A NAFTA Challenge to Canada’s Patent Utility Doctrine is Necessary

Canada is not the first country that comes to mind as a threat to U.S. trade. After all, Canada is our largest goods trading partner, with $632 billion in total goods traded bilaterally during 2013. Canada was one of America’s first free trade agreement partners, and the importance of the North American Free Trade Agreement (NAFTA) is demonstrated by the continuing economic integration between the two countries. Most recently, the U.S. and Canada have undertaken bilateral dialogues on border security issues (Beyond the Border) and regulatory cooperation (the U.S.-Canada Regulatory Cooperation Council).

While the good news of U.S.-Canada trade cooperation is well-recognized, this doesn’t mean the trading relationship is always smooth sailing. A trade dispute over Canada’s subsidies for softwood lumber has been an irritant for over two decades and Canada has voiced strong concerns over U.S. government procurement practices. Over the last decade U.S. pharmaceutical companies have faced trade challenges in the form of a narrow interpretation of patent eligibility in Canada. Canada’s patent utility provisions are a serious threat to U.S. innovative industries, and therefore are legitimately being raised in NAFTA’s dispute settlement system.

Concerns about Canada’s intellectual property rights (IPR) protections are neither recent nor unique to the pharmaceutical sector. In fact, Canada has been cited in the United States Trade Representative’s (USTR) “Special 301” report – which identifies countries that have serious IPR deficiencies – every year since 1989. On April 10, 2014, 32 members of Congress, including 19 members of the powerful House Ways and Means Committee, sent a letter to USTR urging it to further downgrade Canada in the 2014 Special 301 report due to Canada’s treatment of pharmaceutical patents. In the 2014 Special 301 report, USTR noted that Canada has made improvements in some areas but, “with respect to pharmaceuticals, the United States continues to have serious concerns” with Canada’s IPR protections. USTR also highlighted Canada’s “amorphous and evolving [patent utility] standard,” known as the promise doctrine, as a serious concern because it leads “to uncertainty for patent holders and applicants and undermines incentives for investment in the pharmaceutical sector”.

The established international standard under the WTO’s Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement, and the standard in the United States, is that an invention must be novel, not obvious, and “useful or capable of industrial application” to be awarded a patent. However, Canadian courts, through the promise doctrine, are holding innovators to an entirely different standard. The promise doctrine makes Canada the only developed country in the world with a patent utility standard that is inconsistent with both NAFTA and TRIPS.

This promise doctrine has three aspects: a process where the judge subjectively interprets the “promise of the patent” from the patent application; a requirement that the promised utility either be demonstrated or be based on a “sound prediction” of utility on the date of the patent application; and a requirement that evidence establishing a “factual basis” and “sound line of reasoning” for the predicted utility be disclosed in the original patent application.

The promise doctrine causes significant uncertainty for innovators because it not only requires the innovator to “soundly predict” how its invention will be used but also provide enough information in the patent application to prove the invention will successfully fulfill its promise. This doctrine presents innovators with a Catch-22. To “soundly predict” how a new medicine would be used, innovators must complete extensive human clinical trials before filing a patent application. However, for a patent to be granted, inventions must be new and useful. If an invention has undergone Phase II human clinical trials, which are consistently published in medical journals, the innovator risks the validity of the patent because the invention will no longer be new. Fulfilling the terms of Canada’s patent promise doctrine could therefore lead innovators to invalidate the novelty of their invention.

Canada’s requirements pose a severe risk to innovative U.S. biopharmaceutical companies, which are major contributors to American jobs and economic growth. The promise doctrine has already resulted in 19 revoked patents for innovative medicines over the past nine years despite the Canadian health regulatory agency’s approval of all 19 drugs as safe and effective. In the 25 years before Canadian courts created the promise doctrine only two patents were invalidated due to lack of utility. This doctrine puts both high-quality American jobs and future industry spending on healthcare research at risk by causing innovative U.S. firms to lose billions of dollars.

Eli Lilly is one American company that has been significantly injured by Canada’s IPR practices. A Canadian generic drug company challenged Eli Lilly’s patents on two medicines based on lack of utility under the promise doctrine. The Canadian courts ruled in the generic company’s favor and invalidated the patents despite the fact that the two medicines were being used by hundreds of thousands of Canadian citizens. In both cases the Canadian generic drug company immediately began producing and selling generic versions of the Eli Lilly-developed medicines following the ruling.

In instances like this – where U.S. companies have significant trade and investments at stake – local courts are not always the best forum to challenge a damaging policy. U.S. and Canadian trade agreements, including NAFTA, contain provisions to address situations just like this one. These provisions establish the procedures for both states and investors to challenge a law that violates a country’s responsibilities under the agreement. Dispute settlement procedures are an important mechanism for safeguarding trade and investment and have been one of the principal elements of NAFTA for the last 30 years. In fact, there have been more than 70 state-state and investor-state arbitration cases heard under NAFTA alone. Mexico has been sued over barriers to the trade of high-fructose corn syrup. The U.S. has been challenged multiple times by Canadian generic drug company Apotex. Canada has been taken to arbitration over its treatment of wind energy projects. As the Canadian government has noted, “in such a large trading area, disputes are bound to emerge.” The point is, when disputes happen, it is not unusual for parties to utilize the agreement’s dispute settlement procedures.

Corporations generally prefer to avoid dispute settlement procedures due to the legal costs involved. But it should not be a surprise – and it isn’t a unique occurrence – that traders and investors will avail themselves of legal protections under trade agreements when necessary. In the case of Canada’s patent utility definition, it is perfectly reasonable for U.S. entities to make their case that Canada’s policy fails to meet the IPR obligations that Canada agreed to in NAFTA. Countries must be held accountable for meeting their agreed-to responsibilities to maintain a fair and equal playing field where discovery and growth can thrive.