Litigating Intellectual Property Rights in Investor-State Arbitration: From Plain Packaging to Patent Revocation

Enforcing intellectual property (IP) rights abroad is a difficult enterprise. International IP treaties have generally not created global, directly enforceable IP rights. Usually, the protection they confer cannot even be directly invoked in front of national courts. Rather, because of the territorial nature of IP protection, right holders must enforce their rights in local courts based on local laws. Litigating one’s IP rights abroad hence faces significant hurdles.

International investment law may offer some options to overcome these hurdles: international investment agreements (IIAs) commonly include IP rights in their protection for foreign investments against government interference. Moreover, under IIAs investors can often directly challenge host state measures in international arbitration proceedings. Relying on investment standards therefore offers right holders an alternative mechanism to protect their IP rights abroad. And unsurprisingly, IIAs are increasingly used to challenge the host state’s compliance with international IP treaties.

In one of these cases, the tobacco company Philip Morris argues its trademarks have been expropriated by Australia’s tobacco packaging controls. In another, the American pharmaceutical giant Eli Lilly is invoking investment standards under Chapter 11 of the North American Free Trade Agreement to challenge Canadian court decisions that revoked some of its key patents.[1] In both cases, the investor invokes legitimate expectations that the host state complies with international IP treaty norms. In the award AHS vs Niger, however, arbitrators have denied their competence to rule on alleged breaches of an international IP agreement.[2]

Compared to domestic proceedings (where international IP standards usually cannot be invoked), World Trade Organization dispute settlement (where right holders have no legal standing), and the protection of property under human rights instruments (where protection is limited to the specific human rights standards), investor-state arbitration under IIAs may be the only forum where right holders can attempt to litigate international IP norms such as those in the TRIPS Agreement. This in turn may have significant effects on the regulatory autonomy of host states in responding to public interest concerns (such as enhancing access to medicines or reducing smoking) once domestic measures affect IP rights of foreign investors.

This brief article reviews the options for litigating international IP norms in investment disputes in light of current cases, and concludes that most routes pursued by right holders are unlikely to be successful. Ironically, it is only the clauses in investment treaties which aim to safeguard flexibilities in the international IP system that are likely to open a door for challenging compliance with international IP obligations in investor-state arbitration.

IP rights in current investor-state arbitration cases

In 2011, Australia introduced the Tobacco Plain Packaging Bill, which

1. requires tobacco product packaging to be drab dark brown or other prescribed colour; and
2. prohibits the use of graphic trademarks and restricts the use of word marks on tobacco product packaging to the effect that the brand, business, company or variant name may be displayed only in certain standard styles and positioning on the packaging.^[3]
3. The rules aim to reduce the attractiveness and appeal of tobacco products to consumers, increase the noticeability and effectiveness of mandated health warnings, and reduce the ability of the tobacco product and its packaging to mislead consumers about the harms of smoking. In response, Philip Morris Asia (PMA), based in Hong Kong, initiated investor-state arbitration proceedings against the Australian Government under the Hong Kong-Australia BIT.

PMA argues that plain packaging turns tobacco products into a commodity, prevents it from distinguishing its products from competitor brands, and thereby substantially diminishes the value of PMA’s investments in Australia. One of its key claims is that Australia is in breach of the BIT because plain packaging breaches international trademark rules in the Paris Convention for the Protection of Industrial Property (PC) and WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). Relying primarily on the fair and equitable treatment (FET) standard, PMA claims a “legitimate expectation that Australia would comply with its international trade treaty obligations”, in particular under TRIPS and the PC.[4] PMA also argues that the umbrella clause in the Hong Kong-Australia BIT requires Australia to observe, as an obligation it has entered into with regard to investments of protected foreign investors, compliance with “international obligations binding on the host state that affect the way in which property is treated in Australia.”[5] According to PMA, these obligations include those deriving from international IP treaties such as TRIPS and the PC.[6]

As mentioned, another IP-related investment dispute concerns the US-based pharmaceutical company Eli Lilly which in November 2012 initiated investor-state arbitration proceedings under Chapter 11 of NAFTA against Canada following the invalidation of some of its pharmaceutical patents by Canadian courts.^[7] At the centre of the dispute is a ‘promise doctrine’ whereby Canadian courts take for granted what the patent application has described as useful effect of the invention and hold the applicant responsible for fulfilling this ‘promise’ of utility. If the patented invention later is found not to meet a promise the court has constructed from the patent application, the patent can be revoked. Eli Lilly complains that the strict patentability requirements resulting from this doctrine, as applied by the Canadian Courts since 2005, violate Canada’s international IP obligations under NAFTA, TRIPS and the Patent Cooperation Treaty (PCT). This in turn, Eli Lilly argues, breaches NAFTA’s investment chapter since “Canada has a positive obligation to ensure Canadian law complies with NAFTA and the PCT, consistent with the reasonable investment-backed expectations of the investor.”[8]

