Highly anticipated NAFTA award rejects patent law–related claim against Canada

Eli Lilly and Company v. The Government of Canada, UNCITRAL, ICSID Case No. UNCT/14/2  

An arbitral tribunal constituted under the investment chapter of the North American Free Trade Agreement (NAFTA) has reached the award stage.

The tribunal rejected the claim that judicial invalidation of patents constituted a breach of either Article 1110 (Expropriation) or Article 1105 (Minimum Standard of Treatment) of NAFTA, and awarded Canada legal costs of approximately CAD4.5 million. The claimant was also required to bear the arbitration costs of approximately USD750,000.

The arbitration was conducted pursuant to the rules of the United Nations Commission on International Trade Law (UNCITRAL), and the International Centre for Settlement of Investment Disputes (ICSID) provided administrative services.

Background and claims

The claimant, Eli Lilly and Company (Eli Lilly), is a global pharmaceutical company constituted under U.S. laws. Eli Lilly’s business involves marketing proprietary pharmaceuticals in Canada. This includes Strattera, used for the treatment of Attention-Deficit/Hyperactivity Disorder, as well as another psychiatric medicine called Zyprexa.

For a pharmaceutical product to be patentable, the underlying invention must be new and non-obvious and have utility. In terms of utility, which is central to this dispute, Canadian courts increasingly make use of the “promise of the patent” doctrine in their analysis. According to this doctrine, if a patent application sets out an explicit promise of utility, the patent will be void if it does not meet this promised utility. Concurrently, there has been a significant increase in the number of patents invalidated by Canadian courts on the basis of a failure to support the promised utility.

The Canadian courts invalidated Eli Lilly’s Canadian patent on Strattera in 2010 and on Zyprexa in 2011. In both cases, the decision was based on a failure to provide proper support for “promised” utility under the Canadian law promise doctrine. After Canada’s first-level appellate court dismissed the claimant’s appeal, the Supreme Court of Canada (SCC) denied Eli Lilly’s applications for leave to appeal in 2011 and 2013 for Strattera and Zyprexa, respectively.

The tribunal was constituted in July 2013. Eli Lilly’s principal claims were that Canada breached its NAFTA obligations regarding Expropriation and Minimum Standard of Treatment. It sought damages of not less than CAD500 million.

Tribunal dismisses jurisdictional objection

As a preliminary matter, the tribunal considered Canada’s objection that the complaint related to judicial developments outside NAFTA’s three-year limitations period.

However, the tribunal noted that the limitations period under NAFTA Articles 1116(2) and 1117(2) only begins to run when an investor first acquires knowledge of the alleged breach. For the tribunal, the alleged breaches in this case were the SCC’s denials of leave to appeal in 2011 and 2013. It held that, as a result, the limitation period had not expired.

Tribunal reviews Canadian judicial developments as evidence of “dramatic change”

Eli Lilly’s primary argument was that the promise doctrine constituted a “dramatic change” in Canadian patent law. The tribunal observed that it was difficult to accept that there had been a dramatic change “where the relevant Canadian judicial decisions were handed down over a period of more than six years, encompassing a range of cases from first instance to appellate tier” (para. 309). It further observed the need to be mindful of the role of the judiciary in common law jurisdictions.

The tribunal nevertheless examined Eli Lilly’s allegation that the promise utility doctrine imposes three elements, which drastically depart from the traditional utility test. The first element is the “promise standard” whereby patent examiners and judges seek to identify a promise in the patent disclosure. The second element relates to the evidentiary burden on patentees whereby evidence of utility such as scientific effectiveness and commercial use is inadmissible if it was generated after the filing date of the patent. Third, pre-filing evidence may not be considered to support a sound prediction unless that pre-filing evidence was referenced in the patent application itself.

On the first element, the tribunal found that the promise standard already existed in earlier Canadian case law. While the tribunal agreed that the approach to post-filing evidence in the relevant SCC jurisprudence had been “unexpected,” it found that ultimately the potential for the SCC to reverse lower-court decisions is an aspect of a common-law judicial system. On the third element, pertaining to pre-filing evidence, the tribunal was persuaded by Canada’s evidence, which included client alerts issued by the investor’s outside counsel in the arbitration that this was an incremental and evolutionary change in Canadian law. As a result, the facts surrounding each of the three elements did not demonstrate a dramatic transformation of the utility requirement in Canadian law.

Tribunal reviews further evidence that promise utility doctrine constituted dramatic change

Despite the above findings, the tribunal was cognizant that Eli Lilly had alleged that the three elements were part of a unitary, cohesive doctrine and that they must be considered together. Therefore, it examined certain further evidence.

Eli Lilly had submitted two versions of the Manual of Patent Office Practice (MOPOP). The MOPOP included the three-part promise utility test in its 2009 version but not in the 1990 version. The tribunal, however, observed that the MOPOP was not an authoritative document and could not be claimed to be a complete statement of Canadian patent law.

The tribunal was likewise unimpressed with the remainder of Eli Lilly’s arguments, which included a comparative examination of patent law in the three NAFTA states and a legitimate expectation that a patent once issued would not be revoked.

On the allegation that the promise utility doctrine is arbitrary and discriminatory, the tribunal found that this could not be sustained. Even if the tribunal were to accept Eli Lilly’s position regarding the applicable legal standards, the specific allegations would not succeed.

Costs

The tribunal noted that Article 40(1) of the UNCITRAL Rules adopts the loser pays principle for arbitration costs as default and that in this case there was no reason to proceed otherwise. Therefore, Eli Lilly was ordered to bear all arbitration costs amounting to approximately USD750,000.

In respect of the costs of legal representation and assistance, Article 40(2) of the UNCITRAL Rules confers broad discretion on the tribunal to determine any reasonable apportionment. While Eli Lilly’s legal fees totalled almost USD9 million, Canada claimed some CAD5.9 million. In the exercise of its discretion and considering that Canada prevailed on the merits but not on jurisdiction, the tribunal concluded that it was appropriate for Eli Lilly to reimburse Canada for 75 percent of its costs.

Notes: The tribunal was composed of Albert Jan van den Berg (President appointed by ICSID Secretary-General pursuant to NAFTA Article 1128, Dutch national), Gary Born (claimant’s appointee, U.S. national) and Daniel Bethlehem (respondent’s appointee, British national). The final award of March 8, 2017 is available at http://www.italaw.com/sites/default/files/case-documents/italaw8546.pdf.

Matthew Levine is a Canadian lawyer and a contributor to IISD’s Investment for Sustainable Development Program.