Can Investors Use the Proposed Unified Patent Court for Treaty Shopping?

Pratyush Nath Upreti*, Upreti & Associates

In recent years, there have been several discussions on Investor-State Dispute Settlement (ISDS) and its impact on states’ sovereign right to regulate. The latest cases of Philip Morris and Eli Lilly are evident where intellectual property claims were brought under the scrutiny of investment tribunals. These cases have received greater attention, bringing serious debate upon ISDS provisions in the ongoing Investment Agreementa, such as Transatlantic Trade and Investment Partnership (TTIP) between the European Union and the United States. On the other hand, the European Commission has proposed the Unified Patent Court (UPC) as a common patent court for all member states of the European Union. In other words, a step towards achieving further harmonization of the patent system in the European Union. On this note, let’s examine whether the proposed Unified Patent Court Agreement can be used to challenge IP claims under the ISDS.

Under International Investment Law, investment treaties offer an investor a choice of either ICSID or UNCITRAL arbitration. At the national level, an investor may choose European Court of Human Rights for additional claims of property rights or pursue a host country’s local court before the tribunal. The recent IIAs restrict investor to seek local remedies in the form of monetary compensation after consenting arbitration under the agreement. Although, forum shopping under investment law is not a new phenomenon. It rests on parties to choose the forum. But the important question is: can an investor have the liberty to do treaty shopping to enforce their intellectual property rights?

Treaty shopping refers to the strategy used by multinational corporations to ‘steal’ not only a higher level of protection, advantages or benefit, but also the jurisdiction of arbitral tribunals. For example, an Indian investor wants to protect its investment in South Africa, in spite of India does not have investment treaty with South Africa. This would be achieved by establishing a subsidiary Indian company in the country (China) in which South Africa has an investment treaty with.  For example, in China, the investor will be able to enjoy protection through treaty. In effect, investors tried to seek protection through China-South Africa treaty as corporate nationalities of China. The treaty shopping is mainly done (i) to seek to ensure treaty protection where none would otherwise be available (ii) to seek to benefit from specific substantive protections in particular treaties or (iii) to seek to benefit from certain procedural or other aspects of the dispute settlement provisions of a particular treaty.

In general, investors use treaty shopping through specific clauses of the investment agreement. But it may not always be so. Under the proposed Unified Patent Court, an investor may get the advantage of treaty shopping with respect to patent cases.  The preamble of the proposed Unified Patent Court states;

Considering that the Unified Patent Court should be a court common to the Contracting Member States and thus part of their judicial system, with exclusive competence in respect of European patents with unitary effect and European patents granted under the provisions of the EPC.”

Similarly, Article 1 of UPC states “The Unified Patent Court shall be the court common to the Contracting Member States and thus subject to the same obligations under Union Law as any national court of the Contracting Member States”.  In addition, Article 2 defines court as the Unified Patent Court created by the Agreement. The combined reading of the preamble and Article 1 of the UPC makes clear that for European Patent, Unified Patent Court is the National Court of Contracting Member States.

Now let’s turn into ongoing Eli Lilly vs. Canada under the North American Free Trade Agreement (NAFTA). The case involves investment claims in tribunal on the ground that the patent invalidation by the Canadian Supreme Court violated the principle of fair and equitable treatment, as well as the expropriation of property. Although, it is very difficult to assume that arguments of Eli Lilly will succeed.  But in light of Eli Lilly case, an investor may challenge the decision of invalidity or any decision on patent given by UPC.

Article 32(1) describes UPC as having exclusive competence in respect of actions for revocation of Patents. Also, Article 65 empowers the court to decide on the validity of a patent on the basis of an action for revocation or a counterclaim for revocation. Thus, the Court may revoke a patent, either entirely or partly on the grounds referred in the EPC. So, revocation/invalidation of the patent under UPC may give rise to the expropriation of property and violate the legitimate expectation of an investor along with full protection and security to the investor.  It is important to note that these terminologies are the golden rules of investment agreements. However, lack of clear and reliable interpretation has given investors an opportunity to litigate intellectual property under investor-state dispute settlement.

