Eli Lilly v. Canada: Investor-State Arbitration Is an Open Gate for the “Patent Trolls”

In 2017, Canada won the dispute against the US-based pharmaceutical company Eli Lilly in investor-state arbitration (ISA). Foreign investors can sue sovereign governments in ISA in case of mistreatment, such as, for example, expropriation, a violation of fair and equitable treatment and discrimination.  To succeed in its claim, the investor should show that the state violated the provisions of an international investment agreement (IIA) such as, for example, the North-American Free Trade Agreement (NAFTA).

Eli Lilly brought its claim after the Canadian courts revoked two of the company’s patents on the basis that these patents lacked utility. The courts applied “the promise doctrine” to invalidate the patents on the basis that the patents lack utility. In ISA, Eli Lilly  argued that the Canadian test for utility of the patent is arbitrary “judge-made law” and thus constitutes a violation of Canada’s international obligations under NAFTA. The company advanced its challenge against Canada on two accounts. First, Eli Lilly claimed that the judicial interpretation of utility in Canada (the so-called “promise doctrine”) contradicts the meaning “capable of industrial application” under NAFTA, Chapter 17. Second, the company alleged that Canada’s utility standard has abruptly changed over the years. According to Eli Lilly, such “dramatic” change in the judicial interpretation of the utility standard is problematic because it violates Chapter 11 of NAFTA. Both arguments questioned the traditional role of the domestic courts in interpreting and applying the patentability criteria. Ultimately, Eli Lilly’s argument failed in ISA. In short, the ISA arbitrators concluded that Eli Lilly failed to produce sufficient evidence to support its allegations.

For the Government of Canada, however, it may be too early to celebrate this victory. The reasons become evident after appreciating the context of the Eli Lilly’s claim. First, the Eli Lilly’s dispute lasted more than five years. NAFTA does not provide parties to a dispute with procedural mechanisms to dismiss the claims early, akin to the summary judgment or a failure to state a claim provisions in common law jurisdictions. Accordingly, NAFTA permits claims that may eventually lack any legal or factual foundations without providing an opportunity to  curb such claims early to minimize the costs. Second, the tribunal did not explicitly address whether a change in the judicial interpretation of the state’s patent law can potentially violate this state’s international legal obligations, including those under IIAs. In practice, it means that the doors for claims similar to Eli Lilly’s remain open. The consequences are significant for states parties to ISAs. The legal costs to defend the investment claims average at US 5 million dollars per one dispute. Losing such a claim is an even more expensive option for states for two reasons. First, the monetary costs may be substantial. For example, Eli Lilly demanded US 500 million dollars in damages. Second, losing a claim may result in reputational harm for a state as a potential destination for foreign investment. As a result, some states prefer a settlement of the dispute over facing a foreign investor in the ISA process.

These factors combined create a structure that encourages foreign investors to bring IP claims in ISA against states in hope to achieve a favourable settlement in a fashion similar to the “patent trolls”.  The claims similar to Eli Lilly’s can become a tool for speculation. In particular,  the claimants can allege that the states’ patent laws dramatically change and such change constitutes a violation of an applicable IIA. If an effective mechanism for the early dismissal is not available, a state has to defend its claim for a prolonged period of time and face substantial costs. Some states, however, lack financial or expert capacity to uphold such defence. From a policy perspective, the concern the Eli Lilly’s type claims may inspire foreign investors to file claims against states not to vindicate their property rights, but rather to use such claims as a bargaining chip to achieve profitable settlements. Such procedural use of IP rights (and particularly patents) fundamentally contradicts the purpose of the national IP systems that  grant IP rights for the benefit of society and not merely “in exchange for speculation”.