Apr 232015
 

sean at podiumThis presentation is in the IP room. But my message is for the IP team to be talking to the ISDS folks next door. The reason is that there is an increasingly urgent need revise the EU and US ISDS templates to protect IP policy decisions from the ISDS chapters of trade agreements. Both the US and EU have been tinkering with their models of late. But both revised models fail to ensure a key domestic sovereignty protection that has been the core of international IP law for 130 years – the exclusive use of state-to-state dispute resolution for enforcement of international IP commitments.

The problem is this – dating back to the appearance of the issue in NAFTA, language in investment chapters that appear designed to carve out IP policy decisions from private attack in investment forums in fact invite and facilitate such attack.

A.   International IP and State-to-State Enforcement

Private enforcement of international IP minimum standards are a rupture in the fabric of international intellectual property law. State-to-state dispute settlement is an important check and balance in the process that reduces litigation. Governments are more wary litigators than many companies. The reasons are many – governments seek to maintain complex diplomatic relations, they are loathe to take on the costs of litigation, and since they must live by the rules their own litigation establishes, they are more cautious in taking aggressive interpretations of international law that could limit their own regulatory freedom. We thus see relatively few international intellectual property cases litigated, including under the 20 years of TRIPS and its stronger enforcement forum in the WTO.

This restraint is good. Imposing international disciplines on what kind of domestic policies a country can have – the vertical relationship between state and citizen rather than state to state — is controversial and against what most of international law seeks to do.

B. NAFTA and the 1110(7) ISDS Backdoor

Investment provisions dating back to the 1950s have included intellectual property among the kinds of property subject to compensation for direct expropriation. But extending these protections to so-called “indirect” expropriation is new to the post-NAFTA period.

The term “indirectly” opens the process to consideration of what in U.S. constitutional law is referred to as a “regulatory taking” – that is a regulation or regulatory action that diminishes the value of property, even if the government does not take ownership of the property.

The term “investment” has become incredibly broad, including, in the Model U.S. BIT (and TPP leak’s) language:

every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk.

“Intellectual property” is commonly covered explicitly defined as a covered investment, including in the Model BIT of the U.S. and in the recent TPP leaked ISDS chapter.

The extension of the investment chapter’s indirect expropriation provisions to intellectual property raises complicated issues about the relation between the investment and IP chapters of free trade agreements. The separate intellectual property chapter is subject only to the traditional public international law enforcement mechanism of state-to-state dispute resolution. Does the ISDS extension to IP enable private enforcement of this traditional field of public international law?

To address the connection between the two chapters and their divergent enforcement mechanisms, NAFTA Section 1110(7) states:

  1. 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).

If that provision had ended at its comma before “to the extent,” the implication would be that any IP issues between the parties would have to be solved through state-to-state enforcement. This would reinforce, rather than rupture, the historical international rule. But by including the last clause evoking the extent of consistency with Chapter 17, it invites ISDS to be used by private companies to challenge the revocation, limitation or creation of intellectual property rights alleged to be inconsistent with the intellectual property chapter. This opens a backdoor for private companies to essentially enforce the terms of the IP chapter, even though the IP chapter itself makes no allowance for such litigation.

B.    Eli Lilly

No one in the first decade of NAFTA dared to suggest that they could directly enforce the IP chapter through the ISDS backdoor I define above until recently. But that dam has now been breached.

In a recent case against Canada, Eli Lilly claims that it can use the 1110(7) backdoor, and the vagueness of the fair and equitable treatment clause, to directly enforce an alleged violation of the Chapter 17 requirement to grant patents (the same language included in Article 27 of TRIPS). In that case, it is noteworthy that both sets of memorials (aka legal briefs) accept that Article 1110(7) invites the ISDS panel to decide whether Canada’s actions are consistent with the IP chapter of NAFTA. Cf Canada’s Memorial (failing to challenge jurisdiction of ISDS panel to interpret Chapter 17).

The Philip Morris cases follow a similar logic. They argue that regulating branding on cigarette packages violates TRIPS, and therefore is an indirect expropriation of their property.

Each of these cases is really an IP minimum standards case. They are arguing that the country’s IP laws do not meet the minimum standards in another chapter or agreement. But they attempt to evade the exclusive state-to-state enforcement process of those agreements by styling the action as an indirect expropriation of an investment. And the problem, of course, is that these agreements invite that challenge.

What else could come along? Some pretty clear examples of cases that could become common under the current ISDS logic:

  • Challenges to court rulings, like the U.S. Sct Alice ruling, that have the effect of revoking patents or other IP rights.
  • Challenges to royalty determinations in FRAND cases.
  • Challenges to “fair use” and other copyright exception cases under the Berne 3 step test.

Neither TPP nor CETA are any better at preventing these kinds of cases.

