The TRIPS Waiver and BITs: Scope for Concern?

[Aarohi Chaudhuri is a 3rd year BA LLB (Hons.) student at the National Law School of India University, Bengaluru]

In April 2021, a group of WTO members led by India and South Africa proposed the temporary lifting of patents over Covid-19 vaccines. The suggested mechanism to achieve this end was to waive the relevant provisions of the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (‘TRIPS’). This waiver would have enabled manufacturers in lower income countries to access the necessary technology to produce vaccines at affordable rates. On the other hand, manufacturers based in higher income countries are opposed to this on the grounds that it would stifle innovation, and unfairly deprive them of their proprietary rights.

This crisis sheds light on the frequent burden of States to balance two distinct sets of international law obligations, being investment-friendly policies as mandated by free trade agreements (‘FTAs’), and regulatory goals such as the protection of human rights or the environment. Covid-19 has caused these sets of obligations to clash: a State’s desire to democratize vaccine access through a waiver of patents encroaches into the intellectual property rights (‘IPR’) of the pharmaceutical sector. Investor-state dispute settlement (‘ISDS’) is one hitherto unexplored forum wherein this clash of obligations could play out.

In this post, I explore whether the proposed TRIPS waiver of IPR over vaccines could give rise to ISDS claims against India and the other participating States. First, I will examine whether IPR can qualify as an ‘investment’ so as to invoke ISDS at all. Second, I will attempt to locate the TRIPS waiver in a substantive violation of international investment law.

Are IPR ‘investments’ in international investment law?

At the threshold level, claimant pharmaceutical firms must demonstrate that their vaccine patents fall within the scope of protected investments as defined in a bilateral investment treaty (‘BIT’), or the investment chapter in an FTA. Many BITs explicitly include IPR in their definitions of investment [see Germany-India BIT (1995) art 1 (b) (iv); Chile-Egypt BIT (1999) art 1 (2) (f)]. Certain BITs, however, place the additional caveat that the IPR in question be recognized by the national laws of both participating States [Benin-Ghana BIT (2001) art 1 (1) (iv)]. This latter paradigm would create hurdles for pharmaceutical companies whose patents are not registered within the States they bring claims against. An unregistered patent being the basis for an ISDS claim would prove problematic, as the claimant would essentially be claiming relief for an asset that does not even exist under the laws of the host State. That said, the express inclusion of IPR within the definition of investment is neither necessary nor sufficient to satisfy the jurisdictional requirement. Should IPR expressly be included, it can provide guidance to a tribunal as to jurisdiction; if not, IP is not ipso facto excluded, because BITs are rarely exhaustive in their definitions. Rather, the principal metric is whether IPRs satisfy the characteristics of an investment, as laid down in Salini v. Morocco [¶52].

The Salini test was developed for ICSID Tribunals to establish whether jurisdiction exists as under article 25(1) of the ICSID Convention. It has subsequently been adopted into the language of various investment agreements, as an independent requirement for any claim brought by an investor to satisfy [see Brazil-India BIT (2020) art 2.4; Switzerland-Tunisia BIT (2012) art 1; China-Japan-S. Korea Trilateral Investment Agreement (2012) art 1]. According to the version of the test typically used today, a proposed investment must (i) involve a contribution of capital or other resources; (ii) be of a certain duration; and (iii) include an assumption of risk by the investor [see Mabco v. Kosovo ¶296; AMF Aircraft-Leasing v. Czech Republic ¶472]. These criteria are considered interdependently, and not individually: for example, a contribution of capital in itself implies a duration of commitment, and risk of loss.

Prima facie, requirements (ii) and (iii) above are satisfied by the commercial interest held in, as well as the longevity of, IP rights. Requirement (i), however, may prove contentious with regard to establishing a contribution by a claimant investor. As observed in Orascom v. Algeria [¶370], while this contribution could be in the form of capital or other resources, it must necessarily be made to the host State. This qualifier could exclude circumstances wherein pharmaceutical firms have invested resources in developing a vaccine in their home country, and only registered the patent in the host State without any real expenditure therein. In such cases, there would be no economic contribution made within or towards the host State, thus removing potential claims from the scope of investment protection. However, a valid claim may instead lie in respect of other infrastructure associated to its vaccine patents within a host State, such as a manufacturing plant or storage and distribution facilities. Such physical infrastructure more clearly meets the requirements of the Salini test. A waiver of IPR would render this associated infrastructure economically unviable as well, and thus enable an ISDS claim.

