Jeremy Corbyn, Leader of the Labour Party, recently announced a report entitled "Medicines For the Many: Public Health before Private Profit", which sets out a proposed set of policies on access to medicines in the UK, which are reflected in the Labour Party's manifesto launched last week. An accompanying press release described the report as "a radical programme of reforms to make life-changing drugs available at affordable prices and create a health innovation system that will put public health before private profit". In this article, we summarise key aspects of the proposed policies, consider the relevant legal background and analyse potential implications for companies operating in the life sciences sector, with a particular focus on issues relating to intellectual property.
1. Key points
The Medicines for the Many report (the "Report") envisages a potential future Labour government "actively [using] voluntary and compulsory licenses to secure affordable generic versions of patented medicines where the patented product cannot be accessed". The Report proposes doing this either via claiming the use of patented inventions for services of the Crown ("Crown Use"), or via applications for compulsory licenses. The powers to access patented medicines in these ways are already provided for in the Patents Act 1977, which also includes provisions for compensation for affected patent owners, but there is little case law on their use in practice.
We envisage that any exercise of the Crown Use or compulsory licence provisions is likely to give rise to litigation over the nature and extent of these powers and associated provisions (such as compensation), particularly given the lack of guidance available from the Courts to date. Decisions by the Government and other public bodies (such as NICE) in connection with the assertion of Crown Use or as part of an application for a compulsory licence must be taken in accordance with public law principles (such as acting within their powers and in a procedurally fair manner), otherwise it may be possible to challenge them by way of judicial review. It is also possible that a compulsory licence or Crown Use might amount to a de facto expropriation or a control on use of property within the meaning of human rights legislation and also as generally protected against in the numerous bilateral investment treaties to which the UK is a party.
Further, since the UK is party to the international Agreement on Trade-Related Aspects of Intellectual Property Rights ("TRIPS"), any amendments to UK law proposed by a future Labour government in this regard will have to be compliant with the terms of that Agreement. Since TRIPS provides that "unauthorised use", which includes compulsory licensing and Crown Use, should only be permitted where, amongst other things, a proposed user has first made an effort to obtain a licence on reasonable commercial terms and that a patent owner will be entitled to adequate renumeration, any proposed amendments to the relevant compensation provisions provided for in the Patents Act will have to be considered carefully in this light.
The Report also states that a Labour government intends to review "non-patent monopoly protections on medicines" such as data/marketing exclusivity, SPCs and patentability criteria. However, as regards patentability requirements, since the UK is a signatory to the European Patent Convention (the "EPC"), an international agreement that is entirely separate from the EU and its institutions and as such, not affected by Brexit. Consequently, a UK government's ability to alter unilaterally the patentability requirements applying to patents in the UK is limited. The UK's scope to amend provisions on data/marketing exclusivity and SPCs may be similarly limited, subject to the terms of the UK's exit from the European Union.
It may therefore be difficult for a Labour government to achieve a number of the aims set out in the Medicines for the Many Report without international cooperation.
2. Labour's proposal in brief
The Report extends to 52 pages and contains a discussion of a number of proposed policies, including some which the Labour Party states that it would implement immediately were it elected, and others which would be put into effect in the longer term. In the press release accompanying the Report, the immediate actions are summarised as follows:
Actively use voluntary and compulsory licenses to secure affordable generic versions of patented medicines where the patented product cannot be accessed;
Increase the transparency of medicine prices, the true cost of research and development and pharmaceutical company finances so that the NHS can have informed discussions on drug pricing;
Resist efforts to increase corporate control over medicine and drug intellectual property rights in future trade deals by excluding provisions that go beyond the TRIPS agreement.
