration, the ICJ and the WTO dispute settlement systems are inter-state dispute resolution mechanisms.[161] Recourse to these dispute settlement mechanisms is exercised at the discretion of the home state of the private party and requires the exercise of diplomatic protection.[162] However, diplomatic protection constitutes a prerogative and not a duty for states, and they may exercise it at their will.[163] While companies lobby their governments to file disputes before the WTO DSM, it is up to the states to decide whether to bring a claim.[164] The home state may be reluctant to initiate a trade dispute because of political and diplomatic considerations, especially when the alleged IP violation is limited in scope.[165] Even when the home state does bring an ICJ or WTO claim, governments are generally more wary in promoting interpretations of international law that could limit their own regulatory freedom in the future.[166] An investor would exercise limited, if any, control over the dispute settlement strategy. Moreover, under an ICJ or WTO dispute, the state would be under no obligation to pay any reparation to the IP owners who were actually injured.[167] Remedies under the WTO DSM[168] have only a prospective character.[169] Inversely proportional to the decrease of patent disputes at the DSM,[170] the number of patent investor-state arbitrations has arisen.[171] While the effectiveness of the DSM is under dispute,[172] the recent rise of IP-related investment disputes may indicate a shift of forum.[173] Second, investment arbitration may be a suitable choice when the host state’s judiciary does not seem to ensure fair trials or impartiality. In such circumstances, the foreign investor may immediately refer the dispute to arbitration.[174] Alternatively, the investor-state arbitration may constitute the last resort when the case has already been discussed at the national level and the foreign investor is unsatisfied with the result for reasons such as perceived discrimination and denial of justice.[175] Third, the dispute settlement chapters of a number of Free Trade Agreements provide for the option of filing non-violation complaints for IP rights,[176] which is not currently possible under the TRIPS Agreement. Non-violation complaints are geared toward state measures that do not appear to directly violate treaty provisions but are nevertheless sufficiently disadvantageous to the investor’s IP. The aim of the provision is to maintain the balance of benefits struck during negotiations and transfer from the treaty-negotiating parties to arbitral panels the authority to decide when the investor has suffered enough disadvantage. There are indications that non-violation complaints have already been raised before investment tribunals.[177] Non-violation complaints about IP regulation were controversial during the TRIPS negotiations and remain so.[178] While the TRIPS Agreement provides for such remedies,[179] WTO Members have adopted a moratorium and agreed not to use non-violation complaints.[180] This is because non-violation complaints were historically used in GATT to address situations that were not specifically covered by the vague obligations of the agreement.[181] Therefore, they were not needed in the TRIPS context, in which member states’ obligations had been more clearly detailed in international conventions including the TRIPS Agreement and the Paris Convention.[182] Finally, the increasing use of investment arbitration for settling patent-related disputes may reflect the growing importance of “intellectual capital” as a source of wealth generation vis-à-vis other forms of capital investment in industries such as the extractive industries, and manufacturing. Ideas play a vital role in modern economies[183] Science, technology, and creativity generate economic value and increase the significance of intellectual property[184] as useful tools to incentivize creativity and technological development on as well as enhance access to technology.[185]

IV. Towards a New Dialectics: Pharmaceutical Patents, Public Health and Foreign Direct Investments

In recent years, a growing number of investor-state arbitrations have concerned the way host states govern the pharmaceutical sector. Arbitrations have been filed against both industrialized and developing countries in different continents, indicating that the phenomenon has a truly global scale.[186] The rise of patent-related investment arbitrations highlights the emergence of a new battlefield between the public and private interests. Investment arbitrations provide a new place of dialectical interaction between the private interests of the patent holders and the public interest of the host states in preserving access to medicines and ensuring the safety and effectiveness of given pharmaceutical products. Some of these arbitrations are related to states’ regulatory measures in the patent system.[187] For instance, the first known investment arbitration dealing with pharmaceutical patents, Signa S.A. v. Canada,[188] challenged Canada’s patent regulations. Signa, a Mexican generic pharmaceutical company, contended that the regulations governing the authorization process violated the fair and equitable treatment standard under Article 1105 of the NAFTA.[189] Signa established a joint venture with the Canadian company Apotex, Inc. for the production of a generic version of Bayer’s top-selling ciprofloxacin hydrochloride, an antibiotic that treats a number of bacterial infections.[190] In order to sell the pharmaceutical in Canada, an authorization was required by the relevant authorities.[191] According to the claimant, the relevant regulations provided that “by merely purporting to have a relevant patent, a person c[ould] obtain a mandatory prohibition against a generic competitor for a period of about 3 years.”[192] Because Bayer, the patent holder company, prevented Apotex and Signa from making ciprofloxacin hydrochloride for a period of about three years, Signa claimed loss of revenues and market share.[193] As the parties quickly settled this case, there is no publicly available information on the dispute and whether the filing of the Notice of Intent to Arbitrate had any strategic or other impact is not known. Nonetheless, the case is significant because it shows that foreign investors can challenge patent regulation governing the duration of patent protection and even the authorization processes. Other arbitration disputes relate to various issues, ranging from the regulation of competition law to the implementation of harmonization measures in the pharmaceutical sector required by the European Union. For instance, Uruguay is reportedly facing an arbitration claim over a recent decree that limits the concentration of ownership in Uruguay’s pharmacy sector.[194] A U.S. investment fund has filed Notices of Dispute pursuant to the Spain–Uruguay and U.S.–Uruguay BITs respectively, alleging that the decree harms the company’s recent investment in a chain of local pharmacies.[195] In parallel, the Servier v. Poland case arose because of regulatory measures adopted by Poland to implement EU law harmonizing pharmaceutical regulations.[196] By including IP within their ambit, IIAs restrict the regulatory autonomy of states in the pharmaceutical sector, potentially affecting fundamental public interests. These disputes give rise to both jurisdictional and substantive issues. First, some disputes will center on the jurisdictional issue of which economic activities amount to an investment, giving rise to an arbitral tribunal’s jurisdiction over the dispute.[197] Second, some investment disputes are concerned with whether or not a certain state action constitutes an unlawful expropriation of the patent right.[198] Third, if an expropriation has occurred, claims may concern the adequacy of the amount or form of compensation.[199] Fourth, the patent owner may also allege violation of the fair and equitable treatment standard.[200] Finally, some claims may concern alleged discrimination suffered by the foreign investor in violation of national treatment and most favoured nation treatment.[201] This article examines each of these claims. While it is too early to predict how relevant arbitral tribunals will adjudicate these cases, such disputes highlight the emergence of an additional litigation venue, i.e. investment treaty arbitration, for resolving pharmaceutical patent-related disputes. International investment agreements enable private companies to file claims against the host states directly without the intervention of the home state and to recover damages and loss of profits; they internationalize a given dispute, isolating it from the oversight of the domestic courts of the host state. At the same time, these new dialectics require the elaboration of new procedural, substantive and interpretive legal tools for recalibrating the expectations, entitlements and powers of the litigating parties. In fact, at the procedural level, investment treaty arbitration may not be adequate to enable arbitrators to strike an optimal equilibrium between public and private interests. As IP disputes can affect important public values, these arbitrations and the relevant awards should be disclosed to the public. Moreover, at the substantive level, arbitrators may not have in-depth expertise of IP law and the underlying policy considerations. The risk is that an inadequate appreciation of the policies underlying IP rights by adjudicators may lead to an overemphasis of the private interests and an under-emphasis of the public interests. The propertization of patents, i.e. conceiving them as mere assets, may lead interpreters to forget that they are based on a compromise between public and private interests.[202] As the substantive interplay between IP and international investment law remains uncharted,[203] and the functioning of investment treaty obligations with regard to IP, the parties’ expectations, and enforcement aspects of these treaties are largely unexplored.[204] Interpretation is crucial to striking an appropriate balance between private and public interests. The next subsections provide an overview of the existing patent-related investment disputes and are organized by issues that may arise in arbitration.

A. The Notion of Investment

International investment agreements are “agreements concluded between states for the promotion and protection of reciprocal investments.”[205] Addressing the question as to whether certain economic activities relating to pharmaceutical products amount to an investment is crucial to establishing an arbitral tribunal’s subject matter jurisdiction. A patent holder is entitled to the substantive and procedural protections afforded by the treaty only if the treaty classifies her as an “investor” or her economic activity as an “investment”. If a given economic activity—in casu, a pharmaceutical patent —constitutes a protected investment, the patent holder will benefit from the substantive protections of the applicable IIA. In order to ascertain whether pharmaceutical patents constitute a form of protected investment under a given IIA, one has to look at the specific text of the applicable treaty. If the parties have opted for resolving their dispute at the ICSID, the ICSID Convention will be also applicable, which extends jurisdiction “to any legal dispute arising directly out of an investment.”[206] In this situation, the adjudicators will have to determine whether a given economic activity constitutes an investment under both the ICSID Convention and the applicable IIA. Patents are usually considered a form of investment under the ICSID Convention and most IIAs. The ICSID Convention does not provide a definition of investment.[207] Rather, it stipulates that ICSID jurisdiction extends “to any legal dispute arising directly out of an investment.”[208] In practice this has meant that commentators and arbitral tribunals have elaborated a number of criteria for defining the term.[209] Most notably, the leading test was articulated by Salini v. Morocco, which involves a dispute arising out of the construction of a highway. The Salini test includes four elements: 1) a contribution of money or other assets of economic value; 2) a certain duration; 3) an element of risk; and 4) a contribution to the host state’s development.[210] In general terms, tribunals allow the consideration of pharmaceutical patents as a form of investment. First, pharmaceutical patents are assets of economic value, with a duration of twenty years. Second, creating a medicine involves an element of risk, as it may take years of research and development. Finally, the availability of pharmaceutical products—which goes hand in hand with the protection of pharmaceutical patents—can improve the public health of a given country, and albeit indirectly, to its economic development. These requirements embody a balance between the private interests of foreign companies and the public interest of the host state, because they ensure that economic activities are protected as long as they contribute to the economic development of the host state. However, given the vagueness of the ICSID Convention, the definition of investment provided by the applicable IIA will often be decisive for ascertaining whether a given activity constitutes an investment, because the specific languages of the IIAs are frequently given deference.[211] In Servier v. Poland,[212] a dispute concerning the commercialization of pharmaceuticals in Poland, the Tribunal upheld its jurisdiction notwithstanding Poland’s opposition.[213] According to Poland, the presence of Servier subsidiaries in Poland did not entitle Servier to recover,[214] as the claimants did not have any investments in the host state itself under Polish law.[215] Servier counter-argued that “it [wa]s the Treaty, not Polish law, that [wa]s relevant in assessing whether Servier’s assets [we]re protected investments.”[216] The Tribunal held that it possessed jurisdiction, acknowledging that the companies were incorporated in France, thus being foreign investors, and therefore it had jurisdiction ratione personae.[217] It usually requires a case-by-case analysis to determine whether IP constitutes an investment[218] because different IIAs provide different definitions of investment. BITs do not include detailed regulation of pharmaceutical patents. Rather, they briefly mention IP rights as a form of protected investment.[219] Some IIAs incorporate a broad definition of investment that generally covers both tangible and intangible property.[220] Other IIAs either generally refer to IP rights, or explicitly indicate the types of IP covered, such as copyright, patents, industrial designs, trade secrets, trademarks and others.[221] A question that often arises is whether patent applications are covered investments under the relevant investment treaty. Although registered patents are covered in most investment treaties, it remains an open question as to whether patent applications should be deemed a form of protected investment even if they are not entitled to the same protections as a patent itself.[222] Certain IIAs expressly exclude the possibility that patent applications constitute protected investments.[223] Other investment treaty provisions protecting “rights with respect to [IP]”[224] or “patentable inventions” leave much uncertainty.[225] For instance, the U.S.–Jamaica BIT covers patentable inventions and therefore should cover patent applications as investments.[226] Other IIAs protect “intangible property” and arguably this generic notion can include patent applications.[227] As patent applications can be sold and assigned to third parties,[228] the argument goes that they are a form of “intangible property,” even though they do not constitute “intellectual” property.[229] The European Court of Human Rights held that both registered trademarks and applications to register trademarks were “property rights” within the meaning of Article 1 of Protocol No. 1 of the European Convention on Human Rights.[230] The fact, however, that most investment treaties provide protection to both investors and their investments only after the establishment of an investment suggests that a case-by-case analysis is needed. Recently in Apotex Holdings Inc. v. United States (Apotex III), a Tribunal held that patent applications were not investments under NAFTA Chapter 11.[231] The claimants sought over $1 billion in damages from the United States[232] after the U.S. Food and Drug Administration (FDA) imposed an Import Alert on certain generic medicines that were produced in Canada by Apotex Inc., exported to the U.S. and sold in that market by a U.S.-based Apotex subsidiary.[233] According to the respondent, the FDA issued the alert after its inspections of Apotex facilities in Canada found significant violations of U.S. laws and regulations.[234] The United States emphasized that Apotex produced all of its products in Canada,[235] and argued that the cross-border trade of pharmaceuticals did not constitute an investment.[236] The claimants argued that they had the following investments in the U.S.: 1) certain intellectual property rights, that is, abbreviated new drug applications (ANDAs), directly held by Apotex Inc. and indirectly held by Apotex Holdings;[237] and 2) Apotex Corp., a U.S.-based subsidiary of Apotex Holdings, that markets pharmaceuticals produced in Canada.[238] The Tribunal held that ANDAs were not “investments” in the United States.[239] In this regard, the Tribunal followed previous awards (Apotex I and II) which rejected claims that applications for the sale of medicines into a host state could be considered investments.[240] The Tribunal clarified that even if preparing those applications required significant expenses, the true business activity was the production of the medicines in the home state for export in the host state.[241] Therefore, the only investment was the subsidiary Apotex Corp. Commentators criticized the award on this latter point, submitting that it “blurs the line between trade and investment disputes,” and that companies might use their subsidiaries as a kind of “Trojan horse” for obtaining protection under the relevant BIT.[242] The mere sale of pharmaceutical products does not amount to an investment. Mere sales of goods do not have the prerequisites of a certain duration, risk and contribution to the economic development of the host state which characterize investments. Rather, such sales can “preserve export markets for the patent owner, leading to welfare losses for the host country,” potentially “impeding local innovation,” and increasing the costs of medicines.[243] As mentioned, IIAs reflect a bargain where the state restricts some of its sovereign rights to attract foreign investments. When the private party is not holding up her end of the bargain by taking risks and making a real contribution to the host state’s economy, such sales are not investments and are not entitled to the substantive protection of the IIA. An arbitral tribunal recently clarified that the mere sale of medicines does not amount to an investment in Italy v. Cuba.[244] Italy initiated this investment treaty arbitration arguing that the contractual agreement between Menarini, an Italian pharmaceutical company, and Medicuba, an entity affiliated with the Cuban Ministry of Health, was an investment protected under the Italy-Cuba BIT.[245] According to the claimant, the agreement did not relate merely to the supply of medicines, but also included the research and development of new pharmaceutical products.[246] The claimant also stressed the duration of the contract, the collaboration with local agents, and the particular importance of the given medicines to public health in Cuba.[247] The respondent counter-argued that Menarini was not an “investor” as it merely sold its products to Medicuba and had no subsidiary in Cuba.[248] According to the respondent, contacts with local agents should be considered a normal business practice, and the organization of a cardiology conference was merely aimed at marketing related products and should not be conceived as evidence of an investment.[249] Cuba concluded that it had reached an agreement with the company, according to which Cuba would have paid its invoices, while the company would have started its commercial operations with Medicuba again.[250] After reaching the mentioned agreement with Cuba, Menarini ceased to invoke diplomatic protection.[251] In light of this circumstance, Italy withdrew its diplomatic protection.[252] However, it did not withdraw the claim in its own name.[253] The Tribunal found Menarini’s activities not an investment, and dismissed Italy’s claims due to lack of subject matter jurisdiction. In its reasoning, the Tribunal defined investment as any economic activity carried out by an investor characterized by a contribution to the economic development of the host state, for a certain duration and involving commercial risks.[254] After examining the contract between Menarini and Medicuba, tellingly entitled “Contrato de Compra-Venta” which translates to “Contract of Sale,”[255] the Tribunal held that the given commercial activity was not an investment but a sale of pharmaceuticals. As there was neither contribution of resources into Cuba nor assumption of risk beyond the mere risk of nonpayment, the Tribunal held that such sale of medicines did not constitute an investment protected under the Italy–Cuba BIT.[256] The Tribunal added that sponsoring medical congresses does not qualify the subsequent sales of medicines as investments, as such activity is a classic marketing practice.[257] To summarize, the question as to whether intellectual property constitutes an “investment” requires a case-by-case assessment. Mere sales of pharmaceuticals do not amount to investments. IIAs reflect a bargain—where the state gives up some of its sovereign rights in exchange for a better chance of attracting foreign investments. Arbitral tribunals have taken this bright-line rule that when it is mere sale of goods, the state is not gaining enough from the bargain and the investor is not contributing enough by taking risks or contributing to the economic development of the state.[258] Patent applications create a mere expectation of obtaining a patent but do not constitute patents. Although some argue that the application is a form of “intangible property”, the question as to whether a patent application can be considered an investment depends on the precise wording of the relevant IIA.[259] Because the specific language of the treaty reflects the voluntary consent of the state involved, it can be presumed that the states have already taken the public interest into account when accepting to protect patent applications as forms of investments. Any determination of intellectual property as an “investment” in international investment law and arbitration has far-reaching policy implications. Firstly, the IIA language reflects a delicate balance between private and public interests. States can shape this balance when defining investment in their IIAs—a fine balance that is also intrinsic in the protection of pharmaceutical patents. Secondly, when arbitral tribunals determine whether an economic activity constitutes an investment, such determination can affect both foreign and domestic pharmaceutical companies.[260] In fact, the tribunals’ awards could have effects reverberating beyond the parties to the given disputes. Although the rule of stare decisis, or binding precedent, does not apply to international arbitration and awards are binding only between the parties,[261] previous arbitral awards have influenced, if not shaped, much of contemporary investment law.[262] For example, if a patent application is considered to be a protected investment, private interests may receive a higher level of protection than they otherwise would be and the state regulatory autonomy will be restricted according to the relevant investment treaty provisions. By contrast, if a patent application is not considered to be a protected investment, private interests will receive a lower level of protection than they otherwise would, but the host state will preserve its regulatory autonomy. Therefore, it is crucial that when treating intellectual property as an “investment,” arbitrators should consider the precise wording of the applicable investment treaty and the underlying policy implications,[263] taking into account both private and public interests. The determination whether a certain economic activity constitutes an investment can affect the ability of the host state to calibrate national policies to local conditions and needs.

