In Depth: in now-public final award, tribunal sees no dramatic change in Canadian patent law to ground Eli Lilly’s claims of NAFTA breach
As IAReporter reported last week (see here), Canada has defeated claims of breach of the North American Free Trade Agreement (NAFTA) by US pharmaceutical company Eli Lilly.
We’ve extensively reviewed the parties’ developing arguments in the case (in 2012, 2014, 2015 and 2016), as well as submissions by the non-disputing NAFTA parties Mexico and the USA, and efforts by various amici curiae to present further submissions.
Below, we review the tribunal’s Final Award of March 16, 2017 [click to download] in more detail.
The tribunal consisted of Albert Jan van den Berg (chair, appointed by ICSID), Daniel Bethlehem (Canada’s nominee) and Gary Born (investor’s nominee). The investor was represented by Gowling Lafleur Henderson LLP and Covington & Burling LLP. Canada was represented by its Trade Law Bureau.
Time-bar jurisdictional objection rejected
The tribunal began by addressing Canada’s objection that the investor’s complaint related to the development of the ‘promise utility’ doctrine in Canadian patent law between 2002 and 2008, and that the complaint was therefore caught by NAFTA’s three-year time-bar.
The tribunal observed that NAFTA’s time-bar began running from when the investor first acquired knowledge of the ‘alleged breach’. In the tribunal’s view, the ‘alleged breach’ here was not the development of the doctrine itself, but the application of that doctrine by the Canadian Supreme Court in 2011 and 2013, which invalidated the investor’s two patents.
While earlier court decisions that developed the doctrine might have increased the risk of invalidation of the two patents, the tribunal said, NAFTA did not require investors to bring claims based on a risk of future loss, but instead an alleged actual breach and loss. Thus, the time-bar could not prevent Lilly’s claims, as formulated in its filings.
Tribunal doubts Canada’s view that domestic judicial conduct can only be assessed against denial of justice standards, but sees no need for definitive ruling
Next, the tribunal turned to Canada’s argument (supported by Mexico and the US) that denial of justice was the only substantive standard of international law relevant to conduct of a national judiciary.
The tribunal doubted this view. It noted that the judiciary was an organ of the state, and that its conduct was attributable to the state under the regular rules of attribution in the law of state responsibility. For the tribunal, a judicial act could therefore constitute an expropriation, for instance if ‘a judicial decision crystallizes a taking alleged to be contrary to NAFTA Article 1110’.
The tribunal also cited the definition of the minimum standard of treatment adopted in Glamis Gold v. USA, which included ‘manifest arbitrariness’ and ‘blatant unfairness’ alongside ‘gross denial of justice’. Since the former two concepts could equally attach to judicial decisions, in the tribunal’s view, such decisions could also breach NAFTA Article 1105.
Nevertheless, the tribunal emphasised that it did not conduct appellate review of domestic court decisions: ‘considerable deference is to be accorded to the conduct and decisions of such courts’. A breach of Article 1105 by national courts would only be found in exceptional circumstances, with ‘clear evidence of egregious and shocking conduct’.
Moreover, the tribunal added, the definition of expropriation in NAFTA Article 1110 required ‘due process of law’, which again meant that domestic judicial conduct was relevant in an expropriation finding as well as in denial of justice claims.
Despite these suggestive statements, however, the tribunal cautioned that it did not need to make any finding on ‘the debate about the denial of justice limits of liability of a respondent State’ – since, as would be later discussed, the tribunal saw no breach of NAFTA at all on the facts in question.
Tribunal finds pre-existing indications of allegedly new doctrine in earlier case-law; changes are merely ‘progressive development’ in common-law system
The tribunal then addressed Lilly’s central argument: that Canadian courts effected a ‘dramatic change’ in patent law during 2002-2008, ultimately leading to the invalidation of the Zyprexa and Strattera patents by the Supreme Court.