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The longer term actions are described in the same press release as:
Creating a publicly owned pharmaceutical company to manufacture generic drugs and medicines to sell to the NHS at affordable prices, with any profits reinvested back into the existing network of publiclyfunded research and development facilities, used to offset the cost of more expensive drugs or fund nondrug based public health interventions to improve health outcomes;
Separate innovation from price incentives by replacing the current system where research and development funding is channelled into the most lucrative and profitable medicines with a system of innovation funding based on upfront grants or subsidies and funding awards tied to priorities that are most socially valuable and challenging such as antimicrobial resistance;
Attach public interest conditions to any public funding for research and development so any organisation receiving taxpayers' money will need to ensure patient access and affordability, share their knowledge and disclose data on their research and development spending.
3. Crown Use and Compulsory Licenses under UK Patent Law
Although the Report in places refers to "compulsory licences", elsewhere it appears that what is envisaged is the exercise by a future Labour government of the broad powers for the use of patented inventions for services of the Crown ("Crown Use") that already exist under the Patents Act 1977. The distinction between the compulsory licence regime and the Crown Use provisions may be important in this context, for example when it comes to the compensation which must be provided to the patentee.
Crown Use
Sections 55 to 59 of the Patents Act 1977 provide for the use by any government department or any other person authorised in writing by a government department, of patented inventions for "services of the Crown" (which is defined, in section 56(2)(b), as including the production or supply of specified drugs and medicines). Drugs and medicines will be considered 'specified' for these purposes if they are (i) required for the provision of primary medical services, pharmaceutical services or various medical dental services under certain legislation relating to the National Health Services of the UK; and (ii) specified for this purpose in regulations made by the UK Secretary of State.
Where patented medicines or drugs meet these requirements, section 55(1)(a) of the Act allows the making, using, importation, keeping, selling, offering for sale, disposing or offering to dispose of such patented products (including products obtained directly by means of a patented process), without the consent of the patentee. Section 55(7) requires that the government must notify the patentee as soon as practicable after the use is begun (or the patent is granted, if later). If the government supplies a patented product to a third party under the Crown Use provisions, that third party may deal with the product as if the Crown were the patentee, according to section 55(8).
As far as compensation is concerned:
if the invention in question has been "recorded by or tried by or on behalf of a government department" before the priority date of the invention, then no royalty or other payment by way of compensation is required in respect of Crown Use of the invention (section 55(3));
where the invention in question has not been "recorded by or tried by or on behalf of a government department" before the priority date of the invention, any Crown Use must be on terms agreed between the relevant government department and the patentee, with approval of the UK Treasury or, where no agreement can be reached, as determined by a Court pursuant to a reference by either party under section 58 (section 55(4)) case law relating to compensation pursuant to the Crown Use provisions of the Patents Act 1948 suggest that the approach of the court will be to determine what a willing licensee and licensor would have agreed as a reasonable royalty by way of compensation for the use in question1;
1 Patchett's Patent (No.2) [1967] F.S.R. 249 (1967)
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in addition to the compensation payable under section 55(4), the government department concerned in Crown Use must pay the patentee (or their exclusive licensee) compensation for "any loss resulting from his not being awarded a contract to supply the patented product or perform the patented process or supply a thing made by means of the patented process". In determining the level of compensation, regard must be had to the profit which the patentee/licensee would have made on such a contract, provided that such a contract could have been fulfilled from the patentee/licensee's existing manufacturing or other capacity, though notwithstanding the existence of circumstances rendering the patentee/licensee ineligible for the award of such a contract (section 57A).
It is worth noting that in some situations relief can only be ordered by the court in relation to Crown Use where the patentee can prove that (i) the specification of the patent was framed in good faith and with reasonable skill and knowledge; and (ii) the relief is sought in good faith.
The powers of Crown Use, both under the Patents Act 1977 and its predecessor, section 46 of the Patents Act 1949, remain almost entirely untested in litigation. Indeed, the last time that a case came to court in which the British government was using Crown Use provisions in relation to the supply of a medicinal product, specifically with the aim of reducing expenditure in the National Health Service, was in 1965 2.