On what grounds could an ISDS claim arise?

I submit that two classes of claims may arise through the TRIPS waiver: (i) claims based on violations of reasonable treatment standards (such as national treatment or fair and equitable treatment); and (ii) expropriation-based claims.

With respect to the first class of claims, there are two relevant obligations that would arguably be breached by a waiver of patent rights. First, is the expectation of stability in a State’s domestic legal framework, which is either expressed as a standalone clause, or read into the Fair and Equitable treatment (‘FET’) standard. The latter is of greater concern to India, given that its Model BIT and subsequent agreements do not include a standalone stabilization clause. This obligation suggests that an investor is entitled to expect no significant change to the general regulatory framework in place at the time of an investment [see CMS v. Argentina ¶284]. The tribunal in BayWa v. Spain [¶73] went further to note that this includes a change to those legal and regulatory policies existing at the time of investment, that were instrumental to the investor making said investment in the first place. An expectation regarding the consistent and meaningful protection of IP rights would have been material to pharmaceuticals entering the drug industry in any given jurisdiction.

The second obligation breached would be the lack of protection from discriminatory treatment. This obligation is often part of FET clauses or national treatment clauses of investment agreements. Discrimination as understood in national treatment clauses pertains to discrimination on the basis of nationality of the investor, whereas discrimination under the FET standard is broader, and refers to any differential treatment from similar cases without cause [see Mobil Exploration v. Argentina ¶883]. Should States use the TRIPS waiver to deny IP rights specifically to foreign manufacturers, and not effectuate the same policy in domestic law through compulsory licensing of IPR held by domestic vaccine manufacturers, it would amount to discrimination on the basis of nationality.

With respect to expropriation, a claim would arise if State policy interfered with the proprietary rights of the investor. Derecognition of patent rights prohibits the patent-holder from preventing unauthorized usage of their IP. This interferes with the right of the patent-holder from controlling the usage of their property, and amounts to indirect expropriation [see Teinver v. Argentina ¶933]. Importantly, expropriation in itself is not unlawful, so long as it is non-discriminatory and is made for a public purpose. However, even in circumstances where the expropriation is found lawful, host States have been found liable to pay compensation amounting to a fair market value of the patent waived [see Santa Elena v. Costa Rica ¶72]. By contrast, in circumstances where the expropriation was found unlawful, compensation would also include reparations for the loss of profits due to the expropriation [see Amoco International Finance Corp. v. Iran ¶264].

Notwithstanding the above, both expectations of fair treatment and protection against expropriation are limited by a State’s right to regulate in the public interest [see Levashova]. In this case, States may cite a vaccine scarcity as a justification to waive IP protection, in order to safeguard public health. While public health is a legitimate purpose to invoke this right to regulate, the mere existence of a legitimate purpose would not absolve States from their duty to compensate investors [see Vivendi v. Argentina (II) ¶7.5.21]. This right of compensation would subsist so long as the regulation was not implemented to curb wrongdoing by the affected investor themselves, under what is otherwise known as the police powers doctrine. Specifically in the public health context, States would still be obligated to compensate investors unless the investors’ activities themselves constitute a threat to public health, such as the production of harmful substances or plain packaging of tobacco [see Philip Morris v. Uruguay¶291; Magyar Farming v. Hungary ¶366].

Conclusion

In all, States following through on the proposed TRIPS waiver would leave themselves vulnerable to potentially expensive ISDS claims by affected pharmaceuticals. At the very least, these claims would result in them having to compensate manufacturers the market value of their patents; at worst, this would include damages for the loss of profits. This is especially concerning as it is developing countries that are at the centre of the movement for a TRIPS waiver. India, which is already in the public eye for pending dues out of the Cairn and Vodafone disputes, can ill afford another such adverse award. While vaccine access remains a concern, States would thus be well advised to reconsider the financial implications of a waiver of TRIPS protection in the current international law framework.

Aarohi Chaudhuri

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