When UPC is considered to be the national court of a contracting member state, an investor has an option of treaty shopping to bring the case to the tribunal under a particular BIT. Therefore, an unhappy investor may bring a claim against the decision of UPC (being the national court of all member states) on the basis of any IIAs agreed by any participating member state, as well as new EU IIAs. The objective of the investor is to bring claims under investor-friendly investment agreement. Therefore, the investor may eye on most favorable IIAs, to succeed in their favor.

For example, the Netherlands are considered as one of the liberal proponents of BITs in the world. The recent model BIT adopted by Netherlands has a very wide definition[1] of an investment. Unlike other BITs, it does not require the investor’s presence in a host state to qualify for an investment. Similar to the most liberal approach under BITs, the Dutch model protects investments irrespective of whether they are significant, lasting or any contribution to host country economic development are made in accordance with host country law. Moreover, any investor not satisfied by UPC decision has the option of bringing claims under the provision of Netherlands BITs. Thus, a Patent holder may treaty shop for the most convenient IIAs available in Europe. This may result in more frivolous IP litigation in investor-state dispute settlement.


[1] Under 2004 Dutch Model BIT, definition of investment also includes goodwill, know-how, even right granted under public law, including rights to prospect, explore, extract and win natural resources.


Pratyush Nath Upreti – is a Lawyer at Upreti & Associates a Kathmandu based law firm, where he is leading commercial and research department. He holds Advanced Master (LLM) Intellectual Property Law & Knowledge Management (IPKM) degree from Maastricht University, Netherlands. He is also an executive member of New IP Lawyers Network, a wing of school of Law and its research centre SCule (Science, Culture and the Law) under University of Exeter, United Kingdom. He can be reached by  upretipratyush@gmail.com

Right to Regulation & Investment Court System: Alternative to ISDS? (Part II) – Mediation in Investor-State Dispute: An Option 

 Pratyush Nath Upreti*, Upreti & Associates

In my previous contribution to the EFILA blog, titled Right to Regulation & Investment Court System: Alternative to ISDS?, I analyzed the debate raised by the ISDS provision in TTIP and how the proposed Investment Court may not be able to solve the issues raised by ISDS. It is important to analyze the reasons behind such a huge cry over ISDS set up in the Trade/Investment Agreement. The European Federation for Investment Law and Arbitration (EFILA) in its paper titled A response to the criticism against ISDS has balanced an analysis on the criticism of ISDS.

It is evident that in recent years, there has been a diversion of opinions, which is painful to investors and also encroaching on the national matters of State. Therefore, the global community has to realize that the present ISDS is not always working effectively and alternatives should be proposed. The European Commission’s proposed ‘Investment Court’ might be a step towards formulating an alternative.  No doubt that the proposal is a good attempt but it still needs to be revised.

Recent Trends of International Investment Agreements

In recent years, more countries have been opting for IIAs to continue their existing co-operation with countries or as a way to find an economic development. According to the United Nations Conference on Trade and Development (UNCTAD), there has been rapid growth of IIA from 1980 till 2014 (see Figure 1.)

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Figure 1: Trends of IIAs (Preliminary data for 2014UNCTAD, IIA database)

The above graph highlights the recent trends of IIAs from 1980-2014. It is expected that IIAs number will increase, but the graph indicates that there has been a decline in the last few years. According to UNCTAD data, in 2004 there were 27 IIAs, out of which 14 were Bilateral Investment treaties (BITs) and 13 were ‘other IIAs’, i.e. economic agreements other than BITs like

Free trade agreements (FTAs), bringing the total number of agreements to 3,268 (2,923 BITs and 345 ‘other IIAs). The total number of IIAs was lower down in 2014 as compared to 2013 where there was a total of 44 IIAs (30 BITs and 14 Other IIAs). The interesting fact is that in 2013 the number of BITs terminated was 148, out of which a new treaty replaced 105, 27 were unilaterally denounced and 16 were terminated by consent.

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Figure 2: Most Active negotiator of ‘other IIAs’; treaties under negotiation and partners involved. Source: UNCTAD, IIA database.