This allegedly new doctrine was said to have three elements: 1) the identification of a promise of utility in a patent application; 2) a prohibition on post-filing evidence being used to prove this utility; and 3) a requirement to include evidence demonstrating a ‘sound prediction of utility’ in the application itself.
As a preliminary observation, the tribunal commented that Lilly’s claim that this doctrine was developed by the courts over six years somewhat complicated its claim that this was also a ‘dramatic change’. Moreover, the tribunal confirmed that it was ‘mindful of the role of the judiciary in common law jurisdictions’, and that ‘evolution of the law through court decisions is natural, and departures from precedent are to be expected’.
Examining the doctrine’s first element, the tribunal considered that it had already existed in earlier Canadian case-law, even if it did not play a significant role.
On the second element, the tribunal agreed that a Canadian Supreme Court ruling on the use of post-filing evidence had been ‘unexpected’. However, the fact that the court had reversed the lower courts did not constitute a change in the law, but was merely a natural part of a ‘tiered judicial system’.
The parties’ experts had disagreed on the correct interpretation of various cases relating to the use of post-filing evidence, with the investor arguing that the Supreme Court interpretation was unpersuasive. However, the tribunal held that this expert disagreement simply demonstrated that reasonable minds could differ on matters of legal interpretation, and that Canadian judges had been able to reconcile the various cases, rendering them ‘not entirely inconsistent’.
As for the third element, the tribunal noted that the claimant itself had had a patent application rejected in 2003 for failing to disclose the basis of a ‘sound prediction of utility’, suggesting that this ‘new’ rule was not as novel as Lilly had argued. Indeed, the tribunal observed, the investor’s own lawyers in the arbitration had issued a client update after another court decision in 2009, stating that the court had ‘reiterated’ the test from earlier cases.
This allegedly new evidentiary requirement, therefore, was simply ‘progressive development’ of Canadian law, and an ‘incremental and evolutionary’ change, the tribunal held.
(In Philip Morris v. Uruguay, arbitrator Born had dissented from his colleagues’ position on the role of the judiciary in Uruguay, a civil law jurisdiction. While the majority in that case found the existence of two inconsistent court rulings to be a mere ‘quirk’ of the Uruguayan legal system, Mr Born treated this situation as a denial of justice. However, Mr Born also noted that there was no general problem with inconsistent court rulings, provided that there was a mechanism to resolve such inconsistencies over time (a feature which he held lacking in the Uruguayan situation). This view seems to square with the tribunal’s findings in the Lilly case.)
Patent examination manual not sufficiently authoritative to evidence change in law
The tribunal also examined the Manual of Patent Office Practice (MOPOP), which included the three-part promise utility test in its 2009 version, but not in the 1990 version under which Lilly’s patents were initially granted. For the claimant, this demonstrated that the test was indeed new.
However, the MOPOP was not an authoritative document, the tribunal noted, even if it was relied on in practice by patent examiners. The MOPOP did not claim to be a ‘complete summation’ of patent law; for instance, the 1990 version had not even mentioned a ‘seminal’ 1979 case, the tribunal said. Thus, it could not be taken as evidence of a ‘dramatic change’ in law.
Statistical arguments on invalidation rates prove unavailing
Lilly also pointed out that many patents were now being rejected or invalidated, compared to before 2005 when no patents were invalidated. In the investor’s eyes, this suggested that something – for Lilly, the law itself – must have changed.
However, the tribunal saw no reason to choose 2005 as a cut-off date, particularly since Lilly contended that the ‘new’ doctrine was being developed up until 2008. Because there were very few invalidity cases in the courts before 2005, a small shift in the chosen cut-off date changed the analysis considerably, the tribunal observed.
For the tribunal, a more plausible reading of these statistics was simply that there were more attempts at invalidation now, for a variety of unrelated reasons, inevitably meaning more successful invalidations than in the past.
Comparative examination does not assist investor
The tribunal was also unimpressed by Lilly’s comparisons with other jurisdictions (particularly the USA and Mexico), where the utility tests were said to be significantly less stringent. The tribunal saw no use in identifying differences in the law elsewhere to prove changes in the law in Canada.
