Trade with Europe

Now that Ottawa has confirmed that the final language of CETA has been struck, it’s just a matter of time before the deal is inked.

Even so, Canada still seems uncertain what to think of an investor dispute resolution system, which could have broad consequences for Canada’s intellectual property regime.

That’s because according to a technical summary of the deal, Europe had pushed Ottawa to bring its intellectual property regime for pharmaceuticals into line with the rest of the Western world. Canada declined.

Brussels wanted Ottawa to slap a ten-year timeframe on ‘data protection’ — essentially, a decade of exclusivity for pharmaceuticals, during which time generic drugs are forbidden from filing for patents — but backed down. Canada, in the end, got to keep its current regime, which consists of a six-year exclusivity for innovative drugs, followed by a two-year period where competitive generics can file for approval but are forbidden from being marketed in Canada.

That system has been in place since 2006 and, “it seems to be working very well,” says Daphne Lainson, partner at Smart & Biggar/Fetherstonhaugh.

Red pills and blue pills

Lainson says most of the provisions in CETA that touch on the pharmaceutical industry are aimed at striking harmony between innovator drug companies and their generic competitors. “I think the government would say that they’re balancing various stakeholder interests,” she says.

In fact, the CETA agreement even attracted some criticism from the Canadian Generic Pharmaceutical Association, whose members arguably have the most to lose from the deal, but they were ultimately supportive of CETA’s broad strokes.

In striking that balance, Canada did compromise on extending patent terms. Currently, drug manufacturers enjoy a 20-year life on their patents, starting on the date of filing. Europe allows for a five-year extension on that patent, given that the regulatory process can take nearly a decade, and they encouraged Canada to do the same. Ottawa split the difference, and agreed to a two-year extension — during the extension period, however, those generic drugs will have access to international markets, just not Canada. That benefit, however, is not retroactive, so those companies that would benefit from the extra two years of exclusivity will be unable to take advantage.

“Drugs are so hard to bring to the market, and it takes so long,” says Lainson. “So having any kind of additional protection…is very important.”

“It’s really intended to protect the Canadian market.”

CETA would also effectively end the practise of dual litigation for pharmaceutical patents. That’s a move that everyone tends to agree with.

Currently, a patent-holder for a drug may apply to prohibit a generic producer from sending their drug to market, and a generic producer may file to get around the patent. To do so, both can apply under the Patented Medicines (Notice of Compliance) Regulations (NoC) as well as a patent infringement action. Under the NoC regime, there is no right to appeal for patent-holders, nor can an NoC application decide whether on the actual content of the patent. It is, essentially, an expedited process that can be trumped by the parallel patent litigation. So a generic drug company could obtain approval under a NoC process, only to have a court rule that they are infringing the patent owner’s intellectual property.

That confusion has companies welcoming the change. While it’s not tremendously clear what the new regime will look like, Lainson says she expects it “will look more like the U.S. system,” in that the NoC process will become more of a full process that can determine matters pertaining to the drug’s patent.

“The end result will end up looking like a full action,” she says.

While those compromises seem to have satisfied most stakeholders, there is a simmering fight in an entirely different section of the deal that could leave the pharmaceutical industry as the big loser — and other Canadian sectors as the big winners.

A global community of litigators

More problematic for Ottawa, CETA could open the floodgates for litigation on those areas where we don’t quite stack up to international norms.

According to Ottawa’s technical summary of the deal, CETA would implement some form of an Investor-State Dispute Settlement (ISDS) process. As preparation for the deal, Canada also ratified the Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID) in 2013.

That has made Germany quite worried, prompting news reports last week that the deal might be in peril.

"The German government does not view as necessary stipulations on investor protection, including on arbitration cases between investors and the state with states that guarantee a resilient legal system and sufficient legal protection from independent national courts," wrote the Germany Deputy Economy Minister.

Canada, it seems, was also skittish about ISDS. As Michael Geist, Canada Research Chair in Internet and E-commerce Law at the University of Ottawa, pointed out in his Toronto Star column, one 20-year old lawsuit from Eli Lilly could serve as a cautionary tale about any ISDS process.

The American drug manufacturer had its patent nullified by all three levels of Canadian courts. Now, it’s turning to the NAFTA dispute resolution tribunal, where it is asking for $500 million in damages.

“If the pharmaceutical giant succeeds,” Geist writes. “It will 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.”

It explains some of Ottawa’s concerns.

