In the early 1990s, Eli Lilly applied for patent protection in Canada for two chemical compounds, olanzapine and atomoxetine. The company had already obtained patents over the compounds, but asserted that it had evidence to support new uses for the compounds that merited further protection. The Canadian patent office granted the patents based on the content in the applications, but they remained subject to challenge.

Both patents ultimately were challenged on the grounds that there was insufficient evidence at the time of the applications to support the company’s claims. The Federal Court of Canada agreed, invalidating both patents. Eli Lilly proceeded to appeal the decision to the Federal Court of Appeal and later to the Supreme Court of Canada. The company lost the appeals, as the courts upheld the decision to invalidate the patents.

Under most circumstances, that would conclude the legal story as several Canadian courts reviewed Eli Lilly’s patent applications and ruled that they failed to meet the standards for patentability. Yet in June 2013, the company served notice that it planned to use the ISDS provisions in the North American Free Trade Agreement to claim that in light of the decisions, Canada was not compliant with its patent law obligations under the treaty. As compensation, Eli Lilly sought at least $500 million in damages.

The fear for many was that if the pharmaceutical giant succeeded, it would have effectively found a mechanism to override the Supreme Court of Canada and hold Canadian taxpayers liable for hundreds of millions in damages in the process. Last week, however, the Tribunal hearing the case rendered its verdict, rejecting Eli Lilly’s claims and ordering it to pay millions of dollars to compensate the Canadian government for its costs.

There are several key takeaways from the decision. First, the Tribunal emphasized that overruling national courts should only occur in exceptional circumstances. The potential for any such cases will still be a cause for concern, but the standard it set is quite high:

the Tribunal emphasizes that a NAFTA Chapter Eleven tribunal is not an appellate tier in respect of the decisions of the national judiciary. 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. It will accordingly only be in very exceptional circumstances, in which there is clear evidence of egregious and shocking conduct, that it will be appropriate for a NAFTA Chapter Eleven tribunal to assess such conduct against the obligations of the respondent State under NAFTA Article 1105(1).

On the substance of the case, the Tribunal found that Eli Lilly did not demonstrate a fundamental change to Canadian patent law that might trigger a NAFTA claim:

For all of the reasons in subsections (1) to (5) above, the Tribunal finds that, on the record in this arbitration, Claimant has not demonstrated a fundamental or dramatic change in Canadian patent law. For the interrelated reasons in subsection (6) above, the Tribunal finds that Claimant has not demonstrated, as a factual matter, that its legitimate expectations were violated by the application of Canadian patent law to the Zyprexa and Strattera Patents.

The reasons behind the conclusion include a finding that Canadian patent law did not change dramatically as the courts addressed questions of patent utility:

the Tribunal recognizes that the outcome in AZT was unexpected for some practitioners and even judges who had understood the language of the Court of Appeal in Ciba-Geigy to mean that utility could be demonstrated through post-filing evidence (most notably commercial success). Still, having considered all of the evidence, the Tribunal cannot conclude that the Supreme Court effected a dramatic change from previously well established law when it clarified this rule in AZT.

Further, the statistical data raised by Eli Lilly on invalidating patents was not persuasive (indeed, the Tribunal was troubled by what appeared to be cherry-picking of dates to try to make their case):

Without having been presented with any strong indication toward a single factor, the Tribunal considers it most likely that a combination of developments, including those in patent litigation procedures, the application of substantive patent law, and the pharmaceutical sector, has led to a rise in challenges directed at pharmaceutical patents and more invalidations.

Interestingly, the Special 301 process, which I wrote about earlier this month, made it into the decision as Eli Lilly used it to argue that Canada was out-of-step with international IP standards. The Canadian government response will be familiar:

Respondent challenges the reliability of the 2014 and 2015 editions of the USTR Special 301 Report cited by Claimant, in which the United States expresses “serious concerns” over Canada’s utility requirement. 403 According to Respondent, “the Special 301 Report is based not on empirical evidence and analysis, but on industry allegations made to USTR, including representations made by the Claimant and its industry associations”. In addition, these reports were not issued contemporaneously with the changes in the law that Claimant alleges, but rather at the time of the commencement of this arbitration. Thus, Respondent supposes that the reports were the result of Claimant’s own lobbying efforts to bolster its claims in this arbitration.

The Tribunal was not completely dismissive of the Special 301 Report, but instead concluded that it was an outlier given that there was no other evidence of complaints from other countries:

The Tribunal has paid particular attention to the 2014 and 2015 editions of the Special 301 Report of the USTR. In these documents, USTR notes that the United States “has serious concerns about the lack of clarity and the impact of the heightened utility requirements for patents that Canadian courts have applied recently”. This comment cannot be dismissed outright as a lobbying effort by Claimant, as suggested by Respondent. However, the Special 301 Report stands alone in the record as a complaint regarding Canada’s utility doctrine from any other State, including Mexico, in the decade since the promise utility doctrine was allegedly adopted. For the Tribunal, that silence speaks louder than the single, brief criticism contained in the USTR’s Special 301 Report.

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.

While Eli Lilly failed in its efforts to use the dispute settlement system to extract hundreds of millions from Canadian taxpayers, the dangers of the system remain a reality. The Canadian government tried to address some of the concerns with the reworked provisions in CETA (rules that are not mirrored in TPP), but as new trade deals are negotiated or renegotiated, should rethink the need for investor-state dispute settlement provisions in agreements with countries with respected court systems that offer investors sufficient protections and reliable legal recourse.