C.     TPP

The newly leaked ISDS chapter of the TPP changes the language, but not the basic focus, of the NAFTA model. TPP Art. 11.7(5) states:

The Article does not apply to the issuance of compulsory licenses granted in relation to intellectual property rights in accordance with the TRIPS Agreement, 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 QQ._ (Intellectual Property Rights) and the TRIPS Agreement.

Fn 18. For greater certainty, the Parties recognize that, for the purposes of this Article, the term “revocation” of intellectual property rights includes the cancellation or nullification of such rights, and the term “limitation” of intellectual property rights includes exceptions to such rights.

On its face, it might appear that the TPP language expands the field of IP decisions protected from ISDS attack. But viewed against the background of the Eli Lilly logic, this language in fact expands ISDS jurisdiction over international IP questions in two ways. First, it includes TRIPS – which would make it the first international agreement to explicitly authorize private enforcement of that WTO agreement. Second, the footnote clarifies that a broader range of policy decisions – including “exceptions” – can be challenged by private parties.

D.    CETA

The Comprehensive Trade and Economic Agreement (CETA) between Canada and the European Union was finalized after the Eli Lilly case was filed and shows a clear attempt to respond to it. CETA Art. X.11(6) states:

For greater certainty, the revocation, limitation or creation of intellectual property rights to the extent that these measures are consistent with TRIPS and Chapter X (Intellectual Property) of this Agreement, do not constitute expropriation. Moreover, a determination that these actions are inconsistent with the TRIPS Agreement or Chapter X (Intellectual Property) of this Agreement does not establish that there has been an expropriation.

A separate “Declaration to Investment Chapter Article X.11 Paragraph 6” states:

Mindful that investor state dispute settlement tribunals are meant to enforce the obligations referred to in Article X.17(1): Scope of a Claim to Arbitration of Chapter x (yyy), and are not an appeal mechanism for the decisions of domestic courts, the Parties recall that the domestic courts of each Party are responsible for the determination of the existence and validity of intellectual property rights. The Parties further recognize that each Party shall be free to determine the appropriate method of implementing the provisions of this Agreement regarding intellectual property within their own legal system and practice. The Parties agree to review the relation between intellectual property rights and investment disciplines within 3 years after entry into force of the agreement or at the request of a Party. Further to this review and to the extent required, the Parties may issue binding interpretations to ensure the proper interpretation of the scope of investment protection under this Agreement in accordance with the provisions of Article X.27: Applicable Law and Rules of Interpretation of Chapter x (Investment).”

The new language clarifying that a determination that an action that is inconsistent with the TRIPS Agreement or the IP chapter “does not establish that there has been an expropriation” still empowers ISDS panels to decide “the extent that these measures are consistent” with TRIPS or the IP chapter. It permits (although does not require) that inconsistent actions be subject to compensation.

The rest of the “declaration” about avoiding the use of ISDS as a defacto appeal mechanism contains helpful ideas that are not operationalized in the text of the investment chapter. It appears that Eli Lilly’s claim that the invalidation of its patent by a court violates the IP chapter and constitutes an expropriation could have been brought as easily under CETA’s investment chapter as under NAFTA (or the leaked TPP).

CETA’s final language is arguably less protective than Canada had originally offered. It had sought:

For greater certainty, this Article does not apply to a decision by a court, administrative tribunal, or other governmental intellectual property authority, limiting or creating an intellectual property right, except where the decision amounts to a denial of justice or an abuse of right.

I say that the Canada proposal is “arguably” more protective because, despite its stronger tone, it too contains vague limiting principles (“except where . . . a denial of justice or an abuse of right”) that could be used by corporations to open a backdoor to IP chapter enforcement.

E.     India Model BIT

India recently published a draft model investment treaty, which states among the areas excluded from ISDS coverage:

(v) 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 the Law of the Host State. (emphasis added).

Making IP law ultimately accountable to domestic law is certainly more protective of local regulatory autonomy. But the India proposal fails to make clear who has exclusive authority to determine whether the intellectual property policy at question is “consistent with the Law of the Host State”? Can the ISDS panel make this ultimate determination?

F.     A better solution

The better solution would remove the “consistent with” language from all the proposals and only permit IP chapter challenges through traditional state-to-state processes. For example, a clause could state:

Investment chapters and investor-state dispute settlement mechanisms shall not apply to any claim of indirect expropriation or fair and equitable treatment with respect to intellectual property. For further clarity, they shall 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.

The TPP language, evoking TRIPS, shows that this issue may arise in TTIP even if there is no IP chapter. Indeed, even if there is no ISDS chapter, the problem I highlight here needs to be addressed because both the US and EU have scores of BITs that incorporate the flawed design noted here. Since later in time treaties can amend previous obligations, the TTIP (and other ongoing negotiations such as TPP) can correct failures of the past between the same parties. TTIP can fix the dozens of investment treaties between the U.S. and EU states. And TPP can fix NAFTA.

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