The meaning of the term “protection” in IP law is not the same as the one that is understood in investment law. Intellectual property protects certain classified items such as copyrights, designs, trademarks and patents after satisfying certain qualifications under national laws. Intellectual property protects individuals and legal entities by providing a right of exclusion, which excludes others from use. In contrast, the protection provided by IIAs is a legal mechanism that is used to compensate investors through substantial investment standards for the breach of treaty obligations committed by a sovereign state. Fundamentally, the meaning of the term is different, but those (IP) investments are only protected if they qualify as investments in the host state.
To argue that IP is a protected investment implies that the legality and scope of an IP investment should be established through national law.Footnote 51 Correa and ViñualesFootnote 52 discussed several models and approaches to establishing IP as a protected investment in an influential article. The referral model proposed by Correa and Viñuales argues that if there is a reference to national law in the definition of investment, then IP must be read and understood conceptually and legally according to domestic law. The central idea of the referral model is based on the premise that “domestic law is controlling”.Footnote 53 The authors relied mostly on treaty language to argue the role of domestic or national law. However, the position taken here is that IP is a protected investment by virtue of the territoriality principle embedded in IPRs, irrespective of explicit references made in treaty language. Thus, the national laws play an influential role in determining IP as a protected investment in investor-state arbitration.
Role of National Law in Determining the Legality of IP Investments
How is national law applied to foreign investment disputes to determine whether intellectual property as a protected investment?Footnote 54 There are two ways in which treaty language utilises the relevance of national law in assessing the legality of investments. First, the legality of an investment under national law is either explicitly mentioned in investment agreements through phrases like “rights conferred by contract or national laws” or “in accordance with national laws and regulations”. Second, even in the absence of any explicit references, arbitral tribunals have established that referring to national law is essential for determining investments.
“In Accordance with National Laws” Requirement
The recently signed Brazil–Guyana BIT (2018) refers to investment as “any kind of asset invested … in accordance with the laws and regulations of each party”.Footnote 55 Likewise, many IIAs refer to a country’s national laws in defining investment explicitly. Such references are generally found as a chapeau to the starting definition of investment or are attached to the explicit content of investment.
There is a divergence in the language used in BITs. For example, the Japan–Jordon BIT (2018) defines investment as “made in accordance with applicable laws and regulations”,Footnote 56 but it does not mention national law in relation to IP as it is included in the definition of investment.Footnote 57 Even though national law is not used to refer to IP, the reference to investment “made in accordance with applicable law” is enough to consider national law in cases that involve IP. In contrast, the Congo–India BIT (2010) refers to IPRs, without categorising the definition of investment, as an “asset established or acquired, including changes in the form of such investment that includes intellectual property rights, in accordance with the relevant laws of the respective Contracting Party”.Footnote 58 In the same spirit but with different variations, the Ethiopia–Algeria BIT (2002) refers to “registered trade-marks”Footnote 59 in its definition of investment. The use of the term “registered” indicates that only those rights derived after registering at the national level qualify as IP and are then treated as an investment. Older IIAs feature similar provisions but with different word choices. For example, the US–Egypt BIT (1986) does not refer to national law in its definition of investment, but it does refer to “valid intellectual and industrial rights …”.Footnote 60 The term “valid” denotes that the legality of IPRs is decided at the national level; subsequently, the question of investment should be analysed.