B. Expropriation

International investment treaties provide, inter alia, for protection against unlawful expropriation.[264] This raises two questions: whether a state action constitutes expropriation, and if it does, whether or not the expropriation is lawful. Several arbitrations have been concerned with the issues of what acts of the state amount to an expropriation. Treaty provisions lack a precise definition of expropriation, and their languages encompass a potentially wide variety of state activities that may interfere with pharmaceutical patents.[265] Usually IIAs clarify that expropriatory measures are lawful if adopted: 1) for a public purpose; 2) on a non-discriminatory basis; 3) in accordance with due process of law; and 4) on payment of compensation.[266] Failure to satisfy any of these requirements will imply that the expropriation is unlawful and thus requires compensation. Expropriation includes both direct and indirect expropriation. Direct expropriation of intellectual property is usually done through formal transfer of title or outright seizure of the same.[267] This has happened in the past.[268] For instance, in German Interests in Polish Upper Silesia, the Permanent Court of International Justice found that a Polish statute, which transferred to the Polish Treasury all the properties of the German Reich located in the territory annexed to Poland, expropriated not only the Chorzów factory, but also certain patents.[269] More recently, in Shell Brand International AG v. Nicaragua,[270] two Shell subsidiaries filed a claim against the Government of Nicaragua for breach of the Netherlands–Nicaragua BIT in response to an alleged direct expropriation of their logo and brand name.[271] According to the claimants, Nicaragua seized their trademarks in an effort to enforce a judgment of a Nicaraguan court.[272] Even without direct expropriation, a state action could nonetheless amount to indirect expropriation of a patent. Indirect expropriation indicates measures that do not directly take investment property but interfere with its use, depriving the owner of its economic benefit.[273] For instance, several studies have examined the question as to whether compulsory licenses—when a government allows someone else to exploit the patented product or process without the consent of the patent owner—and parallel imports—importing and selling branded goods into a market without the consent of the patent owner—can amount to an expropriation of pharmaceutical patents.[274] Although the TRIPS Agreement permits compulsory licenses and parallel imports,[275] the issue remains open as to whether they constitute indirect expropriation under investment agreements. So far no claims have been brought concerning these specific issues.[276] In Servier v. Poland, the Tribunal held Poland liable for expropriation of pharmaceutical marketing authorization in breach of the France–Poland BIT.[277] As part of Poland’s accession to the European Union (EU), the country revised its pharmaceutical laws to harmonize them with EU law.[278] Under one of these harmonization measures, medicines to be sold in Poland required a renewal of their marketing authorization.[279] In late 2008, Polish health authorities did not renew the authorization for two medicines produced by the claimants,[280] the precise reasons for which remain confidential.[281] Around the same time, authorization was granted to Polish companies to produce market alternatives of these medicines.[282] Against this background, the claimants, three French pharmaceutical companies, commenced arbitration under the France–Poland BIT, contending that the denial of authorizations amounted to a substantial deprivation of value, and thus a direct or indirect expropriation of their pharmaceutical patents.[283] Poland argued that its decisions not to renew marketing authorizations were adopted in the “normal course of [its] duties as pharmaceutical regulator, and based on the drug’s failure to comply with EU law requirements,”[284] and thus did not amount to an expropriation. In particular, Servier could not have expected that authorization would indefinitely be granted in the context of both a heavily-regulated pharmaceutical industry and Poland’s transition to its EU membership.[285] Moreover, Poland contended that its conduct complied with EU law, which was binding on both Poland and France being the “product of a joint French and Polish policy choice.”[286] According to Poland, EU law constituted a “relevant rule of international law applicable between the parties” under Article 31(3)(c) of the Vienna Convention on the Law of Treaties,[287] and therefore it would be “inappropriate to find that the regulatory requirements to which both parties agreed could give rise to an obligation of compensation.”[288] Poland further contended that in denying marketing authorizations to certain medicines, it exercised its police powers[289] in a way that was proportionate to the public interest to promote public health and adopted in good faith,[290] and hence the arbitrators should show deference to state regulatory choices.[291] Poland concluded that it had an obligation to adopt the regulatory measures because EU law would not have allowed other regulatory choices.[292] Servier contended that the state measures were discriminatory, disproportionate and unreasonable. According to Servier, the state measures were discriminatory because the state granted authorizations to local producers but rejected Servier’s applications,[293] even though no regulations required Poland to reject foreign applications over local.[294] Servier contended that “Poland viewed the harmonization process as a means to promote the local pharmaceutical industry, in particular through the registration of low-cost local generic products.”[295] On proportionality, Servier suggested that, rather than denying authorization, the health authorities could have limited the indications for use of the medicines, or given conditional approval while requiring further information.[296] Finally, the claimant alleged that no reasonable serious public health reason justified the nonrenewal of their syrup product[297] while authorizing the same product in tablet form.[298] The Tribunal found that the denial of marketing authorizations amounted to an indirect expropriation, implicating a State’s substantial interference with the investor’s rights.[299] The Tribunal held that such indirect expropriation was discriminatory and “not a matter of public necessity”[300] and awarded compensation to the foreign investor. As the award is extensively redacted, the legal test that the Tribunal adopted remains opaque; it also remains unclear whether the Tribunal upheld Servier’s argument that the indirect expropriation was unlawful.[301] But the award does show that the Arbitral Tribunal has looked closely to the language of the applicable IIA that provided that “any divestment” (whether lawful or unlawful) would give rise to prompt and adequate compensation at the real value of the investment.[302] In another recent dispute, the U.S.-based pharmaceutical company Eli Lilly filed a Notice of Intent against the Government of Canada under NAFTA Chapter 11,[303] claiming that the invalidation of some of its patents by Canadian courts for “inutility”[304] amounted to unlawful expropriation[305] and sought $500 million in damages.[306] Although this case is still pending, an examination of the parties’ arguments on the central issue of expropriation sheds light on the private and public considerations in the evolving dialectics. Eli Lilly contended that by invalidating its patent, the Canadian court adopted a standard of utility that was contrary to Canada’s international treaty obligations.[307] It required not only that a given invention have some “scintilla” of usefulness, but also that the patent holder prove the invention has lived up to the usefulness “promised” by the patent holder at the time of seeking the patent.[308] If the patented invention is found not to meet this promise, the patent can be invalidated. According to the claimant, this promise doctrine of utility diverged from patent law in other countries, and had had the effect of invalidating a large number of patents in recent years.[309] Eli Lilly argued that not only would the promise doctrine unduly impede research and development,[310] but it would also breach Canada’s obligations under several IP conventions[311] “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.” [312] Thus, Eli Lilly argued, it constituted either a direct expropriation because it deprived Eli Lilly of its exclusive rights to prevent third parties from making, using, or selling its patented products during the patent term,[313] or alternatively, an indirect expropriation because it had the effect of nullifying the value associated with the patent.[314] In its Statement of Defense, Canada countered that a direct expropriation only occurs when rights are taken by the state,[315] but not when a court invalidates a patent, because this “does not amount to a ‘taking’, but rather, constitutes juridical determination of the existence and scope of rights at law.”[316] In other words, according to Canada, the company cannot claim its investments were expropriated because there were no investments; its patents did not even exist under Canadian law.[317] Canada also argued that the protection against expropriation under NAFTA Article 1110 “does not apply to the procedurally fair invalidation of a patent by a domestic court”[318] because this happens each year by courts in all major jurisdictions.[319] Additionally, Canada argued that its actions cannot give rise to expropriation under Article 1110(7) of NAFTA,[320] because they were consistent with NAFTA Chapter Seventeen,[321] which grants the inventor exclusive rights in a new and useful invention for a limited period in exchange for disclosure of the invention so that society can benefit from this knowledge.[322] Turning to the indirect expropriation claim, Canada argued that the patent invalidation did not constitute a substantial deprivation of the economic value of the claimant’s investments.[323] Rather, according to Canada, the invalidated patents were just one component of Eli Lilly’s overall business in Canada.[324] In fact, the company continues to grow and sells a number of products.[325] With regard to the character of the invalidation, Canada emphasized that “it was a legitimate and good faith exercise of the judicial authority of the state.”[326] The defendant also highlighted that the “whole notion of judicial expropriation is entirely unsettled even in domestic legal systems, let alone in customary international law.”[327] As the case is pending, it is not possible to foresee how it will be decided. In Apotex Inc. v. United States, Apotex, a Canadian generic pharmaceutical company, alleged, inter alia, expropriation of its investments as domestic courts refused jurisdiction to its claim seeking a declaratory judgment of noninfringement.[328] The Federal Food, Drug and Cosmetic Act and subsequent amendments provide for an ANDA that enables generic manufacturers to obtain regulatory approval of lower-priced generic versions of previously approved medicines on an expedited basis, thereby benefitting the U.S. healthcare system and American consumers.[329] In 2003, Apotex filed an application with the FDA to obtain the approval of a generic version of an antidepressant before the expiration of the relevant patent.[330] When the patent holder Pfizer declined to file an infringement suit, Apotex filed for a declaratory judgment that it was not infringing on the patent, which Apotex claimed to be a common legal tactic in patent litigation.[331] However, the Southern District of New York dismissed Apotex’s suit as the claimant lacked a “reasonable apprehension” that Pfizer would launch a suit for patent infringement.[332] The Federal Circuit affirmed the district court’s decision, and the petition for certiorari was denied.[333] Against this background, Apotex filed a notice of arbitration, contending that the United States’ conduct amounted to an unlawful expropriation in violation of NAFTA Article 1110.[334] The claimant argued that “under international law, expropriation occurs where government action unreasonably interferes with an alien’s effective use or enjoyment of property.”[335] According to the Apotex, the U.S. interfered with its property rights in the ANDA “by unlawfully preventing [it] from obtaining a federal court decision” assessing the validity of the relevant patent, and “substantially depriving [it] of the benefits of its investment.”[336] The claimant also argued that the defendant “ha[d] no ‘public purpose’ for interfering with Apotex property rights”,[337] and it “failed to provide the company with due process of law.”[338] Finally, Apotex claimed that it did not receive compensation for the damages it alleged to have suffered.[339] A parallel dispute,[340] which was joined to the former and heard by the same Arbitral Tribunal,[341] involved the submission of an ANDA seeking approval for a generic version of a heart medication.[342] In order to obtain approval of its application, Apotex had sued the patent owner, Bristol Myers Squibb (BMS), to make sure that it would not face a patent infringement claim after it launches the Apotex medicines on the market.[343] In response, BMS moved to dismiss the claim for lack of subject matter jurisdiction on the ground that it had no intention of suing Apotex for infringement.[344] The Court granted BMS’ motion to dismiss.[345] Apotex argued in the arbitration that the administrative decision of the FDA and the opinion of the courts each violate both U.S. statutory law[346] and NAFTA.[347] In particular, Apotex alleged that the state action interfered with its property rights in its medicine application, thus amounting to an unlawful expropriation in breach of NAFTA Article 1110.[348] Apotex further claimed that because the United States had no “public purpose” for interfering with its property rights and did not provide compensation,[349] the company was entitled to compensatory damages. The Arbitral Tribunal dismissed both claims on jurisdiction because of the failure to exhaust local remedies,[350] time limits,[351] and lack of investment.[352] It also ordered Apotex to pay the United States’ legal fees and arbitral expenses.[353] Although the holding does not touch upon the claim of expropriation, the case shows that claims of judicial expropriation have been brought by pharmaceutical companies. In conclusion, there is no mechanical formula for determining whether state conduct amounts to a direct or indirect expropriation. Generally, expropriation requires that there be an investment in the first place. Depending on the language of the applicable IIA, patent applications may not constitute investments. Expropriation requires that there be a substantial deprivation to the investor.[354] The invalidation of a patent can affect the economic interests of the patent holder and can constitute an indirect expropriation of its rights.[355] However, the act of governing patents can constitute a form of legitimate regulatory activity.[356] The character and regulatory purpose behind the government regulation can carry weight in the assessment as to whether there was a legitimate exercise of the state’s police power or an indirect expropriation.[357] The burden of proving that the state conduct is inconsistent with a legitimate exercise of its police powers falls upon the claimant.[358]

C. Determining Compensation

Another area where the fine-tuning of private and public interest takes place is the determination of compensation to be paid after an expropriation has taken place. IIAs’ expropriation provisions may be more beneficial to the patent owner than both domestic and international patent law.[359] Customary compensation rules, uniformly enshrined in investment protection treaties, do not differentiate between the various public purposes of expropriations, but instead pose a single standard:[360] in the case of expropriation, investors must be fully compensated.[361] Several investment treaties further require compensation to be prompt, adequate and effective, according to the so-called Hull formula.[362] In Servier v. Poland, the case concerning the alleged expropriation of Servier’s investments, the France–Poland BIT required that any expropriation would give rise to “prompt and adequate compensation” at the real value of the investment.[363] Therefore, the Tribunal held that this compensation standard was to be applied, regardless of whether the expropriation was lawful or unlawful.[364] While the Tribunal had “discretion to impose additional sanctions to punish Treaty violations of particular seriousness,”[365] it found that Poland had “not engaged in bad faith behaviour … that would require damages beyond the Treaty standard.”[366] Instead, the Tribunal awarded the real value of the investment plus interests, calculated “on the basis of the appropriate rate of interest in force at the time of divestment” as required by the France-Poland BIT.[367]

D. Fair and Equitable Treatment

Fair and equitable treatment (FET) has become the most often invoked provision in investment treaty arbitration.[368] Due to its deliberate vagueness, it constitutes a catch-all provision covering the situations where there is no finding of expropriation or any other breach of other investment treaty standards.[369] The FET standard is an absolute standard of treatment, designed to provide a basic safeguard upon which the investor can rely at any time, as opposed to the “relative” standards embodied in both the national treatment and “most favored nation” principles, which, in contrast, define the required treatment by reference to the treatment accorded to other investments.[370] In an attempt to delimit the perimeters of the standard, the NAFTA Free Trade Commission issued an interpretation of the provision,[371] which is binding on all NAFTA tribunals.[372] The Commission clarified that the FET provision under NAFTA Article 1105 prescribes the customary international law’s minimum standard of treatment and does not require any standard of treatment that goes beyond that.[373] Traditionally, the minimum standard of treatment protected investors only in instances of “egregious and shocking” conduct or “manifestly unfair or inequitable conduct.”[374] Therefore, in the NAFTA context, arbitral tribunals still consider the FET standard to be the customary international law minimum standard of treatment.[375] For instance, in Apotex Holdings Inc, Apotex Inc. v. United States (Apotex III),[376] which concerned the import ban on certain pharmaceuticals produced in Canada, the claimant contended that the U.S. breached the minimum standard of treatment due to a perceived lack of due process in providing the issue alert and the delays experienced in re-inspecting the facilities.[377] Although Apotex contended that the FET standard is an evolving standard which has gone beyond the customary minimum standard of treatment, the Tribunal sided with the United States and affirmed that in the NAFTA context, FET means the customary minimum standard of treatment.[378] The Tribunal found that the Claimants had not presented sufficient evidence of state practice or opinio juris indicating an expansion of the customary minimum standard of treatment.[379] After noting that “[w]hen interpreting and applying the ‘minimum standard’, a Chapter 11 tribunal does not have an open-ended mandate to second-guess government decision making,”[380] the Tribunal did not find any breach of the FET provision. In Eli Lilly v. Canada, the pending case relating to the invalidation of patents for failure to meet the utility requirement, the claimant contends that the allegedly unexpected and arbitrary adoption by the Canadian courts of a new, stricter approach to patent invalidation is contrary to the company’s “reasonable investment-backed expectations,”[381] and in breach of NAFTA Article 1105.[382] The company argues that it could not have anticipated at the time of its investment that the requirement for utility would be altered by the adoption of the “promise of the patent” doctrine into Canadian law and practice.[383] In its Statement of Defence,[384] the Government of Canada counter-argued that the claimant received due process before Canadian courts and simply being disappointed with the outcome of two patent trials does not amount to a breach of the relevant obligations.[385] Rather, according to the respondent, “[t]he threshold for a violation by a court of the minimum standard of treatment” is set “extremely high” under customary international law.[386] Canada highlights that the FET standard does not prevent the evolution of a State’s legal framework,[387] as NAFTA Chapter 11 was never meant “as a kind of insurance policy against the risk of any changes in the host States legal and economic framework.”[388] In its Counter Memorial, Canada also points out that NAFTA’s FET provision does not go beyond the minimum standard of treatment required under customary international law.[389] According to Canada, “a violation of Article 1105(1) will not be found unless there is evidence of serious malfeasance, manifestly arbitrary behaviour or denial of justice by the respondent NAFTA Party.”[390] Therefore, Canada argues that a mere frustration of investors’ legitimate expectations does not establish a breach of the minimum standard of treatment, as the theory of legitimate expectations has not become a rule of customary international law.[391] Although the FET standard has not presented much of a viable claim in the NAFTA context, it can have a concrete impact outside the NAFTA milieu, where arbitral tribunals have broadened the notion of fair and equitable treatment significantly. The standard has exceeded the customary minimum standard of treatment and comprises various additional requirements, such as transparency, due process, and others.[392] Under this broader conceptualization, the FET standard has figured prominently in a number of patent-related investment arbitrations. IP-related FET claims, both within and beyond the NAFTA context, have raised a number of questions. Does the grant of the patent by the host state constitute state representations which in turn create legitimate expectations the patent holder may rely upon?[393] Can an investor rely upon international IP norms as a source of legitimate expectations?[394] Does investment treaty arbitration provide a new means to enforce international IP agreements?[395] What is the relationship between denial of justice and indirect expropriation claims? The next subsections address these questions.
1. IP Rights as a Basis for Investor’s Legitimate Expectations
The concept of “legitimate expectations” allows a foreign investor to claim compensation in situations where “the conduct of a host state creates a reasonable expectation … that [the investor] may rely on that conduct, such that a subsequent failure by the host state to honour those expectations causes the investor to suffer damages.”[396] Legitimate expectations are not an independent cause of action. Whether or not the fair and equitable standard protects the legitimate expectations of foreign investors has been answered in various ways.[397] The divergence concerning the content of the FET standard, and the protection of the legitimate expectations of the investor, is really about the level of protection that should be granted to foreign investors and their investments. While investors want stronger investment protections, host states favor weaker restrictions on the exercise of their sovereign powers.[398] The variance also expresses the preference of NAFTA states for striking a balance between public and private interests at the legislative (domestic) level, rather than empowering arbitral tribunals to find that balance between such interests at the adjudicative (international) level. Translating this general discussion in the specific context of IP protection, one wonders what type of expectations, if any, patents can give rise to. Patents are a type of IP, governed by both national statutes and international instruments such as the Paris Convention and the TRIPS Agreement. Can investors legitimately expect that these domestic and international instruments will not be violated by the host state? Can investors legitimately expect an absolute protection of their economic interests? Patent law is characterized by the concept of the “patent bargain” or granting the right of exclusive exploitation of a given invention in exchange for the disclosure of a novel invention.[399] It expresses a fundamental and intrinsic balance of public and private interests. Patents do not confer absolute rights, nor do they create any legitimate expectation that the exclusivity they confer is absolute and will remain without interference from accepted checks and balances inherent in the IP system.[400] Not only does the international IP framework provide for commonly used regulatory controls on the utilization and exploitation of patents,[401] but patents are territorial in nature. Patents exist by virtue of legal recognition from the state. Therefore, it is within a host state’s competence to determine the patentability and scope of protection offered for patents granted pursuant to national law. Moreover, IP rights do not confer positive rights for rights holders to make or use the protected invention; rather they are negative rights, which allow rights holders to exclude competitors from exploiting a given invention for a limited time. They cannot prevent states from regulating the use of such rights in the pursuit of legitimate public policy objectives.[402] Conversely, if a host state grants specific assurances to an investor regarding the exploitation of her investment in the host state, the adoption of new regulatory measures affecting the economic value of her investment might amount to a breach of fair and equitable treatment.[403]
2. International IP Norms as a Source of Legitimate Expectations
In several investment arbitrations, investors have claimed that measures adopted by the host state and affecting their investments are illegal under a number of international IP agreements and therefore violate the FET standard. According to this line of argument, if the host state is party to international intellectual property agreements such as the TRIPS Agreement, the Paris Convention and the Patent Cooperation Treaty, an investor is justified in having a legitimate expectation that the state will not violate such agreements.[404] This argument assumes that if the state has acted in a way that deviates from the investor’s legitimate expectations, it violates the FET. In Eli Lilly v. Canada, the pending case relating to the invalidation of patents on grounds of inutility, the claimant contends that the adoption by the Canadian courts of a new, stricter approach to patent invalidation is contrary to the company’s “reasonable investment-backed expectations,”[405] and in breach of NAFTA Article 1105.[406] The claimant contends that by violating a number of international law instruments governing patentability requirements, the Canadian measures are in breach of the FET standard.[407] The company stresses its legitimate expectations that Canada complies with international IP treaties,[408] including the TRIPS Agreement, the Patent Cooperation Treaty and NAFTA Chapter 17. Canada maintains that the Tribunal lacks jurisdiction over the alleged breaches of Canada’s international treaty obligations[409] under TRIPS, PCT or NAFTA Chapter Seventeen, and that enforcement of obligations under these other international IP agreements may only be brought before their own respective venues.[410] Canada also maintains that it is not breaching the investor’s legitimate expectations because it is complying with the substantive provisions of the TRIPS Agreement, NAFTA Chapter 17 and the PCT. First, according to Canada, the TRIPS Agreement “did not attempt to create a uniform or deeply harmonized patent regime,” rather, it “left ample room for national variations and approaches to substantive patent issues.”[411] In fact during the TRIPS negotiations, “broad terms were used due to the lack of consensus on substantive law and the desire to maintain flexibility.”[412] Second, Canada stresses that NAFTA Article 1709(1), whose language was drawn upon the TRIPS negotiations,[413] includes the criteria “new,” “result[ing] from an inventive step,” and “capable of industrial application” as criteria for patentability of a given medicine, but also notes that “a Party may deem the terms ‘inventive step’ and ‘capable of industrial application’ to be synonymous with the terms ‘non-obvious’ and ‘useful,’ respectively.”[414] This indicates that the parties could not agree on a common terminology for patentability requirements and their substantive content. Third, Canada notes the irrelevance of the PCT to the case. In fact, according to the state, such treaty “does not govern either substantive conditions of patentability or the invalidation of patents. It simply facilitates the international filing of patent applications ….”[415] In fact, Canada stresses that “[f]iling in accordance with the PCT is no guarantee that a patent application will result in a successful patent grant, or that any grant of a patent will withstand judicial scrutiny.”[416] The argument that a state’s adhesion to other treaties gives rise to legitimate expectations that the state will not breach such treaties relies on an expansive and evolving interpretation of the FET standard. Under NAFTA, it seems that such a claim lacks merits, as NAFTA tribunals have adopted a restrictive approach to the interpretation of the standard, analogizing it to the minimum standard of treatment under customary law. Beyond the NAFTA context, some tribunals have considered that the protection of legitimate expectations constitutes part of the FET standard. However, it remains to be seen whether arbitral tribunals will consider that legitimate expectations include an expectation that the host state will not breach its international law commitments. The argument, if adopted, would impose a powerful constraint on states for which the state did not bargain for in the negotiation of IIAs. Even if arbitral tribunals accepted such an expansive interpretation of the FET standard, the fact remains that international IP treaties provide very vague terms, and therefore have traditionally left much room for maneuver to the states. In general terms, international IP treaties “include deliberate gaps, reflecting areas of non-convergence and the residual sovereignty of states to legislate specific rules.”[417] Such treaties do not define the concepts of utility, novelty and nonobviousness because “there is no consensus on how to apply these doctrines.”[418] Rather the content of these “open-ended” standards evolves over time,[419] and states shape patentability standards “to achieve net policy goals in specific sectors.”[420] The national implementation of international IP standards varies across countries.[421] As the current international IP regime is “rooted in the disparate practices … of different nations,” “non-uniformity pervades [its] very fabric.”[422] For instance, the TRIPS Agreement clarifies that “[m]embers shall be free to determine the appropriate method of implementing the provisions of this Agreement within their own legal system and practice.”[423] Moreover, the Rules and Procedures Governing the Settlement of Disputes (DSU) provides that WTO panels and the Appellate Body (AB) “cannot add to or diminish the rights and obligations provided for in the covered agreements.”[424] WTO jurisprudence has confirmed this “space reserved for state sovereignty.”[425] In conclusion, how countries achieve a competitive balance between public and private interests remains a national prerogative, provided that they comply with their international obligations.
3. A New Tool to Enforce International Intellectual Property Agreements
Can investment treaty arbitration constitute a new tool to enforce international IP agreements? Can it provide investors with an alternative venue to challenge the consistency of domestic regulations with the TRIPS Agreement, instead of lobbying their governments to bring a WTO dispute? And if parallel proceedings are brought before the WTO DSM and investment treaty arbitral tribunals respectively, will arbitral tribunals, WTO panels and the AB show any deference to the other venues? In some exceptional cases, foreign investors have attempted to use international investment law to indirectly protect other values by requiring a state to respect its international law obligations that are critical to the success of the investment.[426] For instance, a Canadian investor filed an investment treaty claim against Barbados, arguing that the alleged failure to enforce its own environmental law implementing international obligations violates FET under the Canada-Barbados BIT.[427] The formulation of this claim illustrates a novel form of interplay between international investment law and other branches of international law. When adjudicating IP investment disputes, the question arises as to whether arbitral tribunals can take into account other bodies of law in addition to international investment law. A breach of the TRIPS Agreement cannot provide a basis for an independent claim in investment treaty arbitration. Investment treaty arbitral tribunals cannot adjudicate on a violation of international IP law, unless the relevant investment treaty requires them to do so. If an international investment agreement does not refer to other treaty obligations, it appears difficult to assume that the IIA parties wished to interpret the FET standard in such a wide-ranging manner.[428] In fact, had the IIA parties wished to expand the scope of protection to cover violations of other treaties, they could have included explicit reference to these other treaties. In addition, the DSM has exclusive jurisdiction in settling disputes over breaches of WTO law.[429] This seems to preclude arbitral tribunals to adopt such an expansive interpretation of the FET standard. For instance, in Grand River Enterprises Six Nations v. United States, the Tribunal held that the FET standard in NAFTA Chapter 11 “does not incorporate other legal protections that may be provided investors or classes of investors under other sources of [international] law” otherwise the standard would become “a vehicle for generally litigating claims based on alleged infractions of domestic and international law.”[430] In another case, the Tribunal held that the applicable law “does not incorporate the universe of international law into the BITs or into disputes arising under the BITs.”[431] Yet, when interpreting a treaty, a tribunal can take account of other international obligations of the parties according to customary rules of treaty interpretation as restated by the Vienna Convention on Law of Treaties (VCLT).[432] Article 31.3(c) of the VCLT provides that there shall be taken into account, together with the context, “[a]ny relevant rules of international law applicable in the relations between the parties.” Therefore, the host state’s obligation under other international IP treaties can come into consideration of the disputes before arbitral tribunals. The TRIPS Agreement, for example, can thus provide “interpretive background” to inform investment treaty standards.[433] Arbitral tribunals risk overlooking important aspects of IP policy and being detached from local communities and their concerns. This is all the more likely considering the fact that their appointment usually requires expertise in international investment law, not IP law. They contribute to an investment law culture with its own language and way of speaking, expressing ideas, as well as defining problems and solutions.[434] Furthermore, due to the emergence of a jurisprudence constante in international investment law, there is a risk that arbitral tribunals will conform to these de facto precedents without necessarily considering analogous IP cases adjudicated before other international courts and tribunals. Although consistency in decision-making is desirable because it can enhance the coherence and predictability of the awards and contribute to the legitimacy of arbitral tribunals as a legal institution, arbitrators should be cautious of precedents that place strong emphases on the investors’ economic interests at the detriment of the public interest pursued by the host state. Have arbitral tribunals paid any attention to the specificities of IP? Are they imposing standards of good IP governance, by adopting general administrative law principles, such as proportionality, due process, and reasonableness? These questions present a fertile field of inquiry, which may help in detecting common patterns and lead to a balance between the protection of investors’ economic interests and public welfare. While international investment law should not be used to enforce other IP treaties, arbitral tribunals still have to consider these other treaties in the arbitrations.[435]
4. Denial of Justice Claims
One particular form of FET violations,[436] denial of justice, is one of the oldest principles of customary international law,[437] and “lies at the heart of the development of international law on the treatment of aliens and of foreign investment.”[438] Denial of justice imposes liability on the state for serious failures of its system of justice.[439] Since denial of justice involves a system failure, exhaustion of local remedies is a prerequisite for claiming it.[440] While denials of justice claims were traditionally discussed in inter-state disputes, nowadays, foreign investors can challenge denial of justice directly before arbitral tribunals.[441] A successful invocation of denial of justice is mutually exclusive with a finding of a judicial expropriation,[442] but investors often make both claims as a matter of strategy. This parallel invocation of the denial of justice claim and the indirect expropriation claim enables the foreign investor to fully exploit the scope of the protection afforded under IIAs.[443] This section examines how these claims have been articulated. Denial of justice is very difficult to prove. Rarely has such a claim been successful. It is not a denial of justice if state courts made a mere error of law. Investment treaty tribunals are not an appeal mechanism for the decisions of domestic courts. Rather, denial of justice implies the failure of a national legal system as a whole to satisfy minimum standards of treatment. Moreover, to invoke denial of justice successfully, the claimant must exhaust local remedies first, giving the judicial system of the host state a chance to redress its failure before filing a claim before an international arbitral tribunal.[444] For instance, in Apotex v. United States (Apotex I and II), concerning the approval for generic versions of given antidepressant and anti-cholesterol medicines, the claimant made parallel claims that the courts’ judgments were “unjust” and amounted to an expropriation of its investment, and that they constituted a “substantive ‘denial of justice’” in violation of NAFTA Article 1105.[445] In particular, the claimant contended that it was denied justice when U.S. courts allegedly “rendered manifestly unjust decisions” by misapplying domestic law.[446] Both parties agreed that, in order to eventually establish a denial of justice, “judicial finality must first be reached in the host State’s domestic courts … unless such recourse is ‘obviously futile’.”[447] However, they disagreed on the meaning of “obviously futile.”[448] The United States pointed out that with respect to one of its medicines, Apotex had not pursued all available avenues before the domestic courts. In particular, it had not sought U.S. Supreme Court review of the lower court decisions.[449] Apotex submitted that “it [wa]s wholly unrealistic to suppose that the Supreme Court would not only have granted the petition, but could have scheduled argument and render an opinion in Apotex’s favour … Any efforts to achieve such a result would have been “objectively futile.”[450] The Arbitral Tribunal upheld all preliminary objections raised by the United States, including dismissing the denial of justice claim, on the grounds that the claimant had failed to exhaust local remedies.[451] The Tribunal reasoned that the judicial acts of the lower courts lacked sufficient finality to form the basis of claims under NAFTA Chapter 11.[452] While the Tribunal appreciated that “petitioning the U.S. Supreme Court was unlikely to secure the desired relief,”[453] it held that “under established principles, the question whether the failure to obtain judicial finality may be excused for ‘obvious futility’ turns on the unavailability of relief by a higher judicial authority, not on measuring the likelihood that the higher judicial authority would have granted the desired relief.”[454] The Tribunal explained that the national court system must be given a chance to correct errors before its perceived failings can constitute an international wrong.[455] By contrast, claims of judicial expropriation have not required exhaustion of local remedies.[456] For instance, the Saipem Tribunal found the host state responsible for expropriation resulting from the judicial intervention in arbitral proceedings dismissing the respondent’s objection that the exhaustion of local remedies was a substantive condition for judicial expropriation. Rather, the Tribunal clarified that the local remedies rule would apply in the case of denial of justice, but not in the case involving judicial expropriation. Therefore, the claim of judicial expropriation can be easier to substantiate and can be more investor-friendly in terms of eventual compensation. As a result, denial of justice claims seem to favour the state autonomy over the protection of private economic interests. Conversely, judicial expropriation claims may be more favorable to investors than denial of justice claims and can affect the state judiciary autonomy in the pharmaceutical sector.

