IP, Investment Arbitration and Policy Justifications

Guest post by Ivan Stepanov*

International investment agreements (IIAs) are international treaties which protect investors coming from one state and their investment in another. They represent the source of what is called international investment law. IIAs have endemic protection standards with the protection against expropriation and the “fair and equitable treatment” (FET) standard being most prominent.

Even though IIAs are instruments of public international law, the dispute settlement mechanism embedded in the treaties offers the investor, a private party, to challenge the state, if it holds that through state action, it or its investment have suffered economic losses. The actions of the state are then assessed in light of the aforementioned protection standards. This mechanism is called the investor-state dispute settlement or more commonly addressed as investment arbitration. Essentially through investment arbitration an investor has the chance to sue the state in an international forum inside a specific legal environment.

What makes investment arbitration so interesting is that it very effectively combines the sphere of private and public law in terms of (quasi)judicial recourse possibilities. It deviates from the standard notions of state to state dispute settlement, like the dispute settlement mechanism of the WTO or the commonly found private commercial arbitration. In regards to the first instance, the investor is free to pursue a claim against the state, unlike the standard state to state practice where it has to convince a state to litigate for its cause. In regards to the second instance, the applicable law is mostly dictated by the IIA, unlike commercial arbitration where the freedom to choose the law is considered to be one of legal pillars of the procedure.

So where does intellectual property (IP) come into play? IP rights (IPRs) have been defined as “investments” in IIAs since the first modern bilateral investment treaty (BIT) between Germany and Pakistan of 1959. When an asset or right is identified as an “investment” under an IIA, this creates the jurisdictional requirement for an arbitration tribunal to rule on the issue arising out of that “investment”. Consequently, IPRs are prime candidates for investment arbitration. However, this possibility was for a very long time unused. It was only in 2010 and 2011 when Philip Morris (PM) started two arbitration proceedings against Australia and Uruguay respectively. PM complained that the “plain packaging” laws enacted by Australia and Uruguay affected the use of their trade marks. This was followed by the NAFTA investment arbitration case between Eli Lilly and Canada (2012). The case dealt with the revocation of two pharmaceutical patents on the basis of the “promise utility doctrine”, which Eli Lilly now is seeking to challenge.

The cases garnered considerable attention. International investment law was relatively unknown to the IP community, whereas lawyers dealing with international investment law had their own (pre)conceptions of property and its role in the world of investment arbitration. The problem is that IP does not conform to the standard notion of property. IPRs are very prominent policy tools, not only intended for incentivizing creation and inventiveness but also in relation to areas of public health and the environment. The fear was that investment tribunals would not pay sufficient regard to the nature of IPRs and that they would apply the protection standard without deeper consideration. This might disrupt the policy goals which IPRs were created to facilitate. When the arbitration requests were filed, the IP community could only hold its breath and hope for the best.

So where exactly does the “danger” of investment arbitration hide? Namely in the example of the PM cases, the situation is quite clear. Both Australia and Uruguay enacted ”plain packaging” laws. These laws, in an effort to battle smoking, prescribe the appearance of the cigarette packaging. The measures determine the color of the packaging, the percentage of it that needs to be covered in warning labels, the use of specific typefaces and the prohibition of displaying logos. As trade marks are very prominently displayed on cigarette packaging, these measures directly circumscribe their use. This was all enough for PM to start investment arbitration proceedings. PM argued that by not being allowed to use the trade marks as before, the trade marks, as investment had suffered by their value decreasing. The counter argument of both Australia and Uruguay was that they had the right to regulate and change their laws. They particularly relied on the public health nature of the measures. So the main question in both cases was – whether the measures which circumscribed the use of the trade marks in light of public policy issues are allowed under the rules against expropriation and the FET standard?

PM v. Australia never actually reached that stage. The case was dismissed on jurisdictional grounds (PM was not considered to be a foreign investor.) All eyes were now on the Uruguay case. In July 2016 the award was finally rendered and it was an all-out victory for Uruguay. According to the Tribunal the measures enacted were completely in line with both standards of protection – the anti-expropriation rules and the FET standard. The Tribunal recognized that Uruguay had the right to change its laws, in light of the public policy measures which they proposed. However the justification for the changes of trade mark law was grounded outside of the normally perceived area of trade marks or IP. They were primarily grounded in public health. This situation begs the question whether, in principle a change in IP law that goes to the detriment of the investor could be sufficiently justified with just a general IP policy argument or must there be a spreading out into other policy areas, like public health or the environment? As the time of IP and investment law is still young this question like many others will be answered in the future.

*Ivan Stepanov is a lawyer from Serbia. He holds two LL. M. degrees – one in International Trade and Investment Law from the University of Amsterdam and the other in Intellectual Property and Competition Law from the Munich Intellectual Property Law Center. He is currently stationed in Alicante where he is doing an internship with the European Union Intellectual Property Office.


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