Regarding arbitral awards, national law is essential for determining the legality of investment. In Fraport v. Philippines,Footnote 61 the tribunal analysed the definition of investment, which refers to “accordance with the respective laws and regulations of either Contracting State” and emphasised the role of domestic law to establish the legality of an investment. The tribunal also examined the treaty language and found that “parties were anxious to encourage investment, which was the raison d'etre of the treaty”Footnote 62 and “economic transactions undertaken … . [must] meet certain legal requirements of the host state in order to qualify as an “investment” and fall under the [t]reaty”.Footnote 63 In responding to the claimant’s arguments that compliance of national laws has no international legal significance, the tribunal viewed that:
The [t]ribunal cannot agree, as a matter of law, with the [c]laimant’s contention that “[e]ven if there could be said to be an issue as to whether the Philippine laws were complied with … it could be of only municipal, not international legal significance”. This interpretation, if accepted, would deprive a significant part of the ordinary words of a treaty of any meaning and effect. The BIT is, to be sure, an international instrument, [effect a renvoi to national law] mechanism which is hardly unusual in treaties … . A failure to comply with the national law to which a treaty refers will have an international legal effect.Footnote 64
Similarly, the tribunal in Tokios Tekelés v. UkraineFootnote 65 accepted that if the assets touch on the question of legality, then such assets should fall under the wording of the investment definition “… in accordance with the laws and regulations of the latter”.Footnote 66 These cases confirm the practice of referring to national law to determine the legality of investments under national law before assessing them based on the Salini test.Footnote 67 IIAs that were used in a few IP disputesFootnote 68 that were brought before the ISDS did not explicitly refer to national law. Even if they had, the question of the legality of IP investments did not need to be addressed because the issue was already settled. However, this does not remove the relevance of national law in assessing IP investments. According to arbitral tribunals, the legality clause in IIAs “reflects both sound public policy and sound investment practice”,Footnote 69 and any investment made that goes against the local law is devoid of jurisdiction. In other words, the state maintains some control over foreign investments by denying investors access to dispute settlement if they do not comply with the laws of the host state.Footnote 70 Certainly, in the case of IPRs, legality accrues through registration; if not, an IPR becomes freely available state of art as soon as it is disclosed to the public. The question concerns whether there should be an explicit reference to the role of national law in assessing IP as an investment in treaty language. The next section will answer this question.
“In the Absence of Accordance with National Laws” Requirement
The US–Mongolia BIT (1994) refers to “inventions in all fields of human endeavor”Footnote 71 to define IP. The plain reading of this phrase confirms that everything can be patentable; however, such readings cannot sustain legitimacy. This is because the phrase should be read in the context of national IP laws. In principle, “inventions in all fields of human endeavor” (without the reference to national laws) could be patented, but the scope of patentability criteria is based on national law.Footnote 72 If one reads this from the investor’s perspective, one can easily argue that since the host state has committed to BITs, even “second medical use” patents that are not protected by national law should be protected as investments. This reading is incorrect. Even, if an asset (e.g. inventions) is capable of being patented, but it has yet to receive registration, then it will read as an investment, but not “patent as an investment”. In that case, if the patent is registered at the national level, it will qualify as an investment with limitations of national patent law.Footnote 73 Some IIAs do not explicitly refer to “in accordance with national laws” in their definitions of investment or the content of IPRs that is included in their definitions of investment. In the absence of such explicit references, should arbitral tribunals be required to assess IP investments in relation to national law?
Some arbitral decisions support the role of national law in the absence of such explicit references.Footnote 74 In Cortec Mining v. Kenya, the tribunal concluded that an investment – like licence – is created based on the laws of a host state. Hence, to qualify for protection, an investment must be made in accordance with the national laws of the host state.Footnote 75 In essence, only those investments that derive their legality from national laws or substantially comply with the legal requirements of a host state are treated as protected investments at the international level.Footnote 76 However, the tribunal confirmed that there is no need to explicitly refer to compliance with the national laws of a host state in a treaty. Other tribunals have also determined that compliance with national laws “goes beyond the general rule that for a foreign investment to enjoy treaty protection it must be lawful under the law of the host state”.Footnote 77
Some IIAs refer to “rights in the field of intellectual property, such as copyright, trademark …”.Footnote 78 The references to “rights” indicate that IP originates from the country where it is registered. In other words, the legality of such rights should originate at the national level. The term “rights” not only refers to legality but also means that the scope of rights is based on national law. This point is supported by the Montenegro–Moldova BIT (2014), which refers to accordance with laws and regulations of contracting parties in the first sentence of its investment definition, which is followed by this statement “intellectual property rights, as defined in the multilateral agreements concluded under the auspices of the World Intellectual Property Organization … including, but not limited to, copyrights … .”.Footnote 79 This BIT also includes a separate provision that refers to “rights in the field of intellectual property”.Footnote 80 When read with a general reference to accordance with national laws and regulations, this separate provision within the definition of investment indicates that the scope of “rights in IP” is based on national law. Thus, the reference to “rights” also borrows the same limitations that are incorporated into national IP laws.