E. Non-Discrimination

The non-discrimination principle is a cornerstone of international investment law.[457] It is typically reflected in two investment treaty provisions:[458] the principles of national treatment (NT)[459] and most-favored-nation (MFN) treatment.[460] The basic purpose of the NT and MFN clauses is to avoid discrimination and to guarantee equal competitive opportunities for foreign investors in the host state. These two standards do not guarantee a specific level of protection but are relative standards that require a host country to treat a foreign investor in the same way that a domestic investor or an investor from another country in like circumstances would be treated. In order to ascertain whether companies are in “like circumstances,”[461] one should first consider whether they are in the same sector and whether those competitors have been accorded more favorable treatment than the claimant. Then, in order to ascertain whether there is improper discrimination or a legitimate distinction, one should consider the impact and objective of a given state measure in the particular field.[462] Certain apparently neutral regulations may substantively discriminate against foreign companies and their investments.[463] In Eli Lilly v. Canada, the pending case relating to the invalidation of patents, the claimant alleges that Canada denied the company national treatment.[464] First, the company contends that it faces more arduous patent standards in Canada than a Canadian investor might face in other jurisdictions, such as the United States and Europe.[465] Yet, this form of extraterritorial analogy is highly unusual in national treatment claims before arbitral tribunals, given the regulatory diversity of IP laws across the globe, and is likely not going to be accepted by the Arbitral Tribunal.[466] Second, the company argues that domestic generic pharmaceutical companies received more favourable treatment as they have benefited from the invalidation of Eli Lilly’s patent.[467] Third, the claimant highlights that only pharmaceutical companies bear the burden of the promise doctrine, rather than patent holders in other economic sectors.[468] According to the claimants, the judicial decisions amount to a de facto discrimination against pharmaceutical patents, contrary to the state’s obligation not to discriminate among different fields of technology under NAFTA Article 1709(7).[469] While the case is still pending, it can have a significant impact on access to medicines. In fact, if the Arbitral Tribunal upholds the investor’s claim, it would be more difficult for generic pharmaceutical companies to enter into the relevant market. In Apotex v. United States (Apotex I and II),[470] concerning the approval for generic versions of antidepressant and anti-cholesterol medicines,[471] the claimant contended inter alia that the host state violated the non-discrimination provision by “failing to treat Apotex in the same fashion as U.S. investors.”[472] As the case was dismissed on jurisdiction, the discrimination claim became moot.[473] There is a fine line between discrimination and legitimate distinctions based on public policy reasons. This line is difficult to identify, because “‘discrimination’ and ‘non-discrimination’ are not polar opposites in a static system.”[474] In Apotex III, which concerned an import ban on certain pharmaceuticals produced in Canada, Apotex contended that it had been discriminated against as comparable national and foreign manufacturers had received better treatment. Under the NT claim, Apotex argued that it had been treated less favourably than other comparable domestic investors.[475] The U.S. countered that manufacturers in the U.S. are subject to even more regular inspections and enforcement due to their location.[476] The Tribunal held that there was no violation of NT as the claimant and the domestic competitors were not in “like circumstances.”[477] Under the MFN claim, Apotex contended the FDA inspected a competitor’s facilities in Israel and found many violations,[478] but did not issue an import alert against the Israeli manufacturer.[479] Although the Tribunal held that the U.S. had treated Apotex less favourably than the Israeli manufacturer,[480] and thus had de facto discriminated against Apotex, it still concluded that there was no discrimination because the U.S. had established legitimate reasons for the different treatment.[481] The United States submitted that “the FDA is required necessarily to exercise a difficult regulatory discretion lying at the heart of its important mandate on public health; and that this discretion as to enforcement actions is never a binary choice, but depends on many factors particular to the specific situation.”[482] The Tribunal concluded that, in casu, the FDA actions were “materially influenced by the FDA’s genuine concerns over shortages of essential drugs manufactured” by the Israeli manufacturer,[483] and had established a legitimate reason for the different treatment.[484] Not only can discrimination claims substantiate breaches of NT and MFN treatment, they can also evidence the unlawfulness of a given expropriation or the unfairness of a given state conduct. While in some arbitrations, arbitral tribunals can uphold such claims as a distinct violation of the MFN or NT provisions in the relevant BIT,[485] in other cases discrimination can constitute evidence of the breach of the FET standard,[486] or be one of the relevant factors of unlawful expropriation.[487] For instance, in Servier v. Poland, Servier asserted that “under customary international law, the expropriation of an investment can only take place for a public purpose, in a non-discriminatory manner, and against compensation.”[488] After holding that “notions of unfairness and discrimination may insert themselves into a discussion of what constitutes divestment of property,”[489] the Arbitral Tribunal concluded that “[n]ot only was the refusal of authorisation discriminatory, but the regulatory measures were disproportionate in nature and … not a matter of public necessity,”[490] thus amounting to an indirect expropriation.[491] Discrimination claims play an important role in investment treaty arbitration. A first issue that arbitral tribunals must ascertain is the existence of like circumstances. In the absence of like circumstances, differential treatment does not constitute discrimination but a legitimate distinction between different issues.[492] Certain distinctions may be legitimate and thus do not constitute discrimination in breach of the relevant investment treaty standards.[493] In conclusion, non-discrimination is a key element for striking an appropriate balance between the public and private interests.[494] It helps to ensure that the private interests are not unduly constrained for unspecified illegitimate reasons. A measure allegedly pursuing a public purpose but in fact serving other private domestic interests can constitute a disguised discrimination in breach of relevant investment treaty standards. By reviewing state measures and checking that they are not discriminatory, arbitral tribunals can foster an appropriate balance between genuinely public and private interests.

V. Critical Assessment

States have an inherent right to regulate,[495] particularly with regard to pharmaceuticals, because the regulation of medicines is crucial to public health.[496] Public health is central to the very existence of the state, and the duty to protect it arises from both domestic law and the social contract that underlies most governments.[497] Moreover, from a practical standpoint, national authorities are better placed to appreciate local societies’ needs.[498] Therefore, international conventions protecting various aspects of IP acknowledge the state’s right and duty to protect public health.[499] Regulations governing patent rights are based on a delicate equilibrium between public and private interests.[500] States balance public and private interest in such areas depending on their developmental and public health needs. In fact, the protection of public health necessarily requires constraining a wide range of private activities.[501] For example, states can constrain the rights of pharmaceutical companies so as to prevent nuisance and protect public health.[502] Patent owners have increasingly used investor-state arbitration to challenge regulatory measures adopted by the host states, and these arbitrations have significant impact on the state regulatory autonomy. Arbitral tribunals assess the state’s compliance with investment treaty provisions. This scrutiny may promote good pharmaceutical governance, incentivizing states to pursue the regulation of public health objectives in a transparent, reasonable and non-discriminatory manner, while preserving a state’s legitimate interest to regulate for its domestic public policy. Given the recent rise in the incidence of arbitrations,[503] it is of utmost importance to reflect on this emerging jurisprudence and its possible impact on the public health policies of host states. Pharmaceutical patent investment arbitrations constitute a paradigmatic case study of the interplay between the public and private interests in international investment law and arbitration.[504] They show that private actors are increasingly playing a prominent role in transnational governance of IP, and there are ongoing attempts of shifting enforcement of IP rights from interstate fora to international investment arbitration. Investment arbitration constitutes an avenue for the dialectical interaction between the economic interests of the patent holders and the state interest in public health protection.

VI. Legislative and Interpretive Approaches to the Emerging Dialectics between Private and Public Interests in IP-related Investment Disputes

In the emerging dialectics between patent protection and public health in international investment law and arbitration, treaty making and interpretation can play a crucial role to address the tension between, and eventually reconcile, public and private interests. This section proposes some legislative and interpretive approaches to better accommodate the dialectics between private and public interests in international investment law and arbitration. At the legislative level, treaty negotiators can introduce some carve-outs, clarifications and flexibilities in the text of investment treaties. Negotiators could consider carving out litigation on pharmaceutical patents from the jurisdiction of investment arbitral tribunals. Some international investment agreements expressly clarify that the exercise of state regulatory autonomy in the pharmaceutical sector does not per se amount to a breach of investment treaty provisions,[505] and that compliance with the TRIPS Agreement provisions may preclude any expropriation claim.[506] For instance, Article 6(5) of the U.S. Model BIT of 2012 states that “This Article does not apply 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.” Yet, the creation, limitation, and revocation of IP rights are regulated only in very broad brushes by the TRIPS Agreement. For instance, the TRIPS Agreement only requires that patents should be granted for new, inventive and useful inventions,[508] but it does not define these terms.[509] The question of what deserves to be patented is left for countries to determine in light of their own needs. Countries can exclude some fields, such as plants, animals and surgical methods, from patentability to protect public order.[510] The TRIPS Agreement also allows for member states to provide for limited exceptions and other uses of the patent without the patent owner’s consent, leaving states with the flexibility to implement regulatory measures for the purpose of domestic policy.[511] With regard to revocation, the TRIPS Agreement does not address the grounds for forfeiture; it only requires member states to provide judicial review for every decision to revoke a patent.[512] Therefore, not only can arbitrations pioneer the interpretation and application of relevant IP provisions and pave the way to subsequent arbitral awards, but they can also serve as indirect enforcement tools of WTO law and influence the development of the same. WTO law has its own enforcement tools. The WTO DSM has been defined as the “jewel in the crown” of this organization,[513] and it has exclusive jurisdiction to settle disputes under the covered agreements.[514] However, only a limited number of IP disputes have been brought before the WTO,[515] and TRIPS consistency is tested in proceedings outside the DSM.[516] There is a certain “convergence” between international investment law and international trade law,[517] and the interpretation of the TRIPS Agreement by arbitral tribunals is one of the areas of contact between the two areas of international law.[518] In interpreting the TRIPS Agreement, arbitrators should be aware of the balance between private and public interests intrinsic to the regulation of pharmaceutical patents. The TRIPS Agreement expressly presents clauses taking public health under consideration in construing IP rights. Article 7 of the TRIPS Agreement provides that
“The protection and enforcement of intellectual property rights should contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations.”[519]
In parallel, Article 8 of the TRIPS Agreement states that “Members may, in formulating or amending their laws and regulations, adopt measures necessary to protect public health and nutritio, and to promote the public interest in sectors of vital importance to their socio-economic and technological development, provided that such measures are consistent with the provisions of this Agreement.”[520] When interpreting the TRIPS Agreement, arbitrators must take into account Articles 7 and 8, which set forth fundamental principles of IP governance,[521] and provide space for reconciliation between private and public interests in IP regulation. The Doha Declaration on the TRIPS Agreement and Public Health[522] has further reinforced state regulatory space to adopt public health measures,[523] recognizing the WTO members’ right to protect public health[524] and to use the flexibilities provided by the TRIPS Agreement.[525] Where clear reference is made to the TRIPS Agreement, international investment agreements incorporate the TRIPS Agreement, including its objectives and principles as stated in Articles 7 and 8, as well as the relevant interpretative background provided by the Doha Declaration.[526] Such provisions then become applicable and may provide guidance in the context of investment disputes. Arbitrators must be mindful of the need of preserving a suitable balance between the public and private interests intrinsic in patent protection even in those cases in which the investment chapters of FTAs refer to its own IP chapters instead of TRIPS as a safeguard against expropriation claims.[527] For instance, Article 1110(7) of NAFTA exempts “the issuance of compulsory licensing” and “the revocation, limitation or creation of intellectual property rights” from expropriation protection, if such measures are consistent with NAFTA Chapter 17.[528] NAFTA Chapter 17 contains “TRIPS-plus” provisions on IP rights, which strengthen the IP regimes of NAFTA countries beyond the global standards established by the TRIPS Agreement. For instance, NAFTA Chapter 17 does not include provisions analogous to Articles 7 and 8 of the TRIPS Agreement. Still, arbitrators can take into account public interest considerations under a number of flexibilities embodied in NAFTA Chapter 17.[529] For instance, states can exclude certain inventions from patentability,[530] introduce limited exceptions,[531] and compulsory licenses,[532] as well as revoke the patents.[533] Striking an appropriate balance between the private and public interests in investment arbitration should be easier where states have appended declarations to their FTAs clarifying the interplay between the expropriation provision (included in the investment chapter) and IP provisions (included in the relevant chapter). For instance, in the Canada–EU Comprehensive Economic and Trade Agreement (CETA),[534] a declaration appended to the expropriation provision of Chapter X, which governs foreign direct investment,[535] clarifies that “investor state dispute settlement tribunals … are not an appeal mechanism for the decisions of domestic courts,” and that “the domestic courts of each Party are responsible for the determination of the existence and validity of intellectual property rights.”[536] This means that arbitration tribunals should be deferential to the decisions of domestic courts and tribunals regarding the existence and validity of patents. The mere fact that a company is disappointed with the outcome of a patent trial does not amount to a breach of the relevant treaty provisions. CETA reasserts “each Party shall be free to determine the appropriate method of implementing the provisions of this Agreement regarding intellectual property within their own legal system and practice.”[537] The possibility to issue binding interpretations at a later stage is also reserved.[538] Moreover, Article 3 of Chapter 22, which governs intellectual property, refers to the Doha Declaration, thus incorporating its interpretative guidelines on balancing IP rights and public health.[539] In most cases, however, IIAs make no reference to the TRIPS Agreement. In the absence of an express reference, it would be a radical departure from the text of the IIA, as well as the DSU,[540] to provide investors with the possibility of asserting violations of the TRIPS Agreement against host states. Therefore, in the absence of a reference to the TRIPS Agreement, the argument that an investor can assert a claim for a violation of the state’s TRIPS obligation in an investor-state arbitration proves too much. However, this does not mean that the TRIPS Agreement is irrelevant. The TRIPS Agreement can provide interpretive guidance and context.[541] If the applicable law is national law, as is the case for IP, which is territorial by nature, and national law implements the TRIPS Agreement, the interpretation of the relevant TRIPS provisions may help the arbitral tribunal to ascertain the legitimacy of the same state measures, their rationality and reasonableness, and their eventual conformity with international practice. In turn, this could foster a coherent international framework of IP rules. Treaty interpretation can also provide the adjudicators with interpretive tools to reconcile the public and private interests emerging in the new dialectics between patent protection and public health in international investment law and arbitration. When adjudicating investment disputes, arbitrators must identify the applicable rules, clarify their meaning and relate them to the specific facts of the case. When the arbitrators have limited expertise on IP and its policy implications, experts should be consulted to facilitate sound decision-making and ensure the arbitrators take into account the two equilibria that characterize patent regulation. The intrinsic equilibrium between private and public interest concerns the very structure or architecture of patents. It is evident in the conceptual matrix of patent regime. The “patent bargain” indicates the quid pro quo between the private and public interests that are intrinsic to the patent regime. For instance, compulsory licenses, limited exceptions and even the grant and revocation of patents provide means to limit the private interests under certain circumstances and give a margin of deference to policymakers and adjudicators to determine whether a patent should be granted, or revoked, or limited. In parallel, the extrinsic equilibrium between patent rights and other values appears in the interplay between the IP regime and other fields of law. If one adopts an instrumentalist view of IP, the international IP system should function for the good of all. The notion that the IP regime serves such a social function is widely accepted in international law,[542] as expressly indicated by Articles 7 and 8 of the TRIPS Agreement.[543] In scrutinizing the regime complex that governs IP, it appears that IP is never an absolute right.[544] Rather, IP rights must be put into perspective as they are part of a broader legal system,[545] and must always be harmonized with other rights of equally significant value and with the interests of the community.[546] This is particularly the case with regard to pharmaceuticals, which have deep implications in public health. Finally, arbitrators should acknowledge their responsibility for the charting of the contours of international law norms and, more broadly, as cartographers of the international legal order. Pursuant to Article 31(3)(c) of the VCLT, adjudicators should take into account “[a]ny relevant rules of international law applicable in the relations between the parties.”[547] Therefore, “[e]very treaty provision must be read not only in its own context, but in the wider context of general international law, whether conventional or customary.”[548] A number of international organizations play an active role in the governance of pharmaceutical patents, creating a sort of institutional density or regime complex. As all these organizations receive almost worldwide consensus, a broader perspective of the legal environment that surrounds a given dispute should be adopted in investor-state arbitration.

