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June 2 — Canada would have to amend its patent laws or face a flurry of similar claims if an arbitration panel rules in favor of drugmaker Eli Lilly in a $500 million case alleging violations of North American Free Trade Agreement investor protection rules, legal analysts said.
Canada is an outlier on prescription drug patents because its courts are cancelling patents by finding that drug companies have failed to sufficiently prove claims that their products would be useful, what is known as the “promise of utility doctrine.”
But when that happened to two of Eli Lilly's top-selling drugs—attention deficit hyperactivity drug Strattera and anti-psychotic drug Zyprexa—the company filed suit under NAFTA Chapter 11, claiming that the Canadian government violated its trade commitments and effectively expropriated Eli Lilly's intellectual property.
The case is unusual because few claims under NAFTA have targeted action by the courts rather than government legislation or regulation, Scott Miller, a senior adviser with the Washington-based Center for Strategic and International Studies, said May 27.
The hearing at World Bank headquarters in Washington won't set a legal precedent or make the drug company's shareholders rich, but a win for the drug company would give Canada little choice but to change its patent laws or face an onslaught of similar claims, trade law experts said. The hearing before the International Center for Settlement of Investment Disputes began May 30 and continues through June 9.
Canada, Mexico and the U.S. are the three countries participating in NAFTA.
Since 2005, Canadian courts have invalidated more than 20 patents for major drug products, a significant change in the application of Canada's patent laws, Miller told Bloomberg BNA. There were no such rulings before 2005, and the approach is out of line with jurisprudence in the U.S. and other developed countries, he said.
That has created a Catch-22 for pharmaceutical companies, who are stuck between wanting to file for patent protection as quickly as possible to protect their inventions and the need to provide enough evidence that the proposed invention will be useful, he said. “Lilly is the first to test that,” he said.
Mark F. Schultz, an associate law professor at Southern Illinois University, agreed. Success for Eli Lilly would confirm that claims based on changes to intellectual property law are viable, he said June 1.
“It's a new type of claim under arbitration, so it would set an example,” Schultz told Bloomberg BNA.
The case is also interesting because similar NAFTA arbitration claims involving actions by U.S. courts have generated controversy in the U.S. over protection of judicial independence, Miller said. Those earlier cases were dismissed, so a win by Eli Lilly would show such cases can succeed, he said.
In one case, a NAFTA Chapter 11 arbitration panel rejected in 2003 a claim by Loewen Group Inc., saying it lacked jurisdiction to address claims that a $500 million jury verdict against Loewen in a Mississippi contract dispute was tainted by anti-Canadian bias.
That followed a similar finding by a panel in a 2002 case involving Canadian real estate development firm Mondev International Ltd.’s $50 million claim challenging a Massachusetts court's ruling in a contract dispute with the City of Boston.
Canada has consistently argued in its filings to the arbitration panel that Eli Lilly's claim is an attempt to relitigate cases that were fairly decided by the Canadian courts.
Success for Eli Lilly before the International Center for Settlement of Investment Disputes panel wouldn't set a legal precedent because it is a commercial arbitration, not a trade dispute, Miller said. And given that past NAFTA arbitrations have awarded a median level of about 8 cents on the dollar, a victory probably would only secure a fraction of the compensation Eli Lilly is seeking, he said.
Miller and Schultz said a finding in Eli Lilly's favor won't force Canada to amend its Patent Act to clarify the issue of patent utility, but such amendments might be the best way for Canada to avoid follow-on claims by other pharmaceutical companies whose patents have been invalidated by the Canadian courts under the “promise of utility” doctrine.
The situation also could be resolved by a case to be heard in November 2016 by the Supreme Court of Canada—AstraZeneca Canada Inc.’s appeal of the Federal Court of Canada's invalidation of its patent for the acid reflux drug Nexium, Schultz said.
The arbitration hearing continues through June 9, and if the panel upholds Lilly's claims, that will trigger a separate hearing on damages.
Chapter 11, one of the more controversial elements of NAFTA, allows investors located in one NAFTA party/country to seek money damages in arbitration for measures imposed by another NAFTA party/country that allegedly violate Chapter 11 prohibitions against discriminatory treatment and expropriation of investments.
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