Compulsory licences
The Patents Act 1977 also provides that once three years have elapsed after the grant of a patent, a government department can apply to the comptroller of patents at the UK IPO for a licence under the patent to be granted to any person specified in the application (section 48(1)(c)). The grounds upon which such an application may be made are that: 3
demand in the UK for a patented product is not being met on reasonable terms;
by refusing to grant a licence to the patented invention on reasonable terms, the proprietor has:
prevented or hindered the exploitation in the UK of any other patented invention involving an important technical advance of considerable economic significance in relation to the patented invention;
unfairly prejudiced the establishment or development of commercial or industrial activities in the UK;
by imposing conditions on the grant of licences under the patent, or on the disposal or use of the patented product, or on the use of the patented process, the proprietor has unfairly prejudiced the manufacture, use or disposal of materials not protected by the patent, or the establishment or development of commercial or industrial activities in the UK (section 48A).
As with Crown Use, cases relating to compulsory licences have been few and far between in recent decades and the law remains relatively untested.
4. International obligations with respect to use of the subject matter of a patent: the TRIPS Agreement
The starting point when considering the UK's international obligations in terms of use of the subject matter of a patent without the authorization of the patentee, including use by a national government or third parties authorized by a national government, is Articles 31 and 31bis of TRIPS, with which the national legislation of WTO-member states must be compliant (subject to exemptions and waivers which apply for a transition period). Article 31 states that, subject to particular exceptions, unauthorised use (such as use via compulsory licensing and Crown Use) should only be permitted under national law where certain criteria are respected. These criteria include a requirement that any request for unauthorized use is considered on its individual merits, and that the proposed user must first make an effort to obtain a licence on reasonable commercial terms within a reasonable period of time. Further, Article 31 of TRIPS imposes particular conditions on the nature of the licence once granted, including that it must be non-exclusive, non-assignable, and limited in
2 Pfizer Corp v Ministry of Health [1965] A.C. 512 3 Different grounds will apply depending on whether or not the patentee is a national of, domiciled in or has a place of business in a
World Trade Organisation country (and is, therefore, a "WTO proprietor"). In this section we consider the grounds applicable to WTO proprietors given that they will apply in the vast majority of cases.
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scope and duration according to the purpose for which it was granted. Pursuant to TRIPS, the patent owner will be entitled to adequate remuneration in relation to the licence 4.
The TRIPS Agreement
The TRIPS agreement, which came into effect on 1 January 1995, is to date the most comprehensive multilateral agreement on intellectual property. The three main features of the Agreement are:
Standards. In respect of each of the main areas of intellectual property covered by TRIPS, the agreement sets out the minimum standards of protection to be provided by each Member.
Enforcement. The second main set of provisions deals with domestic procedures and remedies for the enforcement of intellectual property rights. TRIPS lays down certain general principles applicable to all IPR enforcement procedures.
Dispute settlement. TRIPS makes disputes between WTO Members about the respect of the TRIPS obligations subject to the WTO's dispute settlement procedures.
The TRIPS agreement is a minimum standards agreement, which allows Members to provide more extensive protection of intellectual property if they so wish. Members are left free to determine the appropriate method of implementing the provisions of the Agreement within their own legal system and practice.
Any amendments to UK law proposed by a future Labour government in relation to Crown Use and compulsory licences will, therefore, have to comply with the framework set out in Article 31 of TRIPS, if the UK is to avoid a breach of its obligations under international law. So, for example, any amendments to the relevant compensation provisions under UK law will have to be considered carefully in this light (in particular, the Report states that a future Labour government would "Review and revise section 57A of the Patents Act to ensure it does not block the originally intended use of the Crown use provision"). In essence, the TRIPS agreement does not require signatories to make provision for unauthorized use, such as via compulsory licences or Crown Use, but equally TRIPS does not prohibit it. National governments of signatory states are left to decide whether to allow unauthorized use, but TRIPS provides a framework around any such provisions of national law which must be adhered to if a national government does allow such use. It is, therefore, open to signatories to the TRIPS agreement to agree (for example, as part of a Free Trade Agreement) to adopt more restrictive provisions on unauthorized use than are provided for in Articles 31, or to preclude such unauthorized use altogether, provided that any agreed measures do not contravene any other provisions of TRIPS (including Article 31bis). This explains the discussion in the Report regarding a post-Brexit US-UK free trade agreement and the possibility that it will contain provisions requiring the UK to weaken NHS price-control mechanisms. The Report states that the Labour Party's policy will be to ensure that the UK "[does] not include TRIPS-plus demands in negotiations of free trade agreements or endorse other countries adopting these provisions. TRIPS-plus goes beyond what is required as part of the TRIPS agreement and creates further legal barriers to implementing flexibilities."