Conclusion

This article highlights the emergence of international investment law and arbitration as a new battlefield, where the dialectical interaction between private and public interest is taking place. The clash between the economic interests of the patent owner and the pursuit of public policies is not a new phenomenon; what is new is the use of investment treaty law and arbitration as a place of confrontation between these private and public interests. International investment law is a vital area of international law that has furthered the protection of patents, considering them as a form of investment and providing patent owners access to investor-state arbitration. By including intellectual property within their ambit, investment treaties restrict the regulatory autonomy of states in the pharmaceutical sector, potentially affecting fundamental public interests. Patent owners have increasingly used investment treaty arbitration to challenge alleged infringements of patent rights by governments, giving rise to an increasingly complex and contested interplay between pharmaceutical patent protection and public health. This article examines the growing number of investment treaty arbitrations relating to pharmaceutical patents and critically assesses how the emerging dialectics between public and private interests is taking place in investment treaty arbitration. These arbitrations give rise to both jurisdictional and substantive issues. First, some disputes will center on the question as to which economic activities amount to an investment, giving rise to the arbitral tribunal’s jurisdiction over the dispute.[549] Second, although it may be very difficult to prove, an affected patent owner may claim that an unlawful expropriation has taken place.[550] Third, if an expropriation has occurred, claims may concern the adequacy of the amount, or mode, of compensation.[551] Fourth, the patent owner may also allege a violation of the FET standard.[552] Finally, some claims may concern alleged discrimination suffered by the foreign investor.[553] This article argues that international investment law and arbitration should contribute to the construction of public international law as a unitary whole, which aims at furthering public policy interests internationally. To the extent that investment treaty arbitration has failed to do so, either by de-emphasizing public policies or leaving them out entirely, it would be problematic to move forward with globally important policy issues through the vehicle of public international law. Against the critical examination of the legal norms that are developing in the field, this article proposes some legislative and interpretive approaches to better accommodate the dialectics between private and public interests in pharmaceutical patent-related investment disputes. Treaty-making and interpretation can play a crucial role to address the tension between, and eventually reconcile, public and private interests. At the normative level, treaty negotiators can introduce some clarifications, flexibilities or carve-outs in the text of investment treaties. Treaty drafting can improve the language of international investment agreements to include reference to other international instruments, such as the Doha Declaration on the TRIPS Agreement and Public Health. Although these other instruments are not necessarily promoting a better balance between the public and private interests, reference to such international law instruments can still help international arbitrators to obtain useful information on how other instruments are coping with the interaction between private and public interests, as well as achieve mutual support and harmonization across instruments. Negotiators could consider carving out litigation on pharmaceutical patents from the jurisdiction of investment arbitral tribunals. Interpretation can help arbitrators reach a suitable balance between the protection of patent rights qua foreign investments and other non-economic values in public health-related investment disputes. Arbitrators should focus on the nature and purpose of the right that is being protected. Intellectual property rights should not be considered as absolute rights but should be interpreted in the light of their goals and limits. Regulations adopted to protect public health, depending on the specific circumstances of the case, might be viewed as an intrinsic limit to the patent right. Foreign investments protection, when applied to pharmaceutical patents, should be considered not as an end in itself but as one of the available tools to promote human welfare. Moreover, as required by customary rules of treaty interpretation, arbitrators should embrace their roles as cartographers of international law and adopt a holistic approach to treaty interpretation, which takes into account other international law instruments that are binding upon the parties.
* Professor of International Economic Law, Lancaster University, United Kingdom. Earlier versions of this article were presented at the Society of International Economic Law conference, held at the University of Bern on July 10-12, 2014 and at the City Law School, City University, London, on May 11, 2015. The author wishes to thank Oles Andriychuk, Enrico Bonadio, Emily Den, Maggie Diamond, Caroline B. Epstein, Caroline Foster, Lukasz Gruszczynski, Locknie Hsu, David G. Krone, Michele Potestà, Tania Voon, Wen Xue, Steven Wheatley and the participants at the conferences for useful comments on an earlier draft. The usual disclaimer applies.
[1] Johann Peter Eckerman, Conversations of Goethe with Eckermann and Soret 266, 266–67 (John Oxenford trans., Smith, Elder & Co. 1850).
[2] International investment agreements (IIAs) – a term encompassing both bilateral investment treaties (BITs) and Free Trade Agreements (FTAs) or Regional Trade Agreements (RTAs) with investment chapters – are “agreements concluded between states for the promotion and protection of reciprocal investments.” See Bertram Boie, The Protection of Intellectual Property Rights Through Bilateral Investment Treaties: Is There a TRIPS-Plus Dimension? 4 (NCCR Trade Regulation, Working Paper No. 2010/19, 2010).
[3] See, e.g., State Dep’t, U.S. Model Bilateral Investment Treaty, art. 1 (2012) [hereinafter US Model BIT] (listing “intellectual property rights” among the “forms that an investment may take”); Treaty Concerning the Encouragement and Reciprocal Protection of Investments, Ger.-Burundi, art. 1(d), Sept. 10, 1984, 1517 U.N.T.S. 287 [hereinafter Germany-Burundi BIT] (noting that “[f]or the purposes of the present treaty, the term ‘investments’ shall comprise every kind of asset, in particular . . . [c]opyrights, industrial property rights, technical processes, trademarks, trade names, know-how and goodwill . . . .”); Agreement Concerning the Encouragement and Reciprocal Protection of Investments, Peru-China, art. 1(d), June 9, 1994, 1901 U.N.T.S. 257 (affirming that “[f]or the purpose of this agreement, the term ‘investment’ means every kind of asset invested by investors of one Contracting Party in accordance with the laws and regulations of the other Contracting Party in the territory of the Latter, and in particular, though not exclusively, includes: . . . copyrights, industrial property, know-how and technological process . . . .”).
[4] FTAs, however, can include both investment and IP chapters and provide a detailed regulation of IP, tightening their protection beyond current international standards. See Susan K. Sell, TRIPS-Plus Free Trade Agreements and Access to Medicines, 28 Liverpool L. Rev. 41, 41 (2007) (highlighting that pharmaceutical companies have “succeeded in getting extremely restrictive TRIPS-Plus . . . intellectual property provisions into regional and bilateral free trade agreements.”). On the impact of FTAs on access to medicines, see generally Carlos María Correa, Implications of Bilateral Free Trade Agreements on Access to Medicines, 84 Bull. World Health Org. 399, 399 (2006).
[5] Andreas Kulick, Global Public Interest in International Investment Law (2012); see, e.g., US Model BIT arts. 3–7; see also Germany-Burundi BIT, supra note 3, at arts. 2–3, 4(2).
[6] See, e.g., US Model BIT art. 2.
[7] Kate Miles, Reconceptualising International Investment Law: Bringing the Public Interest Into Private Business, in International Economic Law and National Autonomy 295, 295–96 (Meredith Kolsky Lewis and Susy Frankel eds., 2010) (noting that “[a]lthough [investment disputes] resolve questions that can affect significant matters of public policy, the public generally does not have access to the documents, the proceedings are conducted behind closed doors, and the submission of amicus curiae briefs is restricted, if permitted at all.”).
[8] See infra Parts III and IV below for a comprehensive account of the current investor-state arbitrations of pharmaceutical patents.
[9] Christine Haight Farley, TRIPS–Plus Trade and Investment Agreements: Why More May Be Less for Economic Development, 35 U. Pa. J. of Int’l L. 1061, 1065 (2014) (stating that arbitral tribunals review state regulatory and judicial measures “for how they define the availability, validity and scope of IP rights”).
[10] Id. (noting that “IP law is notoriously full of grey areas due to finely balanced policy objectives . . . .”).
[11] See, e.g., Susan Franck, The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law through Inconsistent Decisions, 73 Fordham L. Rev. 1521, 1537–38 (2005) (discussing the alleged legitimacy crisis of international investment law and arbitration).
[12] See id. at 1571.
[13] United Nations Conference on Trade and Development, Nov. 6–8, 2002, The Development Dimension of FDI: Policy and Rule-Making Perspectives, 212, UNCTAD/ITE/IIA/2003/4 (Aug 31, 2003) [hereinafter UNCTAD].
[14] Todd Weiler, Balancing Human Rights and Investor Protection: A New Approach for a Different Legal Order, 1 Transnat’l Disp. Mgmt. 2 (2004).
[15] UNCTAD, supra note 13, at 215.
[16] North American Free Trade Agreement, U.S.-Can.-Mex., Dec. 17, 1992, 32 I.L.M. 289 (1993) [hereinafter NAFTA].
[17] Apotex Inc. v. U.S., ICSID Case No. ARB(AF)/12/1, Notice of Arbitration, ¶ 22 (Dec. 10, 2008), http://www.state.gov/documents/organization/115447.pdf.
[18] Id. ¶ 7.
[19] Apotex Holdings Inc, Apotex Inc. v. United States of America (Apotex III), ICSID Case No. ARB(AF)/12/1, Award (Aug. 25, 2014), http://www.state.gov/documents/organization/233043.pdf.
[20] Id. ¶ 2.24.
[21] Id. ¶ 2.40.
[22] Eli Lilly and Company v. The Government of Canada (U.S. v Can.), ICSID Case No. UNCT/14/2, Notice of Intent to Submit a Claim to Arbitration under NAFTA Chapter Eleven, ¶ 35 (Nov. 7, 2012), http://www.italaw.com/sites/default/files/case-documents/italaw1172.pdf.
[23] Id. ¶ 108.
[24] M. Sornarajah, Evolution or Revolution in International Investment Arbitration? The Descent into Normlessness , in Evolution in Investment Treaty Law and Arbitration (Chester Brown and Kate Miles eds., 2011) [hereinafter Sornarajah, Evolution or Revolution] (arguing that “disparate trends” in international investment law and arbitration “show neither evolution nor revolution but an ongoing conflict [between private and public interests] that either will bring a new system – resulting in a revolution – or will keep the old, simply because one or the other of the camps wins the tussle.”).
[25] See Joost Pauwelyn, The Dog that Barked but did not Bite: 15 Years of Intellectual Property Disputes at the WTO, 1 J. Int’l Disp. Mgmt. 389, 393, 395 (2010) (showing that IP complaints amount to only 3 per cent of all claims under the World Trade Organization agreements, and that such disputes have a higher settlement rate and lower appeal rate than average WTO disputes).
[26] See Sornarajah, Evolution or Revolution, supra note 24, at 631 (arguing that “the law is hurtling into ‘normlessness’ as a result of State reactions to expansive interpretations placed on treaty prescriptions.”).
[27] See Pauwelyn, supra note 25, at 41 (explaining both the low number and the systemic type of IP disputes by the limited prospective remedies that the WTO offers to the winning complainants).
[28] Org. for Econ. Co-operation and Development [OECD], Patents and Innovation: Trends and Policy Challenges, 9 (2004), http://www.oecd.org/sti/sci-tech/24508541.pdf (noting that patents are “considered to represent a trade-off between incentives to innovate on one hand, and competition in the market and diffusion of technology on the other.”).
[29] Id. at 8 (defining patents as “exclusive right[s] to exploit (make, use, sell, or import) an invention over a limited period of time (20 years from filing) within the country where the application is made.”).
[30] Agreement on Trade-Related Aspects of Intellectual Property Rights art. 27, Apr. 15, 1994, 1 Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, Legal Instruments – Results of the Uruguay Round vol. 31, 1869 U.N.T.S. 299, 33 I.L.M. 81 (1994) [hereinafter TRIPS Agreement].
[31] Matthew Herper, The Cost Of Creating A New Drug Now $5 Billion, Pushing Big Pharma To Change, Forbes (Aug. 11, 2013, 11:10 AM), http://www.forbes.com/sites/matthewherper/2013/08/11/how-the-staggering-cost-of-inventing-new-drugs-is-shaping-the-future-of-medicine/ (“A company hoping to get a single drug to market can expect to have spent $350 million before the medicine is available for sale.”).
[32] Keith E. Maskus & Mohan Penubarti, How Trade Related Are Intellectual Property Rights? 39 J. Int’l Econ. 227 (1995).
[33] TRIPS Agreement art. 30.
[34] Id. at art. 31.
[35] Id. at art. 27.
[36] See Rachel Sachs, The New Model of Interest Group Representation in Patent Law, 16 Yale J.L. & Tech. 344, 345 (2014) (“The various fields of intellectual property (IP) law have been marked by seemingly ever-increasing levels of protection.”).
[37] See, e.g., Kristen Jakobsen Osenga, Get the Balance Right!: Squaring Access With Patent Protection, 25 Pac. McGeorge Global Bus. & Dev. L.J. 309 (2012); Carlos Correa, Integrating Public Health Concerns Into Patent Legislation in Developing Countries 9 (2000) (mentioning the “general concern that such legislative reform can have a major impact on people’s access to drugs and on public health policies in the South.”); Victoria E. Hopkins, Analysis of International Patent Protection and Global Public Health, 17 J. Pub. and Int’l Aff. 83, 83 (2006) (noting that the TRIPS Agreement “has elicited public health concerns in developing countries, worried that they will be unable to access essential medicines as a result of increasing patented drug costs.”).
[38] Symposium, Enabling Patent Law’s Inherent Anticipation Doctrine, 45 Hous. L. Rev. 1101, 1106–07 (2008) (explaining that “evergreening refers to attempts by owners of pharmaceutical product patents to effectively extend the term of those patents on modified forms of the same drug, new delivery systems for the drug, new uses of the drug, and the like.”); Rebecca S. Eisenberg, The Role of the FDA in Innovation Policy, 13 Mich. Telecomm. Tech. L. Rev. 345, 348–49 (2007) (noting that in recent years pharmaceutical companies have become “quite creative about strategies to secure ‘evergreening’ patents in order to defer the date their products go off-patent.”).
[39] An infamous case is that of South African Pharmaceutical Manufacturers Ass’n v. South Africa, Case No. 4183 (1998). In 1998, the South African Pharmaceutical Manufacturers Association (PMA) submitted a legal complaint to the High Court of Pretoria challenging the legality of relevant provisions of the (South African) Medicines Act in light of the TRIPS Agreement. The Medicines Act had been enacted to cope with a public health emergency and enabled the state to issue compulsory licenses and use parallel imports to make medicines affordable. Due to international protests and public outcry, the claim was withdrawn. For a detailed account of the case, see Duncan Matthews, Intellectual Property, Human Rights and Development — The Role of NGOs and Social Movements 97–99 (2011).
[40] See Peter Drahos, Introduction to Global Intellectual Property Rights – Knowledge, Access and Development 1, 4 (Peter Drahos & Ruth Mayne eds., 2002).
[41] See Carlos Primo Braga, Carsten Fink & Claudia Paz Sepulveda, Intellectual Property Rights and Economic Development, in The WTO, Intellectual Property Rights and The Knowledge Economy — Critical Perspectives on the Global Trading System and The WTO 245, 254 (Keith E. Maskus ed., 2004).
[42] See, e.g., David M. Gould & William C. Gruben, The Role of Intellectual Property Rights in Economic Growth, 48 J. Dev. Econ. 323, 324 (1996).
[43] Ha-Joon Chang, Kicking Away the Ladder: Development Strategy in Historical Perspective 1–5 (2003) (providing a historical overview of the economic development of industrialized countries and arguing that through the Washington Consensus such countries prescribe policies for the developing countries which they have not used themselves during their period of economic growth).
[44] Ha-Joon Chang, Intellectual Property Rights and Economic Development: Historical Lessons and Emerging Issues, 2 J. Hum. Dev. 287, 305–06 n.8 (2001) (noting that pharmaceutical products “remained unpatentable until 1967 in West Germany and France, 1979 in Italy, and 1992 in Spain. Pharmaceutical products were also unpatentable in Canada into the 1990s.”).
[45] See TRIPS Agreement art. 27 (The TRIPS Agreement has required the patentability of pharmaceuticals).
[46] Elisabeth Rosenthal, The Price of Prevention: Vaccine Costs Are Soaring, N.Y. Times, July 2, 2014, at A1.
[47] See Robert O. Keohane & David G. Victor, The Regime Complex for Climate Change, 9 Persp. on Pol. 7, 7 (2011) (introducing the notion of “regime complex” and defining it as a “loosely coupled set of specific regimes.”).
[48] International Covenant on Economic, Social and Cultural Rights, art. 15, Dec. 16, 1966, 993 U.N.T.S. 3, 6 ILM 36 [hereinafter ICESCR]. As of 2015, the Covenant has 164 parties. The United States has signed but has not ratified the Covenant. See Philip Alston, The US Ratification of the Covenant on Economic, Social and Cultural Rights: The Need for an Entirely New Strategy, 84 Am. J. Int’l L. 365, 365 (1990).
[49] ICESCR, supra note 48, at art. 15.
[50] Id. art. 15.1.c.
[51] Id. art. 15.1.b.
[52] Committee on Economic, Social and Cultural Rights (“CESCR”), General Comment 14: The Right to the Highest Attainable Standard of Health (Article 12), ¶ 17, UN Doc. HRI/GEN/Rev.9 (Vol. I) (2000), http://www.unhchr.ch/tbs/doc.nsf/(symbol)/E.C.12.2000.4.En (“The creation of conditions which would assure to all medical service and medical attention in the event of sickness [in] (art. 12.2 (d) [of the ICESCR]), both physical and mental, includes the provision of equal and timely access to basic preventive, curative, rehabilitative health services and health education; regular screening programmes; appropriate treatment of prevalent diseases, illnesses, injuries and disabilities, preferably at community level; the provision of essential drugs; and appropriate mental health treatment and care.”).
[53] Helen Keller & Lena Grover, General Comments of the Human Rights Committee and Their Legitimacy, in UN Human Rights Treaty Bodies: Law and Legitimacy 116, 132 (Helen Keller and Geir Ulfstein eds., 2012).
[54] Valentina Vadi, Public Health in International Investment Law and Arbitration 27 (2012) [hereinafter Vadi] (“Given the political divide between the Eastern and Western blocs determined by the Cold War, the right to health as well as other economic, social and cultural rights were deemed to be politicized as reflecting a socialist perspective. The traditional distinction between civil and political rights and economic, social and cultural rights was also based on the assumption that while the first category of rights was susceptible to immediate realization, the second was deemed to be only of gradual implementation. The dichotomy was formalized by the division of the so-called International Bill of Rights into two Covenants adopted in 1966.”).
[55] Id.
[56] On the desirability of a World Human Rights Court, see generally Stefan Trechsel, A World Court for Human Rights? 1 Nw. J. Int’l Hum. Rts. 3 (2004); Int’l Comm. of Jurists, Towards a World Court of Human Rights: Questions and Answers, 2 (Dec. 2011) [hereinafter Int’l Comm. of Jurists] (highlighting “a glaring gap in th[e] . . . human rights architecture: a World Court of Human Rights, that would make available a judicial mechanism to provide enforceable and effective justice to individual victims of human rights violations.”).
[57] Laurence R. Helfer, Pharmaceutical Patents and the Human Right to Health: The Contested Evolution of the Transnational Legal Order on Access to Medicines, in Transnational Legal Orders 311, 317 (Terence Halliday & Greg Shaffer eds., 2014).
[58] Int’l Comm. of Jurists, supra note 56, at 2 (pinpointing that states have “the primary responsibility for providing access to remedies at the national level.”).
[59] Id. at 2 (arguing that “victims of human rights violations should have access to effective remedies at both the national and international levels.”).
[60] Id. (stressing that “a complementary system of remedies at the international level is necessary to address instances where a State is unable or unwilling to provide remedies for violations or where such remedies are ineffective.”).
[61] Trechsel, supra note 56, at 4 (noting that “[t]here is already quite an impressive list of bodies which deal with human rights within the framework of the United Nations.”).
[62] Id. at 5 (pinpointing that “none can be regarded as a substitute for a world court for human rights” as “[e]ither [such UN bodies] are not judicial bodies—this applies in particular to the various commissions and committees—or they are not directly dealing with human rights issues, which applies to the Criminal Tribunals”).
[63] On the institutional fragmentation of the human rights system, see, e.g., Marjan Ajevski, Fragmentation in International Human Rights Law – Beyond Conflict of Laws, 32 Nordic J. of Human Rights 87, 88 (2014).
[64] Mehrdad Payandeh, Fragmentation within International Human Rights Law, in A Farewell to Fragmentation: Reassertion and Convergence in International Law 297 (Mads Andenas and Eirik Bjorge eds., 2015) (stigmatizing the risks of conflicting jurisprudence among different monitoring bodies due to “structural biases of the different human rights treaty bodies.”).
[65] Paris Convention for the Protection of Industrial Property, Mar. 20 1883, last revised at Stockholm on July 14 1967, and amended on Sep. 28 1979, 828 U.N.T.S. 305 [hereinafter Paris Convention].
[66] Rochelle Dreyfuss & Susy Frankel, From Incentive to Commodity to Asset: How International Law is Reconceptualizing Intellectual Property 3–4 (N.Y. Univ. Public Law & Legal Theory, Working Paper No. 14-53, 2014).
[67] Helfer, supra note 57, at 314.
[68] Paris Convention, supra note 65, at art. 28.
[69] Dreyfuss & Frankel, supra note 66, at 5.
[70] TRIPS Agreement Annex 1C.
