Effect of BITs on patents

Manoj K Singh

Economic reforms programmes in India were started in 1991, continued with the Bilateral Investment Promotion and Protection Agreements generally referred to as Bilateral Investment Treaties or BITs. These BITs seeks to provide favourable conditions for the investors of one country in the other country. The aim of the BITs is the stimulation of business initiatives and increase in prosperity. Government of India, so far, signed BITs with 82 countries out of which 72 are already in force.

What is an investment treaty?

Before proceeding with the effect of the BITs on the intellectual property regime of the state, it is necessary to put some light on the investment treaty like BITs. A bilateral investment treaty is an agreement between two countries in which each country takes obligation for the investment in its country by the investors of the other country. The protections offered by BITs are only limited to ‘investors’ and their ‘investments’. Generally, ‘investment’ includes movable and immovable property, shares and other interests in companies, claims to performance under a contract having an economic value, and intellectual property rights. The obligations agreed upon in investment treaties are directly enforceable by the investors by way of international arbitration often before the international Centre for Settlement of Investment Disputes or a tribunal established under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCTAD).

There are 12 known treaty claims against India till date, the 11th highest number of claims in world. Further, there are 17 more claims that are estimated against India in the near future.

Position of pharmaceutical patents in India

From the very inception patents remains a very sensitive issue in the context of pharmaceuticals. In favour of the pharma patents it is argued that stronger patent protection will incentivise the innovation while the opposition argues that strong patent regime will result in the monopoly over essential medicines and high prices and consequently exclusion of large section of society from essential medicines. This was balanced by the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) by introducing compulsory license on patented drugs.

As a signatory of WTO, India has amended its patents laws in accordance with TRIPS and allowed pharma patents. However, the balance was made by prohibiting ever greening of patented drugs by prohibiting patents on ‘the mere discovery of a new form of a known substance’ and allowing grant of compulsory license.

BITs and patents

In almost all the BITs India has signed, investments have been defined in a way that includes intellectual property rights such as patents, copyrights etc. This enables the investors to file claim under BITs for any action that directly or indirectly affects their intellectual property, including patents. Indian BITs provides prohibition against expropriation. The term expropriation is defined as ‘taking of an asset by the government and all measures having the effect of taking the assets that deprive the investors of an asset its use.’ At times expropriation and nationalisation are considered as similar terms; however, expropriation is much broader than the former. Nationalisation means to bring under the control of or to make it the property of the nation, whereas expropriation means dispossession of property for the public use generally with compensation. The word ‘expropriate’ has a wider meaning than the word ‘nationalise’. The Indian BITs provides expropriation for the public use only, against the compensation in a non discriminatory manner.

Conflict with BITs and patents arise when the Indian government takes the assets of the investors by way of compulsory license or by revoking patents in compulsory license. This step of the government triggers investors to invoke the expropriation clause in the BITs and to appoint arbitration tribunal to decide sovereign issues like whether the issuance of compulsory license is legal or not. Also, the investors are not bound to exhaust local remedies or approval of their government before bringing the claim under BITs.

This is a situation where the gains acquired through the multilateral agreements like TRIPS on patents and public health may be lost bilaterally through BITs. In this context recent judgments of the Indian courts have signalled the possibility of the intervention of the BITs on the Indian IP regime.

In March 2012, the Indian Patent Office on the claim of the Natco Pharma issued compulsory license for the making and selling of the Nexavar, a patented drug of Bayer Corporation. Later the decision of the Indian Patent Office was also affirmed by the Intellectual Property Appellate Board (IPAB). The compulsory license was mainly issued on the public grounds.

Another case was of cancer drug Glivec. In April 2013, the Supreme Court of India held that the cancer drug glivec of Novartis is not a patentable subject matter under the Indian Patent Act, 1970. This judgment opens the doors for the generic manufacturers to manufacture the version of the glivec.

The immediate reaction to these court and regulatory decisions was the losing companies discussing the option of dispute resolution under the BITs. While there is another option of WTO Dispute Resolution Mechanism under TRIPS, however, there is a large number of reasons to choose BITs.

The potential impact of BITs proposed rights to the foreign investors can be seen from the case of Eli Lilly & Company Vs. Canada. Eli Lilly filed a notice of intent to arbitrate under North American Free Trade Agreement (NAFTA) claiming $500 million against Canada. The dispute arises due to the invalidation of the Eli Lilly’s patent on Strattera and Zyprexa by Canada’s Federal Court of Appeal and subsequently dismissal of appeal by the Supreme Court of Canada. Eli Lilly states that the grounds taken by Canadian court i.e. promise doctrine and related disclosure requirement are well beyond the requirement in the US and European Union and also the same are not found in the Patent Cooperation Treaty (PCT). Challenging both the invalidations of its patents Eli Lilly claims violations of minimum standard of treatment, indirect expropriation, and national treatment norms.

In essence, Eli Lilly claims that his expectations of profit were unjustly upset; the invalidation of patents is illegal from the international perspective and therefore constitute an expropriation. The decision in the case is pending. However, the above case clarifies the risks of including IP rights in investment treaties. Therefore as per the above Germany-based Bayer Corporation and Switzerland-based Novartis can bring claims against India for the granting of compulsory license and invalidation of patent respectively under the BITs.

BITs actually provide additional safeguards apart from WTO and TRIPS to foreign investors which they can seek in order to protect their investment unjustly. These treaties essentially provide regulatory powers to foreign investors and private arbitrators on one side and are restricting the sovereignty of the country to regulate business affairs on the other side. Further, little attention is given to the risk that the investment treaty poses against the access to the life saving medicines.

Therefore in the present circumstances, BIT agreements are required to be re-examined in order to make sure that the benefits in public health sector conceded through multilateral agreements should not be lost in the light of bilateral agreements.

(The author has been assisted by Kailash Choudhary)