Monday, May 01, 2017

Canada Won the Eli Lilly NAFTA ISDS Battle Bigly but Who Will Win the War?

As everyone knows by now, Canada supposedly “won” the Eli Lilly NAFTA case. Prof. Richard Gold suggested in a tweet that there is an analogy here to Vimy Ridge, which was recently and rightly on the mind of all thinking and caring Canadians.

Indeed, just like Vimy, the Eli Lilly win was costly, important and empowering. But just as WWI, which was supposed to be “the war to end all wars” went on for a long time afterwards and WWII soon followed, the Eli Lilly case was only a battleground victory and not the end of the Investor State Dispute Resolution (“ISDS”) wars.

Moreover, unlike Vimy, it may not have been necessary or even desirable for Canada to risk this Eli Lilly ISDS battle. However, we did and we “won”. Let Canada celebrate this success but it is much too early to declare victory in the ISDS wars. It may even be the case that this was a “Pyrrhic Victory”, as the influential scholar Robert Howse suggests and I discuss below.

Now that NAFTA is apparently about to be renegotiated in a very uncertain and unstable political and trade climate, it is important that Canada learn whatever lessons is can from this saga.


It will be recalled that on May 13, 2013, a panel of the Supreme Court of Canada (“SCC”) with presiding Justice Marshall Rothstein (now retired) held an extraordinarily  rare and very patient oral hearing on whether Eli Lilly should be allowed leave to appeal in a case involving the “promise doctrine”. On May 16, 2013, the Court declined the leave application, as usual without reasons. Here is the webcast of that hearing.

Undaunted by the SCC’s leave refusal, which would absolutely have been the end of the litigation for any Canadian party, Eli Lilly and Company (“Eli Lilly”), an American “foreign investor” and the parent company of Canadian Eli Lilly  decided to launch a NAFTA challenge, which it commenced on September 12, 2013 under the ultra-controversial Investor State Dispute Settlement (“ISDS”) provisions of Chapter 11 of NAFTA. This ISDS mechanism has been used – and sometimes abused – to permit foreign investors to challenge domestic state actions that constitute illegal expropriation, denial of justice, or denial of “fair and equitable treatment”.  

The astonishing and arguably outrageous aspect of the Eli Lilly challenge was that it was frontally challenging a decision of Canada’s highest court. That is something that no Canadian litigant could possibly do – or would even think about. The only recourse to a Canadian litigant that has been to the SCC and has lost or been denied leave to appeal is to seek legislative change, which will rarely follow. That is the basis of the rule of law, the independence of the judiciary, and the sovereignty of this country.

Eli Lilly was not challenging the conformity of the Canadian patent statute with international law. If there were something substantively wrong with Canada’s Patent Act that makes it non-compliant with international law, it could have been challenged in a state to state procedure in the WTO. But that was not and is not the case. Likewise, the Patent Cooperation Treaty has a state to state dispute settlement provision involving recourse at the International Court of Justice.

So, Eli Lilly instead basically sought to have a NAFTA panel of three arbitrators overrule the SCC, which presumably saw no need to hear a case that challenged a long, evolutionary and clear line of Canadian case law. Oh, and by the way, Eli Lilly was now seeking damages in the amount of $500,000,000. A victory for Eli Lilly would not only have been very expensive for Canadian taxpayers. It would have set the stage for many further challenges to Canada’s judicial and political sovereignty and exponentially increased the danger of regulatory and legislative chill.

Here is the “Final Award” released March 16, 2017. Here is the ICSID Archive of all the background material.