Correa has expressed concern about such an approach. He gives the example of the Canada–Argentina BIT (1993), which defines investment as “rights with respect to copyrights patent” contrary to the usual practice of “copyrights, patents”. To Correa, the phrase “rights … with respect to …” would allow investors to argue that IP rights that are not granted by the state would fall under the scope of investment.Footnote 81 To some extent, this is true, but if one reads the reference to “rights” in relation to IP more broadly, one can conclude that this reference means that only those rights that are derived from national law, irrespective of any explicit reference to national law, are considered IP investments. Any assets that can potential qualify as IP cannot be considered unless provided under national law. Similarly, the term “rights” refers not only to validity of or qualification for IP protection, but also to the fact that rights are subject to national law. This means that the scope of those rights is based on the national regime, and they are, therefore, subject to national IP policies. For example, the term “rights” in patents means that not only the validity of patent rights is based on national law, but post-grant administrative or judicial proceedings are also based on substantial and procedural national IP laws.
This practice confirms that IP as an investment cannot be assessed without national laws irrespective of any explicit reference to national laws in the definition of investment. Grosse Ruse-Khan indicated that since IPRs are territorial rights, IP rights in investments must be derived from national laws. This means that the absence of national law requirements in treaty language is irrelevant in the assessment of IP.Footnote 82 An alternative approach to using national law in the absence of explicit references can be made through the applicable law of investment arbitration, which allows the use of “international law”.Footnote 83 In this regard, the Guidelines on Intellectual Property and Private International Law of the International Law Association (ILA) have accepted that in the “grant, registration, validity, abandonment, or revocation of a registered intellectual property right the court of the State of registration shall have exclusive jurisdiction”.Footnote 84 The ILA guidelines are considered to be an instrument of international law and thus fall under applicable law. This means the parties may use ILA guidelines as the applicable law to bring national law in assessing IP as a protected investment. To summarise, irrespective of the treaty language, national law plays an important role in determining the legality of IP investments.
IP-Related ISDS Cases and the Role of National Law
In the Philip Morris, Eli Lilly and Bridgestone disputes, the arbitral tribunals did not rely on national law when assessing investments. In Philip Morris v. Uruguay, the issue of trademarks as investments was never questioned, and the question of legality did not arise because the trademarks in question were registered. In the case of Eli Lilly v. Canada, the tribunal assumed the patent was an investment. In Bridgestone v. Panama, the trademark in question was already registered in Panama; therefore, the question of the validity of the investment did not arise. The Philip Morris and Eli Lilly disputes demonstrate the importance of national IP law in assessing IP-ISDS disputes. This section will first analyse the Philip Morris and Eli Lilly disputes to examine how arbitral tribunals have relied on IP law and the extent to which they have referred to national IP law and will then examine the Bridgestone dispute.
Philip Morris v. Uruguay: Reference to National IP law
The basic assumption in intellectual property law is that the scope of IP protection is based on a territorial limit where it receives protection. The coverage of the exclusive rights within the territory of a country is a testament to the territoriality of IP rights.Footnote 85 One essential finding of an arbitral award in Philip Morris v. Uruguay is that it reflects a well-established territoriality principle in IP law. The dispute was related to tobacco plain packaging measures that restricted the use of a trademark resulting in the expropriation of Philip Morris’ property and destroyed the commercial value of IP and goodwill.Footnote 86 In examining the question of trademark restriction and right to use, the arbitral tribunal referred to Uruguayan laws on trademarks.
