Investment chapters in trade agreements: intellectual property rights as protected investments.

Author:Reichman, Jerome H.

This panel was convened at 12:45 pm, Friday, April 11, by its moderator, Frederick M. Abbott of Florida State University College of Law, who introduced the panelists: Gary N. Horlick of Georgetown University Law Center; James Love of Knowledge Ecology International; Jerome H. Reichman of Duke University School of Law; and Susan K. Sell of the Elliott School of International Affairs, George Washington University. ([dagger])


There is a long historical arc surrounding the question of host country protection of alien property. Traditionally there has been a distinction between trade agreements on one side, and investor protection agreements on the other. The former were multilateral, regional, or bilateral, while the latter were more typically bilateral. More recently, starting in the 1980s, there has been a trend toward incorporating investor and investment protection in bilateral, regional, and plurilateral trade agreements. (There was a failed effort to conclude a Multilateral Agreement on Investment in the mid-1990s.) One of the earlier exemplars is the NAFTA, signed in December 1992, and entered into force on January 1, 1994. Within the United States, the approval process for the NAFTA involved the most politically contentious discourse surrounding a trade agreement during the past 50 years, at least.

Investment and investor protection is a key element of the NAFTA, situated in its Chapter Eleven. Chapter Eleven establishes standards of protection and provides for investor-to-state dispute settlement, based on diversity of nationality, under ICSID or UNCITRAL Rules, employing panels of arbitrators appointed by the parties through a prescribed process. (1) The NAFTA does not expressly refer to "intellectual property" in its definition of a protected "investment," but Article 1139(g) includes among defined investments "(g) real estate or other property, tangible or intangible, acquired in the expectation or used for the purpose of economic benefit or other business purposes." Article 1110(7), in setting standards regarding expropriation and compensation, states: "This Article does not apply to the issuance of compulsory licenses granted in relation to intellectual property rights, or to the revocation, limitation or creation of intellectual property rights, to the extent that such issuance, revocation, limitation or creation is consistent with Chapter Seventeen (Intellectual Property)." Regarding the standard of protection to be provided by the host country, Article 1105(1) provides: "Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security."

What is the standard of treatment prescribed by customary international law? To my mind, the best articulation of that standard has been made by the NAFTA Chapter Eleven arbitral panel in Glamis Gold v. U.S., which stated:

to violate the customary international law minimum standard of treatment codified in Article 1105 of the NAFTA, an act must be sufficiently egregious and shocking--a gross denial of justice, manifest arbitrariness, blatant unfairness, a complete lack of due process, evident discrimination, or a manifest lack of reasons--so as to fall below accepted international standards and constitute a breach of Article 1105(1). The Tribunal notes that one aspect of evolution from Neer [Neer v. Mexico, 4 R. Int'l Arb. Awards, 60-62 (Oct. 15, 1926)] that is generally agreed upon is that bad faith is not required to find a violation of the fair and equitable treatment standard, but its presence is conclusive evidence of such. Thus, an act that is egregious or shocking may also evidence bad faith, but such bad faith is not necessary for the finding of a violation. (2) Eli Lilly, a U.S.-based pharmaceutical company, has initiated a claim against Canada under UNCITRAL Rules alleging, principally, that the legal methodology developed by the Supreme Court of Canada in 2002 for assessing the criterion of utility, the "promise doctrine," and more specifically the "doctrine of sound prediction," violates customary international law and treaty law, and constitutes an unlawful expropriation. The claim specifically refers to decisions by Canadian federal courts invalidating Eli Lilly patents on the drugs Straterra and Zyprexa, and demands $500 million in damages.

The doctrine of sound prediction, as articulated by Justice Binnie of the Canadian Supreme Court in Apotex v. Wellcome, (3) provides that if a patent applicant has not "demonstrated" utility at the time of initial application (i.e., priority date), the application must disclose a sound prediction of utility that embodies three elements: (1) a factual basis for the prediction; (2) an articulable and sound line of reasoning at the time of the patent application from which the desired result can be inferred from the factual basis, and (3) proper disclosure, which is normally a full, clear, and exact description of the nature of the invention and the manner in which it can be practiced.

The question to be put to a NAFTA panel is whether that judicial doctrine is a violation of customary international law or the NAFTA text. Applying the standards of Glamis Gold, the question is whether its application is so egregious and shocking as to constitute a denial of fundamental justice.

This claim is the tip of a looming iceberg. Recent trade and investment agreements include intellectual property as protected subject matter, and the United States is proposing extensive intellectual property-related investor protection in the Trans Pacific Partnership (TPP) agreement and the Transatlantic Trade and Investment Partnership (TTIP). These proposals are now facing pushback from some TPP negotiating countries, from within the European Union with respect to the TTIP, and from civil society.

Questioning the subject matter scope of dispute settlement under NAFTA Chapter Eleven is not new. There have been a number of Chapter Eleven cases in which participating governments and civil society have raised serious questions about whether the intent of the NAFTA parties was to allow such intrusion into areas of regulation characteristic of the exercise of national regulatory sovereignty. But the claim brought by Eli Lilly appears to intrude into sovereign discretion at a newly deepened level--questioning the considered opinion of the Canadian Supreme Court in interpreting patentability standards for which international rules allow considerable flexibility. A NAFTA arbitral panel would essentially be acting as an ordinary court of appeal from the highest judicial authority established by the Canadian Constitution regarding a traditional matter of government regulation. It is extraordinarily difficult to make a case that there is an international legal standard regarding the criterion of utility that precludes the Canadian Supreme Court's doctrine of sound prediction. One might go so far as to say that the Canadian Supreme Court doctrine is an excellent model on which other countries should base assessments of utility.

* This session was organized by an ASIL interest group and may not have conformed to the programmatic guidelines of the Annual Meeting's Program Committee.

([dagger]) Professor Horlick and Mr. Love did not submit remarks for the Proceedings.

([double dagger]) Edward Ball Eminent Scholar Professor of International Law, Florida State University College...

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