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Canada's International Drug Patent Problem
In the eyes of the United States, Canada has a drug problem.
Granted, this isn't an illegal narcotics or drug cartel problem. But in the world of international trade, the problem is pretty bad. In fact, it's serious enough to land Canada on the "Watch List" in the U.S. Trade Representative's "Special 301 Report"—a report released annually that evaluates the intellectual property rights protection and enforcement of the United States's trading partners.
So how exactly did Canada end up on this list? It boils down to this: The United States and the world's major multinational pharmaceutical companies are unhappy with the way Canada interprets its drug patent laws.
"Canada is an outlier," says Patrick Kierans, a senior partner at Norton Rose Fulbright in Toronto who has represented multinational pharmaceutical companies. "It has a higher standard for drug patents than anywhere else in the world."
Defenders of Canada's patent system insist that this is not true. Other countries also have standards that differ from that of the U.S., they say, and patent systems worldwide are far from unified. Nevertheless, Canada is on the USTR's "Watch List"—a place usually reserved for developing economies.
This is actually an upgrade from years past, when Canada sat on the U.S.'s "Priority Watch List," keeping company with such notorious big-time IP infringers as China and Russia. The basis for Canada's lowly status in the eyes of the U.S. for four consecutive years had been its copyright laws and its commercial-scale trafficking of counterfeit products. But with passage in 2012 of Canada's Copyright Modernization Act, and the introduction this year of Canada's Counterfeit Products Act, these problems are deemed well on the way to being fixed.
Canada's drug patents, however, are another story. In its report, the USTR writes that the U.S. has "serious concerns" about Canada's treatment of pharmaceutical patents. It criticizes the country's administrative process for regulatory approval of pharmaceutical products, which curbs the right to appeal. And more pointedly, it expresses concern about the impact of Canada's "heightened" utility requirement for patents.
That utility requirement, in fact, has Big Pharma up in arms. It has prompted an international trade dispute that not only challenges a sovereign nation's legal system but also could end up costing Canadian taxpayers as much as $100 million. It raises broader questions that arise in a world where the value of intellectual property is rapidly outpacing that of real property, but where patent systems still vary from country to country.
In November of last year, Eli Lilly and Company notified the government of Canada that it intends to challenge the country's standards for granting patents, claiming that they violate provisions of the North American Free Trade Agreement. The company launched its attack after Canadian courts invalidated Lilly's patent for Strattera, a drug used to treat Attention Deficit Hyperactivity Disorder (ADHD). In its formal filings, it demanded $100 million in compensation from Canada, saying that is the amount the patent invalidation cost the company.
So how is an individual company, albeit the tenth-largest pharmaceutical corporation in the world, able to demand $100 million in compensation from a nation of 35 million people? The drugmaker filed what is known as an investor-state dispute, which, under provisions of some international trade treaties, allows companies to initiate challenges against foreign governments.
The investor-state concept is not new. The provisions, which are included in trade agreements and bilateral investment treaties and are designed to attract direct foreign investment and protect the interests of foreign investors, give private companies the right to challenge government policies before foreign tribunals. Sometimes these challenges are brought because of an alleged violation by the host country of a "minimum standard of treatment" that it is required to provide foreign investors, such as police protection and due process. They are also brought because a host country has allegedly failed in its "national treatment" obligation to afford foreign investors treatment that is "no less favorable" than that afforded to domestic companies in like circumstances. And finally, they are brought when there has been an alleged "expropriation" of property.
"But these provisions usually concern real property—not intellectual property," says Richard Gold, James McGill professor at the Faculty of Law at McGill University. "And this is the first time a company has used the investor trade provisions of a U.S. trade agreement to push for patent protection."
Under the Canadian Patent Act, an invention can be patentable only if it is new, inventive, and useful. Over the last decade, the Canadian courts have interpreted "useful" to mean that the utility of the patent as described in the application must be demonstrated as of the filing date. "The train left the tracks on this, and it needs to be righted," says Norton Rose's Kierans, who says it's unrealistic to expect that drug trials and data will be completed when a patent application is filed. "In some cases, the 'promise' of pharmaceutical patents has been elevated to a level required for regulatory approval, and determining the promise has become a very contentious and unpredictable issue," he says.
The evidence Lilly presented in its Strattera patent application to demonstrate the drug's promised benefit—a single study involving 22 patients—was deemed insufficient by Canada's courts. In fact, both a Canadian federal court and a court of appeals ruled that the company failed to demonstrate the drug had the utility that Eli Lilly had promised.
The court rulings paved the way for generic drug makers in Canada to produce a less expensive, nonbranded version of the drug—something Lilly argues is a "direct expropriation" and also an "indirect expropriation" in the form of a "regulatory taking." In its formal notice of intent to take Canada to a NAFTA investor tribunal, Lilly not only challenges the invalidation of its patent, saying that violated Canada's obligations under NAFTA, but also challenges the "utility requirement" as it has been interpreted in Canadian courts.