The above figure emphasizes the number of treaties under negotiation and partner countries involved in a negotiation. At present, the European Union has 28 treaties under negotiation among 70 different countries as partners. Although the data highlights seven countries under negotiation, but at present there are 45 countries and four regional integration organizations that are revising their model IIAs.

The findings of UNCTAD data highlights that the countries’ willingness to enter into agreements and few IIAs are under revision. This implies three things. First, negotiation is getting more complex because of the increase in the number of countries in the negotiation process, as every country has a share of interest. Furthermore, even if a deal is negotiated in the broader package, then also the question of commitment to those issues is very important.

Second, the interrelation between IIAs and domestic concerns comprising ‘social, environmental and public health’ matters makes negotiation more difficult. Ignoring this issue means that negotiation has a severe impact on the development of host countries. Therefore, finding the proper balance may take more time, which makes negotiation slow.

Third, some of the most recent investment disputes might show that IIAs go beyond the protection and promotion issues and leave no flexibility on some issues that allow member countries to peruse their development agenda, according to their needs.

Fourth, the transparency in negotiation deals creates a public nuisance on some contingent issues, diverse opinions on other issues, which may or may not be discussed, would have a negative impact on negotiations and, as a result, it creates negative public opinion.

Fifth, recent claims of investors under the investor-state dispute settlement mechanism have raised concern on such negotiation deals particularly such claims are encroaching upon host state sovereignty and domestic regulation.

The critics fear that the growing frivolous claims brought to ISDS will slowly discourage investors and states to opt for ISDS.  The data shows that the average cost of arbitration is $8 million per party. Therefore, at international level, there is a need to offer an alternative, which balances both the interest of investors and states. Moreover, such an alternative should be acceptable by both the parties.

Investor-State Mediation

In recent years, the relationship between the state and investors is getting salvaged. The development will be fragile when rift exists between the investor and state. Parties – for own benefit – use the increasing diverse opinions of the arbitration tribunals. This will result in negative consequences in global investment regime. The possible way to balance the system is by revising ISDS provisions or adopting investor-state mediation.

The very idea of arbitration, mediation and conciliation is to resolve the dispute. Among the three, arbitration is overwhelmingly accepted for several years. The growing criticism of ISDS has sorrowed relation between investors and the State and should be looked at with immediate concern. Perhaps, the time has come to also use the mediation process in Investor-State Disputes. There has been an attempt to use mediation in Investor-state disputes with success in a limited jurisdiction. However, scholars argue the very nature in which mediation aims to settle a dispute is different from arbitration, making it difficult for acceptance of mediation.

According to Jacqueline Nolan-Haley in her work ‘Mediation: The ‘New Arbitration’ argues that “the morality of mediation lies in the optimum settlement, a settlement in which early party gives up what he values less, in return for what he values more. The morality of arbitration lies in a decision according to the law of contract.”  The author explains this observation, as the nature of mediation is more adversarial than that of arbitration.

Similarly, authors Welsh & Schneider in their work ‘Becoming Investor –State Mediation’ (2012) analyze a very fundamental difference between ‘mediation’ and ‘arbitration’. According to the authors, mediation is an ‘interest-based’ system of negotiation, which looks like a meeting. Whereas, ‘arbitration’ is a ‘right-based’ system which looks like a hearing. The very fundamental concept, which the authors are trying to convey, is that the mediation facilitates parties to arrive to a decision unlike arbitration, which focuses on adjudication.  Also, the authors clear the misnomer attached to ‘mediation’. They identify several models of  ‘mediation’ such as ‘facilitative’, ‘elective’, and ‘understanding-focused’, ‘therapeutic’ ‘Humanistic,’ ‘narrative,’ ‘insightful,’ ‘transformative’ and focus on facilitating the development of understanding and ‘integrative (or interest-based) solutions’.

