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Date of Award 16 March 2017
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Claimant Eli Lilly and Company (United States)
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Respondent The Government of Canada
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Treaty North American Free Trade Agreement (NAFTA)
Introduction
On 16 March 2017, an International Centre for Settlement of Investment Disputes (ICSID) tribunal chaired by Professor Albert Jan van den Berg, with co-arbitrators Gary Born (Claimant's appointee) and Sir Daniel Bethlehem (Respondent's appointee), issued its award in Eli Lilly and Company v. The Government of Canada (Award). The Award dismissed all of Eli Lilly's claims and ordered it to pay the arbitration costs and 75% of Canada's legal costs and expenses.
Eli Lilly – a pharmaceutical company incorporated in the United States – filed a claim against Canada at ICSID in 2012 under Chapter Eleven of NAFTA and the UNCITRAL Arbitration Rules, requesting compensation for the invalidation by the Canadian courts of its Canadian patents for Zyprexa and Strattera. Eli Lilly claimed that this invalidation amounted to an expropriation and unfair and inequitable treatment of its investment by Canada in violation of Articles 1110 and 1105 of NAFTA.
The background to the dispute is as follows:
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• Zyprexa: In 1991, Eli Lilly filed for a Canadian patent for olazapine, a medication approved for the treatment of symptoms of psychotic disorders. The patent was issued in 1998 (Zyprexa Patent). In 2007, Canadian drug manufacturer Novopharm Limited obtained regulatory approval to market a generic version of Zyprexa. Eli Lilly filed suit against Novopharm in the Canadian Federal Court for patent infringement. In 2011, after protracted litigation, the Federal Court (reconsidering the case on the basis of directions from the Federal Court of Appeal) found the Zyprexa Patent to be invalid for ‘lack of utility’ (Zyprexa Decision). On 16 May 2013, the Supreme Court rejected Eli Lilly's application to appeal the Zyprexa Decision.
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• Strattera: In 1996, the Claimant filed a ‘new use’ patent application for atomoxetine, as a method of treatment for the psychiatric disorder known as attention-deficit/hyperactivity disorder. The patent was issued in 2002 (Strattera Patent). In 2010, Novopharm challenged the validity of the Strattera Patent in Federal Court, which found it to be ‘invalid on the basis of utility’ (Strattera Decision). Eli Lilly's appeal was dismissed and, on 8 December 2011, the Supreme Court rejected Eli Lilly's application to appeal the Strattera Decision.
Eli Lilly alleged that the Canadian Court's revocation of the Zyprexa and Strattera Patents was in breach of Chapter Eleven of NAFTA. Specifically, Eli Lilly claimed that the application of the ‘promise utility doctrine’ to invalidate the patents was a far-reaching departure from the traditional utility doctrine that had applied when the Zyprexa and Strattera Patents were granted. Eli Lilly alleged that this retroactive application of the promise utility doctrine was in violation of the prohibition on expropriation under NAFTA, Article 1110, the requirement that investments of US investors be accorded fair and equitable treatment under NAFTA, Article 1105, as well as being arbitrary and discriminatory in violation of NAFTA Article 1709(7).
Why Is This Case Relevant?
The Award is the first final investment arbitration award on patents. Even though the Tribunal dismissed all of Eli Lilly's claims, the Award may provide guidance to future litigants as to how future tribunals will approach allegations of treaty breach in relation to patent rights.
The case attracted considerable attention of outside parties, including Mexico and the United States, who as non-disputing parties of NAFTA, made submissions in support of Canada. Additionally, the Canadian Chamber of Commerce, a pharmaceutical industry trade association, and several scholars filed amicus briefs in support of Eli Lilly's allegations.