Some Perceptions about the Award

Michael Geist, who is not shy when it comes to critical comment on Canadian policy, quickly opined  that:
The Tribunal decision represents an enormous win for the Canadian government and for the supremacy of Canadian law and the judicial system more broadly. The real fears that dispute settlement could be used to override Supreme Court of Canada decisions lies at the heart of concern with ISDS provisions that have found their way into trade agreements such as CETA and the TPP. (highlight added)

Richard Gold, a very independent and highly respected Canadian academic at McGill who is Canada’s leading patent law professor and scholar, has just published an encouraging op-ed in the Globe and Mail an April 6, 2017 in which he concludes:
The win over Eli Lilly only opens the door of possibility. It provides us freedom to do what we need to do to have a sustainable innovation policy and bring wealth and wellbeing to Canadians. Now, we face the hard part: What we do with that freedom.

Nathaniel Lipkus has stated in Policy Options on April 7, 2017 that:
The good news is that we no longer need to worry that trade tribunals will become supranational courts of appeal over domestic property law disputes.

As will be seen below, Robert Howse is more pessimistic and I tend to agree with him.

Why I am Less Enthusiastic

In my respectful view, Canada gambled and won an important victory in an arguably avoidable and unnecessary battle in this instance, but it is far from clear that that the ISDS wars are over. Canadian political and judicial sovereignty remain seriously at risk.

In the ISDS proceeding, Canada chose to acknowledge that “a State is responsible in international law for the conduct of its organs, including the judiciary”. (paras 175 and 186) and argued that “the only substantive obligation under NAFTA Chapter Eleven with respect to judicial measures is to ensure that the investments of an investor from another NAFTA Party are not denied justice. As Claimant has not claimed a denial of justice, the Tribunal need make no further inquiries.” (footnotes omitted, para 186). 

Basically, this means that unless there is proof of corruption or bias or other extremely serious denial of justice, the decisions of the judiciary should not be reviewable under ISDS. Since one cannot even imagine that there would be such a denial of justice in Canada and it was not alleged, that should have been the end of the matter.

However, Canada did not raise this as a preliminary jurisdictional challenge. As I have previously noted and questioned, Canada chose not to have this challenge dismissed initially on purely jurisdictional grounds, namely that the NAFTA ISDS mechanism does not permit a foreign investor to bypass or appeal from domestic courts – except in the obviously inapplicable circumstance in Canada of denial of natural justice such as a result of corruption or bias. One would have thought that there was little risk in such a challenge and that it had a good chance of success – and it turns out that that one would probably have been right. Australia resisted an ISDS challenge of its tobacco plain packaging by Phillip Morris on technical jurisdictional grounds and prevailed. Would a normal defendant refrain from relying on a jurisdictional defence - such as being dragged into the wrong court or a limitation period – in order to take the high road and have a civilized debate on the merits?

Canada argued that

“…that domestic courts are to be afforded substantial deference, and that NAFTA tribunals cannot “second-guess the reasoned decisions of the highest courts of a State”. Respondent relies upon the finding of the Mondev tribunal that even if a domestic court were to elaborate a new interpretation of the law, as Claimant alleges in this case, this is not unexpected in a common law jurisdiction. In the absence of a denial of justice, there would be no violation of Article 1105.” (footnotes omitted) (para 198) (highlight added)

With respect, this is much too polite. “Deference” is a concept that applies when higher courts review findings of fact, discretionary rulings, etc. of lower courts or tribunals. The concept of “deference” implicitly, if not explicitly, concedes that there is jurisdiction but that the higher court will defer to the lower in certain respects. There should be absolutely no jurisdiction for a NAFTA tribunal to review domestic Canadian courts absent evidence of denial of justice. This should not be about deference. It’s about simple and total lack of jurisdiction in the absence of a “denial of justice”.

Instead, Canada chose to take an arguably and unnecessarily dangerous high road and to let this line of argument blend in with the enormously complicated and expensive resolution on the merits.  Not only was this risky because Canada might have lost on the merits and lost half a billion US dollars and set a dreadful precedent. It dignified what should have been a clearly inapplicable process required spending about $CDN 6.5 million of taxpayers’ money – most of which was the time of civil service lawyers calculated at well below private sector rates. Of this amount.  Canada spent almost US $1.4 million on an outside law firm and several experts, including professors making six figure amounts. Canada will only be reimbursed for 75% of its costs of legal representation and assistance – in the amount of CAD $4,448,625.32. There is no explicit explanation for this shortfall of almost $CDN 2 million – despite Canada’s overall success and very discounted rates for its public servants’ time.