Among these models, the authors suggest adopting a model which will improve relationships between the parties and able to acknowledge volatile political situations.  In other words, the authors suggest the last model as a suitable model in the context of investment treaties. Also somewhere in their article, the authors touch the possibilities of the role of state officials as potential ‘quasi-mediators’. I tend to disagree on this, particularly in the context of investor-state disputes. The role of state officials as quasi-mediators will further complicate the process and may create a trust-deficit environment. Therefore, it is important to note that the very foundation of the mediation process is ‘trust’.

Mediation in Investment Agreements

The recent studies show that mediation has been used with great success in international commercial law. The critics argue that success of mediation in commercial law cannot be an assurance for success in the international investment regime. However, the recent Investment Agreements such as EU-Canada: Comprehensive Economic and Trade Agreement (CETA) and ASEAN Comprehensive Investment Agreement (ACIA) have incorporated ‘mediation’ in their provisions..

Also, mediation features in some Model BITs. For example Article 10.4 of the Thai BIT Model states that:

The disputing parties may at any time agree to good offices, conciliation or mediation. Procedures for good office, conciliation or mediation may begin at any time and may be terminated at any time. Such procedures may continue while the matter is being examined by an arbitral established under this article, unless the disputing parties agree otherwise. Proceedings involving good offices, conciliation and mediation and positions taken by the disputing parties during these proceedings shall be confidential and without prejudice to the rights of disputing investor in any further or other proceedings.

This shows that mediation appears in some Investment Agreements and it is just a matter of time until such practice will gain momentum.

Mediation as an alternative?

There is a diversion of opinion within the scholar’s milieu arguing that arbitration is more favorable than other forms of dispute settlement. However, the recent trends urge us to rethink arbitration and finding beyond the arbitration.  This forum shift has been realized in other international communities, as a result of IBA rules on Mediation developed to encourage good practices of mediation. One of the important features of the IBA rules on mediation gives the liberty to the state to make the mediation process private. This will take away unwanted public opinion.

At the end, I think every modern Investment agreement should include ‘Consultation’ & ‘Mediation’ among the methods for amicable settlement of disputes arising out of International Investment Agreements.  I believe adopting mediation would be a right approach because the process does not abide with a strict interpretation of law unlike in ISDS.

Similarly, the mediation process is a more informal proceeding than ISDS and involvement of a neutral party to the dialogue would give rise to a win-win situation for both parties. Moreover, in the broader sense, the inclusion of mediation in IIAs will make a country less skeptical about consequences of litigating intellectual property rights through regular ISDS mechanism. In other words, the mediation process will help the state to main regulatory rights in the host country.

On the other side, it is important to note that the decision of mediation does not gain force as like of arbitration under the ICSID Convention, making mediation a toothless weapon.  This would be the reason for Europe to opt for ‘Investment Court’ model in spite of reference to mediation in CETA, which is similar to the WTO mediation process for trade dispute settlement.

However, there is a school of thought believing that mediation may create transparency and a proper environment to negotiate between the parties.  But the lack of enforcement of such a decision might make the situation worse.  Therefore, it would not be rational to jump to a conclusion that the ‘mediation’ process will immediately solve the problems raised by ISDS. Moreover, the mediation process is yet to be tested in International Investment Agreements.


Pratyush Nath Upreti – is a Lawyer at Upreti & Associates a Kathmandu based law firm, where he is leading commercial and research department. He holds Advanced Master (LLM) Intellectual Property Law & Knowledge Management (IPKM) degree from Maastricht University, Netherlands. He is also an executive member of New IP Lawyers Network, a wing of school of Law and its research centre SCule (Science, Culture and the Law) under University of Exeter, United Kingdom. He can be reached by   p.upreti@student.maastrichtuniversity.nl

Right to Regulation & Investment Court System: Alternative to ISDS? (Part I)

   by Pratyush Nath Upreti, Upreti & Associates*

Intellectual Property is sexy! Its romantic endeavor with other branches of law makes it appealing for IP scholars. This romance can be seen through the lens of the global Intellectual property regime. In today’s industrialized world, the landscape of the intellectual property is changing. Mostly, all forms of ‘intellectual property’ have raised debate in the trade agreements domain, making it an important aspect of trade negotiation. The open market economy encourages the developed countries to opt for Investment/Trade Agreement such as Free trade agreement (FTA), Bilateral Investment Treaties to attract investors by strengthening IP regimes. It is evident that IP as incentive commodity has turned into assets, trading commodity.

