CETA's patent protections

By Justin Ling Fall issue 2014

Canada wins compromises on pharmaceutical regime, but some raise concerns over reach of arbitration mechanism.

CETA's patent protections

Daphne Lainson
Photography by Mike Pinder

It is being feted as the long-sought-after free trade deal with Europe, lush with compromises that allow Canada to keep its generous pharmaceutical regime, while bringing it in line with other major trading partners. After five years of negotiations, it would seem, at last, that the Comprehensive Economic and Trade Agreement (CETA), the final text of which was released last month, will soon be pushed to the market square. That is, at least, if the government in Berlin, having drawn battle lines over its investor-state dispute resolution chapter, agrees to keep the deal on track.

Generis protections

One of the changes for Canada’s intellectual property regime that has made industry reasonably happy is the introduction of ‘patent term restoration’ — or, as the Europeans called it, sui generis protection for pharmaceuticals.

Generally speaking, patent term restoration extends the life of a patent to account for regulatory delays, which can take up to a decade in Canada. The fact that Canada has no extension powers makes it unique in the G7.

Currently, drug makers are afforded a 20-year patent life. When that expires, generic producers can start producing cheaper versions of the medication. In Europe, the government allows the drug’s innovator to apply for up to a five-year extension, a rule which Brussels was pushing Ottawa to adopt. Adding five years, however, risks hurting Canada’s sizeable generic drug industry. During the negotiations, they came to a compromise: the patent term restoration would be capped at two years, during which time the generic producers would have the right to produce and market the drug — just so long as it’s not in Canada.

"What Europe wanted for pharmaceutical products is some recognition that there is, effectively, a loss of patent term because of the time it takes to get regulatory approval." Daphne Lainson Smart & Biggar/Fetherstonhaugh, Ottawa

The Canadian Generic Pharmaceutical Association panned the two-year extension, saying that it “will still delay market entry of cost-saving generic prescription medicines in Canada.” The group, however, lauded the Canadian government’s success in getting the Europeans to back down from their original five-year timeline.

“What Europe wanted for pharmaceutical products is some recognition that there is, effectively, a loss of patent term because of the time it takes to get regulatory approval,” Daphne Lainson, partner at Smart & Biggar/Fetherstonhaugh, told National.

Lainson says the introduction of patent term restoration is “a significant step forward for Canada.”

Notwithstanding the frustration for generic producers, she says sui generis protection changes “will further harmonize the Canadian system with our major trading partners, and further protect innovation, recognizing the very long period of time required to bring new, life-saving medicines to market.”

What will not change under CETA are Canadian data protections for pharmaceutical innovation. Currently, generic drug producers cannot apply to use the innovator’s research and data to begin producing their own drugs for six years after the original innovator’s approval, and they cannot begin marketing the drug for another two years after that. The Europeans wanted Canada to extend that to 10 years, but ultimately failed.

Dual litigation

A major frustration for generic and innovator drug producers alike in Canada is the dual litigation regime.

Currently, both can apply for remedy under the Patented Medicine Notice of Compliance Regulations (NoC) — innovators to have a generic drug blocked from coming to market; and generic producers to begin marketing their drug before the innovator’s patent has expired.

That system tends to favour generic producers. If they can prove that the generic drug won’t infringe on the original patent, the Ministry of Health paves the way for them to begin marketing before the patent even expires. Any appeal, at that point is considered largely meaningless. If the decision goes in favour of the innovator, however, the generic producer has the right of appeal.

During the process, however, the innovator can file for a judicial review and stay the decision for 24 months, which has become a popular stalling tactic.

Running parallel to this process is the civil law remedy for patent infringement, which tends to support the innovator company. Under the Patent Act, innovator companies can file suit if they feel that a generic drug infringes on their unexpired patent.

Exacerbating an already quixotic system is the fact that a decision by the ministry under the NoC rules isn’t determinative of patent infringement; it is merely an administrative decision. So however the decision comes down, both parties can seek civil recourse under the Patent Act as well. There, a court would make the formal decision on the infringement.

“In Canada, we have these abbreviated proceedings that ultimately don’t decide the issue,” says Lainson. “You could have a whole separate [civil] proceeding that actually looks at those issues.”

Edward Hore, partner at Hazzard & Hore, wrote in a 2004 report entitled Patently Absurd, “the odd result is that [the generic company] might lose the prohibition proceeding under the Regulations…yet later establish at a full trial under the Patent Act that the patent is both not infringed and invalid.”

