Eli Lilly is accusing Canada of violating its obligations to foreign investors under the North American Free Trade Agreement by allowing its courts to invalidate patents for two of its drugs.

The company officially filed a complaint this week with NAFTA seeking $500 million US in compensation.

The Indianapolis-based pharmaceutical giant had already notified the federal government in June of its intention to submit a NAFTA complaint, but filed the formal "notice of arbitration" on Thursday after it failed to settle the dispute through negotiation.

A three-member international tribunal made up of arbitrators chosen by the disputing parties will hear the complaint.

The NAFTA claim alleges that several Canadian court rulings invalidating the patents for Eli Lilly's drugs Straterra and Zyprexa were illegal under international law because they violated Canada's obligations under Chapter 11 of NAFTA, the international trade treaty that covers the U.S., Canada and Mexico.

Chapter 11 protects the investments of companies and investors from NAFTA countries that operate in other NAFTA states. Eli Lilly alleges Canada violated the provisions of Chapter 11 that guarantee fair and equal treatment to foreign investors and protect them from expropriation of their investments.

"Patent decisions in Canada over the last decade not only fly in the face of long-established international standards, but they're subjective and completely unpredictable," Doug Norman, vice-president and general patent counsel for Eli Lilly, said in a statement issued Friday.

"The standard seems to be that there is no standard."

A Federal Court decision in 2010 invalidated Eli Lilly's patent for Strattera (atomoxetine), a drug used to treat attention deficit hyperactivity disorder (ADHD), six years before it was due to expire.

Federal Court decisions in 2009 and 2011 voided the patent for Zyprexa (olanzapine), an anti-psychotic drug used to treat schizophrenia, which was to expire in April 2011.

The challenges to both patents were initiated by the generic drug company Novopharm (later renamed Teva Canada Ltd.).

Drugs did not fulfil promise of patents, courts find

In the Straterra case, the Federal Court judge found that the drug did not meet the threshold of "utility" for the long-term treatment of ADHD and did not fulfil the implied "inventive promise" of the patent — that is, it did not do what the inventor said, or implied, it would do when it applied for the patent.

The court found that the clinical trial used to demonstrate the drug's utility — a seven-week, double-blind placebo-controlled study of 22 patients — was "too small and too short in duration to provide anything more than interesting but inconclusive data."

The judge hearing the Zyprexa patent challenge found that the drug did not meet the implied promise Eli Lilly made that the drug is markedly superior to other drugs for the long-term treatment of schizophrenia. (The Zyprexa case was initially ruled on in 2009 but then sent back to Federal Court after an Appeal Court judge found the original reason for invalidating the patent was not legally sound but that it could be challenged on the grounds of utility.)

The company's attempts to appeal the rulings to the Supreme Court of Canada failed, which is why it turned to the NAFTA arbitration process.

It initially announced it would be filing a NAFTA challenge in December 2012 and demanded $100 million in compensation for the Straterra decision but amended its complaint in June to include the Zyprexa case and upped the compensation demand to $500 million after the Supreme Court refused to hear its final appeal of the Zyprexa decision in May.

Government 'expropriated' drug maker's rights

Ely Lilly is contending that the court decisions constitute an expropriation of the "exclusive rights" conferred to Eli Lilly under the two drug patents, the company said in the notice of intent to submit a NAFTA claim filed June 13.

By stripping the company of its patents before they were expired, the courts deprived Eli Lilly of its "exclusive rights to prevent third parties from making, using or selling its patented product during the patent term" and cost the company money, the drug maker said.

The global sales of Straterra were $620.1 million in 2011 and sales of Zyprexa totalled $5.026 billion in 2010, the company said in its June document, which has the Canadian sales figures blacked out.

The company argues that by not rectifying the "judge-made law" on utility that expropriated Eli Lilly's exclusive rights as the patent holder, the government was guilty of expropriating Eli Lilly's investments, the company said, which is prohibited under Chapter 11 and entitles the company to compensation "equivalent to the fair market value of the expropriated investment."

Eli Lilly objects to the way Canadian courts interpret whether a drug has fulfilled its promise of being useful in the treatment of a certain condition. It argues that unlike other jurisdictions, Canada has an "elevated standard" when it comes to demonstrating the utility of a new drug and doesn't use the widely accepted threshold that demands only that patent holders show their invention has a "scintilla" of utility.

"In a series of decisions issued since 2005, the Federal Court of Canada and the Federal Court of Appeal have created a new judicial doctrine whereby utility is assessed not by reference to the requirement in the Patent Act that an invention be 'useful' but rather against the 'promise' that the courts derive from the patent specification," Eli Lilly wrote in its June notice of intent.

"This non-statutory 'promise doctrine' is not applied in any other jurisdiction in the world."

Medical innovation at risk

In its statement Friday, the company's patent counsel said that the Canadian courts' approach to assessing the promise of drug patents could deter companies from developing new drugs for sale in Canada.

"It's impossible to know what specific 'promise' can be implied from an application, and how much data are needed to support it," Norman said. "If this pattern persists, the already challenging business of medical innovation will become all the more difficult in Canada."

But consumer rights groups and some patent lawyers say Canada's approach to patents is not that different in spirit to that of other countries and has generally worked in the favour of large drug companies like Eli Lilly, and that, in any event, countries have a right to define "usefulness" in their own way.

Various consumer advocacy organizations on both sides of the U.S.-Canada border have expressed concern over the company's attempts to challenge domestic court decisions before an international trade tribunal and over the broad investor rights that the NAFTA treaty affords to companies.

The Council of Canadians, the Washington, D.C.-based government watchdog organization Public Citizen and the global consumer rights group Sum of Us have all spoken out against Eli Lilly's complaint, and Sum of Us created an online petition calling on Eli Lilly to drop the suit.

Eli Lilly's NAFTA complaint is unprecedented and should worry the citizens of Canada and other NAFTA countries because the drug maker is not only challenging the invalidation of its particular patents but is challenging "Canada's entire legal doctrine for determining an invention's 'utility' and, thus, a patent's validity," Public Citizen wrote in a brief on the case.

"While pushing for an entirely different patent standard, Eli Lilly, the fifth-largest U.S. pharmaceutical corporation, is demanding [$500 million] from Canadian taxpayers as compensation for Canada's enforcement of its existing patent standards."

Eli Lilly seeking 'monopoly patent protections'

While the tribunal can only award damages and can't force Canada to change its laws, some argue that the latter is, ultimately, what Eli Lilly is after.

The company's so-called investor-state challenge "marks the first attempt by a patent-holding pharmaceutical corporation to use the extraordinary investor privileges provided by U.S. 'trade' agreements as a tool to push for greater monopoly patent protections, which increase the cost of medicines for consumers and governments," Public Citizen said.

If Eli Lilly is successful in getting the NAFTA tribunal to approve its claim for compensation, it "could expose Canada to a slew of investor-state attacks from other drug companies that have had patents invalidated because their patent applications failed to show or predict that the medicines would provide the promised benefits," the group said.

In an interview with the American online news magazine Politico, Toronto attorney Lawrence Herman, a former trade official with Canada's foreign service, agreed that Eli Lilly is less interested in compensation than in changing Canada's patent law so that judges no longer have the leeway to make the kind of rulings they did in its case.