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

By Valentina S. Vadi*

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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.