5. Possible consequences and implications of Labour's proposed policy
The Report does not give any substantial detail on how, in practice, a future Labour government would use the compulsory licencing and/or Crown Use powers in the Patents Act 1977. One possibility is that the powers
4 For completeness, we note that European Regulation (EC) 816/2006 provides for compulsory licensing of pharmaceuticals for export to developing countries with public health problems however, given that the focus of this memorandum is on licensing within the UK, rather than in the context of export to other countries, this has not been considered in detail.
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might be exercised once or twice in relation to high profile cases (such as the cystic fibrosis drug Orkambi, which was specifically highlighted in both the Report and Mr Corbyn's speech announcing the policy at the recent Labour Party Conference) as a warning in the hope that this influences the manner in which pharmaceutical companies approach negotiations with NICE in future. In this connection, we note that pharmaceutical companies have successfully challenged NICE decisions which were unfavourable to them (which we return to briefly below). Another possibility is that the powers are exercised much more widely and routinely, whenever NICE decides that a drug should not be approved for NHS use on the basis of its cost.
In any event, it is to be expected that any exercise of the Crown Use or compulsory licence provisions of the Patents Act by a future Labour government would give rise to litigation over the nature and extent of these powers and associated provisions (such as compensation), particularly given the lack of guidance available from the Courts to date as a result of the dearth of relevant cases since the Patents Act 1977 came into effect. Litigation is likely to focus not only on correct approach to the key provisions of the legislation in general, but also on the finer details and individual wording of each relevant part of the statute. Provisions relating to the grounds upon which compulsory licences may be granted, and to the compensation (in relation to both Crown Use and compulsory licences) are likely to be a particular area of focus of such litigation. We set out below (in the section on "public law and human rights") some more detail on the likely grounds on which challenges to government decision making in this area will be founded.
On one hand, it seems likely that, the Crown Use provisions of the Patents Act 1977 may be favoured by any future Labour government seeking to implement the policies set out in the Report section 55 of the Act confers on the government a right unilaterally to use inventions for the services of the Crown, provided that certain requirements are met. In contrast, compulsory licences would be a less straightforward route because, in order to obtain one, the government is required to apply to the comptroller to request such a licence, which will only be granted if the government succeeds in convincing the comptroller that the specific requirements of the Act have been met on the merits of its case.
On the other hand, the compensation provisions associated with Crown Use (particularly those in section 57A relating to loss of profit) may be more generous than those associated with compulsory licences, although this will depend on how these issues are approached by the UK courts.
It is particularly interesting to note that, in applying for a compulsory licence, the comptroller (and then, potentially, the courts) may be required to decide whether or not a patented product is being supplied "on reasonable terms" in the UK. Where a compulsory licence is requested in relation to a product which is not available through the NHS in the UK solely because NICE has refused approval on grounds of cost, this could mean the court is called upon to adjudicate on the question of whether the (likely confidential) price offered to NICE by a pharmaceutical company for the product in question is "reasonable". Equally, it is possible to envisage the courts being asked to determine questions of whether NICE's approach to evaluating medicines (including the framework in which medicines are assessed by reference to the cost per quality-adjusted life year ("QUALY")) and the government's approach to funding medicines are lawful in relation to a given drug.