Michael Geist

Michael Geist
University of Ottawa

More confoundingly, a generic producer may be given the green light to produce their drug before the expiration of the patent, only to have a court decide that they do, in fact, infringe the patent and be forced to pay damages.

CETA, supposedly, fixes that. It allows innovators to formally appeal under the NoC regime, and seeks to make that process determinative regarding the validity of the patent and any infringement. To that end, the NoC process will look more like a full proceeding and will likely do away with the 24-month stay. It’s been referred to “patent linkage” as it ties drug regulations to patent law.

Even so, companies could still pursue the claims in court under the Patent Act — a process that would be largely duplicative.

Overriding democracy?

Despite the compromise and in spite of protestations to the contrary, the deal could still unravel on a separate matter (although at press time, the German ambassador to Canada had indicated that the deal is not in danger.)

In preparation for the CETA deal, amongst others, Ottawa finally ratified the contentious and decades-old Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID), which subjects Canada to a Washington-based arbitration panel whereby companies based in signatory states can file for arbitration against other signatory states.

"[U]nlike other rules under which international investors can file claims, ICSID doesn’t require you to go through the domestic courts to enforce an award." Tolga Yalkin University of Ottawa

CETA specifically lists the ICSID tribunal as a main recourse for any disputes under the deal.

Decisions from the ICSID tribunal are determined under any trade relationships that the two countries may share. The decisions can come attached with penalties that range from the hundreds of millions of dollars, into the billions. Unlike many other trade tribunals, like those set up under Chapter 11 of the North American Free Trade Agreement, there is no provision that requires domestic courts to certify the decision and there is no exemption that says that countries may be exempt from penalties where their legitimate public policy interests cannot be the subject of litigation.

Any decision from the ICSID tribunal is definitive.

This form of arbitration has been used by tobacco producer Philip Morris to file claims against countries such as Uruguay and Australia, who have passed legislation to slap anti-smoking ads on cigarette packages; it was also used by Swedish energy company Vattenfall to sue Germany after Angela Merkel’s government chose to phase out the country’s nuclear power plants.

Signing onto CETA blows open the door on the number of scenarios where companies could take advantage of the ICSID system, which explains German consternation over the deal.

Closer to home, in what could be a sign of things to come, U.S. drug giant Eli Lilly is employing NAFTA’s Chapter 11, after the Canadian courts nullified two of its patents for being built on insufficient evidence.

“If the pharmaceutical giant succeeds, 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,” Michael Geist, Canada Research Chair in Internet and E-commerce Law at the University of Ottawa, wrote in The Toronto Star.

Tolga Yalkin

Tolga Yalkin
University of Ottawa

But even if the case succeeds, the Canadian courts could refuse to pay out, citing that its patent laws are a matter of democratic decision-making. And it’s exactly that sort of case that would be perfectly suited for the ICSID tribunal.

“ICSID is kind of a game changer,” says Tolga Yalkin, a part-time professor at the University of Ottawa who has specialized in international law. “Because, unlike other rules under which international investors can file claims, ICSID doesn’t require you to go through the domestic courts to enforce an award.”

For Canada, it could mean that foreign drug producers could file claims for damages over Canada’s patent regime, often chided by countries like the U.S. for being too leveraged in favour of generic producers, and they could win.

But the system could also mean that Canada’s generic producers would have the opportunity to file for arbitration against European countries, arguing that their long data protection requirements and extended patent term restorations are anti-competitive.

But Yalkin envisions a scenario where the ICSID tribunal would lessen states’ abilities to bring in new regulation. That is, if the Canadian government brings in new legislation that disadvantages innovator companies — or mining corporations, logging companies, or whichever investor — and the company says it violates the term of the trade agreement, it could result in expensive arbitration under ICSID.

“The argument could be made that the company had a legitimate expectation that these sort of regulations would not come into force,” he says. And, as such, the investors would have a much stronger hand, “unmitigated” by Canadian courts.

"If [Eli Lilly’s NAFTA challenge succeeds], 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." Michael Geist University of Ottawa

Yalkin says it could create a chilling effect in public policy and that it could mean “that regulatory structures that do exist are frozen.” And if the government doesn’t remove the offending regulations or legislation, it will be taxpayers on the hook for the potentially massive awards handed down by the tribunal.

This is a relatively new problem for Canada, which has only just ratified ICSID, and has always benefited from the public policy exemption from its other trade deals with similar mechanisms.

“The question here is: on balance, is ICSID to the benefit of Canada?” Yalkin says. “I don’t even know if, empirically, you can answer that question.”

Justin Ling is a regular contributor based in Ottawa.

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