Canada predictably won on the “merits” of this dispute. This was hardly surprising. Canada’s case law on the promise doctrine and utility has evolved rationally and coherently over many years and through numerous Federal Court, Federal Court of Appeal and Supreme Court cases since the SCC Consolboard decision of 1981.

The Tribunal stated:

423. Furthermore, the Tribunal finds that Respondent has asserted a legitimate public policy justification for the promise doctrine. In particular, Respondent has explained that enforcing promises contained in the disclosure helps ensure that “the public receives its end of the patent bargain” (particularly but not solely in connection with “new use” and “selection” patents) and that it “encourages accuracy while discouraging overstatement in patent disclosures”. The Tribunal need not opine on whether the promise doctrine is the only, or the best, means of achieving these objectives. The relevant point is that, in the Tribunal’s view, the promise doctrine is rationally connected to these legitimate policy goals. [footnote omitted]

By way of conclusion, the Tribunal stated that:

442. For the above reasons, the Tribunal holds that even if it were to accept Claimant’s position regarding the legal standards applicable to its allegations of arbitrariness and
discrimination, Claimant has failed to establish the factual premise on which its allegations of arbitrariness and discrimination are based. The Tribunal has already concluded that there was no fundamental or dramatic change in Canadian patent law. In the circumstances presented in these proceedings, the evolution of the Canadian legal framework relating to Claimant’s patents cannot sustain a claim of arbitrariness or discrimination going to a violation of NAFTA Articles 1105(1) or 1110(1).
(highlight added)

What did Canada achieve with this arguably needless roll of the dice? Here’s my summary, which is explained a bit more below:

  •    Canada spent about $6.5 million on this case but only recovered about $4.5 million in costs
  •   The Tribunal ruled that “It is not the task of a NAFTA Chapter Eleven tribunal to review the findings of national courts and considerable deference is to be accorded to the conduct and decisions of such courts.” The door is still open to challenges of Canadian judicial decisions “in very exceptional circumstances, in which there is clear evidence of egregious and shocking conduct” (para. 224)
  • It is still open to challenge Canadian judicial decisions, since the Tribunal ruled that in each case, it “will be a matter for careful assessment in any given case, subject to the controlling appreciation that a NAFTA Chapter Eleven tribunal is not an appellate tier with a mandate to review the decisions of the national judiciary.”
  • The Tribunal stated that the Tribunal it was “unwilling to shut the door to the possibility that judicial conduct characterized other than as a denial of justice may engage a respondent’s obligations under NAFTA Article 1105.” (para 223) (highlight added)
  • A “fundamental or dramatic change” in Canadian IP law as determined by the Canadian courts may still open the door to another challenge. Guess what? There is sometimes “fundamental or dramatic change” in legislation or judicial interpretation.  That should not be any basis for an ISDS challenge. That’s why we have legislatures and an exemplary judicial system by any measure.

What Could be Next?

Accordingly, I believe that there could be news ISDS challenges that may slip through the door that the Tribunal is “unwilling to shut” based on these exceptions. Canada may be forced to defend these challenges at huge cost and risk. For example, there is a well-financed lobby of copyright content owners who believe that Canada has lost its way on copyright fair dealing, and who tried unsuccessfully to roll back the CCH v. LSUC decision. While their time may have run out on that and the 2012 amendments, they may be waiting for the next opportunity. We have also seen some blatant and histrionic attacks in recent years on the Copyright Board, including the “renegade” comment from former head of the Canadian Association of Broadcasters in 2005 and the shameful attempt by Music Canada in 2015 to lobby the new Chair, telling him in an astroturf campaign that:

This [Re:Sound Tariff 8] decision discards years of agreements freely negotiated between digital music service providers and the music industry and sends a message to the world that it does not value music as a profession.  This is inconsistent with Canadian values. 