The Tribunal confirmed that the conduct of the courts – as organs of the State – is attributable to the State. Accordingly, a judicial act could give rise not only to a denial of justice, but also to an expropriation or result in manifest arbitrariness or unfairness in violation of the customary international law minimum standard of treatment. However, the Tribunal also emphasized that ‘a NAFTA Chapter Eleven tribunal is not an appellate tier in respect of the decisions of the national judiciary’,Footnote 1 and that ‘[i]t is not the task of a NAFTA Chapter Eleven tribunal to review the findings of national courts and considerable deference is to be accorded to the conduct and decisions of such courts’.Footnote 2 Accordingly, only ‘in very exceptional circumstances, in which there is clear evidence of egregious and shocking conduct’ is it appropriate for a NAFTA Chapter Eleven tribunal to adjudicate such conduct against a State's NAFTA obligations.Footnote 3
Main Findings of the Arbitral Tribunal
Eli Lilly Failed to Demonstrate a Dramatic Change in the Utility Requirement under Canadian Law
Canada alleged that, for Eli Lilly's claims under NAFTA Articles 1105 and 1110 in relation to the promise utility doctrine to succeed, Eli Lilly had to demonstrate that this doctrine gave rise to a ‘dramatic change in the law’. Footnote 4 Indeed, Eli Lilly conceded that this was the case. Eli Lilly's main argument was that the Canadian Courts' interpretation of the utility requirement and, specifically, their adoption of the promise utility doctrine in the mid-2000s, did, in fact, depart dramatically from prior Canadian patent law. Eli Lilly alleged that the Zyprexa and Strattera Decisions applied the promise utility doctrine retroactively to the Zyprexa Patent and the Strattera Patent, amounting to expropriation under NAFTA Article 1110 and unfair und inequitable treatment contrary to NAFTA Article 1105.Footnote 5
According to Eli Lilly, the threshold for demonstrating utility under the traditional utility standard was low. To prove utility, a ‘mere scintilla’ of utility sufficed. By contrast, the standard for the promise utility doctrine was significantly more stringent and notably also higher than the utility standards applied by Canada's NAFTA partners, the United States and Mexico.Footnote 6
Eli Lilly claimed that the promise utility doctrine had three elements that departed from the traditional utility test: (i) the need to identify a promise of utility in the patent disclosure, which becomes the measuring stick for utility; (ii) a prohibition on using post-filing evidence to prove utility; and (iii) the requirement that pre-filing evidence relied on to support the promise be referenced in the patent application.Footnote 7
The Tribunal analyzed the several elements of the promise utility doctrine and found that: (i) while the requirement to identify the promise of the patent ‘may not have played a significant role in the Canadian jurisprudence before 2005 … the rule was clearly “out there” to be ignored at a patentee's peril’;Footnote 8 (ii) with respect to the ban on post-filing evidence to prove utility, introduced by the Supreme Court in a 2002 decision, the Tribunal recognized that, although unexpected, the change in the law was not dramatic;Footnote 9 and (iii) the requirement that the basis of sound prediction of utility be disclosed in the patent application was not entirely novel and that, in any event, Eli Lilly was aware of the requirement from previous communications with respect to patent applications.Footnote 10
The Tribunal ultimately concluded that Eli Lilly had not demonstrated ‘a dramatic transformation of the utility requirement in Canadian patent law’,Footnote 11 such that would give rise to a violation of NAFTA Articles 1110 or 1105.Footnote 12 To the contrary, the Tribunal found that the evidence showed that Canada's utility requirement underwent ‘incremental and evolutionary’Footnote 13 rather than dramatic changes during the period between grant and invalidation of the Zyprexa and Strattera Patents.
Eli Lilly Failed to Demonstrate that the Utility Requirement under Canadian Law was Arbitrary or Discriminatory
Eli Lilly separately alleged that the promise utility doctrine was arbitrary because it was ‘unpredictable and incoherent’ and ‘serve[d] no legitimate public purpose’.Footnote 14 Additionally, Eli Lilly claimed that the doctrine discriminates against pharmaceutical patents as a field of technology, which NAFTA Article 1709(7) prohibits.Footnote 15 Canada asserted that Eli Lilly had failed to prove that the utility doctrine was discriminatory, and also that the evidence presented by Eli Lilly was flawed and did not show a statistical difference in utility-based invalidation of patents between the pharmaceutical sector and other sectors.Footnote 16
The Tribunal acknowledged that an arbitrary or discriminatory measure could violate NAFTA Articles 1110 and/or 1105, even in the absence of a fundamental or dramatic change in the relevant area of law.Footnote 17 However, the Tribunal found that none of the three elements of the promise utility doctrine identified by the Claimant was arbitrary and that the Canadian Courts' application of these rules had foundations in Canadian law.Footnote 18 Additionally, the Tribunal determined that Canada had asserted a legitimate public policy justification for the promise doctrine – namely, that ‘enforcing promises contained in the disclosure helps ensure that “the public receives its end of the patent bargain” … and that it “encourages accuracy while discouraging overstatement in patent disclosures”.’Footnote 19
With respect to discrimination, the Tribunal did not find discrimination on the evidence against the pharmaceutical industry in relation to the promise utility doctrine. The Tribunal also noted that Eli Lilly had not alleged that the promise utility doctrine discriminated against foreign patent holders on its face,Footnote 20 and that Eli Lilly failed to demonstrate that the doctrine discriminated in fact against foreign patent holders.Footnote 21 Accordingly, the Tribunal dismissed the Claimants' claims of arbitrariness and discrimination.
Finally, the Tribunal applied the ‘loser pays’ principle in relation to the costs of the arbitration, ordering Eli Lilly to bear the costs of the arbitration and 75% of Canada's legal fees and other costs.