Similarly, the expectation of investors is increasing. Recent cases such as Philip Morris v. Uruguay have revealed the complexity and potential overlap between intellectual property, Investment Law, and Trade Law. The nature of claims raised in such cases has raised serious concerns regarding state’s sovereign right to regulate, which is reflected in the ongoing negotiation of Transatlantic Trade and Investment Partnership (TTIP). The recent public consultation report on investment protection and investor-to-state dispute settlement (ISDS) in the TTIP reveals that the Commission received a total of nearly 15,000 replies and an overwhelming majority showed concern to the inclusion of ISDS in TTIP.

One of the aspects is the EU Right to regulate provisions in the Investment Agreement. The concern raised is that the ISDS would be a potential limitation to the rights of government to regulate on public interest. Earlier September, European Commission published a draft text of the Investment Chapter in the proposed Transatlantic Trade and Investment Partnership (TTIP) between the EU and the US, propose the ‘Investment Court’, which has generated discussion.

Right to Regulation

According to the report from the Swedish National Board of Trade, the term ‘right to regulate’ is misleading. The report refers right to regulate as ‘to the extent to which the state can legislate and make decisions without running the risk of being found in violation of the treaty and having to pay damages’. It has been an established principle of state sovereign right to regulate on public, health and environment affairs. But the diverse opinions of tribunals and increasing legitimate expectation of Investor has seriously narrowed the state right to regulate.  The very fundamental question is to what extent can investors expectations rise?

In Eli Lilly vs. Canada under the North American Free Trade Agreement (NAFTA), Eli Lilly a pharmaceutical company invoked investment claims under UNCITRAL rules, on the ground that the patent invalidation by a Canadian Court violated a principle of fair and equitable treatment, including Lilly’s legitimate expectation about the treatment of its investment and Canada’s obligation to refrain from conduct that is arbitrary, unfair, unjust and discriminatory. Further, it was argued that ‘Lily was entitled to reasonably rely on the stability, predictability, and consistency of Canada’s Legal and business framework existing at each stage of the establishment, expansion, and development of Lilly’s Investment.

The above cases raised a fundamental question on the scope of application of ‘fair and equitable treatment or reasonable expectation of investment’ under intellectual property investment claims. The investor expectation should not be subjective and not all investor expectations are legitimate. Moreover, the arguments put forward by the claimant in Lilly directly come in conflict with state sovereign right to regulate the domestic Intellectual Property. The investor completely ignores the difference between the pre-existing rights and post-existing rights. Both the pre and post rights have limitation. The right does not arise if a prerequisite is not fulfilled. Similarly, once rights are acquired, they cannot be absolute; they are subject to changes on several grounds.

In practice, fair and equitable treatment and full protection and security are not absolute, there being limitations. Parkerings-Compagniet AS v. Lithuania tribunal analyzed the state sovereign power to regulate lies on higher foot then claims of free and equitable treatment. The Tribunal stated:

 

“It is each state’s undeniable right and privilege to exercise its sovereign legislative power. A state has the tight to enact, modify or cancel a law at its own discretion. Save for the existence of an agreement, in the form of a stabilization clause or otherwise, there is nothing objectionable about the amendment brought to the regulatory framework existing at the time an investor made its investment. As a matter of fact, any businessman or investor knows that law will evolve over time. What is prohibited however is for a State to act unfairly, unreasonably or inequitably in the exercise of its legislative power.”

Similarly, in Chemtura v. Canada, the tribunal upheld the Canadian government’s right to legislate laws based on scientific reviews and dismissed the investor’s claims. However, critics of ISDS have raised that such limitation of state right to regulate may bring regulatory snare. Therefore, Europe is trying to narrow down the scope of provision under the agreement to avoid vague interpretation by a tribunal. The previous agreements such as CETA and EU Singapore FTA, were drafted in a way to have a higher benchmark on the right to regulate.