“The reality is that the Canadian government has been holding up finalizing the agreement due to related fears stemming from fears of more Eli Lilly-style cases,” Geist writes.

However, Canadian negotiators did manage to hammer out a declaration to go with the deal that makes it clear that European companies are not to treat the ISDS regime like an appeal process for domestic courts, much like Eli Lilly is doing. As that might not be enough, they also secured a review of the whole system in three years.

Lainson notes that it’s hard to predict how the international legal community will treat Canada, if or when it comes to that. When it comes to pharmaceutical patents, a lot is in flux, even here at home.

She’s keeping a particular eye on Apotex v. Sanofi‑Synthelabo, which will be heard before the Supreme Court of Canada this fall. The ruling could set a clear trend in case law for where the Canadian courts stand on intellectual property.

Canada, she says, is already an “outlier” on the issue, given that “global harmonization” appears to lean towards innovative drug companies, as opposed to their generic competitors.

“In this particular aspect of the law, Canada. The approach we've taken seems to be unique, and that is one of the issues that companies are struggling with,” she says.

In fact, American regulators have put Canada on the ‘naughty list,’ fingering it as having one of the loosest patent regimes in the developed world.

Being in the crosshairs of our trade partners has never carried too much risk. For the few trade tribunals that Canada is subject to, Canadian courts have the power to set aside any damages if they feel that the matter strikes to the heart of Ottawa’s policy. Indeed, that’s why the Eli Lilly lawsuit seems destined to fail — even if the NAFTA tribunal sides with the drug manufacturer, Canadian courts can simply refuse to pay the amount.

When it comes to ICSID, however, there will be no domestic approval. Canada, in theory, will have to pony up the cash.

One of the most extreme examples of how ICSID works is a $2-billion lawsuit brought against Uruguay this year by Phillip Morris, a massive tobacco company based in Switzerland. The cigarette producer argued that the South American country had violated a bilateral agreement between the two countries by launching a tough anti-smoking campaign, which limited vendors’ ability to market their cigarettes. That case is ongoing, but it highlights pitfalls in creating an international forum for those sorts of claims.

Canada faced a similar problem in the 1990s, when Parliament looked to mandate uniform cigarette packaging. One American producer put a chill on the idea by threatening to use NAFTA’s tribunal to go after Canada for a hefty sum. That claim, ultimately, would have been unlikely. An ICSID claim, however, would make that claim all the more easy.

In another case that may explain German’s nervousness, a Swedish company is using ICSID to sue the German state for more than $4.5 billion over its decision to phase-out nuclear power.

Given that there are 150 signatories to ICSID, many of whom have signaled some form of trade agreement with Canada, international companies may be looking to expose cracks in the Canadian legal regime.

Tolga Yalkin, an adjunct professor at the University of Ottawa, says there is a legitimate reason to worry about ICSID: It could suddenly give teeth to a whole slew of investment deals and treaties that previously had no real enforcement mechanism, or that have caveats carved out. And there would be no domestic oversight.

“ICSID creates an automatic requirement to pay up the reward if the tribunal decides there has been a violation,” says Yalkin. “The unique characteristic of ICSID is that it’s self-enforcing.”

For example, any awards given to Eli Lilly in their suit under Section 11 of NAFTA could be set aside by the Canadian courts under the Commercial Arbitration Act, (the domestic recourse to administer award under Section 11), as the court is able to dispense with any awards that are “in conflict with the public policy of Canada.”

Under ICSID, there is no exemption for matters relating to public policy in Canada.

Yalkin provides another example: in British Columbia the Water Sustainability Act requires companies to pay a fee for withdrawing water in B.C.  As such it could be construed to violate international treaties to which Canada is signatory. But, he says, “having an international investment treaty is just half of the story.” Under ICSID, companies like Nestlé, who bottle water in B.C., could sidestep that public policy exemption and take the matter to arbitration under ICSID.

When Canada signs on the dotted line at the bottom of CETA, the list of companies who could take advantage of this new system grows exponentially.

In the end, Canada might be a net winner with ICSID — in fact, the Canadian extractive industry is already using the process to go after countries that restrict their ability to mine.

Alberta-based Infinito Gold filed for arbitration earlier this year, seeking nearly $100 million in damages from Costa Rica, after its government placed a moratorium on open-pit mining — effectively putting an end to Infinito Gold’s project in that country.

According to Yalkin, it’s unclear whether awards paid out to Canadian industry would outweigh penalties imposed on Ottawa. Either way, he says, “it’s a benefit subsidized by the Canadian taxpayer.”