Indeed, as mentioned above, there have been cases where decisions of NICE, which is a body exercising public functions and which is therefore amenable to judicial review, have previously been challenged in the courts. For instance, in Eisai Ltd v NICE [2008] EWCA Civ 438 the Court of Appeal found that NICE had breached the general principle of procedural fairness by failing to make available a fully executable (as opposed to read-only) version of an economic model as part of a consultation on new guidance in relation to certain drugs for the treatment of Alzheimer's disease. In addition to procedural challenges such as in Eisai, decisions of NICE could be subject to judicial review challenges on the basis that they are irrational (e.g. that they are so unreasonable that no reasonable decision maker could have reached that decision) 5 or unlawful (e.g. if NICE has gone beyond its statutory powers).
Such scenarios could see the courts being pulled into disputes which come very close to issues of politics and public policy.
5 See for instance Servier Laboratories Ltd v NICE [2010] EWCA Civ 346, where the Court dismissed a challenge to NICE's refusal to recommend Servier Laboratories Ltd's drug as the preferred treatment for the prevention of osteoporotic fractures in postmenopausal women.
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6. Avenues of Challenge: Public Law and Human Rights
Property-related human rights
If the value of a pharmaceutical company's intellectual property rights are diminished as a result of the measures outlined in the Report, it might be possible to challenge the relevant measure based on principles relevant to the peaceful enjoyment of possessions, which exist both at common law and pursuant to the Human Rights Act 1998.6 The Human Rights Act incorporates the European Convention on Human Rights (the "Convention"), including Protocol 1, Article 1 to the Convention ("A1P1") into UK law.
A1P1 protects the right to peaceful enjoyment of property (which, as relevant here, includes patents). In the case of deprivation (or expropriation) of property, appropriate compensation is ordinarily payable under A1P1, whilst in the case of a "control on use" of property, compensation is less likely to be payable.
De facto expropriation, control on use and compensation
It is possible that a compulsory licence or Crown Use might amount to a de facto expropriation or a control on use within the meaning of A1P1, for example if the value of intellectual property rights are diminished. The classification will ultimately rest on the practical impact of a future Labour Government's action on the particular property rights.
While at this stage (given the lack of detail on the policy proposals) it is difficult to give a firm view on how the courts would classify a particular interference with property rights, the courts are ordinarily reluctant to find that a measure is in fact a deprivation. For instance, in R (British American Tobacco UK Limited) v Secretary of State for Health [2016] EWCA Civ 1182 (the "Plain Packaging case"7), concerning trademarks, the Court of Appeal found that a de facto deprivation does not necessarily arise even where the Government carries out measures that make a company's property rights "far less valuable than they were before".
Once more detailed policy proposals are put forward, it could be considered whether a future Labour government's proposed interference with pharmaceutical companies' property rights would amount to a "control on use". There would then be an analysis as to whether the control is "sufficiently severe" that compensation is payable. In the Plain Packaging case, the Court of Appeal emphasised that such "sufficiently severe" cases require compensation which achieves a fair balance between the Government's policy objectives and the impact of the control on use on the individual's property rights.
Interplay with TRIPS
As mentioned above, Article 31 of the TRIPS agreement provides for compensation for use of the subject matter of a patent without the authorisation of the patentee. While this is a helpful provision from the perspective of pharmaceutical companies, which we expect would be considered as part of any challenge seeking compensation, it is unclear how far this provision in an international treaty would provide any further protection than that afforded by A1P1 (as set out above). This is an issue that we envisage being tested by the courts as part of any challenge.
Interplay with Section 57A of the Patents Act
The Report states that section 57A of the Patents Act "creates ambiguity on the need to offer compensation to the patent holder for loss of profits in the event of the government utilising a Crown use licence." The Report notes that there have been limited cases in this area and concludes that "it is reasonable to interpret that this right is only extended to those with a reasonable expectation of profit". We consider it likely that the level of compensation payable will be contested and it is not clear to us that the courts would necessarily endorse the interpretation put forward in the Report. It is probable the principles for compensation under A1P1 would be considered as part of any such litigation, not least because, under s3 of the Human Rights Act, all legislation must be read and given effect in a way which is compatible with Convention rights (including A1P1).