[71] The TRIPS Agreement has incorporated some of the fundamental principles of the Paris Convention such as the equal treatment of nationals and foreigners among others. See TRIPS Agreement art. 3; see also id. art. 2.1 (stating that “Members shall comply with Articles 1 through 12, and Article 19 of the Paris Convention.”).
[72] For a detailed commentary, see Carlos Correa, Trade Related Aspects of Intellectual Property Rights — A Commentary on the TRIPS Agreement (2007); Daniel Gervais, The TRIPS Agreement: Drafting History and Analysis (4th ed., 2012).
[73] TRIPS Agreement at art. 27 (introducing pharmaceuticals as a patentable subject matter and requiring that patents be available in WTO member states “for any inventions, whether products or processes, in all fields of technology, provided that they are new, involve an inventive step and are capable of industrial application.”).
[74] Id. at art. 33 (stating that “[t]he term of protection available shall not end before the expiration of a period of twenty years counted from the filing date.”).
[75] Jerome H. Reichmann, The TRIPS Agreement Comes of Age: Conflict or Cooperation with the Developing Countries, 32 Case W. Res. J. Int.’l L. 441, 441–43 (2000) (pointing out that the TRIPS Agreement imposed “relatively high” standards of intellectual property protection which de facto correspond to those used in industrialized countries).
[76] Michael Spence, Which Intellectual Property Rights are Trade-Related?, in Environment, Human Rights and International Trade 263–85 (Francesco Francioni and Tullio Scovazzi eds., 2001).
[77] General Agreement on Tariffs and Trade, Oct. 30, 1947, 61 Stat. A-11, 55 U.N.T.S. 194 [hereinafter GATT].
[78] Id. at art. 20(d) (“Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures: . . . (d) necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement, including those relating to . . . the protection of patents, trade marks and copyrights, and the prevention of deceptive practices . . . .”).
[79] José E. Alvarez, The WTO as Linkage Machine, 96 Am. J. Int’l L. 146, 147 (2002) (noting “[t]he WTO’s success in ‘nesting’ issues within a broader context so that the ‘fabric’ of one became the foundation for another, as well as in making possible package deals between previously unlinked issues.”).
[80] Dreyfuss & Frankel, supra note 66, at 3, 32 (noting that the TRIPS Agreement “moved from framing IP as a barrier to trade into conceptualizing it as a tradable commodity in the name of facilitating trade” and suggesting that the system may be “inclined to interpret proprietary rights broadly while construing user interests narrowly.”). On the different, albeit related, phenomenon of the propertization of intangible assets, see Valentina Vadi, Trademark Protection, Public Health and International Investment Law: Strains and Paradoxes, 20 Eur. J. Int’l. L. 773, 775 (2009) (“The propertization of intangible goods has become a common trend in international standard setting. Propertization can be defined as the process of putting emphasis on proprietary aspects of given intangible rights or the characterization of modern knowledge governance as moving towards a property-based regime.”).
[81] TRIPS Agreement art. 1.1 (“Members shall give effect to the provisions of this Agreement.”)
[82] Id. (“Members may, but shall not be obliged to, implement in their law more extensive protection than is required by this Agreement, provided that such protection does not contravene the provisions of this Agreement.”).
[83] In recent years, states have signed a number of regional and bilateral agreements including TRIPS-plus provisions. On the phenomenon, see, e.g., Ruth L. Okediji, Back to Bilateralism? Pendulum Swings in International Intellectual Property Protection, 1 U. Ottawa L. & Tech J. 125, 141 (2003–2004) (describing the phenomenon of forum shifting as a means of increasing the strength of protection of intellectual property rights).
[84] TRIPS Agreement art. 64. See generally Rochelle Cooper Dreyfuss & Andreas F. Lowenfeld, Two Achievements of the Uruguay Round: Putting TRIPS and Dispute Settlement Together, 37 Vand. J. Int’l L. 275, 282 (1997).
[85] Boie, supra note 2, at 4 (noting that “[international investment agreements] usually protect intellectual property by including it in the definition of investment.”).
[86] Dreyfuss & Frankel, supra note 66, at 3.
[87] Jennifer Prah Ruger, Normative Foundations of Global Health Law, 96 Geo. L. J. 423, 424 (2007–2008) (describing international health law as “a relatively new academic field”); Shawn H.E. Harmon, International Public Health Law: Not so Much WHO as Why, and Not Enough WHO and Why Not? 12 Med. Health Care and Philos. 245, 245 (2009) (noting that “neither the WHO nor international law have yet played their necessary part in promoting ‘health for all.’”); see generally David P. Fidler, International Law and Public Health: Material on and Analysis of Global Health Jurisprudence (2000).
[88] David P. Fidler, International Law and Global Public Health, 48 U. Kan. L. Rev. 1, 2 (1999–2000) [hereinafter Fidler, Int’l Law and Global Public Health] (highlighting “states’ extensive use in the late part of the nineteenth century and first half of the twentieth century of international law in dealing with public health problems.”).
[89] The First International Sanitary Convention focused on cholera. See Bob Reinalda, Routledge History of International Organizations: From 1815 to the Present Day 172 (2009). The Convention was adopted at the seventh International Sanitary Conference held in Venice in 1892. See Aginam Obijiofor, Global Health Governance: International Law and Public Health in a Divided World 51 (2005).
[90] David P. Fidler, The Globalization of Public Health: The First 100 Years of International Health Diplomacy, 79 Bull. World Health Org. 842, 843 (2001).
[91] Id.
[92] Id.
[93] Id.
[94] WHO, The World Health Report 2007: A Safer Future: Global Public Health Security in the 21st Century 7 (2007).
[95] Id.
[96] Constitution of the World Health Organization, July 22, 1946, 62 Stat. 2679, 14 U.N.T.S. 185.
[97] Fidler, Int’l and Global Public Health, supra note 88, at 22 (noting “the historical penchant [of the WHO] for dealing with public health problems within a narrow ‘medical-technical’ approach.”).
[98] Id. at 22 (“WHO has historically been staffed predominantly by physicians, medical scientists, and public health experts.”).
[99] David P. Fidler, The Future of the World Health Organization: What Role for International Law? 31 Vand. J. Transnat’l L. 1079, 1099 (1998).
[100] Harmon, supra note 87, at 251.
[101] Id. (internal citation omitted).
[102] Id.
[103] Jennifer Prah Ruger, Normative Foundations of Global Health Law, 96 Geo. L.J. 423, 438 (2007–2008) (noting that “international health law has been viewed as ‘ineffective’”).
[104] WHO, Framework Convention on Tobacco Control 6 (2003), http://www.who.int/tobacco/framework/WHO_FCTC_english.pdf.
[105] Harmon, supra note 87, at 251.
[106] Jarrod Hepburn, Clovis Trevino & Luke Eric Peterson, World Health Organization is Given Green-Light by Arbitrators to Intervene in Philip Morris v. Uruguay Arbitration, 8 Inv. Arb. Rep. 1, 31 (2015) (noting that “[i]n their request to intervene, the WHO and the FCTC Secretariat contended that their submission ‘may assist the tribunal in the determination of factual and legal issues’ as it w[ould] provide evidence of the relation between health warnings and labeling and the protection of public health, on tobacco control globally which, in their view, may assist the tribunal in assessing the claimant’s legitimate expectations and the legal relation between the FCTC and the Switzerland-Uruguay BIT.”). For a commentary of the specific arbitration, see Valentina Vadi, Global Health Governance at a Crossroads: Trademark Protection v. Tobacco Control in International Investment Law, 48 Stan. J. Int’l L. 93–130 (2012).
[107] Lawrence O. Gostin, Public Health Law in a New Century 283 JAMA. 2837, 2837 (2000) (highlighting that “the government has the primary responsibility to advance the public’s health because it acts on behalf of the people” and noting, at 2838, that “theories of democracy” explain “the primacy of government in matters of public health.”).
[108] Vadi, supra note 54, at 30; Montevideo Convention on the Rights and Duties of States art. 1., Dec. 26, 1933, 49 Stat. 3097, 165 L.N.T.S. 19 (stating that a population is one of the three elements required for statehood, together with territory and government).
[109] Harmon, supra note 87, at 247.
[110] Allyn Taylor, Global Governance, International Health Law and WHO: Looking Towards the Future, 80 Bull. World Health Org. 975, 975–76 (2002), http://www.who.int/docstore/bulletin/pdf/2002/bul-12-E-2002/80(12)975-980.pdf.
[111] Id. at 251.
[112] José E. Alvarez, The Public International Law Regime Governing International Investment 14–15 (2011). For a historical overview, see Andreas Lowenfeld, International Economic Law 469-494 (2d ed. 2008); Jeswald W. Salacuse, The Law of Investment Treaties (2010); M. Sornarajah, The International Law on Foreign Investment 19–28 (3d ed. 2010); Andrew Newcombe & Luis Paradell, Law and Practice of Investment Treaties 3–57 (2009).
[113] United Nations Conference on Trade and Development [UNCTAD], World Investment Report 2011, 100, U.N. Doc. UNCTAD/WIR/2011 (July 26, 2011).
[114] United Nations Conference on Trade and Development [UNCTAD], Bilateral Investment Treaties: 1959–1999, 1, U.N. Doc. UNCTAD/ITE/IIA2 (Dec. 14, 2000).
[115] Some authors are skeptical about whether BITs actually attract investment. See Jason W. Yackee, Do BITs Really Work? Revisiting the Empirical Link between Investment Treaties and Foreign Direct Investment, in The Effect of Treaties on Foreign Direct Investment: Bilateral Investment Treaties, Double Taxation Treaties, and Investment Flows (Sauvant & Sachs eds. 2009); Jason W. Yackee, Bilateral Investment Treaties, Credible Commitment, and the Rule of (International) Law: Do BITs Promote Foreign Direct Investment, 42 Law & Soc’y Rev. 805, 807 (2008). See generally M. Hallward-Driemeier, Do Bilateral Investment Treaties Attract Foreign Direct Investment? Only a Bit And They Could Bite (Policy Research, Working Paper No. 3121, 2003). However, other authors have identified a positive impact. See generally Jeswald Salacuse & N. P. Sullivan, Do BITs Really Work? An Evaluation of Bilateral Investment Treaties and Their Grand Bargain, 46 Harv. Int’l. L.J. 67 (2005); E. Neumayer & L. Spess, Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries?, 33 World Dev. 1567 (2005); A. Bénassy-Quéré, M. Coupet & T. Mayer, Institutional Determinants of Foreign Direct Investment, 30 World Economy 764 (2007); P. Egger & V. Merlo, The Impact of Bilateral Investment Treaties on FDI Dynamics, 30 World Economy 1536 (2007); P. Egger & M Pfaffermayr, The Impact of Bilateral Investment Treaties on Foreign Direct Investment, 32 J. of Comparative Econ. 788 (2004); J. Tobin & S. Rose-Ackerman, Foreign Direct Investment and the Business Environment in Developing Countries: The Impact of Bilateral Investment Treaties (Yale Law and Econ. Working Paper No. 293, 2005).
[116] See generally Valentina Vadi, Converging Divergences: The Rise of Chinese Outward Foreign Investment and Its Implications for International (Investment) Law, 2011–2012 Y.B. Int’l Inv. L. 705 (2013) (noting that the traditional distinction between capital importers and capital exporters has become blurred and investment treaties have increasingly been signed not only among industrialized countries on the one side and developing countries on the other side, but also among LDCs and emerging economies).
[117] Lahra Liberti, Intellectual Property Rights in International Investment Agreements: An Overview 1, 3 (OECD Working Papers on Int’l Inv., 2010/01, 2010), http://www.oecd-ilibrary.org/finance-and-investment/intellectual-property-rights-in-international-investment-agreements_5kmfq1njzl35-en (noting the “possibility for an IPR holder to bring a claim against a state under the investor-state dispute settlement mechanism.”).
[118] Jan Paulsson, Arbitration Without Privity 10 ICSID Rev. For Inv. L. J. 232, 239 (1995).
[119] David R. Sedlak, ICSID’s Resurgence in International Investment Arbitration: Can the Momentum Hold?, 23 Penn. St. Int’l L. Rev. 147, 147–49 (2004) (noting that investor-state arbitration has become a standard feature in international investment treaties since the 1980s).
[120] See Andrew Newcombe & Lluis Paradell, Law and Practice of Investment Treaties 24 (2009).
[121] See Ibrahim F.I. Shihata, The Settlement of Disputes Regarding Foreign Investment: The Role of the World Bank, with Particular Reference to ICSID and MIGA, 1 Am. U. J. Int’l L. & Pol’y 97, 103 (1986) (noting that “The main features of th[e ICSID System] include its voluntary character, its flexibility, and its effectiveness.”).
[122] Nigel Blackaby, Investment Arbitration and Commercial Arbitration (or the Tale of the Dolphin and the Shark), in Pervasive Problems in International Arbitration 217, 232 (Julian Lew & Loukas Mistelis eds., 2006).
[123] John Collier & Vaughan Lowe, The Settlement of Disputes in International Law 69 (1999) (“The parties choose an uneven number of arbitrators, three in the absence of agreement, and the persons to act as arbitrators.”); J.A. Fontoura Costa, Comparing WTO Panelists and ICSID Arbitrators: The Creation of International Legal Fields, 1 Onati Socio-Legal Series 1, 14 (2011) (“Virtually all ICSID arbitrators and ad hoc committee members have some legal background, since only 0.4% of the whole population is composed of individuals who had not at least studied law. On the other hand, WTO figures are very different: 45% of panelists and 10% of AB members have no links to any legal background or professional activity.”).
[124] Jeswald W. Salacuse, The Emerging Global Regime for Investment, 51 Harv. Int’l L. J. 427, 466 (2010).
[125] Alan S. Rau, Integrity in Private Judging, 38 S. Tex. L. Rev. 485, 507 (1997).
[126] Some hearings have been broadcast in special viewing rooms at the ICSID headquarters in Washington, but were not webcast. See Lise Johnson, As Hearings Kick Off in Apotex v. USA Arbitration, New Pleadings Show Continued Sparring Over Canadian Drug Companies’s Claim to Own NAFTA-Protected Investments, 6 Inv. Arb. Rep. 1, 5 (2013).
[127] While more awards have been published, some arbitrations and the relevant awards were given minimal publicity. For instance, a redacted version of the Servier award, discussed below, was released by a Polish Government agency following a request under the country’s access to information laws. A May 2013 ruling of the Warsaw District Administrative Court directed Poland’s Ministry of Health to release the Servier award, subject to any redactions of confidential commercial information. A previously released copy of the 2012 award offered only the cover page and signature page. See Jarrod Hepburn, Poland Releases A New – Less Redacted – Version of Award From Dispute With French Pharma Companies; MFN can’t Broaden Investment Treaty’s Arbitration Clause, 6 Inv. Arb. Rep. 1, 3–4 (2013).
[128] States usually offer investors a variety of rules to choose from, which may include the UNCITRAL Arbitration Rules, the Rules of Procedure for Arbitration of the International Centre for Settlement of Investment Disputes (ICSID), the arbitration rules of the International Chamber of Commerce (ICC) or other arbitration rules such as the arbitration rules of the Stockholm Chamber of Commerce (SCC).
[129] Luke Eric Peterson, Int’l Inst. for Sustainable Dev. [IISD], Bilateral Investment Treaties and Development Policy-Making, 15 (2004).
[130] NAFTA Free Trade Commission, Statement of the Free Trade Commission on Non-Disputing Party Participation, at 7 (Oct. 7, 2003), http://www.state.gov/documents/organization/38791.pdf.
[131] ICSID, Administrative and Financial Regulations, Reg. 22: Publication, at 66, ICSID Doc. ICSID/15 (April 2006), [hereinafter ICSID, Admin. and Financial Regs.], https://icsid.worldbank.org/ICSID/StaticFiles/basicdoc/CRR_English-final.pdf).
[132] ICSID, Rules of Procedure for Arbitration Proceedings, Rule 37: Visits and Inquires; Submissions of Non-Disputing Parties, at 117, ICSID Doc. ICSID/15 (April 2006), https://icsid.worldbank.org/ICSID/StaticFiles/basicdoc/CRR_English-final.pdf.
[133] United Nations Convention on Transparency in Treaty-based Investor-State Arbitration (the “Mauritius Convention on Transparency”), Dec. 10, 2014, A/RES/69/116. The Convention will enter into force six months after the deposit of the third instrument of ratification. The list of the parties to the Convention as well as signatories is available at http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/2014Transparency_Convention_status.html.
[134] New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Jun. 10, 1958, 330 U.N.T.S. 38 [hereinafter NY Convention].
[135] Convention on the Settlement of Investment Disputes between States and Nationals of other States, Mar.18, 1965, 17 U.S.T. 1270 [hereinafter ICSID Convention].
[136] Id. at art. 52.
[137] NY Convention, supra note 134, at art. 5.
[138] Gus Van Harten, Investment Treaty Arbitration and Public Law 70 (Vaughan Lowe ed., 2007).
[139] M. Sornarajah, The Clash of Globalizations and the International Law on Foreign Investment 12 Can. For. Pol’y. 2, 2–10 (2003).
[140] See generally Kyla Tienhaara, Regulatory Chill and the Threat of Arbitration: A View from Political Science, in Evolution in Investment Treaty Law and Arbitration 607 (Chester Brown & Kate Miles eds., 2011); Stuart G. Gross, Inordinate Chill: BITS, Non-NAFTA MITS, and Host-state Regulatory Freedom: An Indonesian Case Study, 24 Mich. J. Int’l L. 893, 960 (2003) (examining a case where Indonesia repealed a regulation protecting forests after the threat of an investment treaty arbitration). But see Jeremy Caddel & Nathan M. Jensen, Which Host Country Government Actors are Most Involved in Disputes with Foreign Investors?, in Columbia FDI Perspectives No. 120 at 1, 2 (Karl P. Sauvant & Shawn Lim eds., 2014) (“Given the low rate of disputes involving legislative branch activity, arguments that investor-state arbitration may encroach on the legitimate prerogatives of domestic governments appear to be overstated. Instead, democratic legislatures should embrace investor state arbitration as an additional check on executive branch misbehavior.”).
[141] Lukas Vanhonnaeker, Intellectual Property Rights as Foreign Direct Investments: From Collision to Collaboration vii (2015) (noting “a relative paucity of cases”).
[142] For a comprehensive analysis of the pharmaceutical patent-related arbitrations see infra Part IV.
[143] ICSID Convention, supra note 135, at art. 48(5) (“The Centre shall not publish the award without the consent of the parties.”); ICSID, Admin. and Financial Regs., supra note 131, at 66, (“The Secretary-General shall appropriately publish information about the operation of the Centre, including the registration of all requests for conciliation or arbitration and in due course an indication of the date and method of the termination of each proceeding. If both parties to a proceeding consent to the publication of . . . arbitral awards; or the minutes and other records of proceedings, the Secretary-General shall arrange for the publication thereof, in an appropriate form with a view to furthering the development of international law in relation to investments.”).
[144] See, e.g., The Arbitration Inst. of the Stockholm Chamber of Commerce, Rules of the Arbitration Institute of the Stockholm Chamber of Commerce, art. 46, (Jan. 2010), http://www.sccinstitute.se/filearchive/1/13207/1999_web_a4_vanliga_2004_eng_rev_2005.pdf.
[145] Treaty for the Promotion and Protection of Investments, Ger.-Pak., Nov. 25, 1959, 457 U.N.T.S. 24.
[146] Gus Van Harten and Martin Loughlin, Investment Treaty Arbitration as a Species of Global Administrative Law, 17 European Journal of International Law 121, 124 (2006).
[147] Asian Agricultural Products Ltd v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/87/3, Award, at 527 (June 27 1990).
[148] Lucy Reed, Jan Paulsson & Nigel Blackaby, Guide to ICSID Arbitration (2d ed. 2011).
[149] U.N. Conference on Trade & Dev. [UNCTAD], World Investment Report 2007: Transnational Corporations, Extractive Industries and Development, xi, U.N. Doc. UNCTAD/WIR/2007 (July 2007).
[150] Vadi, supra note 54, at 51.
[151] Helfer, supra note 57, at 314 (“National patent laws are exclusively territorial in scope.”).
[152] See, e.g., Anheuser Busch Inc. v. Portugal, 2007-II Eur. Ct. H.R. (holding that intellectual property undeniably attracts the protection of Art. 1 of Protocol No. 1). See generally, Henning Grosse Ruse–Khan, Overlaps and Conflict Norms in Human Rights Law: Approaches of European Courts to Address Intersections with Intellectual Property Rights, in Research Handbook on Human Rights and Intellectual Property (Christopher Geiger ed., 2014).
[153] See generally Pauwelyn, supra note 25.
[154] Although alternative dispute mechanisms such as arbitration and mediation have been traditionally described as cheaper than litigation, this is not always the case, especially with regard to investment disputes, where legal fees and expenses are extremely high. See Matthew Hodgson, Counting the Costs of Investment Treaty Arbitration, 9 Global Arb. Rev. 2 (2014) (“[T]he average party costs were quite similar, at $4,437,000 for claimants and $4,559,000 for respondents.”); Tamara L. Slater, Investor-State Arbitration and Domestic Environmental Protection, 14 Wash. U. Global Stud. L. Rev. 131, 147 (2015) (noting that “[i]n international arbitration, the monetary cost is often millions of dollars.”). The cost variation depends on jurisdiction. See generally International Bar Association, Intellectual Property and Entertainment Law Committee, International Survey of Specialised Intellectual Property Courts and Tribunals (Sep. 2007) (determining, country by country, the level of effectiveness of the judicial system in its ability to settle IP disputes).
[155] Valentina Vadi, Mapping Uncharted Waters: Intellectual Property Disputes with Public Health Elements in Investor-State Arbitration, 2 Transn’l Disp. Mgmt. 1, 6 (2009) [hereinafter Vadi, Mapping Uncharted Waters].
[156] See, e.g., AHS Niger and Menzies Middle East and Africa S.A. v. Republic of Niger, ICSID Case No. ARB/11/11, Award, at 15 (July 2013) (where Niger was found liable for expropriation of airport services concession, but no damages due for subsequent “misuse” of intellectual property).
[157] See Vadi, Mapping Uncharted Waters, supra note 155 (referring to David Vaver, Does the Public Understand Intellectual Property? Do Lawyers? (Univ. of Oxford Faculty of Law & Legal Studies Research Paper Series, Working Paper No. 23/2006, 2006)).
[158] Hege Elisabeth Kjos, Applicable Law in Investor-State Arbitration: The Interplay Between National and International Law 225 (2013) (noting that “the sanctioning of the host state behaviour no longer depends on the discretionary intervention by the investor’s home state.”).
