The pharmaceutical business and investment arbitration: introductory remarks

The pharmaceutical business is, as known, subject to a plethora of State regulations trying to address the potentially dangerous effects related to the production process and/or to a wrong use of medicines. Such regulations may, however, adversely affect the companies carrying out the business, which have to find ways to adequately protect their rights, especially in times when the national and international regulatory activity is particularly intense. Among these ways, investment arbitration is certainly a path to be explored.

Despite the significant amount of investments carried out by pharmaceutical companies in foreign countries, the number of investment arbitrations concerning this kind of business is still quite low. According to a recent study, there are only thirteen reported cases concerning the pharmaceutical business, among which only two were concluded in favour of investors (Servier v. Poland and Merck v. Ecuador).

However, while as of today two disputes are still pending, a closer look to the concluded cases reveals that six of them were settled or discontinued by claimants and in three cases tribunals declined jurisdiction due to the wording of the relevant definition of “investment”. In only one case the investor’s claim was rejected at the merits stage.

This scenario clarifies that the potential of investment arbitration for pharma companies is still unexplored, and that, contrary to some commentators’ opinions, it is arguable that, subject to the jurisdictional thresholds of the relevant investment treaty, the unjust prejudice suffered by holder of patents and marketing authorizations - due to measures adopted by a foreign State where the business is located - may involve the international responsibility of the host State when the invalidation of a patent or the refusal or withdrawal of the authorization are illegitimate under the relevant international law rules. As we will see below, the scenario might not be different when a State illegitimately decides to end a monopoly.

After having introduced the topic of the jurisdiction of investment arbitral tribunals for cases concerning pharmaceutical patents and marketing authorizations, this brief note will focus on the possible violations of standards of treatment of foreign investments, with a particular emphasis, inter alia, on the phenomenon of compulsory licensing, a technique consisting in the public authorization to a third party to use a patent without the consent of the patent holder and subject to the payment of a royalty that has been recently at the centre of the debate (and was, indeed, suggested by the European Commission) to facilitate production of COVID-19 medical tools.

Jurisdictional issues

Patents and marketing authorization may be considered as protected investments under the definition of the vast majority of existing investment treaties, which endorse the so-called “every kind of asset” approach to the definition of investment, in accordance to which, apart from sales, almost all kind of businesses carried out in a foreign State may be considered as investments.

The above consideration is not affected by the circumstance that sometimes investment treaties do not expressly refer to intellectual property rights in the pharmaceutical industry but simply refer to general categories of investments. In the lack of an explicit exclusion, investment in the pharma industry fall into the scope of application of international investment treaties.

As to patents, even in the rare cases where a patent for invention obtained in the territory of the host State is not expressly mentioned in the relevant definition of investment, it can be equalized to as a “title having an economic value”, a concept which may be found in almost all modern definitions of investment.

While the same applies with regard to existing marketing authorizations concerning medical products – considering that it is undeniable that they have a patrimonial value and are assets that may be traded for an economic benefit or for other business purposes – it is necessary to point out that authorizations for mere sales of products in the territory of the host State cannot often be considered as investments, because many treaties (as well as the case law developed with regard to the concept of jurisdiction in the ICSID system) expressly exclude sales from the definition of investment.

Another complex question concerns the possibility to consider requests for marketing authorizations as investments. This issue was resolved in the negative – and the Tribunal for this reason declined jurisdiction – in the Apotex I and II joined cases brought by a Canadian investor against the United States under the Chapter XI (concerning foreign investment) of the North American Free Trade Agreement (NAFTA). The dispute regarded the denial of approval of authorization concerning two drugs and it is here interesting to note that, obiter dictum, the Tribunal also noted that the authorizations would have concerned the mere sale of products and that – as in the vast majority of investment treaties – sales cannot be considered as investments under art. 1139 NAFTA.

This solution is per se not surprising if we consider that when requesting a patent or authorization the pharmaceutical company still does not owe the relevant patent or authorization. However, the contribution to a project concerning the obtaining of a patent or authorization with the aim of obtaining a future return may somehow fall into other common categories of investments, including “rights with respect to copyrights”, “intangible rights” and “patentable inventions”. It is not by chance, indeed, that in Anheuser-Busch v. Portugal the Great Chamber of the European Court of Human Rights accepted that a trade mark application may fall within the concept of property to be safeguarded under Art. 1 of Prot. 1 of the European Convention of Human Rights.