Possible amendments to the law
The Report also suggests that a Labour government might "revise the law to make it clear there is no
6 There are also similar protections in Article 17 of the Charter of Fundamental Rights of the European Union, albeit under the terms of the European Union (Withdrawal) Act 2018 the Charter will no longer apply in the UK after Brexit.
7 Herbert Smith Freehills acted for British American Tobacco in the Plain Packaging case.
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responsibility to pay compensation in such cases." To the extent that a Labour government implemented this measure through primary legislation in Parliament, for instance by amending s57A (whether or not having regard to TRIPS), a challenge might be made on human rights grounds (for example, that the legislation is incompatible with A1P1). A court has the power to make a declaration of incompatibility under s4 of the Human Rights Act. This is effectively a public statement that the relevant legislation is incompatible with the Convention and Human Rights Act, following which a government will often amend that legislation.
However, if a Labour Government sought to "revise the law" through other means (for instance by way of secondary legislation or administrative action), the scope for bringing public law and human rights challenges would be far broader and the relevant subordinate legislation or administrative decision would be amenable to judicial review. Potentially relevant grounds of review would include error of law (including if the subordinate legislation or administrative decision goes beyond the terms of the primary legislation which provides for licensing), taking into account irrelevant considerations or ignoring relevant considerations in the exercise of the power, bad faith, unreasonableness and any procedural arguments that might be appropriate.
We note that similar constraints will apply to Government actions in other related areas (for instance a decision to exercise the existing compulsory licencing and Crown Use provisions).
7. Other IP-Related Policies
Data/marketing exclusivity, SPCs and patentability criteria
The Report further states that data exclusivity, marketing exclusivity and SPC protection "have been criticised for fuelling higher prices while having a questionable effect on innovation", before going on to express an intention to review such "non-patent monopoly protections on medicines". The Report also states that "Brexit might present an opportunity for the UK to move away from these EU rules, while remaining in the EU could give the UK the chance to collaborate with other countries to place them under review".
Data exclusivity
The period of time where an applicant cannot rely on the clinical data, submitted by the original applicant to a national regulatory authority for their own regulatory submission for the same compound. In effect, this provision prevents others from relying on pre-existing clinical data in order to obtain regulatory approval for their generic, hybrid or biosimilar product.
Marketing exclusivity
The period of time during which a generic, hybrid or biosimilar cannot be placed on the market, even if the medicinal product has already received a marketing authorisation.
Supplementary Protection Certificates
A form of IP that extends the protection of patented active ingredients present in pharmaceutical products, as a compensation for the delay caused by the need to obtain regulatory approval (a marketing authorisation) in order to be sold in the UK.
Elsewhere, the Report says a future Labour government would "follow Brazil, India and Argentina's lead and initiate a review of the stringency of UK patent criteria and its impact on access to quality and affordable medicine". The logic seems to be that if the requirements for patentability in the UK are made more demanding, pharmaceutical companies will find it harder to protect their products and, accordingly, this will make it easier for generic companies (or the government itself) to offer low-cost versions to the NHS. The compliance of any such amendments with TRIPS would have to be considered in detail.
Moreover, the UK is a signatory to the EPC, an international agreement which is entirely separate from the EU and its institutions, and as such, its status will not be affected by Brexit. A UK government's ability to alter unilaterally the patentability requirements applying to patents in the UK is, therefore, limited; the EPC sets out substantive provisions of patent law in relation to patentability (i.e. validity) and requires that European Patents shall "have the effect of and be subject to the same conditions as a national patent granted by [the EPC
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signatory state for which it is granted]". Accordingly, section 130(7) of the Patents Act 1977 notes that various provisions of the Act relating to patent validity are "so framed as to have, as nearly as practicable, the same
effects in the United Kingdom as the corresponding provisions of the European Patent Convention, the
Community Patent Convention and the Patent Co-operation Treaty have in the territories to which those Conventions Apply" and section 77(1) of the Act states that the UK designation of a European Patent shall be treated as if it were a UK patent. The UK cannot, therefore, unilaterally amend its patent laws (whether in relation to GB patents granted by the UK IPO or the UK designation of European Patents granted by the European Patent Office) in such a way that is inconsistent with the provisions of the EPC.