[159] Barton Legum, Investment Treaty Arbitration: An Option Not to Be Overlooked, in International Litigation Strategies and Practice 189, 190 (Barton Legum ed., 2005) (stressing that “in a significant innovation, [investment treaties] allowed the foreign investor to initiate and control prosecution of the arbitration, without having to rely on its state to bring the treaty case for it.”).
[160] Arbitral tribunals have held states liable to compensate investors for breaches of treaty standards that result in injury, relying on a case involving a Chorzów, Poland factory. See, e.g., MTD Equity Sdn. Bhd & MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Award, ¶ 238 (May 24, 2004). The Chorzów Factory case involved the German government seeking damages for harm sustained by two German companies caused by acts of the Polish government. Case Concerning the Factory at Chorzoacute;w, 1928 P.C.I.J. (ser. A) No. 17, at 47 (Sep. 13) (judgment on the merits) (holding that “reparation must, as far as possible, wipe out all the consequences of the illegal act and re-establish the situation which would in all probability, have existed if that act had not been committed.”).
[161] Statute of the International Court of Justice art. 34(1), Jun. 26, 1946, 8 U.N.T.S. 993 (“Only state[s] may be parties in cases before the [International] Court [of Justice].”); see also Understanding on Rules and Procedures Governing the Settlement of Disputes art. 1, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 2, 1869 U.N.T.S. 401 [hereinafter DSU]; Collier & Lowe, supra note 123, at 132–69 (describing the nature and scope of ICJ jurisdiction); Robert O. Keohane, Andrew Moravcsik & Anne-Marie Slaughter, Legalized Dispute Resolution: Interstate and Transnational, 54 Int’l Org. 457, 463 (2000) (referring to “the GATT and WTO panels” and the ICJ as “interstate tribunals . . . in which only member states may file suit against one another.”).
[162] Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain), 1970 I.C.J. 3 (Feb. 5). In a more recent case, the Court has recognized the residual nature of the exercise of diplomatic protection and recourse to the Court in case of investment disputes. Case Concerning Ahmadou Sadio Diallo (Guinea v. Dem. Rep. Congo), 2007 I.C.J. 582, ¶ 88–91 (May 24) (Preliminary Objections).
[163] Malcolm N. Shaw, International Law 589 (7th ed. 2014) (“There is under international law no obligation for states to provide diplomatic protection for their nationals abroad.”).
[164] See generally Petros C. Mavroidis et al., Panel Discussion, Is the WTO Dispute Settlement Mechanism Responsive to the Needs of the Traders? Would a System of Direct Action by Private Parties Yield Better Results?, 32 J. World Trade 14 (1998) 147–165 (discussing the questions whether the WTO DSM is responsive to the traders’ economic interests and whether a system of direct action would better serve those interests); Joel P. Trachtman & P.M. Moremen, Costs and Benefits of Private Participation in WTO Dispute Settlement: Whose Right is it Anyway?, 44 Harv. Int’l L.J. 221 (2003) (analyzing the role of private actors in the WTO DSM); A. Catbagan, Rights of Action for Private Non-State Actors in the WTO Disputes Settlement System, 37 Denv. J. Int’l L. & Pol’y 279, 302 (2008) (proposing the institutionalization of direct action by private parties).
[165] Christina L Davis, Setting the Negotiation Table 21 (2005) (“Low-profile issues that do not have a strong interest group on either side are unlikely to rise to the level of adjudication. A government will be reluctant to initiate the formal adjudication process if there is not a strong interest group with sufficient political and economic interests to gather the backing for a formal dispute complaint. Government officials rely on interest groups to provide the background information to help select and prepare trade dispute cases.”).
[166] Sean Flynn, How the Leaked TPP ISDS Chapter Threatens Intellectual Property Limitations and Exceptions, IntellectualPropertyWatch.Org, (Mar. 26, 2015), http://www.ip-watch.org/2015/03/26/how-the-leaked-tpp-isds-chapter-threatens-intellectual-property-limitations-and-exceptions/.
[167] Martin Dixon, Robert McCorquodale & Sarah Williams, Cases and Materials on International Law 423 (5th ed. 2011) (noting that “[b]ecause a State brings an international claim for its own injury, it is neither under an obligation to exercise diplomatic protection nor to pay any reparation (including compensation) received by it to the national actually injured.”).
[168] See generally DSU.
[169] Geraldo Vidigal, Re-Assessing WTO Remedies: The Prospective and the Retrospective, 16 J. Int’l Econ. L. 505, 505 (2013) (noting the “World Trade Organization (WTO) system of ‘prospective’ or ‘forward-looking’ remedies” and highlighting “their different functions when contrasted to reparation: inducing compliance ex post, rather than discouraging it ex ante.”).
[170] Yoshifumi Fukunaga, Enforcing TRIPS: Challenges of Adjudicating Minimum Standards Agreements, 23 Berkeley Tech. L.J. 868, 879 (2008) (noting that “the use of the WTO DSM to resolve TRIPS disputes has fallen, while its use to resolve general trade disputes continues unabated.”).
[171] But see Panel Report, Canada – Patent Protection of Pharmaceutical Products, WT/DS114/R (Mar. 20, 2000) (holding that the TRIPS permits generic producers to manufacture a given pharmaceutical during the life of the patent; only stockpiling is deemed incompatible with Article 30); Panel Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical Products, WT/DS5O/AB/R (Dec. 19, 1997).
[172] Fukunaga, supra note 170 (noting “there remain questions regarding the effectiveness of the WTO DSM in the TRIPS context.”).
[173] States have increasingly settled potential IP-related disputes. Id. at 888–889 (noting that “more than half of the disputes concerning TRIPS were settled within the consultation process through a mutually agreed solution.”). The TRIPS Council may have helped in reducing the number of IP-related disputes. Id. at 894, 897 (noting that “[t]he Council’s effectiveness as a monitoring body might be working to preempt potential disputes well before they would reach the DSM.”). In fact, discussion of given issues before the Council allows member states to explain, discuss and eventually adjust their regulatory measures.
[174] However, in case of denial of justice claims, the exhaustion of local remedies is needed.
[175] See generally Michael Goldhaber, The Rise of Arbitral Power Over Domestic Courts, 1 Stan. J. of Complex Litig. 373, 375 (2013) (tracing the doctrinal evolution of the denial of justice doctrine and discussing the rise of arbitral power over domestic courts more generally.).
[176] GATT, supra note 77, at art. 23(1)(b), (c) (“If any contracting party should consider that any benefit accruing to it directly or indirectly under this Agreement is being nullified or impaired or that the attainment of any objective of the Agreement is being impeded as the result of . . . (b) the application by another contracting party of any measure, whether or not it conflicts with the provisions of this Agreement, or (c) the existence of any other situation, the contracting party may, with a view to the satisfactory adjustment of the matter, make written representations or proposals to the other contracting party or parties which it considers to be concerned. Any contracting party thus approached shall give sympathetic consideration to the representations or proposals made to it.”). See generally Susy Frankel, Challenging TRIPS-Plus Agreements: The Potential Utility of Non-Violation Disputes, 12 J. Int’l Econ. L. 1023 (2009).
[177] Luke Eric Peterson, Newly Disclosed Document Shows that Pharma Corp Hopes to Construe Alleged Non-Compliance with Patent Treaties as a Breach of Investment Treaty, Inv. Arb. Rep. (Dec. 10, 2012).
[178] Haochen Sun, TRIPS and Non-Violation Complaints From a Public Health Perspective, Ctr. for Int’l Dev. at Harv. Univ. 5 (2002), http://www.cid.harvard.edu/cidtrade/Papers/Sun-TRIPS.pdf (“During the TRIPS negotiations in particular, there was significant disagreement regarding the inclusion of a provision on non-violation in the context of intellectual property disputes,” and that “[t]he potential application of the non-violation remedy to the TRIPS Agreement remains controversial.”).
[179] TRIPS Agreement art. 64.2.
[180] The 9th WTO Ministerial Conference held in Bali, Indonesia (3–7 December 2013) reiterated the moratorium until its next session to be held in Nairobi, Kenya, in December 2015. The United States and Switzerland have asked for reconsideration of this issue, and the TRIPS Council is examining the scope and modalities for non-violation complaints. Press Release, WTO, Intellectual Property Meeting Mulls Irish Tobacco Plan, Drug Tariffs, Sport, Non-Violation (Oct. 10, 2013), https://www.wto.org/english/news_e/news13_e/trip_10oct13_e.htm#nonviolation.
[181] Robert E. Hudec, Enforcing International Trade Law: The Evolution of the Modern GATT Legal System, 7 (1993) 7 (noting that the non-violation procedure allows, to a certain extent, “the closing-up of a loophole in substantive law, offering the possibility of maintaining the balance of interests even in cases where the substantive law dose not cover the issues at hand”).
[182] Paris Convention, supra note 65.
[183] Christopher S. Gibson, Latent Grounds in Investor-State Arbitration: Do International Investment Agreements Provide New Means to Enforce Intellectual Property Rights?, Y.B. on Int’l Inv. Law & Pol’y 397, 398 (2010) [hereinafter Gibson, Latent Grounds in Investor-State Arbitration] (noting that modern economies have become “predominantly ‘conceptual,’ reflecting the vital role of ideas in … products and services.”).
[184] Id. at 398.
[185] Id. at 412.
[186] These arbitrations are showcased in the subsections below, which distinguish and categorize them on the basis of the claims articulated by the claimants.
[187] See, e.g., Eli Lilly and Co. v. The Government of Canada, ICSID Case No. UNCT/14/2, http://www.italaw.com/cases/1625.
[188] Signa S.A. v. Government of Canada, Notice of Intent to Submit a Claim to Arbitration Under Section B of Chapter 11 of the North American Free Trade Agreement (Mar. 4, 1996), http://www.international.gc.ca/trade-agreements-accords-commerciaux/assets/pdfs/disp-diff/signa-01.pdf.
[189] Id. ¶¶ 4, 12.
[190] Id. ¶¶ 1–3.
[191] Id. ¶ 4.
[192] Id. ¶ 6.
[193] Id. ¶ 9.
[194] Luke Eric Peterson, Uruguay Threatened over Decree Affecting Ownership of Pharmacies, Investment Arbitration Reporter (May 13, 2014), http://www.iareporter.com/articles/round-up-water-concessionaire-warns-estonia-under-dutch-treaty-uruguay-threatened-over-decree-affecting-ownership-of-pharmacies/.
[195] Id.
[196] Luke Eric Peterson, France’s Second Largest Pharmaceutical Company Quietly Pursues Arbitration Against Republic of Poland, Investment Arbitration Reporter (Aug. 19, 2011), http://www.iareporter.com/articles/frances-second-largest-pharmaceutical-company-quietly-pursues-arbitration-against-republic-of-poland.
[197] See infra Section IV.A.
[198] See infra Section IV.B.
[199] See infra Section IV.B.
[200] See infra Section IV.D.
[201] See infra Section IV.E.
[202] See Dreyfuss & Frankel, supra note 66, at 3–4 (pinpointing the reconceptualization of IP by international law).
[203] For a seminal study, see Carlos A. Primo Braga & Carsten Fink, The Relationship Between Intellectual Property Rights and Foreign Direct Investment, 9 Duke J. Comp. & Int.’l L. 163 (1998).
[204] Ruth L. Okediji, Is Intellectual Property “Investment”? Eli Lilly v. Canada and the International Intellectual Property System, 35 U. Pa. J. Int’l L. 1121, 1124 (2014) [hereinafter Okediji, Is Intellectual Property “Investment?”] (noting that “[a]lthough the definition of ‘investment’ contained in most investment treaties mention intellectual property, the obligations, expectations, and enforcement aspects of these treaties are largely undeveloped.”).
[205] Boie, supra note 2, at 4 (defining IIAs – a term encompassing both “bilateral investment treaties (BITs) and FTAs or Regional Trade Agreements (RTAs) with investment chapters” – as “agreements concluded between states for the promotion and protection of reciprocal investments.”).
[206] ICSID Convention, supra note 135, at art. 25(1).
[207] Alex Grabowski, The Definition of Investment Under the ICSID Convention: A Defense of Salini, 15 Chi. J. Int’l L. 287, 293 (2014) (noting that “[t]he signatories to the [ICSID] convention purposefully left the term ‘investment’ undefined when granting the body jurisdiction over matters of international investment.”).
[208] ICSID Convention, supra note 135, at art. 25(1).
[209] Grabowski, supra note 207, at 293 (noting that “[a] variety of tribunals have applied a plethora of different tests ….”).
[210] Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction, (July 23, 2001). The need for the last element, the contribution to the economic development of the host state, is sometimes put in doubt. See L.E.S.I.–DIPENTA v. République Algérienne Démocratique et Populaire, Decision on Jurisdiction, (July 12, 2006); Apotex Holdings Inc. v. United States (Apotex III), ICSID Case No. ARB(AF)/12/1, Award, ¶ 7.62 (Aug. 25, 2014) (holding that it did not seem necessary that the investment contribute to the economic development of the country; according to the Tribunal, the contribution to economic development was difficult to establish, and was implicitly covered by the other three elements of an investment); Quiborax v. Bolivia, ICSID Case No. ARB/06/2, Decision on Jurisdiction, ¶ 220 (Sept. 27, 2012) (arguing that while the ICSID Convention attempts to foster economic development via international investment, such development is not a necessary element of investment).
[211] Malaysian Historical Salvors SDN BHD v. The Government of Malaysia, ICSID Case No. ARB/05/10, Decision on the Application for Annulment (Apr. 16, 2009).
[212] Les Laboratoires Servier, S.A.S., Biofarma, S.A.S., Arts et Techniques du Progrès v. Republic of Poland, Award, ¶¶ 515, 532 (Feb. 14, 2012).
[213] Id. ¶ 190 (noting that Servier did not plead that the marketing authorizations were a protected investment).
[214] Id. ¶ 206.
[215] Id. ¶ 222.
[216] Id.
[217] Id. ¶ 510, 518.
[218] Okediji, Is Intellectual Property “Investment”?, supra note 204, at 1126.
[219] Id. (noting that “[s]uch agreements usually protect intellectual property by including it in the definition of investment.”). Conversely, FTAs often include a distinct chapter for governing intellectual property. See id. (highlighting that “[t]he fact in RTAs, that several subject matters, including both investment and IP, are covered in one single agreement may have significant consequences for the interplay of these provisions”). IP chapters providing for higher standards of IP protection than those provided by the TRIPS Agreement are known as ‘TRIPS-plus.’ See Beatrice Lindstrom, Scaling Back TRIPS-Plus: An Analysis of Intellectual Property Provisions in Trade Agreements and Implications for Asia and the Pacific, NYU J. of Int’l L. and Pol. 917, 919 (2010) (noting that “[o]ver the past ten years, a new trend has developed in which bilateral trade agreements mandate changes to domestic intellectual property laws, resulting in laws that exceed the standards agreed to at the WTO. These agreements are referred to as ‘TRIPS-plus.’”) A complete analysis of the interactions between the investment and IP chapters of FTAs is outside the scope of this article.
[220] For instance, Article 1139(g) of the North American Free Trade Agreement (NAFTA) states “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.” North American Free Trade Agreement, signed on 17 December 1992, in force on 1 January 1994, 32 ILM 289, 605 (1993).
[221] See, e.g., the Agreement between the Swiss Confederation and the Dominican Republic on the Promotion and Protection of Investments (CH-Cuba BIT), art. 1.2(d) (stating that “[t]he term ‘investments’ shall include every kind of asset, in particular, though not exclusively: … copyrights, industrial property rights (such as patents, utility models, industrial designs or models, trade or service marks, trade names, indications of origin), technical processes, know-how and goodwill”). The first BIT, signed between West Germany and Pakistan in 1959, included “patents and technical knowledge” in the definition of “investment.” Treaty for the Promotion and Protection of Investments, Ger.-Pak., art. 8(1)(a), Nov. 25, 1959, 457 U.N.T.S. 24 (affirming that “[t]he term ‘investment’ shall comprise capital brought into the territory of the other Party for investment in various forms in the shape of assets such as foreign exchange, goods, property rights, patents and technical knowledge.”).
[222] Liberti, supra note 117, at 8 (“A first issue regarding the scope of the definition of investment is whether patent applications, though not an IPR, would qualify as an intangible property.”).
[223] See, e.g., 2009 ASEAN Comprehensive Investment Agreement, art. 4(c) (limiting an “investment” to “intellectual property rights which are conferred pursuant to the laws and regulations of each Member State.”).
[224] Agreement Between the Government of Hong Kong and the Government of Australia for the Promotion and Protection of Investment, Austl.-H.K., art 1(e)(iv), Sep. 15, 1993, 1748 U.N.T.S. 385; Agreement Between the Government of Canada and the Government of the Republic of Argentina for the Promotion and Protection of Investment, Arg.-Can., art. 1(a)(iv), May 11, 1991, 2467 U.N.T.S. 97.
[225] Treaty Between the United States of America and Jamaica Concerning the Reciprocal Encouragement and Protection Investment, Jam.-U.S., art. I.1(a)(iv), Feb. 2, 1994, S. Treaty Doc. No. 103–35.
[226] Id. (stating that “[f]or the purposes of this Treaty, (a) ‘investment’ means every kind of investment in the territory of one Party owned or controlled directly or indirectly by nationals or companies of the other Party, such as equity, debt, and service and investment contracts; and includes without limitation: … (iv) intellectual property which includes, inter alia, rights relating to: literary and artistic works, including sound recordings, patentable inventions, industrial designs, semiconductor mask works, trade secrets and confidential business information, and trademarks, service marks, and trade names.”).
[227] See generally Liberti, supra note 117.
[228] Bryan Mercurio, Awakening the Sleeping Giant: Intellectual Property Rights in International Investment Agreements, 15 J. of Int’l Econ. L. 871, 878 (2012) (“For instance, the value of the expected IPRs (and hence the expected profit to be derived from the IPRs) can be vast and easily quantifiable as, for instance, applications for a patent (and in some jurisdictions, applications for trademark) can be sold and assigned to third parties.”).
[229] Patents can only be acquired through registration.
[230] Anheuser-Busch Inc. v. Portugal, 45 Eur. Ct. H.R. 36 (2007).
[231] Apotex Holdings Inc. v. United States (Apotex III), ICSID Case No. ARB(AF)/12/1, Award, ¶ 7.62 (Aug. 25, 2014).
[232] Id. ¶ 2.34.
[233] Id. ¶ 2.24.
[234] Id. ¶ 2.40.
[235] ¶ 2.51 (“The Respondent submits that Apotex Inc. does not claim to manufacture or even test any drugs in the USA; nor does it assert the existence of any offices or employees in the USA; nor does it assert the existence of any offices or employees in the USA; it pays no taxes in the USA on its supposed investments (including its ANDA-related activities) ….”).
[236] Id. ¶ 2.37 (contending that “the Tribunal has no jurisdiction to decide the Parties’ dispute under NAFTA”; that “the Claimants’ complaint is in fact directed at a trade measure”; and that “the Claimants are seeking improperly in these proceedings to convert a possible trade-related claim between NAFTA Contracting States (under NAFTA Chapter Twenty) into an investment claim by a foreign entity (under NAFTA Chapter Eleven).”).
[237] Id. ¶ 2.28.
[238] Id. ¶ 2.27.
[239] Id. ¶ 7.62.
[240] Apotex Inc. v. United States, UNCITRAL, Award on Jurisdiction and Admissibility (June 14, 2013).
[241] Apotex III, ¶ 7.62. One of the three arbitrators dissented from the Tribunal’s conclusion. He suggested that approved ANDAs can be bought and sold and are in other ways treated as property under U.S. law. Id. ¶ 7.66.
[242] Lise Johnson, New Weaknesses: Despite a Major Win, Arbitration Decisions in 2014 Increase the US’s Future Exposure to Litigation and Liability 4 (2015), http://ccsi.columbia.edu/files/2014/03/Brief-on-US-cases-Jan-14.pdf.
[243] Okediji, Is Intellectual Property “Investment”?, supra note 204, at 1126.
[244] La Republique d’Italie v. La Republique de Cuba, UNCITRAL, Arbitrage ad hoc, Sentence Finale, ¶ 219 (Jan. 15, 2008). Italy espoused the claims of sixteen investors operating in different fields and raised claims in its own name for breach of the Italy-Cuba BIT. Id. at ¶ 46. It sought the payment of €1 from Cuba as symbolic compensation and of several millions of U.S. dollars as compensation for the injury suffered by its investors. Id. ¶ 96(1)(e)(6).
[245] See, e.g., Enrico Milano, The Investment Arbitration between Italy and Cuba: The Application of Customary International Law under Scrutiny, 11 L. & Practice of Int’l Cts and Tribunals 424, 500 (2012) (defining this arbitration as “a landmark case … to the extent that it has constituted the first inter-State proceedings in the history of modern BITs.”) See generally Michele Potestà, Republic of Italy v. Republic of Cuba, 106 Am. J. Int’l L. 341 (2012). See also Anthea Roberts, State-to-State Investment Treaty Arbitration: A Hybrid Theory of Interdependent Rights and Shared Interpretive Authority, 55 Harvard Int’l L. J. 1 (2014).
[246] La Republique d’Italie v. La Republique de Cuba, UNCITRAL, Arbitrage ad hoc, Sentence Finale, ¶ 219 (Jan. 15, 2008).
[247] Id. ¶ 90.
[248] Id. ¶ 134.
[249] Id.
[250] Id. ¶ 136.
[251] Id. ¶ 39.
[252] Id. ¶ 39, n.1.
[253] Id. ¶ 93. In fact, Italy did still have standing to sue in its own name.
[254] La Republique d’Italie v. La Republique de Cuba, UNCITRAL, Arbitrage ad hoc, Sentence Finale, ¶ 81 (Jan. 15, 2008) (“sauf dispositions contraires spécifiques d’un Traité Bilatéral de protection des Investissements, trois éléments sont requis pour que l’on se trouve en présence d’un investissement: un apport, la durée et une prise de risque de la part de l’investisseur…. Ceci permet d’écarter, par exemple, les simples opérations de vente.”).
[255] Id. ¶ 215.
[256] Id.
[257] Id. ¶ 220 (clarifying that “… le fait que Menarini aurait sponsorisé des congres medicaux, ce qui n’est d’ailleurs pas etabli ne permet pas de qualifier d’investissement la vente des medicaments en cause, puisqu’il s’agit d’operations classiques de promotion des produits vendus.”).