In light of the above, it seems possible to affirm that both violations concerning (i) granted patents and marketing authorizations and (ii) applications for obtaining them may fall under the scope of application of the standards of protection contained in investment treaties.

Standards available at the merits stage, the phenomenon of compulsory licensing and the possible defences by host States

As to the case concerning an application for granting a patent or a marketing authorization, while it is of course within the powers of the local authorities to refuse to grant or refuse the application, the (administrative) process of refusal shall be the result of an application of the principle of audi alteram partem and shall be non-discriminatory. As an example of measures potentially able to limit investors’ rights under investment treaties, it is possible to mention Spanish measures adopted at the time of COVID which include the need of prior authorisation for foreign investments in certain strategic sectors (including healthcare), as well as subjective restrictions based on the conditions of the investor. Should in concreto an authorization be denied in a discriminatory manner or without the respect of due process, it might consist in a violation of the fair and equitable treatment standard.

When, on the contrary, there is an already existing investment, prejudices generated by actions by the host State may result both in violations of the fair and equitable treatment standard (e.g. violations of legitimate expectations, arbitrary measures, disproportionate measures, measures in violation of the principle of due process) and in expropriations (both direct – consisting in a State measure expressly depriving an investor of a certain asset - and indirect – i.e. the result of a series of state measures which are tantamount to expropriation).

An example of measures constituting a violation of the fair and equitable treatment standard may be found in the Gilead Sciences v. Ukraine case, in which the Claimant owned the exclusive right to market a molecule in Ukraine and suddenly found a cheaper competitor on the official domestic registries. In this case, an award ascertaining a violation of legitimate expectations would have been likely and this is the reason why the dispute was finally settled by the State. As to cases concerning expropriations of businesses carried out by pharma companies, the Servier v. Poland case is particularly interesting, considering that the Claimant, followed by the arbitral tribunal, affirmed that the arbitrary refusal to renew a marketing authorization constituted an (indirect) expropriation of the investor goodwill/clientele in the host State.

With regard to the above, it is in any case worth highlighting that, in a sensible area such as the business of pharmaceutical products, investors’ rights shall always be balanced with States’ right to regulate in the public interest. Hence, in order to constitute a violation of international law, the damage suffered by investors shall be disproportionate with regard to the public purpose inspiring States’ actions.

In this respect, the question of compulsory licensing is particularly interesting. Provided for in many domestic regulations and also in art. 31 of the TRIPS (Agreement on Trade-Related Aspects of Intellectual Property Rights) and recently implemented in many domestic legal systems (see, e.g., art. 70-bis of the Italian Industrial Property Code), this mechanism concerns the case where States authorize the use of a licence (without a request for voluntary licence) for urgent reasons (as it happened in South Africa in the late nineties with the aim of facing the AIDS epidemic). For a compulsory license to legitimately take place, it is necessary that it lasts a limited amount of time (i.e., if there is an emergency, the duration of the state of emergency), it only concerns a specified internal market and is accompanied by an “adequate” remuneration to the original patent holder (and, apart the cases of emergency, preceded by an attempt aimed at obtaining the permission to use the patent by the original holder on agreed terms). Should these forms of protection not take place, the original patent holder might - subject to the specific circumstances - claim the existence of an indirect expropriation.

Next steps

Pharmaceutical companies developing and producing all or part of their drugs in a foreign country should consider investment arbitration as a viable alternative to face host States’ regulatory actions which are in prejudice of their rights conferred by international law.

Definitions of investment in the plethora of existing international investment treaties are wide enough to include both already granted licences and marketing authorizations and applications aimed at obtaining them.

In this regard, investors should consider, on a case by case basis, the possibility to start arbitration proceedings to claim the violation of the fair and equitable treatment standard (including the duties to grant due process, to respect legitimate expectations, to respect the principle of proportionality and not to act arbitrarily) as well as the possibility to claim the existence of a series of measures which, taken together, are tantamount to expropriation.

The above applies in particular in the present time of crisis, where States are evaluating the adoption of measures, such as compulsory licensing, which are apt to substantially reduce the value of foreign investments in the pharmaceutical industry.