Even if a future Labour government could somehow unilaterally amend UK law in order to make patent validity requirements more stringent for GB patents granted by the UK IPO, this is likely to have a very limited effect on the cost of medicines. This is because, for reasons of efficiency, global pharmaceutical companies tend to seek patent protection through the European Patent Office by way of a single application for a European Patent, rather than prosecuting individual patents in separate proceedings before each of the EPC signatory states of interest. Accordingly, a future Labour government would need to secure agreement from the EPC signatory states to an amendment of the patentability requirements of the EPC in order to achieve its objectives. This is likely to be time-consuming and challenging.
Conditions to be applied to public funding for research
Finally, the Report outlines a policy to place stricter conditions on government funding for pharmaceutical research and development, with such conditions to include "stipulating that intellectual property rights should
either be avoided or shared via open licensing or participation in patent pools. Such models should be applied
to as many steps of the drug discovery pipeline as possible, from basic research to late-stage clinical trials, and to improve access to end products". The Report also states that "the UK government should also attach
conditions to publicly funded medicines that enable it to license a third party to produce an affordable generic if price becomes a barrier to access in another country". Such provisions could have potentially significant impacts on the ability of pharmaceutical companies to commercialise the outputs of government funded research to which such conditions have been attached. A Labour government would also need to ensure that such contracts were compliant with relevant public procurement principles. Ultimately, however, pharmaceutical companies would not be forced to take such government funding and so would be free to decide whether or not the specific conditions attached to a particular funding offer make commercial sense. Careful analysis of the legal and commercial impact of such conditions, especially from an intellectual property perspective, is likely to be needed before any decision is taken.
8. Investment Protection under Bilateral Investment Treaties
What are bilateral investment treaties?
Foreign investors in the UK which may be affected by a future Labour government's proposed changes to the pharmaceutical industry may enjoy protections under a bilateral investment treaty (a "BIT"). The UK has over 90 BITs with other countries. Whilst BITs are state to state agreements, they usually contain provisions allowing an investor from one state to enforce the guarantees as to the treatment of their investment in the other state (the host state) through international arbitration before an independent tribunal.
Investment treaty protections
A Bilateral Investment Treaty is an agreement between two countries containing reciprocal undertakings for the promotion and protection of private investments made by nationals of the signatories in each other's territories. Such agreements were entered into in order to provide confidence to private investors (e.g. in relation to compensation in the event of expropriation, fair and equitable treatment and so on). The UK has such treaties with a large number of jurisdictions, including China, Hong Kong, India and Singapore.
The definitions of investor and investment vary between different BITs. Investment is defined in broad terms in the 2008 UK Model BIT (the template agreement on which most UK BITs are based (the "Model BIT")) as "every kind of asset, owned or controlled directly or indirectly" by an investor, along with a non-exhaustive list of categories of assets which may constitute investment. The definition of investment in the Model BIT includes shares in a company; claims to money or to any performance under contract having a financial value; and "intellectual property rights, goodwill, technical processes and know-how".
Treaties commonly include protection against unlawful expropriation of an investment, whether directly or indirectly through a series of governmental acts which
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encroach on an investment and result in it being deprived of value. Other protections include the guarantee of fair and equitable treatment (or "FET"). Claims under FET provisions typically fall into two broad categories: prohibitions against a denial of justice and claims based on administrative decision-making. Not all regulatory changes will constitute a violation of the FET standard, and the existence of such protections does not deprive a state of its ability to exercise its regulatory powers. However, where the state's exercise of its regulatory power is based on procedural unfairness or lack of due process, bad faith, discrimination or a failure to protect an investor's legitimate expectations as to how they will be treated, a FET claim may be warranted.
Compulsory licencing, indirect expropriation and the guarantee of FET
As mentioned above, a compulsory licence or Crown Use may amount to an act of indirect expropriation.
