The North American Free Trade Agreement has received very little love of late. President Trump beat up on NAFTA to secure votes in the US election. Now that he is president, he has put the agreement on the chopping block, seeking to renegotiate it in the hopes of securing a better deal with Mexico. As NAFTA’s third member, Canada has been dragged into the fight.

This is not the first time Canada has been dragged into a NAFTA fight against its will. In 2012, a US-headquartered drug company, Eli Lilly, notified the government of Canada that it was suing Canada in a NAFTA tribunal for violating the trade agreement. The alleged offence? Canadian courts had found the patents for two of its drugs, Strattera and Zyprexa, to be invalid under Canadian patent law (see Novopharm Limited v. Eli Lilly and Company, 2010 FC 915, aff’d 2011 FCA 220, leave to appeal to SCC refused, 34396 (December 8, 2011) (Strattera) and Eli Lilly Canada Inc. v. Novopharm Limited, 2011 FC 1288, aff’d 2012 FCA 232, leave to appeal to SCC refused, 35067 (May 16, 2013) (Zyprexa)) — clearing the way for generic versions of these drugs to access the market. Lilly alleged, in its Notice of Arbitration, that Canadian courts had violated minimum standards of treatment guaranteed to foreign investors under NAFTA and had “expropriated” Lilly’s investments in the two drugs.

Many have viewed Lilly’s NAFTA claim as sour grapes after it lost its patent case in court. Others have expressed concern that Lilly’s claim was a backdoor attempt to relitigate drug cases, using NAFTA to obtain what was otherwise unavailable to it.

Lilly’s claim is exactly the type of case that has irked opponents of modern trade deals. By allowing investors to sue governments for damages, trade agreements are said to elevate the rights of foreign investors over the rights of nations to control their own affairs. This very issue nearly torpedoed the Comprehensive Economic and Trade Agreement with the European Union, until a compromise was reached (see McKenna, “Canada, EU revise trade deal, add investor-state dispute tribunal”; CETA summary of final negotiating results). The Lilly case has loomed large as negotiations on major trade agreements such as the Trans-Pacific Partnership have reached their endgames.

Proponents of sovereignty and fair trade can finally breathe a sigh of relief. In mid-March, the Canadian government emerged victorious in its five-year battle with Lilly. After the parties spent over $15 million on legal bills, a NAFTA tribunal found no merit in Lilly’s claims and awarded approximately $5 million in costs to Canada (Eli Lilly and Company v. Government of Canada, Case No. UNCT/14/2). The good news is that we no longer need to worry that trade tribunals will become supranational courts of appeal over domestic property law disputes.

 The Lilly dispute centred on the “promise doctrine” under Canadian patent law, under which patented inventions must meet the promises set out in the patents or risk being found invalid. Lilly argued that this doctrine was a dramatic departure from pre-NAFTA patent law and out of step with the laws of other countries. The tribunal disagreed, refusing to question the Canadian judiciary’s own interpretation of pre-NAFTA patent law and finding that changes to patent law were incremental and evolutionary.

The most consequential part of the tribunal’s ruling is its consideration of when judges’ decisions can be challenged under NAFTA. The tribunal was unwilling to shut the door to the possibility of a NAFTA violation based on a radical change in domestic law. However, the tribunal set a high threshold for liability, finding that judicial decisions can be grounds for a NAFTA challenge only in very exceptional circumstances, in which there is clear evidence of egregious and shocking conduct.

The Canadian government’s victory was resounding. The tribunal found, for example, that under any plausible standard, the impugned Canadian court decisions were neither arbitrary nor discriminatory. Rather, the tribunal found that Canada’s promise doctrine is rationally connected to legitimate policy goals intended to draw the line between speculation and invention in evaluating patents.

How the US government will respond to the Lilly decision is anyone’s guess. The Obama administration had filed a brief with the tribunal challenging the application of NAFTA to judicial decisions. However, President Trump seems to have no qualms about challenging the decisions of “so-called judges,” by tweet or otherwise.

On the other hand, the President’s rationale for withdrawing the US from the Trans-Pacific Partnership appears to be at least partially based on the extraordinary remedies it would have made available to private investors. Lilly’s claim against Canada was arguably an instance of the very scourge the President and others are seeking to remove from future “free and fair” trade agreements. Lilly’s loss ought to foster confidence in the current investor rights framework.

Canada has not had the luxury of picking its NAFTA fights. The government defended judicial sovereignty against Lilly, and now it must defend free trade altogether in dealing with President Trump. Time will tell whether Canada can navigate NAFTA renegotiation as adeptly as it defended Lilly’s claim. In the meantime, Canadians can be grateful that we have not unwittingly placed our independent, non-elected judiciary at the mercy of foreign corporations.

Photo: Prime Minister Justin Trudeau and US President Donald Trump at the White House on February 13, 2017. Trudeau told an American network he still believes President Trump’s promise on NAFTA that adjustments to the Canada-US trading relationship will be minor. THE CANADIAN PRESS/Sean Kilpatrick

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Nathaniel Lipkus
Nathaniel Lipkus is a partner in the Intellectual Property Department of Osler, Hoskin & Harcourt LLP. His litigation practice focuses on contentious legal issues confronting innovation-intensive industries, with an emphasis on patent and regulatory issues facing pharmaceutical and biotechnology companies.

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