[258] For instance, the sale of cattle was deemed not to constitute an investment in the Canadian Cattlemen case. In 2003, when the United States closed the U.S.–Canadian border to beef and cattle after a case of mad cow disease was discovered in Canada, a group of Canadian cattlemen brought a NAFTA Chapter 11 suit alleging that the U.S. discriminated against Canadian operators, because it allowed U.S. cattlemen who owned Canadian cattle to keep it, while stopping Canadian cattle (of Canadian operators) at the border. Thus, Canadian cattlemen requested damages for losses incurred during the border closure. The case was dismissed on jurisdictional grounds. Canadian Cattlemen for Fair Trade v. United States, UNCITRAL, Award on Jurisdiction (28 Jan. 2008).
[259] Gibson, Latent Grounds in Investor-State Arbitration, supra note 183, at 433.
[260] Okediji, Is Intellectual Property “Investment”?, supra note 204, at 1127 (noting that both investor and state “will be affected by any resulting welfare loss.”).
[261] See ICSID Convention, supra note 135, at art. 53 (stating that “The award shall be binding on the parties . . .”); see also NAFTA, supra note 16, at art. 1136(1) (providing that “an award made by a Tribunal shall have no binding force except between the disputing parties and in respect of the particular case.”).
[262] Gabrielle Kaufmann-Kohler, Arbitral Precedent: Dream, Necessity or Excuse?, 23 Arb. Int’l 357 (2007).
[263] Id. at 1136 (illustrating “the dangers of treating intellectual property as ‘investment’ per se, isolated from its appropriate policy domains.”).
[264] See Germany-Burundi BIT, supra note 3, at art. 2(4) (“Investment by nationals or companies of either Contracting Party shall not be expropriated, nationalized or subjected to any other measure the effects of which would be tantamount to expropriation or nationalization in the territory of the other Contracting Party except for the public benefit and against compensation… The legality of any such expropriation, nationalization, or comparable measure and the amount of compensation shall be subject to review by due process of law.”); Fr.-Pol., art. 5(2), Feb. 14, 1989 (“The Contracting Parties shall not take any expropriation or nationalization measures or any other measures which would have the effect of divesting investors of the other Party, either directly or indirectly, of investments belonging to them in its territory or maritime areas, except for reasons of public necessity and on condition that these measures are not discriminatory or contrary to a specific undertaking. Any divestment measures that may be taken shall give rise to the payment of prompt and adequate compensation, the amount of which shall correspond to the real value of the investments in question on the day before the measures are taken or made known to the public ….”).
[265] Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case ARB/98/4, Award, at ¶ 98 (Dec. 8, 2000) (noting that “expropriation is not limited to tangible property rights.”).
[266] See NAFTA, supra note 16, at art. 1110.1.
[267] United Nations Conference on Trade and Development, 2012, Expropriation: UNCTAD Series on Issues in International Investment Agreements II, 6, UNCTAD/DIAE/IA/2011/7 (“Direct expropriation means a mandatory legal transfer of the title to the property or its outright physical seizure. Normally, the expropriation benefits the State itself or a State-mandated third party.”).
[268] For instance, during the First World War, the German-owned Bayer trademark for aspirin was assigned to an unrelated US company. See Allen Z. Hertz, Shaping the Trident: Intellectual Property Under NAFTA, Investment Protection Agreements and at the World Trade Organization, 23 Canada–U.S. L.J. 261, 276 (1997).
[269] The Factory at Chorzów (Germany v. Poland), Judgment, PCIJ Rep, Series A No. 7, at 44 (May 25, 1926).
[270] Shell Brands International AG & Shell Nicaragua S.A. v. The Republic of Nicaragua, ICSID Case No. ARB/06/14, Request for Arbitration (May 17, 2006).
[271] Damon Vis-Dunbar, Shell Launches Claim against Nicaragua over Seizure of Intellectual Property, Investment Treaty News (Oct. 13, 2006) (noting that according to Shell, Nicaragua seized its trademarks in an effort to enforce a judgment handed down in 2002 by a Nicaraguan court in Sonia Eduarda Franco Franco, et al. v. Dow Chemical, et al. That judgment was in favour of Nicaraguan citizens who claimed to have been affected by a pesticide, which was manufactured for use on banana plantations in the 1960s and 70s. As the case was withdrawn, very little information is available about the dispute.).
[272] Id.
[273] Brigitte Stern, In Search of the Frontiers of Indirect Expropriation, in Contemporary Issues in International Arbitration and Mediation 35 (Arthur Rovine ed., 2008).
[274] For an examination of the question as to whether compulsory licenses can amount to an indirect expropriation, see Vadi, supra note 54, at 52–53, 76–80, 88–90; Christopher Gibson, A Look at the Compulsory License in Investment Arbitration: The Case of Indirect Expropriation, 25 Am. U. Int’l L. Rev. 25 357 (2010); Carlos M. Correa, Investment Protection in Bilateral and Free Trade Agreements: Implications for the Granting of Compulsory Licenses, 26 Mich. J. Int’l L. 331 (2004).
[275] TRIPS Agreement arts. 6, 31.
[276] For discussion of an investment treaty arbitration concerning compulsory licensing, see Vadi, supra note 54, at 78.
[277] Les Laboratoires Servier, S.A.S. v. Republic of Poland, UNCITRAL, Final Award, ¶¶ 574–76 (Feb. 14, 2012), http://www.italaw.com/sites/default/files/case-documents/italaw3005.pdf.
[278] Id. ¶ 40.
[279] Id. ¶¶ 57–58.
[280] Id. ¶¶ 80, 89.
[281] Id. ¶ 48 (redacting the reason for denial).
[282] Id. ¶¶ 108–110 and 124.
[283] Id. ¶ 215.
[284] Id. ¶ 190.
[285] Id. ¶¶ 271, 274.
[286] Id. ¶ 264.
[287] Id. ¶ 265.
[288] Id. ¶ 265.
[289] Id. ¶ 276.
[290] Id. ¶ 403.
[291] Id. ¶ 280 (stressing that “in assessing the measures, [the Tribunal] should not embark upon an open-ended enquiry into the scientific correctness of the decisions in question or substitute its own regulatory choices for those made by the competent Polish regulator. Rather, the Tribunal should assess whether the measures were motivated by honest belief, held in good faith and based on reasonable scientific grounds, that is, whether Poland acted as a reasonable regulator.”) and ¶ 282 (arguing that “A deferential standard of review must be employed by the Tribunal when it comes to regulatory decisions based around science and national regulation.”).
[292] Id. ¶ 336.
[293] Id. ¶ 310.
[294] Id. ¶ 264 (noting that “Neither the EU Treaty, nor the EU Pharmaceuticals Directive, require[d] Poland to favour the local pharmaceutical industry and adopt measures to drive foreign competitors from the market.”).
[295] Id. ¶ 267.
[296] Id. ¶ 332.
[297] Id. ¶ 352.
[298] Id.
[299] Id. ¶ 576.
[300] Id. ¶ 575.
[301] Id. ¶ 426 (“Servier advance[d] a theory of ‘full reparation in the event of unlawful expropriation,’ supported by principles of international law”).
[302] Id. ¶ 643.
[303] Eli Lilly and Company v. The Government of Canada, ICSID Case No. UNCT/14/2, Notice of Intent (7 Nov. 2012) http://www.italaw.com/sites/default/files/case-documents/italaw1172.pdf.
[304] Id. ¶ 90.
[305] Id. ¶¶ 89–97.
[306] See Okediji, Is Intellectual Property “Investment”?, supra note 204, at 1121 (highlighting that “the firm seeks to compel a change in Canadian patent law, an intervention by the Parliament to limit the interpretation of the utility requirement by judges.”).
[307] Id. at 94.
[308] Eli Lilly and Company v. The Government of Canada, ICSID Case No. UNCT/14/2, Notice of Intent, ¶ 37.
[309] Id.
[310] Id. ¶ 16.
[311] Id. ¶ 6 (referring to Article 27 of the TRIPS Agreement, NAFTA Chapter 17 and the Patent Cooperation Treaty.)
[312] Id. ¶ 42.
[313] Eli Lilly and Company v. The Government of Canada, ICSID Case No. UNCT/14/2, Notice of Arbitration, ¶ 75 (Sep. 12, 2012), http://www.italaw.com/sites/default/files/case-documents/italaw1582.pdf.
[314] Eli Lilly and Company v. The Government of Canada, ICSID Case No. UNCT/14/2, Notice of Intent, ¶ 91 (7 Nov. 2012), http://www.italaw.com/sites/default/files/case-documents/italaw1172.pdf.
[315] Eli Lilly and Company v. The Government of Canada, ICSID Case No. UNCT/14/2, Government of Canada Statement of Defence, ¶ 117 (June 30, 2014), http://www.italaw.com/sites/default/files/case-documents/italaw3253.pdf.
[316] Id. ¶ 108.
[317] Eli Lilly and Company v. The Government of Canada, ICSID Case No. UNCT/14/2, Counter Memorial, ¶ 302 (Jan. 27, 2015), http://www.italaw.com/sites/default/files/case-documents/italaw4131.pdf (adding that domestic law is the law that determines the existence and nature of property rights and stating that “If there is no valid property right at domestic law, then there is nothing that can be ‘taken’ within the meaning of the international law of expropriation. The only context in which a domestic court ruling on the validity of an asserted property right could amount to an expropriation is if there has been a denial of justice.”).
[318] Id.
[319] Eli Lilly and Company v. The Government of Canada, ICSID Case No. UNCT/14/2, Statement of Defence, ¶ 106 (Jun. 30, 2014), http://www.italaw.com/sites/default/files/case-documents/italaw3253.pdf.
[320] Eli Lilly and Company v. Government of Canada, ICSID Case No. UNCT/14/2, Counter Memorial, ¶ 344 (Jan. 27, 2015), http://www.italaw.com/sites/default/files/case-documents/italaw4131.pdf.
[321] Id. (invalidating patents cannot give rise to expropriation claims under Chapter Eleven if those measures are consistent with Chapter Seventeen).
[322] Id. ¶ 7 (according to Canada, the “patent bargain” encompasses a balance between the patent owner and the public: “These rules are intended to ensure that patentees provide the consideration they promised in exchange for the grant of a 20-year monopoly. They seek to ensure that patents are filed on the basis of true invention, rather than of speculation. They verify that disclosure obligations in the patent, which is the basis for the ‘patent bargain’ with the public, are fulfilled. These rules are fundamental to the integrity of the patent system.”).
[323] Id. ¶¶ 409, 411.
[324] Id. ¶ 411.
[325] Id.
[326] Id. ¶ 415.
[327] Id. ¶ 414.
[328] Apotex Inc. v. U.S., ICSID Case No. ARB(AF)/12/1, Notice of Arbitration, ¶ 7 (Dec. 10, 2008), http://www.state.gov/documents/organization/115447.pdf.
[329] Id. ¶ 29.
[330] Id. ¶ 14.
[331] Id. ¶ 19.
[332] Id. ¶ 20.
[333] Id.
[334] Id. ¶¶ 65–71.
[335] Id. ¶ 65.
[336] Id. ¶ 64.
[337] Id. ¶ 68.
[338] Id. ¶ 69.
[339] Id. ¶ 70.
[340] Apotex Inc. v. The Government of the United States of America, ICSID Case No. ARB(AF)/12/1, Notice of Arbitration, ¶ 32 (June 4, 2009), http://www.italaw.com/sites/default/files/case-documents/italaw1229.pdf.
[341] Although there were two different statements of claims and the US Department of State maintained two different web pages for the documents relating to the respective claims, the jurisdiction/admissibility phase in each arbitration was held concurrently, albeit not consolidated. Therefore there was only one award dealing with the two different claims. Apotex Inc. v. the Government of the United States of America, ICSID Case No. ARB(AF)/12/1, Award on Jurisdiction and Admissibility, ¶ 4 (June 14, 2013), http://www.italaw.com/sites/default/files/case-documents/italaw1550.pdf.
[342] Apotex Inc. v. the Government of the United States of America, ICSID Case No. ARB(AF)/12/1, Award on Jurisdiction and Admissibility, ¶ 105 (June 14, 2013), http://www.italaw.com/sites/default/files/case-documents/italaw1550.pdf.
[343] Id. ¶ 114.
[344] Id. ¶ 115.
[345] Id. ¶ 116.
[346] Apotex Inc. v. The Government of the United States of America, ICSID Case No. ARB(AF)/12/1, Notice of Arbitration, ¶ 66 (June 4, 2009), http://www.italaw.com/sites/default/files/case-documents/italaw1229.pdf.
[347] Id. ¶ 32.
[348] Id. ¶ 76.
[349] Id. ¶¶ 78–80.
[350] Apotex Inc. v. the Government of the United States of America, ICSID Case No. ARB(AF)/12/1, Award on Jurisdiction and Admissibility, ¶ 298 (Apotex I and II) (June 14, 2013), http://www.italaw.com/sites/default/files/case-documents/italaw1550.pdf.
[351] Id. ¶ 335.
[352] Id. ¶ 336.
[353] See generally id.
[354] Les Laboratoires Servier, S.A.S. v. Republic of Poland, UNCITRAL, Final Award, ¶ 576 (Feb. 14, 2012), http://www.italaw.com/sites/default/files/case-documents/italaw3005.pdf (finding that the denial of marketing authorizations amounted to an indirect expropriation, implicating a State’s substantial interference with the investor’s rights.)
[355] Id. (noting that “indirect expropriation, at issue in this case, implicates a State’s substantial interference with an investor’s rights. Such interference must be significant, even if not complete, in the sense of depriving the investor of its ability to benefit from the relevant asset”).
[356] Gibson, Latent Grounds in Investor-State Arbitration, supra note 183, at 454.
[357] Les Laboratoires Servier, S.A.S. v. Republic of Poland, UNCITRAL, Final Award, ¶ 568 (Feb. 14, 2012), http://www.italaw.com/sites/default/files/case-documents/italaw3005.pdf (holding that, while it “must accord due deference to the decisions of specialized Polish administrators interpreting and applying laws and regulations governing their area of competence”, it “will also consider the manner in which those decisions were taken and their effect on the Claimants’ investments.”).
[358] Id. ¶ 584 (stating that “the burden then falls onto the Claimants to show that Poland’s regulatory actions were inconsistent with a legitimate exercise of Poland’s police powers.”).
[359] Carlos M. Correa, Bilateral Investment Agreements: Agents of New Global Standards for the Protection of Intellectual Property Rights?, Grain.org 15 (Aug. 3, 2004), https://www.grain.org/fr/article/entries/125-bilateral-investment-agreements-agents-of-new-global-standards-for-the-protection-of-intellectual-property-rights (last visited Oct. 15, 2015).
[360] Compañia del Desarrollo de Santa Elena v. Costa Rica, Award, Case No. ARB/96/1, Final Award, ¶ 72 (Feb. 17, 2000) (holding that “[e]xpropriatory environmental measures—no matter how laudable and beneficial to society as a whole—are, in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies: where property is expropriated, even for environmental purposes, whether domestic or international, the state’s obligation to pay compensation remains.”).
[361] See, e.g., CME Czech Republic B.V. v. Czech Republic, UNCITRAL, Final Award, ¶ 497 (Mar. 14, 2003).
[362] The Hull formula is named after the American Secretary of State, Cordell Hull, who described a full compensation standard as “prompt, adequate and effective” in a diplomatic exchange of notes with Mexico in 1930.
[363] Les Laboratoires Servier, S.A.S. v. Republic of Poland, UNCITRAL, Final Award, ¶ 37 (Feb. 14, 2012), http://www.italaw.com/sites/default/files/case-documents/italaw3005.pdf.
[364] Id. ¶ 644.
[365] Id. ¶ 645.
[366] Id. ¶ 642.
[367] Id. ¶ 663.
[368] See Sergey Ripinsky, Russia, in Commentaries on Selected Model Investment Treaties 605 (Chester Brown ed., 2013) (noting that “this obligation is the one most often invoked by claimants in investment disputes—it is present practically in every case.”); see also Rudolf Dolzer, Fair and Equitable Treatment: Today’s Contours, 12 Santa Clara J. Int’l L. 7, 10 (2014) (pinpointing that “FET may be considered to be at the heart of investment arbitration.”).
[369] Sempra Energy Int’l v. Argentine Republic, ICSID Case No. ARB/02/16, Award, ¶¶ 300–01 (Sept. 28, 2007).
[370] See generally Catherine Yannaca Small, International Investment Law: A Changing Landscape 74 (2005) (highlighting that fair and equitable treatment is “an ‘absolute’, ‘non-contingent’ standard of treatment, i.e. a standard that states the treatment to be accorded in terms whose exact meaning has to be determined, by reference to specific circumstances of application, as opposed to the “relative” standards embodied in “national treatment” and “most-favoured-nation” principles which define the required treatment by reference to the treatment accorded to other investment.”).
[371] See generally NAFTA Free Trade Commission, Notes of Interpretation of Certain Chapter 11 Provisions, (Jul. 31, 2001), http://www.sice.oas.org/tpd/nafta/Commission/CH11understanding_e.asp.
[372] NAFTA, supra note 16, at art. 1131 (providing that “[a]n interpretation by the [FTC] of a provision of this Agreement shall be binding on a Tribunal established under this Section.”).
[373] NAFTA Free Trade Commission, Notes of Interpretation of Certain Chapter 11 Provisions, supra note 371, at B.2 (affirming that “[t]he concepts of ‘fair and equitable treatment’ and ‘full protection and security’ do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens.”).
[374] See L. F. H. Neer and Pauline Neer (U.S.A.) v. United Mexican States, 4 Rep. Int’l Arb. Awards, 60, 60–62 (1926). In Neer, the widow and daughter of a murdered US citizen sued the Mexican government for “lack of diligence” or “lack of intelligent investigation” in prosecuting the murderers. Id. at 61. The US-Mexico Claims Commission held that Mexico was not liable although it acknowledged that “better methods might have been used” for the investigations and the prosecution. Id. at 62. The Commission held that “the treatment of an alien, in order to constitute an international delinquency, should amount to an outrage, to bad faith, to wilful [sic] neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency.”).
[375] For instance, the Glamis Gold Tribunal held that “the customary international law minimum standard remains as apparently articulated in the 1926 Neer award: to violate the customary international law minimum standard of treatment codified in Article 1105 of the NAFTA, an act must be sufficiently egregious and shocking – a gross denial of justice, manifest arbitrariness, blatant unfairness, a complete lack of due process, evident discrimination, or a manifest lack of reasons – so as to fall below accepted international standards ….” Glamis Gold, Ltd. v. The United States of America, UNCITRAL, Award, ¶ 22 (June 8 2009) http://www.italaw.com/sites/default/files/case-documents/ita0378.pdf.
[376] Apotex Holdings Inc, Apotex Inc. v. United States of America (Apotex III), ICSID Case No. ARB(AF)/12/1, Award (Aug. 25, 2014).
[377] Id. ¶¶ 2.30, 2.64.
[378] Id. ¶ 9.3 (recalling the FTC Note of interpretation), ¶ 9.4 (accepting the binding effect of this Note of Interpretation).
[379] Id. ¶ 9.17.
[380] Id. ¶ 9.39 (quoting S.D. Myers Inc. v. The Government of Canada, UNCITRAL, Partial Award, ¶ 261 (Nov. 13, 2000)). See also id. ¶ 9.37 (recalling “the need for international tribunals to recognise the special roles and responsibilities of regulatory bodies charged with protecting public health and other important public interests. These are of course not binding on this Tribunal, which must make its own determinations regarding the facts and the law relevant to this case …. Nevertheless … other decisions indicate the need for international tribunals to exercise caution in cases involving a state regulator’s exercise of discretion, particularly in sensitive areas involving protection of public health and the well-being of patients.”).
[381] Eli Lilly and Company v. The Government of Canada, ICSID Case No. UNCT/14/2, Notice of Intent, ¶ 95 (Nov. 7, 2012), http://www.italaw.com/sites/default/files/case-documents/italaw1172.pdf.
[382] Id. ¶¶ 98, 104.
[383] Id. ¶ 101.
[384] Eli Lilly and Company v. The Government of Canada, ICSID Case No. UNCT/14/2, Statement of Defence,  (Jun. 30, 2014), http://www.italaw.com/sites/default/files/case-documents/italaw3253.pdf.
[385] Id. ¶ 90.
[386] Id. ¶ 99.
[387] Id. ¶ 104.
[388] Id.
[389] Eli Lilly and Company v. The Government of Canada, ICSID Case No. UNCT/14/2, Counter Memorial, ¶ 15 (Jan. 27, 2015), http://www.italaw.com/sites/default/files/case-documents/italaw4131.pdf.
[390] Id. ¶ 227.
[391] Id. ¶ 266.
[392] Christoph Schreuer, Fair and Equitable Treatment in Arbitral Practice, 6 J. World Inv. & Trade, 357, 360, 364 (2005).
[393] Henning Grosse Ruse-Khan, Litigating Intellectual Property Rights in Investor-State Arbitration: From Plain Packaging to Patent Revocation 13 (University of Cambridge Faculty of Law Legal Studies, Working Paper No. 52/2014, 2014), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2463711.
[394] Id.
[395] Gibson, Latent Grounds in Investor-State Arbitration, supra note 183, at 397.
[396] Chris Yost, A Case Review and Analysis of the Legitimate Expectations Principle as it Applies Within the Fair and Equitable Treatment Standard 6 (Mar. 8, 2007) (unpublished thesis, Australian National University), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1364996.
[397] See, e.g., Azurix Corp. v. Argentine Republic, ICSID Case No. ARB/01/02, Award, ¶ 372 (July 14, 2006) (holding that the fair and equitable treatment standard now protects legitimate investor expectations even in the absence of bad faith or egregious conduct by the host state); see also Vaughan Lowe, The Changing Dimensions of International Investment Law 98 (University of Oxford Faculty of Law Legal Studies Research Paper Series, Working Paper No. 4/2007, 2007) (arguing “there is an emerging consensus that transparency and legitimate expectations are matters that it is proper to consider in the context of fair and equitable treatment.”); cf. Michele Podestà, Legitimate Expectations in Investment Treaty Law: Understanding the Roots and the Limits of a Controversial Concept 1–2 (Soc’y of Int’l Econ. Law, 3rd Biennial Global Conference, Working Paper, 2012), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2102771## (noting that “Arbitral tribunals … have typically taken for granted the idea that a breach of the investor’s expectations may be relevant in deciding upon a violation of an investment treaty especially of the fair and equitable treatment standard.”) (internal parenthetical omitted).
[398] See Tai-Heng Cheng, Remarks as Chairman for Panel Discussion at 2007 International Law Weekend: Is the Fair and Equitable Treatment Standard Fair and Equitable? (Oct. 27, 2006), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1259939 at 5 (“[T]he disagreements about the content of the fair and equitable treatment standard are really about investors wanting stronger investment protections, and host states favoring weaker restrictions on the exercise of their sovereign powers.”).
[399] E.g., Katherine J. Strandburg, What Does the Public Get? Experimental Use and the Patent Bargain, 2004 Wis. L. Rev. 81, 90–93 (2004) (describing a patent as a bargain between the inventor and society).
[400] Grosse Ruse-Khan, supra note 393, at 13.
[401] Id. at 13–14 (referring to the WTO panel report in EC–Geographical Indications).
[402] Panel Report, European Communities–Protection of Trademarks and Geographical Indications For Agricultural Products and Foodstuffs, ¶ 7.210 WTO Doc. WT/DS/174R (Mar. 15, 2015) (holding that “the [TRIPS A]greement does not generally provide for the grant of positive rights to exploit or use certain subject matter, but rather provides for the grant of negative rights to prevent certain acts.”).