These rates were unprecedented globally – they are one of the world’s worst royalty rates for non-interactive and semi-interactive music streaming.

That Copyright Board decision is now the subject of judicial review in the Federal Court of Appeal. Interestingly, this seemingly straightforward case has been pending after the hearing in February of 2016 for more than 14 months which is very unusual for a Court that normally hands down decisions in a few weeks or six months at the most. If this case turns out badly for the American record industry as represented by Music Canada, and the SCC either refuses leave to appeal or rejects an appeal, don’t be surprised if there is a NAFTA challenge – assuming we still have an NAFTA with ISDS provisions.

Or consider this overheated language from the usually more analytical Richard Owens in a posting last year based upon his op-ed of July 26, 2016 in the National Post concerning a study he did for the MacDonald Laurier Institute (“MLI”):

“Although the Alberta Education case is one of the most egregious examples, it is not in that case alone that the SCC has taken IP jurisprudence down a crooked path.”
(highlight added)

It’s an interesting coincidence that he uses the word “egregious”, which is the same word used by the NAFTA Tribunal to justify its refusal to “shut the door” to review of decisions of the SCC. What can be said about the “crooked path” comment, other than it is more or less contemporaneous with the “crooked Hillary” rhetoric was head before last year’s American election?

His commentary for MLI, which is referred to in the above postings, reads more like a lobbying brief for the publishing industry than any kind of careful analysis. He states:

How Heritage responds to the pressing needs of the educational publishing industry, and the egregiously bad state of copyright law affecting it, will be a real measure of its efficacy. (highlight added)

Words can matter. I don’t know the circumstances of how or why Richard wrote the above stuff. But if this commentary does reflect the view of Canada’s educational publishers, many of whom have foreign parents, we may be facing a NAFTA challenge based upon what Mr. Owens and some of his colleagues may consider to be “egregious” future decisions of our Copyright Board and Courts. Mercifully, any NAFTA claims based upon the 2012 legislation or the 2012 SCC rulings are now time barred. But we are still awaiting first instance decisions on fair dealing from the Federal Court in the Access Copyright v. York University litigation and from the Copyright Board in the Access Copyright Post-Secondary tariff hearing.

I only hope we are not getting into “alternative fact” and “alternative” legal territory Such provocations on the part of various copyright stakeholders and intemperate and even histrionic commentary are potentially worrisome in view of the Tribunal’s refusal to “shut the door” on challenges to domestic courts if somebody thinks and can afford to assert that our courts or legislature has made fundamental or dramaticchange to Canadian IP law. Sometimes, such change is required.

Indeed, if and when Canada enacts plain packaging requirements for tobacco, that industry will no doubt deploy every legal tool available to fight back. A few – or even several - million dollars for an ISDS challenge is small pocket change for this industry. Any delay in such measures or any lessening of their efficacy resulting from the chill effect of an ISDS challenge is money well spent as far as big tobacco is concerned. It seems abundantly clear that big tobacco will challenge any Canadian effort to implement plain packaging.

It may be noted that Phillip Morris International reported net revenues of $US 74.953 billion and net earnings of $US 6.967 billion in its annual report for 2016, which is replete with references to “plain packaging” and notes that Canada is “considering adopting plain packaging legislation”.

The new cannabis legislation, Bill C-45, includes plain packaging,  trademark and copyright related provisions that may well generate litigation focusing on “expropriation” of trade-mark rights and freedom of expression. Who knows if there are foreign investors waiting in the wings ready to light up an ISDS challenge?

Can Canada Afford ISDS?

ISDS, of course, is one of the main contributing factors to the controversy over CETA, the BREXIT crisis and the demise of the TPP. Hopefully, in any NAFTA renegotiation, Canada will be able to either get rid of ISDS or put in safeguards to ensure that nothing like the Eli Lilly case can ever happen again.

