Concerns Raised Over Potential Threat of Investment Agreements

Investor agreements, included in many bilateral investment treaties (BITs), are a source of growing concern for many national governments. These agreements essentially leave countries vulnerable to litigation by individual firms, rather than other countries, as is the case in traditional World Trade Organization disputes. 

Last month, Carlos Correa, professor of law at the University of Buenos Aires and special advisor on trade and intellectual property at the intergovernmental South Centre, published an article in SouthViews on BITs. He comments on the potential threat BITs containing investor agreements (IAs) could pose – not only to governments financially, but also to public health interests in terms of access to medicines.

Correa looks specifically at the case of Eli Lilly & Co. and Canada. Eli Lilly is suing Canada, under the investor agreement contained in the North American Free Trade Agreement (NAFTA), for the invalidation of the company’s patent on the ADHD drug Strattera. Eli Lilly claims it has suffered damages of at least 100 million Canadian dollars.

Eli Lilly is calling for an arbitral tribunal that will “operate outside the Canadian jurisdiction and whose decision would not be appellable before Canadian courts, to award it an economic compensation for the alleged losses caused by the patent invalidation,” writes Correa.

Arbitration between firms and countries, in contrast to a judicial process seen in country-country disputes, could lend itself to a more subjective outcome than if such cases were to proceed through a judicial process, according to sources. This is because in an arbitration, the members of the tribunal are selected by the parties, rather than being appointed by an impartial judge, they said.

Correa explains that under IAs, the term “investment” is defined broadly. Furthermore, IAs vary from one agreement to the next. Correa says that “some IAs generally refer to IPRs, while others explicitly indicate the types of IPR covered, such as copyrights and related rights, patents, rights in plant varieties, industrial designs, rights in semiconductor layout designs, trade secrets, trade and service marks, and trade names. In some IAs reference is also made to ‘technical process’ or ‘know how’ and ‘goodwill’”.

The inclusion of IP as investment could be precarious. For countries like the United States, with a high percentage of patent invalidation, this broad definition of investment leaves the government open to being sued by firms on the grounds that revoking a patent would negatively impact the firm’s investment. (Correa cites that US District courts invalidated patent claims in 86% of the cases they decided in 2007-2011; between 2002 and 2012 the Federal Circuit confirmed 70% of the invalidation decisions by lower courts.)

It has been said that states’ motivation behind signing these BITs is the positive effect on foreign direct investment (FDI). Of BITs, the Office of the US Trade Representative (USTR) says BIT programs help “to protect private investment, to develop market-oriented policies, and to promote U.S. exports.”

A large number of developing countries, in particular, signed IAs “with the promise that the protections conferred to investors will increase FDI and boost their economies. There is no evidence, however, suggesting that such promise has been realised,” says Correa.

Correa references a conclusion from the Sixth Annual Forum of Developing Country Investment Negotiators that “there was no clear correlation between the number of BITs and FDI, and that there was a need to shift towards a more balanced investment treaty regime that would take into account developing countries’ sustainable development objectives.”

Further evidence undermining the connection between FDI and BITs is seen in the case of Brazil. Correa points out that Brazil has opted not to sign any BITs, yet has been one of the primary recipients of FDI amongst developing countries.

IAs have become “platforms for multi-billion compensation complaints,” according to Correa, and the investors’ right to directly sue the host states has given way to “unprecedented challenges to governmental action.”

In light of this, Correa notes that several countries such as Ecuador and South Africa have turned away from BITs. In his article, he states that Ecuador has “decided to denounce all BITs it had entered into,” while South Africa will “not sign any new BIT and will attempt to exit from or re-negotiate existing ones.”

Regarding the impact on access to medicines, Correa explains that one of the distressing aspects of the Eli Lilly’s complaint is that “it involves matters that the TRIPS Agreement has left to the discretion of the WTO Members. Deciding on which grounds a patent can be invalidated and how the patentability requirements are applied are among the important flexibilities allowed by that Agreement.” TRIPS is the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights.

Correa states in the article, “if Eli Lilly prevailed in this case, investor-state litigation could become a new, possibly more friendly, venue than the WTO dispute settlement mechanism for right-holders to question the interpretation and implementation of the TRIPS Agreement.” The USTR also admits to a significant benefit of BITs in that they “give investors from each party the right to submit an investment dispute with the government of the other party to international arbitration. There is no requirement to use that country’s domestic courts.”

Regardless of the outcome of the complaint, it is the “systemic implications” that may be very significant, according to Correa. Should Eli Lilly succeed in its complaint, however, this could set a precedent for future cases whereby firms would be less inhibited to take action against a country.

Caitlin McGivern contributed to this report.

Brittany Ngo is currently completing her Master’s in Health Policy and Global Health at the Yale School of Public Health and previously obtained a Bachelor’s of Arts in Economics from Georgetown University. Through her studies she has developed an interest in health-related intellectual property issues. She is a summer intern at Intellectual Property Watch.

Caitlin McGivern is currently studying at the University of Law in London and will graduate with an LLM in 2014. She previously obtained a Bachelor’s of Arts in Philosophy and Theology from the University of Oxford. She is a summer intern at Intellectual Property Watch. She is of Swiss, Canadian and Irish nationalities.