First, the tribunal viewed “trademarks and goodwill associated with the use of trademarks are protected investments”.Footnote 87 Second, while assessing if Uruguayan measures expropriated claimant variants, including goodwill and rights deriving from IP, the tribunal looked at the Uruguayan laws on trademarks to analyse whether the national law guarantees a positive right to use. In fact, in response to the claimants’ arguments that the trademark is a property right under the Uruguayan law allowing a right to use a trademark, the tribunal writes:
[N]othing in their [claimants] arguments supports the conclusion that a trademark grants an inalienable right to use the mark … the scope of the property rights is determined by Uruguayan IP Laws, such that, in order to work out the legal scope of the property right, it is necessary to refer back to the sui generis industrial property regime in Uruguay.Footnote 88
After analysing the Uruguayan law and international treaties, the tribunal concluded:
[T]he trademark holder does not enjoy an absolute right of use, free of regulation, but only an exclusive right to exclude third parties from the market so that only the trademark holder has the possibility to use the trademark in commerce, subject to the State’s regulatory power.Footnote 89
The tribunal’s references to national IP law, along with international IP instruments, acknowledges the territoriality principle of IP law. This is particularly important, if, in the future, the arbitral tribunal is required to assess IP-related ISDS claims. International IP recognises a minimum level of protection, allowing WTO Member countries to exercise rights beyond such a minimum level. Taking this into account, if a developing country considers a broadly permissible limitation on IP rights, that might be perceived as indirect expropriation in the eye of investors. Therefore, recognising national IP law assures that in such a scenario, the tribunal will be required to refer national IP law to determine the scope of the rights.
Eli Lilly v. Canada: Pre-Establishment and Post-Establishment Rights
In Eli Lilly v. Canada, a dispute arose after the Canadian Supreme Court invalidated patents on the basis that they failed to meet the Canadian patent law requirement of utility.Footnote 90 The question of patents as investments was never examined since the tribunal assumed patents to be investments.Footnote 91 However, if one considers the facts of the case, one will uncover two questions. First, should the legality of (intellectual property) investments be analysed when they are made? Second, should the assessment of the legality of (intellectual property) investments be considered in relation to the performance of investments? These two questions are relevant because the facts of the Eli Lilly case reveal that the invalidity of the patent (as an investment) that was determined by the Canadian Supreme Court was challenged. The question concerns whether patents as investments should be questioned when they are made or when they act as investments?
Some arbitral tribunals have shed light on the answers to these questions. In Gustav Hamester v. Ghana, the arbitral tribunal clarified that the legality of an investment at the jurisdictional level is confined to initial illegality. The tribunal noted that
a distinction has to be drawn between (i) legality as at the initiation of the investment (“made”), and (ii) legality during the performance of the investment. … Thus, on the wording of this BIT, the legality of the creation of the investment is a jurisdictional issue; the legality of the investor’s conduct during the life of the investment is a merits issue.Footnote 92
The tribunal referred to the ICSID Convention to argue that “states cannot be deemed to offer access to the ICSID dispute settlement mechanism to the investments made in violation of their laws”,Footnote 93 confirming that illegal investments, irrespective of any treaty reference, cannot be deemed investments.
Arbitral practice has established that the assessment of investments should be made at the time an investment is formed. However, considering the contingent nature of IP rights, should IP as an investment be assessed based on the performance of (IP) investments rather than at the time of investment? If this approach is taken, then the dispute that arose in Eli Lilly would have never happened because, once patents are invalidated by the Canadian Supreme Court, an investor does not have patent rights and hence no investment. In other words, to gain legal status, IPRs should be approved by national laws via registration and should be maintained by abiding by the rules and regulations of national law. If one applies the reference to national law to the facts of Eli Lilly v. Canada, one can determine that the first point to emphasise concerns whether there were valid property rights. If patents are invalidated by the Canadian Supreme Court, then no property rights are provided to them. Therefore, patents as protected investments cannot be established. Eli Lilly’s registered patents would be treated as protected investments to the extent that they were subject to national law.