It has never been clear why the Canada thought that ISDS in NAFTA was a good idea, and it has certainly not worked to Canada’s advantage. A study published by the CCPA in 2015 documented:

“…. the 77 known NAFTA investor-state dispute settlement (ISDS) claims up to January 1 2015. These include 35 against Canada, 20 against the U.S., and 22 against Mexico. Canada has paid out NAFTA damages totaling over $CAD172 million, while Mexico has paid damages of $US204 million. The U.S. has yet to lose a NAFTA chapter 11 case. All three governments have incurred tens of millions of dollars in legal costs to defend themselves against investor claims.”
            (highlight added)

For those cynical types who look to the “school of legal realism” now and then to explain things, it might be noted that ISDS cases can be very lucrative for those involved. The ISDS community is small and rather closed. It is a very lucrative niche for some retired judges, certain academics and practitioners who are arbitrators – and for the experts involved, especially if there is repeat business. This an area of practice that will not likely go gently into any good night. There may even be some who aspire get into this small ISDS circle and may be reluctant to criticize it, even though they know its shortcomings. 

Some Canadian experts made substantial six figure amounts in this case. A Canadian professor from UNB, who was an expert witness for Eli Lilly was paid US $213,692. A Toronto lawyer, who was an expert witness for the Canadian Government, was paid more than CDN $492,000 – far more even than any of the arbitrators. Much, if not all, of this “expert” testimony would have almost certainly been inadmissible in any domestic Canadian judicial proceedings insofar as it dealt with Canadian law. There were also expensive expert reports about foreign and treaty law. Foreign law is normally irrelevant and wouldn’t be considered by a Canadian court – unless there is a void of applicable Canadian jurisprudence or the Canadian statute is somehow ambiguous and requires reference to a treaty, which was not the case here.

The three arbitrators, none of whom were Canadian and all of whom are clearly very well qualified, made US $259,734.75, $114, 359.20 and $138,872.07. Ironically, several of the “experts” made more than two of arbitrators and one made more than the Chair of the Tribunal, who presumably held the pen in writing the judgment. NAFTA arbitrators get paid US $3,000 per day, which may not seem to be a lot per diem compared to some routine commercial arbitration cases – but these NAFTA cases take a lot of time and the community of arbitrators is said to be rather small.

Eli Lilly spent over $US 8,000,0000 for legal fees and disbursement – mostly to a US law firm and $US 1.3 million on experts, arbitration costs and fees. Their Canadian firm, Gowlings, was paid US $1,577,017.

More detail, including names and amounts, are set out near the end of the award.

The costs of the many Canadian public service lawyers in the Trade Law Bureau who worked on this case were hourly billed at “hourly rates that are substantially lower than those charged in the private sector.” (FN 622 of award).

It may be noted that Eli Lilly USA reported revenue of US $21.2 billion and net income of US $2.7 billion for 2016 and did not even mention the NAFTA case in its 2016 annual report.

So, this is where we appear to stand:

This decision may not stop the next pharma, tobacco, copyright or whatever other ill-considered case from proceeding – at great cost and risk to Canada and pocket change costs to the claimants, who may predictably lose but foment sufficient expense, consternation, controversy and regulatory chill in the meantime to justify the relatively costs in terms of their rent driven revenues. Delay and indecision by Government can be very profitable for certain industries. Do not count on any ISDS tribunal readily declining jurisdiction.

I take some comfort that my general views are backed up by Professor Robert Howse, a distinguished Canadian academic now at NYU who has the best take yet in his piece called “Eli Lilly v Canada: A Pyrrhic Victory Against Big Pharma”
So, what is the real message of the Eli Lilly tribunal? They are not coming out and saying it, but, by implication, they encouraging future regulatory takings claims by implication that the concept of "expropriation" under NAFTA might well apply to require a host state compensate an investor even for jurisprudential shifts in the approach of a country's highest courts to that country's law (including its constitution), if that shift can be characterized as dramatic, radical, or fundamental. It is a matter of the Eli Lilly legal team simply not doing a good enough job proving that the jurisprudential developments in question were dramatic.