Furthermore, although the Office of the U.S. Trade Representative had complained in a 2014 report about a ‘heightened utility requirement’ that Canadian courts had ‘recently’ applied, the tribunal commented that no other country had criticised Canada’s developments, and ‘that silence speaks louder than the single, brief criticism’ from the US.
No legitimate expectation of continued patent validity, given possible challenges
Finally, the tribunal addressed the investor’s claim of breach of legitimate expectations.
Without determining whether this doctrine was indeed part of NAFTA’s minimum standard of treatment – an issue that has been repeatedly addressed in pleadings by the NAFTA parties in prior cases – the tribunal ruled that it could not be breached here, since any patentee should expect that its patent might be invalidated under naturally evolving patent laws.
In any case, the tribunal added, this claim would fail already given the finding that no dramatic change in the law had even occurred.
Rational connection to legitimate public policy, and inherent unpredictability of law, support a finding of no arbitrariness
The investor’s other major argument in the case alleged that the promise utility doctrine was inherently arbitrary and discriminatory, breaching Articles 1105 and 1110 even if it entailed no dramatic change in law.
According to the investor, the doctrine’s first element – requiring courts to seek a promise of utility in an application – was ‘unpredictable and incoherent’, leading to a ‘hopeless tangle’ of approaches by Canadian courts.
However, the tribunal viewed this simply as Lilly’s subjective view of the process. Instead, the tribunal found that domestic courts applied regular interpretive principles. If the results were inconsistent, the tribunal said, this was understandable: ‘some level of unpredictability is present in the application of all law’.
Furthermore, the ‘promise’ element had a sufficient rational connection to a legitimate public policy: it ensured that ‘the public receives its end of the patent bargain’, and it ‘encourages accuracy while discouraging overstatement in patent disclosures’.
The second element of the doctrine, barring the use of post-filing evidence to demonstrate utility, was also non-arbitrary – indeed, it was a ‘bright line rule’ that set a very clear date for testing utility. This element similarly had a rational connection to the valid public policy of preventing patents being granted on mere speculation.
The requirements certainly might complicate matters for ‘companies in innovative industries’, the tribunal admitted. Nonetheless, this was a rational policy choice by Canada, which the tribunal would not scrutinise further.
While the scope of the third element, the disclosure rule, might be unclear, the tribunal held that this did not make the rule arbitrary; ‘questions about the precise scope of application of legal rules abound in nearly all legal regimes’.
No discrimination against pharmaceutical sector
Similarly, the tribunal found no discrimination against the pharmaceutical sector in the promise utility doctrine.
The investor’s evidence (discussed above) that no patent invalidation claims had succeeded before 2005, while many succeeded after 2005, showed only a correlation between the doctrine’s development in the courts and higher invalidity rates, the tribunal observed. Since the investor’s own expert had agreed that there was no necessary causation between the two, the tribunal drew no conclusions from these statistics.
Lilly also briefly raised a claim of de facto nationality discrimination, on the grounds that most generic pharmaceutical manufacturers (who would benefit from patent invalidations) were Canadian, while most traditional manufacturers were foreign. However, the tribunal swiftly held that it could not find any discrimination here from ‘such a bare record’.
Thus, the tribunal dismissed both claims of arbitrariness and discrimination.
Unsuccessful investor ordered to bear 75% of state’s legal costs
Lilly claimed around US$9 million in legal fees, while Canada claimed around C$5.9 million.
The tribunal acknowledged that the claims were not frivolous, that they raised complex issues of fact and law, and that both parties’ expenses were reasonable. However, applying the general ‘loser pays’ principle, the tribunal noted that Lilly had entirely lost on the merits (although defeating Canada’s jurisdictional objection).
In these circumstances, the tribunal ordered the investor to pay 75% (or C$4.4 million) of the state’s legal costs, and to bear the full arbitration costs of around US$750,000.