Registration with a specific jurisdiction allows a patentee to exercise their exclusive rights, but to what extent are these guaranteed by the national patent system? International IP provides the freedom to define patentability criteria, and if Canada had adopted the utility criteria in the form of the Promise Doctrine, then by mere registration in Canada, Eli Lilly should have been subject to Canada’s IP policy. Surprisingly, the arbitral tribunals contradicted their approach. They presumed patents to be investments, which means they presumed the validity of IP based on national laws. However, when it came to the revocation and invalidation of IP, the same presumption became a violation of investment standards.Footnote 94 This is because the arbitral tribunal tended to ignore the basic principles of international IP. Therefore, to address this, the principle of territoriality needed to be aligned in the definition of IP that was included in the definition of investment. In other words, reconceptualising the investment definition suggested in Sect. 6 would ensure that national IP limits are recognised.
Regarding the question of lawful investments made in accordance with the host state, examining Cortec Mining v. KenyaFootnote 95 is useful in understanding the role of national law as it relates to investments that indirectly feature IPRs. The dispute arose when the government revoked a special mining licence (SML) that went against the claimant’s assets and interests (shares, IPRs and know-how),Footnote 96 which resulted in the expropriation of the investment. The question before the tribunal concerned whether the SML was a protected investment. The tribunal first acknowledged that an investment made under ICSID arbitration must demonstrate that an investment should “be in accordance with the laws of the host state and made in good faith”.Footnote 97 The tribunal offered a detailed analysis of whether the licence arrangement that resulted in “know-how” and “intellectual property” qualified as a protected investment made in accordance with Kenyan laws. In response to the claimant’s arguments that IP rights and know-how were generated in furtherance of the SML, the respondent argued that “data generated” that may consist of IP rights was freely given to the government “in the hopes of – but with no entitlement to – a mining licence”Footnote 98 and that the data generated was not disclosed and remained the property of the claimant. In other words, there was “no protected investment in IP”. The tribunal agreed with the respondent’s claims and found that the SML was void ab initio under international law. According to the tribunal:
ICSID and the BIT protects only “lawful investments”. The text and purpose of the BIT and the ICSID Convention are not consistent with holding host governments financially responsible for investments created in defiance of their law’s fundamental protecting public interests such as the environment. The explicit language to the effect that protected investments must be made “in accordance with laws of Kenya” is therefore unnecessary to secure the objects and purpose of the BIT.Footnote 99
The above passage indicates the importance of the legality clause. The Cortec Mining tribunal found that the IP was not a protected investment because the licence was based on know-how and generated data that were illegal, which resulted in noncompliance with the host state’s laws. An investor’s access to dispute settlement depends on the conditions imposed by the state. Therefore, the point to emphasise is that states should expressly provide conditions for access to dispute settlement by redefining the content of investment.Footnote 100 One common requirement with which investments must comply is the internal legislation of the host state.Footnote 101
Bridgestone v. Panama: The Degree of Investors’ Engagement in the Host State
Bridgestone v. Panama is the first dispute where arbitral tribunals have discussed when IP (trademarks) is an investment and to what extent investors’ engagement should be considered when assessing IP as an investment.
The dispute arose after Panama’s Supreme Court set aside lower court findings and held that trademark opposition proceedings brought by the claimant were carried out in bad faith; they subsequently awarded a heavy penalty. The claimant filed investment arbitration on the grounds that they had suffered an egregious denial of justice and a violation of due process.Footnote 102 At the time of this writing, the dispute is ongoing; however, the decision on expedited objections addresses some key questions regarding the role of investments in the host state. The question before the tribunal concerned whether a licence to use the relevant trademark satisfied the definition of investment under the US–Panama Trade Promotion Agreement (TPA) and the ICSID Convention.Footnote 103 To answer this, the tribunal needed to establish when a trademark qualifies as an investment. First, the tribunal analysed the functions of trademarks and acknowledged that past arbitral tribunals had not discussed this question:
Nor has this [t]ribunal been referred to any other decision that considers the circumstances in which a trademark can constitute an investment when it is unaccompanied by other forms of investment such as the acquisition of shares in a company incorporated under the law of the host State, the acquisition of real property, or the acquisition of other assets commonly associated with the establishment of an investment.Footnote 104.
