The UPC and Investor – State Arbitration

Henning Grosse Ruse-Khan

What are the international investment law implications of the Unified Patent Court (UPC)? 

No, (thankfully) this is not an exam question for undergraduates taking the IP course (although you never know…), but rather the issue that Katfriend Henning Grosse Ruse-Khan (University of Cambridge, King’s College and Max Planck Institute for Innovation and Competition) investigates in his guest post below.

Here’s what Henning writes:

“The development (for better or worse) of European Patent Law, in particular the creation of a unitary patent title and a common court to litigate patent infringement in Europe raises, among other things, questions of international (IP) law. One addressed in this brief post concerns the potential for Investor-State dispute settlement over decisions handed down by the UPC. It essentially deals with the application of international investment law standards to UPC judgments affecting European patents.

International investment law – although a distinct body of rules than IP treaties – is becoming increasingly relevant for the protection of IP rights, including patents, abroad [this Kat notes that this is also true for copyright, with particular regard to the role of ISPs. For instance, in its recent Discussion Paper on Online Copyright Infringement, the Australian Government wrote that "Australia is obliged under its free trade agreements with the United States, Singapore and Korea (not yet ratified) to provide a legal incentive to ISPs to cooperate with rights holders to prevent infringement on their systems and networks."]. In a nutshell, these rules, usually embedded in bilateral investment treaties (BITs) or Investment Chapters in free trade agreements (FTAs) such as NAFTA Ch.11, protect assets, including IP rights, of foreign investors against state interference. Investment rules in BITs or FTAs often allow foreign investors to challenge host state measures directly in international dispute settlement in front of an arbitration tribunal. Increasingly, the measures under scrutiny involve IP rights: Philip Morris currently challenges tobacco packaging rules in Australia and Uruguay as a form of indirect expropriation; while the US pharmaceutical company Ely Lilly is suing Canada under NAFTA’s investment protection rules for the revocation of two crucial patents (for its drugs Zyprexa and Strattera) by Canadian courts.

A confident Gustav pictured moments after
being asked to explain the international
investment law implications of the UPC

In Eli Lilly v Canada, Lilly challenges what it calls a ‘promise doctrine’ (further discussed here) whereby Canadian courts take for granted what the patent application describes as useful effect of the invention and hold the applicant responsible for fulfilling this ‘promise’ of utility: If the patented invention later is found not to meet a promise the court has constructed from the patent application, the patent can be revoked. Lilly complains that the strict patentability requirements resulting from this doctrine, as applied by the Canadian Courts since 2005, are violating Canada’s international IP obligations under NAFTA, TRIPS and the Patent Cooperation Treaty (PCT). This in turn, Lilly argues, breaches the fair and equitable treatment (FET) and expropriation standard under NAFTA’s investment chapter by interfering with reasonable investment-backed expectations (see a brief description here and further discussion here).

In light of these arguments invoking investment standards against decisions by patent courts, there are several scenarios for investor-state arbitration challenges of UPC judgments: Decisions revoking a patent under Artt.32:1 d), 65 UPCA for example could be challenged as a form of indirect expropriation or breach of the fair and equitable treatment (FET) standard that is often held to protect legitimate expectations of the patent holder. Here, an important question concerns whether a foreign patent holder can claim any legitimate expectations based on the grant of a patent that a revocation might interfere with (for a detailed discussion, see again here). In addition, declaratory judgments of non-infringement based on Art.32:1 b) UPCA could be viewed as in breach of the duty to provide ‘full protection and security’ – if this standard is understood as encompassing a duty to protect patents against third party infringements. Although there are good arguments against such an expansive reading of the investment protection standards, the Eli Lilly dispute against Canada shows that such challenges are not just a theoretical option.

Yes: treaty shopping
is this cute

The nature of UPC decisions makes such challenges all the more likely:  As “court common to the Contracting Member States” and “part of their judicial system”, the UPC is – by virtue of the UPCA preamble – a “national court” of all the Contracting Member States. As a national court of all these countries, its decisions could be challenged by investors who enjoy protection under any of the BITs or FTAs agreed by participating EU Member States, as well as under future EU investment agreements. Essentially, patent holders may ‘treaty shop’ for the most favourable international investment agreement available: It may well be quite a number of such treaties that are binding upon UPCA Contracting Member States and that offer investor-state dispute settlement.

This highlights the potential for international investment law and in particular its system of dispute settlement to interfere with national court decisions and other state measures affecting patents and other IP rights. It remains to be seen whether IP holders as foreign investors attempt to use this as a forum where they get another option for challenging otherwise final decisions of national courts. If one of the underlying reasons for creating the UPC is to keep the European Court of Justice out of substantive patent law, then this gives even more reason to worry: It certainly can be doubted that investment tribunals have any (more) expertise and experience in ruling on patent law matters. States are beginning to respond to this problem: The EU and Canada have introduced language in their FTA aiming to prevent a re-interpretation of IP law via investment tribunals. However, this is not sufficient to prevent future investor-state arbitration challenges – as it will not affect the huge amount of BITs already in force between UPCA Members and third states.”