"Lilly is not just disputing the invalidity of its patent. It's challenging Canada's entire legal doctrine," says Ben Beachy, research director for Public Citizen's Global Trade Watch. "It's trying to use the trade agreement to attack the public policy of a sovereign nation."
The Lilly controversy isn't surprising, given the company's level of frustration with Canada's patent system. In addition to Strattera, which earned Lilly approximately $620 million worldwide in 2012, the federal court in Canada invalidated Lilly's schizophrenia drug Zyprexa for lack of utility. Lilly sought leave to appeal the decision to the Supreme Court of Canada, and in a rare occurrence, the court ordered an oral hearing of Lilly's leave application. But in May it denied the appeal, leaving Lilly with no further legal options to pursue under Canadian law.
Attorneys for Eli Lilly would not comment on the specifics of the investor-state case, and a spokesman would say only that "as an innovation-based pharmaceutical company, this is certainly an important topic for Lilly, and we continue to call for strong IP protection in the markets in which we operate."
Gold, the professor at McGill, says he expects that claims in investor-state cases have at least some merit. "But in this case," he says, "on every single point raised by Eli Lilly, I can find nothing to support their case."
The company's claim that Canada is the only country to have such a standard is false, he says. In fact, any attempts to negotiate substantive patent laws in international treaties have failed. "TRIPS [the Trade Related Aspects of Intellectual Property Rights agreement] purposely didn't get into substance, and if the Patent Cooperation Treaty required harmonization, that would come as a surprise to everyone who signed on to it," he says.
Lilly's investor-state challenge has attracted attention worldwide, from other pharmaceutical companies and from IP attorneys and scholars. Henning Grosse Ruse-Khan, senior research fellow at the Max Planck Institute for Intellectual Property and Competition Law in Munich, says Lilly's allegations that Canada's patent laws violate NAFTA demonstrate the tensions that exist between international IP and investment law. But the company's claim that Canada's court rulings contravene global treaties such as TRIPS, which is administered by the World Trade Organization, takes the conflict to a new—and somewhat frightening—level, he says.
"Individual companies have no standing under the WTO to bring actions against countries. This can only be done between governments," he says. "It appears that IP holders are trying to use these trade agreements as a backdoor mechanism to litigate compliance with international treaties."
Ruse-Khan believes more and more countries will try to use trade agreements to litigate perceived violations of IP–specific agreements such as TRIPS—even though such WTO–administered agreements do not have investor state arbitration provisions. Public interest groups such as Public Citizen, which has been closely watching developments related to investor-state disputes, also worry that this is the start of a new trend to resolve IP disputes. "As the world's economies shift from manufacturing-based to knowledge-based, and intellectual capital becomes more valuable than actual property, companies will probably bring more actions like Lilly's," says Burcu Kilic, legal counsel for global access to medicine at Public Citizen.
This has already happened. Australia, in an effort to curb smoking, passed legislation requiring that tobacco products be sold only in plain packaging. Philip Morris Asia Limited, the Hong Kong–based Asian subsidiary of Philip Morris International Inc. (maker of Marlboro and other cigarette brands), brought an investor-state proceeding against Australia, claiming that the law violated a bilateral treaty between Hong Kong and Australia. It says the plain packaging law expropriates its intellectual property, it alleges that the law makes Australia noncompliant with TRIPS, and it asks for billions of dollars in compensation.
Beachy says that countries—especially those with a lot of IP—are now trying to incorporate more intellectual property provisions into international and bilateral trade agreements. This could negatively affect IP laws of individual countries and even strip away IP rights that already exist, he says. The Trans Pacific Partnership Agreement, for example, a treaty currently being negotiated among 12 countries, including the U.S., Japan, Australia, and Canada, is expected to include many specifics concerning IP laws. "That will make it even easier for companies to bring IP–based investor-state cases against governments," he says.
Foreign investors are increasingly resorting to investor-state arbitration to settle all sorts of investment disputes. By the end of last year there were 518 such cases—a record number, according to the United Nations. In one, Ecuador was ordered to pay $1.77 billion to Occidental Petroleum Corp.
Attempts by Lilly, Philip Morris, and others to force taxpayers to pay companies such huge compensation awards could backfire, however. Australia has said it will not sign on to the TPP or any other treaty if it has investor-state provisions. And Ecuador has indicated that it will pull out of all of its investor-state treaties.
Lilly's notice of intent to file a NAFTA claim, meanwhile, is only a first step. The company must file the actual claim—and the company has remained silent about when or if this will happen. If it does, Canada would file a counterclaim, and eventually the investment tribunal would hear the case behind closed doors.
Some observers think that Lilly may not go further. It may have brought the investor-state proceeding to put pressure on the Canadian legislature to amend the country's "utility" requirement. The USTR's placement of Canada on its "Watch List" adds even more pressure.
"They may be trying to bully Canada, hoping they can change its ways," Gold says. "The question is, how far will they go?"