Second, to elaborate, the tribunal raised two sub-questions. First, does the mere registration of trademarks in a country qualify as an investment? Second, can the exploitation of trademarks in a country be treated as a prerequisite for qualifying as investment? To answer the first question, the tribunal held that mere registration does not amount to or have the characteristics of an investment because registration only provides a negative right to exclude others from using a trademark. Therefore, a trademark cannot be considered to be an investment or have the characteristics of an investment. According to the tribunal:
The effect of registration of a trademark is negative. It prevents competitors from using that trademark on their products. It confers no benefit on the country where the registration takes place, nor, of itself, does it create any expectation of profit for the owner of the trademark. No doubt for these reasons the laws of most countries, including Panama, do not permit a trademark to remain on the register indefinitely if it is not being used.Footnote 105
To answer the second question, the tribunal confirmed that the exploitation of a registered trademark may amount to an investment or have the characteristics of an investment. According to the tribunal, the exploitation of a trademark requires the manufacturing, promoting, selling, marketing of goods that bear the mark, after-sale servicing and providing of guarantees.Footnote 106 Achieving this requires resources. Therefore, such exploitation might result in some benefit for the host states.Footnote 107
To establish this point, the tribunal cited the Philip Morris v. Uruguay case as an example in which “the activities that included marketing the cigarettes under the trademark constituted a qualifying investment”.Footnote 108 The tribunal elaborated that exploitation can be achieved by trademark owners or through franchise agreements that provide “exploitation rights” to a licensee for their own benefit.Footnote 109 The tribunal also acknowledged the fact that, in some cases, qualified investments can be determined by examining interrelated activities. According to the tribunal, “interrelated activities” include selling products that bear a trademark. The tribunal disagreed with Panama’s argument that “an interrelated series of activities, built around the asset of a registered trademark, that do have the characteristics of an investment does not qualify as such simply because the object of the exercise is the promotion and sale of marked goods”.Footnote 110 Instead, it ruled that if Panama’s argument was to be accepted, this would result in the preference of form over substance. Thus, the tribunal concluded that if a licensee can exploit a licence in the same manner as a trademark, this would be sufficient to consider it an investment.Footnote 111
Thus, the point to emphasise is that an economic contribution must be made to the host state for it to be considered an investment. Similarly, Dreyfuss and Frankel suggested using the “in-state investment” approach to assess whether IP is an investment.Footnote 112 According to the authors, the mere inclusion of IPRs in the definitions of investment agreements is not enough. Instead, the inclusion of an in-state investment related to IPRs should be considered since this is important for determining IP investments.Footnote 113 According to Dreyfuss and Frankel, this approach “would potentially limit the threat of overreaching in IP-related disputes”.Footnote 114 In 2012 the Southern African Development Community (SADC) in its SADC Model Bilateral Investment Treaty Template with Commentary also suggested using the “in state investment” approach.Footnote 115
To some extent, the question of in-state investments has been clarified in Bridgestone v. Panama since the arbitral tribunal has held that the mere registration of a trademark does not qualify it as an investment. Exploiting trademarks through promotion, sales and marketing, among others activities, to generate revenue in a host state qualifies as an investment.Footnote 116 Given this information, the tribunal’s decision did not clarify the scale of investment and economic development that arose from IP in the host state which has left this question partially unanswered. One must remember that the findings of the tribunal are based on the fourth criterion of the Salini test, which is economic development in the host state. However, the arguments examined in the article reveal that before the Salini test, national exceptions and limitations incorporated into the treaty language must be considered. Therefore, before accessing the Salini test, the tribunal needed to determine whether IP investments are in accordance with national laws including exceptions and limitations.