For example under CETA, Article X.9 clears list down the contents of fair and equitable treatment such as (i) denial of justice in criminal, civil or administrative proceedings (ii) fundamental breach of due process (ii) arbitrary conduct and among others. The closed list avoids unwarranted interpretation by the tribunal, which may affect state right to regulate. Similarly, Article X.11 excludes expropriation claims on compulsory license and exclusively explains that indirect expropriation occurs when measure substantially deprives the investor property right such as (i) right to use (ii) enjoy and dispose of its investment (ii) transfer of title or seizure. In spite of such approach, public outcry on ISDS provisions seems to be a major hurdle for the European Union.  Therefore, to negate such a scenario and create a positive public opinion on TTIP, the Commission has proposed ‘Investment Court’ to address Investor claims.

Investment Court: Coffin for ISDS?

The concept of ‘Investment Court’ has been floating through Commission Draft Text of TTIP, which opens with a disclaimer that the document is solely for internal purpose and the commission will consult with the EU’s Member States and discuss the proposal with the European Parliament before presenting it formally to the United States.  The said EU proposal for an Investment Court is described as ‘over ambitious’ and deprives investors of the traditional possibility to choose their arbitrator. The proposal establishes a two tier court system; Tribunal of First Instance (tribunal) and Appeal Tribunal. The tribunal will follow the existing international arbitration rules of ICSID and UNCITRAL. Similarly, Article 13 allows the tribunal to apply only international law and interpret agreements in accordance with customary rules of interpretation. The provision expressly argues that the tribunal is not obliged by domestic interpretations of the law and the tribunal shall not have jurisdiction to determine the legality of a measure under the domestic law of the disputing party.

One of the criticisms of ISDS was the lack of transparency and maverick arbitrators. The proposed Investment Court has overcome such criticism. According to Article 11 of the proposal, judges of the Tribunal and members of the Appeal Tribunal must be persons whose independence is beyond doubt. Similarly, judges shall not be affiliated with government or organizations and also upon appointment, they shall refrain from acting as counsel in any pending or new investment protection disputes under this or any other agreement or domestic law.  In addition, the party to the dispute may challenge the appointment of the judge if it considers that the judge or member has a conflict of interests.

The very fundamental principle of investment arbitration is the investor’s active role in the appointment of an arbitrator. The proposed draft takes away this privilege of investors. However, the proposed draft gives an opportunity to the United States and the European Union to appoint permanent judges to the Appeal Tribunal and also to the Tribunal of First Instance.

This makes me suspicious regarding the possible political appointment of judges. This is very much possible, considering the worries of EU. Moreover, such pro-state judges will keep in mind to avoid unnecessary interpretation which limits the state’s right to regulation.  I believe that the investors cannot accept such an appointment process as the very fundamental reason for the involvement of investors in the appointment process was to avoid political interference. Therefore, I think the Commission should reconsider the appointment of judges and – if needed – some share should also be given to investor to balance the appointment process.

The proposed draft clearly fills the demand for more transparency in the arbitration process by abiding with the ‘UNCITRAL Transparency Rules’ and lists down documents to be publicly made available upon request. Additionally, it goes beyond and allows disclosure of third party funding to the parties.  This is indeed a very important aspect of the proposed draft.

In the end, I conclude that the proposed Investment Court seems a way to avoid ISDS. Moreover, it looks that proposal aims to gather positive public opinion on TTIP. The major question is even if the proposal of Investment Court System is accepted, then will it be applied retrospectively to all previous several Investment Agreement to which EU is member? If not, then there is always a scope of diverse opinion, which may narrow the state right to regulate. Time will tell whether ‘Investment Court’ is coffin to ISDS or muffin to the EU trade policy.

Let time be the protagonist.


Pratyush Nath Upreti recently completed Advanced Master (LLM) Intellectual Property Law & Knowledge Management (IPKM) from Maastricht University, Netherlands.  He is also an active member of New IP Lawyer’s, a wing of school of Law and its research centre SCule (Science, Culture and the Law) under University of Exeter, United Kingdom. He can be reached by p.upreti@student.maastrichtuniversity.nl