Similar to the plain packaging dispute, the investor relies on the FET (and here also on expropriation) standard to claim a legitimate expectation that the host state complies with international IP norms. In Lilly vs Canada however, a specific NAFTA clause safeguards flexibilities in international IP law by ensuring that the expropriation standard does not apply to certain IP limitations such as compulsory licenses or revocations of IP rights as long as these limits are consistent with international IP rules.[9] This clause, which is also present in a range of other BITs, explains why Eli Lilly puts so much emphasis on a breach of these rules: unless Eli Lilly can make a case that Canada’s measures are in breach of international IP law, Eli Lilly is effectively barred from relying on one of its strongest arguments—the detrimental legal and economic effect the revocation has on Eli Lilly’s patents and their exploitation. In order to keep the door open for these expropriation arguments, Eli Lilly first has to show a breach of Canada’s IP obligations. Next to FET and umbrella clauses, these safeguard clauses hence serve as another ‘door opener’ to litigate compliance with international IP law in investor-state arbitration. As discussed below, most-favoured nation (MFN) clauses in BITs could also be understood to cover IP protection under TRIPS or other IP treaties as ‘more favourable treatment’ the host state owes to an investor. Although not relied upon in the current cases so far, MFN clauses hence may provide yet another avenue for investors to invoke international IP obligations between states.

What is the appropriate role for international IP rules in investor-state arbitration?

The full version of this article contains a detailed review of the four options for right holders to litigate international IP norms in investor-state arbitration. Three of these options are based on an expansive reading of traditional elements of the investment protection regime such as legitimate expectations under FET and expropriation standards, umbrella clauses and the MFN principle. However, none of these three options is likely to be successful. While generalisations are difficult in investor-state arbitration, analysing the case of plain packaging in Australia and patent revocation in Canada reveals high hurdles for investors:

1. To the extent one accepts the notion of legitimate expectations as part of FET or the expropriation standard, the grant of a domestic IP right by the host state as such does not allow the investor to legitimately expect his right to be free from measures commonly used to limit IP exclusivity (such as compulsory licenses or options for revoking patents).
2. Leaving aside jurisdictional issues about the exclusive competence of the WTO dispute settlement system to rule over breaches of TRIPS, an investor can only expect host state compliance with international IP rules if these rules are:
   1. directly applicable as part of the domestic law;
   2. sufficiently concrete to be applied by domestic institutions; and
   3. give rise to individual rights of the investor.

Based on these criteria, it seems unlikely that most international IP norms can be invoked by right holders in investment disputes.

1. Umbrella clauses—even if drafted in broad terms and not limited to specific commitments made by host states—have so far not been held as extending to obligations the host state has entered into vis-à-vis other states in international law. Neither the intention of the IIA state parties, nor the underlying pacta sunt servanda rationale for umbrella clauses supports an application which would allow right holders to rely on such clauses to claim a breach of international IP treaties in investor-state arbitration.
2. Finally, MFN rules in international investment agreements (IIAs) also cannot be applied to incorporate IP protection under TRIPS or other international IP treaties as a form of ‘more favourable treatment’ to foreign investors. Based on the ejusdem generis principle, the differences in subject matter and standards of protection between IP and investment law stand against the inclusion of specific international IP protections via an IIA MFN rule. The wording of the relevant MFN clauses in the plain packaging and patent revocation disputes confirms this.

Ironically, therefore, the most promising route for right holders to invoke breaches of international IP norms in investment disputes is based on clauses that aim to safeguard flexibilities in the international IP system. As Eli Lilly’s complaint about Canada’s breaches of TRIPS, NAFTA and the PCT shows, the consequence of these ‘safeguard clauses’ (such as Art.1110:7 NAFTA in Lilly vs Canada) is that consistency with international IP norms is tested in investor-state arbitration. In the context of TRIPS, this raises questions about the legitimacy and acceptance of any decisions on TRIPS compliance rendered by investment arbitration tribunals in light of the competing jurisdiction under the WTO dispute settlement system. If a similar safeguard clause existed in the Hong Kong-Australia BIT, should the plain packaging arbitrators defer in their decision on Australia’s compliance with TRIPS to findings made by the WTO Panel charged with that dispute? Should investment arbitrators rather wait until the WTO Appellate Body has had its final say on the matter, or should they refrain from judging on TRIPS consistency altogether? What if on the other hand arbitrators in the patent revocation case make findings about a breach (or not) of NAFTA’s IP Chapter or the equivalent TRIPS patentability standards? Would such a finding affect any future WTO or NAFTA dispute brought by, for example, the US against Canada? Arguably there is no binding precedence, but it is hard to imagine that a decision made in either of the systems would not have an effect on the other forum.

