It is a well-known story that Big Pharma aggressively uses trade negotiations, political lobbying, and domestic and international litigation (and the threat thereof) to expand the monopoly rents it gains from patent protection, and defeat the effort of states to limit intellectual property rights in the public interest, whether through compulsory licensing, or other means. There was understandable cheering at the recent news that Eli Lilly's lost its ISDS case against Canada, challenging the Canadian courts' reading of Canada's own patent laws as an "expropriation" (among other violations of NAFTA).
A close reading of the case, however, shows that the ruling is in fact extremely dangerous for the public interest; Eli Lilly lost it main claim for only one reason, it was not able to establish facts that (on the company's own admission) would be necessary in order to for the claim to be successful. Rather than closing the door to an interpretation of the law that would allow Big Pharma to sue for "expropriation" where intellectual property norms are altered or reformed for legitimate legal and policy reasons, the tribunal, as will be explained, opened the door even wider.
Eli Lilly challenged a doctrine that developed in the Canadian courts and in Canadian patent office practice, as an interpretation of Canadian intellectual property law. Under this doctrine, the assessment of whether the invention has the requisite "utility" to be afforded patent protection is made in reference to the actual claims, implicit or explicit, in the patent applicant's disclosures as to what good the invention is supposed to do; there must be a basis for these claims at the time of filing. The doctrine in question appears to be little more than a common-sense application of the general requirement of utility to a situation of severe information asymmetries between the applicant and the government decision maker. The former holds generally speaking the information necessary to evaluate whether the invention for which a patent is requested has utility. Given these information asymmetries, unless patent applicants were held to their representations of utility and required to provide a basis for them, patent applicants would have a strong incentive to make unsubstantiated or even baseless claims to utility in order to obtain the monopoly rents from a patent.
Now let's look at what the tribunal did (it included Gary Born, who seems to be the arbitrator of convenience for Big Tobacco as well as Big Pharma).
First of all, in one fell swoop and hardly with any legal reasoning or consideration of international legal authority at all (paragraph 223), the tribunal rejected the important protection for state sovereignty provided in the principle that a state is only responsible internationally for decisions of its courts applying that state's own laws, where a denial of justice has occurred, i.e. a serious miscarriage of justice in the domestic legal system, such as bias, corruption, discrimination, or abject failure of due process or access to justice. The basic notion here is that it is inappropriate for an international tribunal to be used to appeal beyond a decision of the state's highest court, which should normally be expected to be final. Thus, a further important protection of state sovereignty in the doctrine of denial of justice is that a claim for denial of justice itself is not ripe unless the investor has taken its case to the final judicial decision-maker in the state in question.
But the Eli Lilly tribunal had no qualms about saying that an investor can attack decisions of a country's judiciary about the meaning of its own law even in the absence of denial of justice-thus allowing the investor to do an end run around the requirement of finality (having to seek recourse in the domestic judicial system to the final level of appeal or other relief) by framing the claim as one of a violation of fair and equitable treatment or (even more shocking) one of expropriation. The sole authority the Eli Lilly tribunal invokes for this proposition is another NAFTA ruling, Mondev. But if we turn to Mondev, we see that in that case, in fact, the conduct of the host state was characterized as a denial of justice (para. 126) and the tribunal made it clear also (para. 1) that there was no further recourse available to the investor in the US domestic legal system. Hence, the requirement of finality for denial of justice was met.
Now it is true that in Mondev, the investor's claim was not entirely decided on the basis of denial of justice. To one part of the claim, concerning immunity of public authorities to suit in Massachusetts, the Mondev tribunal applied the general standard in 1105 of NAFTA (fair and equitable treatment and full protection and security). But, of course, that part of the claim did not involve sitting in judgment on a US judicial decision; rather, it entailed reviewing a legislated grant of immunity to certain public authorities from certain kinds of litigation. Using Mondev to open up the door to investors doing an end run around the finality requirement for denial of justice is, at the very minimum, highly tendentious.
But didn't Canada win, after all? Incredibly, the Eli Lilly tribunal managed to decide the case without articulating any legal standard at all for the meaning of "expropriation" under NAFTA. The tribunal left the door open for "regulatory takings" arguments that, even where entirely legitimate and publicly interested, changes to regulation nevertheless have to be compensated by the host state merely because they have an economic effect equivalent to a direct taking (Metalclad). This is a prescription for regulatory chill, obviously.
Here is how the tribunal magically accomplished this. Somehow the investor's counsel admitted that, as a factual matter, Eli Lilly's claim depended on establishing that the change to patent regulation allegedly effected by Canada's courts, was "dramatic" or fundamental. Instead of articulating a legal standard for "expropriation" under NAFTA and then applying that standard to the facts, the Eli Lilly tribunal determined that Eli Lilly had failed in its burden of proof to establish that the change to Canadian patent regulation was dramatic, fundamental or radical, and therefore its claim must be denied. The tribunal failed to apply whatsoever the law in 1110 of NAFTA (expropriation) in denying the claim of the investor (and hardly did better with respect to the 1105 fair and equitable treatment aspect of the claim). Even under the very deferential standard applied by the DC Circuit in judicial review of arbitral awards under the New York Convention and related US law, manifest disregard of law or failure to apply the terms of the contract or treaty at all may be a basis for setting aside the award (the seat of this arbitration is DC, so that's what makes the DC Circuit the relevant court; there is a Circuit split of some significance on the manifest disregard of law grounds for challenging an award).
So what is the real message of the Eli Lilly tribunal? They are not coming out and saying it, but they encourage future regulatory takings claims by implication that the concept of "expropriation" under NAFTA might well apply to require a host state compensate an investor even for jurisprudential shifts in the approach of a country's highest courts to that country's law (including its constitution), if that shift can be characterized as dramatic, radical, or fundamental. It is a matter of the Eli Lilly legal team simply not doing a good enough job proving that the jurisprudential developments in question were dramatic.
On those exceptional but usually very important occasions when high courts reconsider well-established judicial doctrines in the face of social, economic, environmental or other forms of rapid change we experience in the world today they must now beware that any basic or fundamental reorientation of their jurisprudence could force that state's government to pay out millions or even billions to foreign corporations in the guise of an "expropriation" having occurred. Regulatory chill from ISDS is bad enough; but when it comes in a form that makes a nation's highest court choose between its duty as a guardian of the state's legal system (including the revision or reversal of important rulings for compelling reasons) and incurring the state's liability to foreign corporations, the attack is not only on domestic policy space as such but also on the judiciary as the guardian of the law.