When high courts reconsider well established judicial doctrines in the face of social, economic, environmental or other forms of rapid change we experience in the world today they must now beware that any basic or fundamental reorientation of their jurisprudence could force the government of that state to pay out millions or billions to foreign corporations in the guise of an "expropriation" having occurred. Regulatory chill from ISDS is bad enough; but when it comes in a form that makes a nation's highest court choose between its duty as a guardian of the state's legal system (including the revision or reversal of important rulings for compelling reasons) and incurring the state's liability to foreign corporations, the attack is not only on domestic policy space as such but also on the judiciary as the guardian of the law.

Now Back to the Supreme Court of Canada

Of course, all eyes now shift back to the SCC, where the AstraZeneca case was heard on November 8, 2017, with materials available here.  The webcast of that hearing is available here.  It is well worth watching and seeing so many SCC judges so engaged in the intricacies of patent law and asking so many questions. Highest courts are normally very reluctant to get involved in patent cases, which usually turn more on evidence and fact finding than major legal issues.

I posted at length about this case the day before the hearing – and the NAFTA “rogue elephant lurking nearby and possibly even in in the room that I expect will remain almost completely silent and will likely be carefully ignored.”

One never knows exactly why the SCC decides to hear a case or not. As we all know, it decided early in 2013 not to hear about the “promise doctrine” in the Eli Lilly case. It will be recalled that the Eli Lilly NAFTA challenge was commenced on September 12, 2013. Not long thereafter, leave to appeal in was granted in the Sanofi case on January 30, 2014, where the “promise doctrine” was in issue. The Court was all dressed up and ready to go on the actual hearing on November 4, 2014– but the case was dramatically and very unusually settled literally on the eve of the hearing, which may have left the justices and interveners somewhat frustrated. I wrote about this at the time.

In the AstraZeneca case, the Appellant, AstraZeneca made the Court aware on the record in the leave to appeal material and its factum of the Eli Lilly NAFTA challenge. Whether this challenge played any role in the Court’s decision to hear the case is something we may never know. However, it is interesting that the Court has agreed twice since the initial refusal to grant leave in the Eli Lilly case to hear about the “promise doctrine”. Both of these leaves were granted after the Eli Lilly NAFTA challenge was launched.

If the SCC had any intention of ruling in advance of the NAFTA tribunal, it is now, of course, too late. A strong ruling either way might have been of interest to the NAFTA tribunal, which might have had to hear further submissions. But that has not happened.

Indeed, counsel for the respondent in the AstraZeneca case on March 22, 2017 has made the Court aware of the Eli Lilly NAFTA ruling as a “supplementary authority”.  There has apparently been no response. My guess is that the Court will not react to the NAFTA ruling one way or the other, unless by way of obiter dicta, which could be very interesting. The whole point is that Canada’s SCC should have the final word on the application and interpretation of Canadian law and a NAFTA Tribunal has no jurisdictional basis to “second-guess” the decision of any Canadian court, much less the SCC (other than in a “denial of justice” case, which is unthinkable in Canada). So, the SCC has no compelling reason to be interested in anything coming from a NAFTA tribunal.

That said, it would now be ironic if the SCC were to undo a long line of Canadian case law on the “promise doctrine” and to effectively, in its forthcoming AstraZeneca ruling, vindicate Eli Lilly’s position in its unsuccessful NAFTA case and the appeal it declined to hear in 2013.  Tempting as it may be, I will refrain from predicting the outcome. As Yogi Berra said, “It's tough to make predictions, especially about the future'”.  In this instance, one might say that it’s especially tough to make a “sound prediction.”


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