[403] Grosse Ruse-Khan, supra note 393, at 14.
[404] Eli Lilly and Company v. The Government of Canada, ICSID Case No. UNCT/14/2. Notice of Intent, ¶¶ 95, 96 (7 Nov. 2012), http://www.italaw.com/sites/default/files/case-documents/italaw1172.pdf.
[405] Id. ¶ 95.
[406] Id. ¶¶ 98–104.
[407] Id. ¶ 5–86.
[408] Id. ¶ 96.
[409] Eli Lilly and Company v. The Government of Canada, ICSID Case No. UNCT/14/2, Government of Canada Statement of Defence, ¶ 83 (June 30, 2014), http://www.italaw.com/sites/default/files/case-documents/italaw3253.pdf (pinpointing that “[t]he Tribunal’s jurisdiction in this matter relates only to alleged breaches of NAFTA Chapter Eleven obligations.”).
[410] Id. ¶ 84 (noting that “[d]isputes in respect of an alleged breach of TRIPS obligations may only be brought pursuant to the Dispute Settlement Understanding of the World Trade Organisation. Allegations of a breach of the PCT are, in accordance with that Treaty, to be brought before the International Court of Justice. Allegations of a breach of NAFTA Chapter Seventeen are to be brought on a State-to-State basis before a tribunal constituted pursuant to NAFTA Chapter Twenty.”).
[411] Id. ¶ 91.
[412] Id. ¶ 87.
[413] Id.
[414] Id.
[415] Id. ¶ 94.
[416] Id.
[417] Okediji, Is Intellectual Property Investment?, supra note 204, at 1132.
[418] Jerome Reichman, Panelist Presentation, Investment Chapters in Trade Agreements: IP Rights as Protected Investments (Apr. 11, 2014).
[419] Id.
[420] Okediji, Is Intellectual Property Investment?, supra note 204, at 1134.
[421] Id. at 1132.
[422] Alan M. Anderson et al., The Globalization of Intellectual Property Rights: TRIPS, BITs, and the Search for Uniform Protection, 38 Ga. J. Int’l & Comp. L. 265, 289 (2010).
[423] TRIPS Agreement art. 1.1.
[424] DSU art. 19.2.
[425] Appellate Body Report, India—Patent Protection for Pharmaceutical and Agricultural Chemical Products, ¶¶ 47–48, WTO Doc. WT/DS/50/AB/R (Dec. 19, 1997).
[426] Valentina Vadi, Cultural Heritage in International Investment Law and Arbitration 129–31 (2014).
[427] Peter A. Allard v. Barbados, UNCITRAL, Notice of Dispute, ¶ 16 (Sept. 8, 2009), http://graemehall.com/legal/papers/BIT-Complaint.pdf (asserting as the investor acquired wetlands and subsequently developed them into an ecotourism facility, he claimed that Barbados had failed to prevent the discharge of raw sewage into the wetlands and to investigate or prosecute polluters, thus reducing the profitability of its investment).
[428] Grosse Ruse-Khan, supra note 393, at 295.
[429] DSU art. 23.
[430] Grand River Enterprises Six Nations, Ltd. v. United States, Award, ¶ 219 (Jan. 12, 2011), http://www.state.gov/documents/organization/156820.pdf.
[431] Bernhard von Pezold v. Republic of Zimbabwe (ICSID Case No. ARB/10/15) and Border Timbers Ltd. v. Republic of Zimbabwe (ICSID Case No. ARB/10/25), Procedural Ord. No. 2, ¶ 57 (June 26, 2012), http://www.italaw.com/sites/default/files/case-documents/ita1044.pdf.
[432] Vienna Convention on the Law of Treaties, May 23, 1969, 1155 U.N.T.S. 331.
[433] Gibson, Latent Grounds in Investor-State Arbitration, supra note 183, at 402.
[434] For an analogous argument with regard to the WTO law, see Fiona Smith, Power, Rules and the WTO, 54 B.C.L. Rev. 1063, 1082 (2013) (“[I]n this ‘world’ … ideas from outsiders, like human rights and environmental scholars, about how WTO law should be regulated are often rejected as ‘wrong’ or misguided by trade lawyers and policymakers. These ideas often place the individual at the heart of the analysis and address her diverse and complex needs in ways that simply do not translate readily into the language of comparative advantage and trade liberalization. We should not really be surprised therefore when trade experts dismiss them as wrong or misguided, or when such ideas are castigated as ‘protectionist’ . . . .”).
[435] For an analogous argument concerning trade law and human rights, see Christopher McCrudden, International Economic Law and the Pursuit of Human Rights: A Framework for Discussion of the Legality of “Selective Purchasing” Laws under the WTO Government Procurement Agreement, 2 J. Int’l Econ. L. 3, 47 (1999).
[436] IIAs require fair and equitable treatment consistent with customary international law, including “the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world.” See, e.g., Treaty Concerning the Encouragement and Reciprocal Protection of Investment, U.S.-Rwanda, art. 6(5), Feb. 19, 2008, S. TREATY DOC. No. 110–23. Therefore, the FET standard is considered to include denial of justice claims. See UNCTAD, Fair and Equitable Treatment, at xvi-xvii (2012).
[437] Francesco Francioni, Access to Justice, Denial of Justice and International Investment Law, 20 Eur. J. Int’l L. 729, 730–31 (2009) (“[T]he principle of the ‘minimum standard of justice’ to be reserved to aliens and their economic interests under customary international law . . . presupposes that the individual who has suffered an injury in a foreign country at the hands of public authorities or of private entities must be afforded the opportunity to obtain redress before a court of law or appropriate administrative agency. Only when ‘justice’ is not delivered, either because judicial remedies are not available or the administration of justice is so inadequate, deficient, or deceptively manipulated as to deprive the injured alien of effective remedial process, can the alien invoke ‘denial of justice’: a wrongful act for which international responsibility may arise.“).
[438] Id. at 729.
[439] Jan Paulsson, Denial of Justice in International Law 4, 36 (2005) (“[A] state incurs responsibility if it administers justice to aliens in a fundamentally unfair manner” and “[I]nternational responsibility arises as a result of the failure of a national legal system to provide due process.”).
[440] Loewen v. United States, ICSID Case No. ARB(AF)/98/3, Award, ¶ 154 (June 26, 2003), http://www.italaw.com/sites/default/files/case-documents/ita0470.pdf (“No instance has been drawn to our attention in which an international tribunal has held a State responsible for a breach of international law constituted by a lower court decision when there was available an effective and adequate appeal within the State’s legal system.”).
l Expropriation or Denial of Justice?: A Note on Saipem v Bangladesh, 13 [441] Roger P. Alford, Ancillary Discovery to Prove Denial of Justice, 53 Va. J. Int’l L. 127, 131–132 (2012) (“Until recent decades, the denial of justice was frequently a wrong without a remedy . . .” that “the diplomatic espousal of claims pursuant to a friendship, commerce, and navigation treaty (FCN) or similar treaties — w[as a] cumbersome and rare event[] . . .” but that the rise of BITs has “altered this course of events . . . .”).
[442] See, e.g., Saipem S.p.A. v. People’s Republic of Bangladesh, ICSID Case No. ARB/05/7, Award (June, 30 2009), http://www.italaw.com/sites/default/files/case-documents/ita0734.pdf (finding the host state responsible for expropriation resulting from the judicial intervention in arbitral proceedings instituted by an investor in pursuit of its contractual right.).
[443] See generally Mavluda Sattorova, Denial of Justice Disguised?: Investment Arbitration and the Protection of Foreign Investors from Judicial Misconduct, 61 Int’l Comp. L. Q. 223–46 (2012); Mavluda Sattorova, JudiciaInt’l Arb. L. Rev. 35 (2010). On denial of justice, see generally Paulsson, supra note 439.
[444] Paulsson, supra note 439, at 130.
[445] Apotex Inc. v. U.S., ICSID Case No. ARB(AF)/12/1, Notice of Arbitration, ¶¶ 61–62 (Dec. 10, 2008), http://www.state.gov/documents/organization/115447.pdf.
[446] Id. ¶ 63.
[447] Apotex Inc. v. U.S., ICSID Case No. ARB(AF)/12/1, Award on Jurisdiction and Admissibility, ¶ 257 (June 14, 2013), http://www.italaw.com/sites/default/files/case-documents/italaw1550.pdf (footnote omitted).
[448] Id.
[449] Id. ¶ 250.
[450] Id. ¶ 274.
[451] Id. ¶ 135.
[452] Id. ¶ 267.
[453] Id. ¶ 276.
[454] Id.
[455] Id. ¶¶ 281–282.
[456] See generally Sattorova, Judicial Expropriation or Denial of Justice?: A Note on Saipem v Bangladesh, supra note 443; Sattorova, Denial of Justice Disguised?: Investment Arbitration and the Protection of Foreign Investors from Judicial Misconduct, supra note 443.
[457] Grosse Ruse-Khan, supra note 393, at 31.
[458] The principle of non-discrimination also constitutes one of the prongs for establishing the lawfulness of expropriation and the unfairness of a given state’s conduct. See supra Sections IV.B., IV.D. respectively.
[459] See, e.g., US Model BIT (“1. Each Party shall accord to investors of the other Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory. 2. Each Party shall accord to covered investments treatment no less favorable than that it accords, in like circumstances, to investments in its territory of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.”).
[460] Id.
[461] Id.
[462] Grosse Ruse-Khan, supra note 393, at 34.
[463] See Les Laboratoires Servier, S.A.S. v. Republic of Poland, UNCITRAL, Final Award (Feb. 14, 2012), http://www.italaw.com/sites/default/files/case-documents/italaw3005.pdf.
[464] Eli Lilly and Company v. The Government of Canada, ICSID Case No. UNCT/14/2, Notice of Intent, ¶¶ 105–07 (Nov. 7, 2012), http://www.italaw.com/sites/default/files/case-documents/italaw1172.pdf.
[465] Id. ¶ 106.
[466] Luke Eric Peterson, Newly Discovered Document Shows that Pharma Corp Hopes to Construe Alleged Non-Compliance with Patent Treaties as a Breach of Investment Treaty, 5 Inv. Arb. Rep. 15, 17 (Dec. 10, 2012) (“This unusual form of extra-territorial comparison is not commonly seen in National Treatment claims under investment treaties.”).
[467] Eli Lilly and Company v. The Government of Canada, ICSID Case No. UNCT/14/2, Notice of Intent, ¶ 107 (Nov. 7, 2012), http://www.italaw.com/sites/default/files/case-documents/italaw1172.pdf.
[468] Eli Lilly and Company v. The Government of Canada, ICSID Case No. UNCT/14/2, Notice of Arbitration, ¶ 12 (Sept. 12, 2003).
[469] Id.
[470] Apotex Holdings Inc, Apotex Inc. v. United States of America (Apotex III), ICSID Case No. ARB(AF)/12/1, Award on Jurisdiction and Admissibility, ¶ 257 (June 14, 2013), http://www.state.gov/documents/organization/115447.pdf.
[471] Apotex Holdings Inc, Apotex Inc. v. United States of America (Apotex III), ICSID Case No. ARB(AF)/12/1, Notice of Arbitration, ¶¶ 58–60 (Dec. 10, 2008), http://www.italaw.com/sites/default/files/case-documents/italaw1323.pdf.
[472] Id. ¶ 60(f).
[473] Apotex Holdings Inc, Apotex Inc. v. United States of America (Apotex III), ICSID Case No. ARB(AF)/12/1, Award on Jurisdiction and Admissibility, ¶ 358(a)–(c) (June 14, 2013), http://www.state.gov/documents/organization/115447.pdf.
[474] Konrad von Moltke, Discrimination and Non-Discrimination in Foreign Direct Investment: Mining Issues, Conference on Foreign Direct Investment and the Environment, at 7 (Feb. 8, 2002), http://www.oecd.org/env/1819921.pdf.
[475] Apotex Holdings Inc. v. United States, ICSID Case No. ARB(AF)12/1, Award, (Apotex III), ¶ 2.31 (Aug. 25, 2014), http://www.italaw.com/sites/default/files/case-documents/italaw3324.pdf.
[476] Id. ¶¶ 8.31, 8.48.
[477] Id. ¶ 8.57.
[478] Id. ¶ 3.120.
[479] Id. ¶ 3.153.
[480] Id. ¶ 8.62.
[481] Id. ¶ 8.65.
[482] Id. ¶ 8.69.
[483] Id. ¶¶ 8.71, 8.73.
[484] Id. ¶ 8.78.
[485] See, e.g., id. ¶ 8.65.
[486] Kenneth Vandevelde, A Unified Theory of Fair and Equitable Treatment, 43 N.Y.U. Int’l L. & Pol. 43, 53 (2010) (“The fair and equitable treatment standard in BITs has been interpreted as requiring that covered investment or investors receive treatment that is reasonable, consistent, non-discriminatory, transparent, and in accordance with due process.”). See also Les Laboratoires Servier, S.A.S. v. Republic of Poland, UNCITRAL, Final Award, ¶ 410 (Feb. 14, 2012), http://www.italaw.com/sites/default/files/case-documents/italaw3005.pdf, (“Servier’s position is that Poland has breached its obligation to provide fair and equitable treatment to Servier’s investments and has treated Servier’s investments in an unjustified and discriminatory manner.” (footnote omitted)).
[487] United Nations Conference on Trade and Development, 2012, Expropriation: UNCTAD Series on Issues in International Investment Agreements II, 3, UNCTAD/DIAE/IA/2011/7 (reviewing “the conditions for an expropriation to be lawful, namely public purpose, non-discrimination, due process and payment of compensation.”).
[488] See Les Laboratoires Servier, S.A.S. v. Republic of Poland, UNCITRAL, Final Award, ¶ 217 (Feb. 14, 2012), http://www.italaw.com/sites/default/files/case-documents/italaw3005.pdf.
[489] Id. ¶ 524.
[490] Id. ¶ 575.
[491] Id. ¶ 570 (“[T]he Respondent’s denial of marketing authorisations would divest the Claimants of their property, giving rise to a requirement of compensation under the BIT, if Poland exercised its administrative and regulatory powers in bad faith, for some non-public purpose, or in a fashion that was either discriminatory or lacking in proportionality between the public purpose and the actions taken.”).
[492] Apotex Inc. v. U.S., ICSID Case No. ARB(AF)/12/1, Award, ¶ 8.57 (Aug. 25, 2014), http://www.state.gov/documents/organization/233043.pdf (stressing that domestic pharmaceutical companies and foreign companies were not in like circumstances).
[493] Id. ¶ 8.78.
[494] Konrad von Moltke, Discrimination and Non-Discrimination in Foreign Direct Investment: Mining Issues, Conference on Foreign Direct Investment and the Environment, at 6 (Feb. 8, 2002), http://www.oecd.org/env/1819921.pdf (“[N]on-discrimination in relation to foreign direct investment means that the interests of a foreign investor and the public interest in an investment will be weighed in a manner that is legitimate, transparent, and accountable, and in accordance with same rules, criteria and procedures that apply to domestic [and other foreign] investors.”).
[495] Chang-fa Lo, External Regime Coherence: WTO/BIT and Public Health Tension as an Illustration, 7 Asian J. WTO & Int’l Health L. & Pol’y 263, 276 (2012) (noting that “the host country has an inherent…‘right to regulate’”).
[496] See, e.g., the summary of the Respondents case in Apotex III, ¶ 2.38 (contending that “for more than a century, the Respondent has established laws and regulations to prevent the importation of adulterated drugs in order to protect public health in the USA. The FDA’s policy on import alerts has been in effect since at least the 1970s. The Respondent did not relinquish this authority and responsibility when it concluded NAFTA.”).
[497] Vadi, supra note 54, at 30.
[498] Id.
[499] See, e.g., TRIPS Agreement art. 8.
[500] See Apotex Holdings Inc, Apotex Inc. v. United States of America (Apotex III), ICSID Case No. ARB(AF)/12/1, Award on Jurisdiction and Admissibility, ¶ 210 (June 14, 2013), http://www.state.gov/documents/organization/115447.pdf; Apotex Inc. v. U.S., ICSID Case No. ARB(AF)/12/1, Award, ¶ 7.44 (Aug. 25, 2014), http://www.state.gov/documents/organization/233043.pdf (with regard to grant of patents and the ANDAs); Eli Lilly and Company v. The Government of Canada, ICSID Case No. UNCT/14/2, Notice of Intent to Submit a Claim to Arbitration under NAFTA Chapter Eleven, ¶ 35 (Nov. 7, 2012), http://www.italaw.com/sites/default/files/case-documents/italaw1172.pdf (with regard to the revocation of patents).
[501] Vadi, supra note 54, at 31.
[502] Id. (noting that “[w]hile the industry often asserts that economic principles militate against state interference, public health law has historically constrained the rights of individuals and businesses so as to prevent nuisance.”).
[503] See supra Part IV.
[504] Other studies have examined the clash between private and public interests in investment law and arbitration. See Julie A. Maupin, Public and Private in International Investment Law: An Integrated Systems Approach, 54 Va. J. Int’l L. 367 (2013–2014); Alex Mills, Antinomies of Public and Private at the Foundations of International Investment Law and Arbitration, 14 J. Int’l Econ. L. 469 (2011).
[505] See, e.g., US Model BIT art. 6(5) (“This Article 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.”).
[506] Mercurio, supra note 228, at 905.
[507] US Model BIT art. 6(5).
[508] TRIPS Agreement art. 27(1) (“Subject to the provisions of paragraphs 2 and 3, patents shall be available for any inventions, whether products or processes, in all fields of technology, provided that they are new, involve an inventive step and are capable of industrial application.”).
[509] For instance, deciding whether a new formulation (producing a pill version of a medicine that formerly came as a powder) or a new combination (combining two or more existing molecules into a new pill) or a new use of a medicine deserves a new twenty-year patent is a prerogative of states and is not determined by the TRIPS Agreement.
[510] TRIPS Agreement art. 27(2) (“Members may exclude from patentability inventions, the prevention within their territory of the commercial exploitation of which is necessary to protect ordre public or morality, including to protect human, animal or plant life or health or to avoid serious prejudice to the environment, provided that such exclusion is not made merely because the exploitation is prohibited by their law.”).
[511] Id. at art. 30 (“Exceptions to Rights Conferred”) and art. 31 (“Other Use Without Authorization of the Right Holder”).
[512] Id. at art. 32 (providing that “[a]n opportunity for judicial review of any decision to revoke or forfeit a patent shall be available.”).
[513] Amrita Narlikar, The World Trade Organization: A Very Short Introduction 85 (2005).
[514] DSU art. 23 (providing that “When Members seek the redress of a violation of obligations or other nullification or impairment of benefits under the covered agreements or an impediment to the attainment of any objective of the covered agreements, they shall have recourse to, and abide by, the rules and procedures of this Understanding.”).
[515] Id. at 20. See generally Joost Pauwelyn, The Dog That Barked But Didn’t Bite: Fifteen Years of Intellectual Property Disputes at the WTO, 1 J. of Int’l Disp. Settlement 389 (2010).
[516] Grosse Ruse-Khan, supra note 393, at 19, 36 (highlighting the risk that “the interpretative result may well be different from the result achieved in a ‘pure’ WTO setting.”).
[517] Id.
[518] See Valentina Vadi, Analogies in International Investment Law and Arbitration 148 (forthcoming 2016) (on file with author) (pinpointing that although there is no binding precedent in international law, both WTO panels and arbitral tribunals are not bound to follow “precedents” of other jurisdictions, they refer to each other’s jurisprudence.).
[519] TRIPS Agreement art. 7.
[520] TRIPS Agreement art. 8(1).
[521] Articles 7 and 8 of the TRIPS Agreement are entitled “Objectives” and “Principles”, respectively.
[522] World Trade Organization, Ministerial Declaration of 14 November 2001, WTO Doc. WT/MIN(01)/DEC/1, 41 ILM 746 (2002) [hereinafter Doha Declaration].
[523] See Frederick Abbott, The Doha Declaration on the TRIPS Agreement and Public Health: Lighting a Dark Corner at the WTO, 5 J. Int’l Econ. L. 469 (2002).
[524] Doha Declaration ¶ 4 (“We agree that the TRIPS Agreement does not and should not prevent members from taking measures to protect public health. Accordingly, while reiterating our commitment to the TRIPS Agreement, we affirm that the Agreement can and should be interpreted and implemented in a manner supportive of WTO members’ right to protect public health and, in particular, to promote access to medicines for all.”).
[525] Id. (“In this connection, we reaffirm the right of WTO members to use, to the full, the provisions in the TRIPS Agreement, which provide flexibility for this purpose.”).
[526] For instance, the EU has referred to the provisions of the Doha Declaration as an overarching principle in its bilateral trade agreements with Korea, Colombia and Peru, and Central America. See Access to Medicines, European Commission, http://ec.europa.eu/trade/policy/accessing-markets/intellectual-property/access-to-medicines/ (last visited Oct. 16, 2015).
[527] Grosse Ruse-Khan, supra note 393, at 36–7.
[528] NAFTA, supra note 16, at art. 1110(7).
[529] Id. at art. 1709.
[530] Id. at art. 1706(2).
[531] Id. at art. 1706(6).
[532] Id. at art. 1706(10).
[533] Id. at art. 1706(8).
[534] Comprehensive Economic and Trade Agreement, Can.-E.U., Sep. 26, 2014, European Comm’n, http://ec.europa.eu/trade/policy/in-focus/ceta/.
[535] Id. at art. X.11, ¶ 6.
[536] Id.
[537] Id.
[538] Id.
[539] Id. at ch. 22, art. 3 (recognizing the “importance of the Doha Declaration on the TRIPS Agreement and Public Health” and providing that “[i]n interpreting and implementing the rights and obligations under this Chapter, the Parties shall ensure consistency with this Declaration” and that “[t]he Parties shall contribute to the implementation and respect the Decision of the WTO General Council of 30 August 2003 on Paragraph 6 of the Doha Declaration on the TRIPS Agreement and Public Health, as well as the Protocol amending the TRIPS Agreement, done at Geneva on 6 December 2005.”).
[540] DSU art. 3.
[541] Gaetan Verhoosel, The Use of Investor-State Arbitration under Bilateral Investment Treaties to Seek Relief for Breaches of WTO Law, 6 J. Int’l Econ. L. 493, 503–6 (2003).
[542] See generally Christophe Geiger, The Social Function of Intellectual Property Rights, or How Ethics can Influence the Shape and Use of IP Law (Max Planck Institute for Intellectual Property and Competition Law, Working Paper No. 13-06, 2013).
[543] TRIPS Agreement arts. 7, 8.
[544] Geiger, supra note 542, at 5 (stressing that “there cannot be an ‘absolute’ right that can be exercised in a totally selfish manner with no consideration for the consequences that this exercise involves, but only rights that are ‘relativized’ by the rights of others and the well-being of the community.”).
[545] Id. at 4.
[546] Id. See also Jakob Cornides, Human Rights and Intellectual Property: Conflict or Convergence?, 7 J. World Intell. Prop. 135, 143 (2004) (pointing out that “property is not an end in itself. Obviously, it must be used in a way that contributes to the realization of the higher objectives of human society.”); Daniel J. Gervais, The Changing Landscape of International Intellectual Property, in Intellectual Property and Free Trade Agreements 49, 60 (Christopher Heath & Anselm Kamperman Sanders eds., 2007) (cautioning that “one should not protect beyond what is necessary to achieve policy objective(s) because the risk of a substantial negative general welfare impact is too high.”).
[547] Vienna Convention art. 31(3)(c).
[548] Ian Sinclair, The Vienna Convention on the Law of Treaties 139 (1984).
[549] See supra Section IV.A.
[550] See supra Section IV.B.
[551] See supra Section IV.C.
[552] See supra Section IV.D.
[553] See supra Section IV.E.