In Dispute: Canada wins Eli Lilly international arbitration appeal

Canada has just dodged a legal bullet. On March 16, the country won an international arbitration case brought by US pharmaceutical giant Eli Lilly.

The company sued in 2013, complaining the Canadian courts had developed a new patent law doctrine that drew into doubt the usefulness of two blockbuster drugs, and ultimately led to the invalidation of the relevant patents.

Lilly alleged that Canada’s courts had acted unfairly and that the patent invalidations had effectively “expropriated” the company’s investments in the two drugs.

International authority

However, a panel of three arbitrators entrusted to hear Lilly’s case did not see things the investor’s way. In their final ruling, the tribunal did confirm – over the objections of Canada – that they had authority to hear the case. 

However, the arbitrators went on to scrutinise the treatment meted out to Lilly, and saw no basis for holding Canada liable for expropriating or mistreating the company.

For some time now, the Lilly vs Canada case had shone a light on the ability of foreign investors to ‘appeal’ supposed final verdicts of a host country’s highest courts. Intellectual property lawyers closely watched the arbitration because it held out promise of a previously overlooked back-door method of challenging such rulings.

While international arbitrators typically disavow any suggestion they are sitting as appeal courts, the reality is that they do so, just in a more limited sense. 

If the courts act egregiously, and without any regard for a foreign investor’s due process rights, arbitrators can and will hold the host country liable for cash damages. Indeed, Lilly was seeking at least C$500m ($376m) in compensation for its lost patents.

Lilly’s arbitration case had attracted a lot of negative publicity, and had been cited by critics of free-trade deals as a warning about the over-reach of the investor protection provisions in such agreements. At a time when US president Donald Trump’s administration is championing an ‘America First’ trade policy, and looking to renegotiate the North American Free Trade Agreement (Nafta), a win for Lilly might have spurred the government to look more carefully at the investor protection provisions built into the agreement.

Indeed, somewhat ironically, a victory for a US investor in this case might have been a wake-up call for the US government itself, driving home the degree to which the US could be similarly ensnared in future by investor arbitration lawsuits.

Rights under Nafta

For the moment, the Trump administration’s move to renegotiate Nafta has appeared to focus more on disagreements over the subsidisation of softwood lumber and other perennial crossborder trade irritants. 

The US has given no signs that it wants to revamp, or even tear up, Chapter 11 of Nafta – the part that gives investors international law protections and a right to sue their host country in international arbitration. Lawyers who make their living bringing these kinds of cases have been scrambling to read the tea leaves and determine whether the Trump administration will shake things up. 

On the one hand, the appointment of former Exxon-Mobil CEO Rex Tillerson as secretary of state seemed likely to shore up government support for investment treaty protections. 

After all, Exxon has used such treaties itself in foreign investment conflicts with Argentina, Venezuela and others. Similarly, another official appointed to a senior international economic policy role in the White House, Kenneth Juster, had most recently been working on behalf of an international gold miner in an arbitration lawsuit against Venezuela.

Removing obstacles

It was also notable that one of the first acts of the Trump administration was to signal its support for a controversial pipeline that was currently the subject of an arbitration lawsuit against the US by the aggrieved Canadian investor. In other words, the Trump administration seemed to be removing obstacles to foreign investors, and thus resolving legal disputes, rather than inviting new ones.

But, despite these developments, questions remain as to whether a president who bullies and berates domestic and foreign investors alike will ultimately support the existence of an international legal system that allows jilted foreign investors to have a hearing before international arbitrators.

Mr Trump’s style of capricious and haphazard policymaking could put the US itself firmly in the -sightlines of foreign investor lawsuits in the future. The US president’s -advisers could be asking themselves whether the real lesson of the Lilly vs Canada case – despite the investor’s loss – is that arbitrators can, and will, review whether a government’s treatment of foreign investors meets international standards of due process.

For a president accustomed to deferring to no one, the international arbitration process may not be at all to his liking – even if it might one day be a valuable lifeline for certain foreign investors.

Luke Eric Peterson is the publisher of InvestmentArbitrationReporter.com, an electronic news and analysis service focused on FDI dispute settlement.