BITs generally protect against expropriations which are (i) not for a public purpose; (ii) discriminatory; (iii) not conducted according to due process of law; and (iv) not accompanied by "prompt, adequate and effective compensation" (or similar wording). By way of example, the 2008 UK Model BIT provides that the compensation payable on expropriation shall be "the genuine value of the investment expropriated immediately before the expropriation or before the impending expropriation became public knowledge, whichever is the earlier ...".
Even if an expropriation is properly considered as being for a public purpose, non-discriminatory and conducted according to due process of law, if compensation is provided by reference to a lower standard than the measure of compensation provided by the relevant BIT, a qualifying investor may nonetheless have a claim under the BIT.
The guarantee of FET may also be significant in the context of Labour's other proposed changes outlined in the Report, particularly if the investor can demonstrate that its legitimate expectations are disappointed. A breach of the FET guarantee is compensable in damages.
BITs and the TRIPS
As discussed above, Article 31 of the TRIPS agreement contains provisions relating to the compensation payable for use of the subject matter of a patent without the authorization of the patentee. However, it is possible that the compensation which a government decides to pay consistent with its obligations under TRIPS may be less than the compensation for expropriation guaranteed by a BIT.
Some investment treaties address the relationship between the substantive protections of the BIT and other international agreements such as the TRIPS agreement. For example, Article 6 of the 2012 US Model BIT contains a provision that precludes the application of the expropriation provisions in the BIT to the "the issuance of compulsory licenses granted in relation to intellectual property rights in accordance with the TRIPS Agreement, or to the revocation, limitation, or creation of intellectual property rights, to the extent that such issuance, revocation, limitation, or creation is consistent with the TRIPS Agreement."
The 2008 UK Model BIT does not contain similar provisions, and (with very limited exceptions), nor do the UK's BITs currently in force. A UK BIT with a third state which covers intellectual property rights within the scope of the definition of investment may therefore provide qualifying investors with access to a better compensatory regime than that specified in the TRIPS agreement.
Legitimate treaty planning
Some of the largest foreign direct investors in the UK pharmaceutical sector are headquartered in the US, Japan, Belgium, Switzerland and Germany none of which countries have a BIT with the UK. Investment from EU Member States in the UK is also considerable. The UK has BITs with certain EU Member States although the continued effect of these is subject to uncertainty depending on the nature of any Brexit transition or deal.
Investors whose investments do not qualify for protection under a BIT (for example, because there is no BIT between the investor's home state and the UK), may wish to consider restructuring their investments in order to provide a potential method of additional protection under international law against volatility and significant changes in policy. The timing of any such restructuring is key as tribunals have drawn a distinction between legitimate treaty planning and abusive restructuring with the intention of internationalising a domestic dispute.
Aside from the considerations arising from Labour's policy plans, investors in the pharmaceutical industry, including pharmaceutical and life sciences funds and other private equity investors, may wish to consider investment treaty planning in the usual course of structuring their investments in the UK and elsewhere.
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9. Contacts
Sophie Rich, Partner Intellectual Property T +44 20 7466 2294 sophie.rich@hsf.com
Andrew Wells, Senior Associate Intellectual Property T +44 20 7466 2929 andrew.wells@hsf.com
Andrew Lidbetter, Partner Administrative & Public Law T +44 20 7466 2066 andrew.lidbetter@hsf.com
James Wood, Senior Associate Administrative & Public Law T +44 20 7466 2306 james.wood@hsf.com
Andrew Cannon, Partner Public International Law T +44 20 7466 2852 andrew.cannon@hsf.com
Sebastian Moore, Partner Intellectual Property T +44 20 7466 2801 sebastian.moore@hsf.com
Joanna Silver, Senior Associate Intellectual Property T +44 20 7466 2315 joanna.silver@hsf.com
Nusrat Zar, Partner Administrative & Public Law T +44 20 7466 2465 nusrat.zar@hsf.com
Hannah Ambrose, Senior Associate Public International Law T +44 20 7466 7585 hannah.ambrose@hsf.com
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Herbert Smith Freehills LLP 2019 The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on the information provided herein.
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