On the other hand, the institutional and normative framework within which a dispute is decided matters. Next to questions of subject matter expertise and secretarial support, differences in allocating the burden of proof and determining the appropriate ‘normative environment’ for interpreting and applying IP provisions are likely to lead to distinct outcomes. In particular where the IP treaty does not have its own specific dispute settlement system, investment decisions on IP matters enjoy a de facto precedence-setting character. But should the outcome really be a matter of which forum gets to decide?

The challenging question for governments is: what are the alternatives to clauses safeguarding TRIPS flexibilities? A first step may be a clarification ensuring that inconsistency with TRIPS is not sufficient to establish expropriation. One could go further and substitute the TRIPS consistency test with one that focuses on traditional investment standards, such as denial of justice or an abuse of right.[10] The latter would avoid the problems linked to competing decisions on the same set of international rules. However, it would not prevent investment arbitrators from regarding international IP rules based on applicable law rules in IIAs, the lex arbitri or on general international law doctrines. Even if not directly applicable, TRIPS and other international IP norms may serve as relevant interpretive context, in particular under Art.31 (3) c) VCLT which—as customary rule of treaty interpretation—allows for relevant rules of international law to be taken into account: As soon as both parties to the IIA are members of the WTO, the Paris or Berne Union, provisions of those treaties that more specifically bear upon a host state measure affecting IP rights as protected investments may be considered as “relevant rules of international law applicable in the relations between the parties”. As a form of lex specialis for the protection of IPR related investments, international IP norms hence may affect the interpretation of investment standards.

Conclusion

I have argued that none of the three attempts to use expansive readings of traditional investment standards like FET and expropriation, umbrella clauses and MFN are likely to be successful to invoke international IP obligations in investor-state arbitration. After all, these obligations agreed between states are owed only to states, not to private parties—even if they enjoy specific international protections as foreign investors. As long as these specific protections do not explicitly extend to international IP rules, one can hardly assume a state consent for expanding general concepts like legitimate expectations or MFN to cover a distinct body of international law.

Ironically, clauses specifically safeguarding flexibilities of the international IP system can lead to litigation over the host state’s compliance with these IP norms. Current discussions in the context of the trade agreement between the EU and Canada show how disputed these clauses are today. Alternatively, general international law doctrines are readily available to fulfil the tasks of specific safeguard clauses—without the ‘side effect’ of allowing investors to challenge compliance with international IP treaties in investor-state arbitration. Interpretation based on Art.31 (3) c) VCLT of course also allows investors to claim that investment standards are to be understood in light of IP norms which the investor may allege to have been breached by the host state. For example, Eli Lilly could claim that the revocation of its patents by Canadian courts amounts to an expropriation under NAFTA Ch.11 because the latter has to be understood in light of both TRIPS and the NAFTA Ch.17 rules on patent revocation and utility as a condition for patentability. Arbitrators examining this claim would arguably also form their view on what these international IP standards entail and whether Canada’s court decisions are consistent with them. However, that does not mean that arbitrators are directly applying these standards and judging on Canada’s compliance. Based on interpretative norms in the VCLT, consistency with international IP norms merely feeds into the principal analysis of the expropriation standard—as one of several factors.[11]

The main downside of relying on general international law doctrines is the legal uncertainty that comes along with it: arbitrators may not consider IP norms as ‘relevant rules’ under Art.31 (3) c) VCLT; they may select other ones than those commonly referred to in safeguard clauses or may find their influence on the appropriate understanding of the investment standard not decisive, perhaps in light of other elements of treaty interpretation. It is hard to predict whether these shortcomings weigh heavier than the negative effects of relying on traditional safeguard clauses described above. Those who draft the next generation of IIAs therefore have to think carefully which approach they prefer in addressing the overlap between international IP and investment rules.

Author: Henning Grosse Ruse-Khan is a lecturer at the University of Cambridge and Fellow at King’s College.

[1] See the further discussion in section 2. below and in the full version of the paper, online at http://ssrn.com/abstract=2463711.

[2] AHS vs Niger, ICSID Case No. ARB/11/11, Award of 15 July 2013; further discussed in the full paper.

[3] Australian Tobacco Plain Packaging Bill 2011, s 19, 20, 21, 36.

[4] Philip Morris Asia vs. Australia, Notice of Arbitration, 21 November 2011, at para.6.5 and 7.6-7.11.

[5] Ibid, at para.7.15-7.17.

[6] Ibid, at para.7.17.

[7] Eli Lilly and Company vs. Canada, Notice of Intent, 7 November 2012.

[8] Eli Lilly vs. Canada, Notice of Arbitration, para.71, 77.

[9] See Art.1110:7 NAFTA.

[10] See Part II, section 4 of the full article.

[11] Next to other interpretative elements such as ordinary meaning, context and object and purpose, BITs sometimes contain a range of general factors that determine whether or not host state measures amounts to an expropriation; see for example Annex A to the 2013 US Model BIT or Art.1110:8 NAFTA.