A recent decision provides a narrow interpretation of "investment" under NAFTA Chapter Eleven
In a recent NAFTA Investor-State claim brought against the
United States by Apotex Inc., Canada's largest producer of
generic drugs, the Tribunal upheld the United States'
preliminary objections to jurisdiction on the grounds, inter
alia, that the company's efforts to win approval for
generic drugs in the United States market did not make it an
"investor" under Article 1139 of NAFTA Chapter
Eleven. In Apotex Inc. v. The Government of the United
States of America, Award on Jurisdiction and Admissibility (14
June 2013), the Tribunal held that significant expenses incurred
in: (i) seeking Food and Drug Administration ("FDA")
approval; (ii) purchasing materials and ingredients in the United
States intended for the manufacture of products abroad (in this
case in Canada); and (iii) conducting litigation and establishing
an agent in the United States for the purpose of corresponding with
and making submissions to the FDA, were all insufficient to qualify
as an "investment" under the treaty. This award
sheds further light on the precise meaning of the term
"investment" under NAFTA and confirms that, as with other
provisions of NAFTA Chapter Eleven, investors must surmount a high
jurisdictional threshold in order to bring claims before a NAFTA
tribunal.
Apotex alleged in the arbitration that its rights were violated by
the United States in breach of NAFTA Articles 1102 (obligation to
accord national treatment to foreign investments), 1105 (obligation
to accord fair and equitable treatment to foreign investments) and
1110 (obligation not to expropriate without payment of fair
compensation). Apotex claimed that it was subject to
mistreatment by the United States, its agencies (in particular the
FDA) and its Federal Courts in the course of the company's
efforts to bring generic versions of the anti-depressant drug
Zoloft (to be marketed as Sertraline by Apotex) and the
anti-cholesterol drug Pravachol (to be marketed as Pravastatin by
Apotex) to market in that country. In particular, the
Sertraline claim arose out of three United States Federal Court
decisions pertaining to Apotex's application for FDA approval
of its generic drug. The Pravastatin claim arose out of a
decision by the FDA and three decisions of the United States
Federal Courts, pertaining to Apotex's application for FDA
approval of its generic drug.
The United States objected to the jurisdiction of the NAFTA
Tribunal on the grounds, inter alia, that Apotex did not
qualify as an "investor" which had made an
"investment" in the United States for the purposes of
NAFTA Article 1139 (which Article contains the definitions of
"investment" and "investor of a
Party").
Apotex argued in response that: (i) it had invested millions of
dollars in developing its products and preparing and filing its
submissions to the United States' FDA; (ii) the sole purpose of
Apotex's development and submission of the FDA application was
to obtain FDA approval to commercialize its products in the United
States; (iii) Apotex's FDA application was manifestly a U.S.
investment (i.e. property, tangible or intangible, acquired in the
expectation or used for the purpose of economic benefit or other
business purposes); (iv) Apotex had made substantial commitments of
capital and other resources towards economic activity in the United
States, including the purchase of raw materials from United States
suppliers for its Pravastatin manufacturing process; and (v) Apotex
had designated its United States affiliate and distributor as its
United States agent for FDA regulatory purposes, as well as
designating an agent for service of process in the United States,
thus consenting to jurisdiction and suit
there.
The Tribunal addressed Apotex's defenses to the United
States' main jurisdictional objection and found that,
"each of the specific activities and expenses relied upon by
Apotex simply supported and facilitated its Canadian-based
manufacturing and export operations," meaning that such
expenditures could not count as investments in the United
States. Further, the Tribunal held that Apotex's
activities with respect to the contemplated sales of its Sertraline
and Pravastatin products in the United States were "those
of an exporter, not an investor" and as such were not
protected by NAFTA's provisions on national treatment.
Similarly, the Tribunal held that the purchase of materials and
ingredients in the United States could not count as an investment
as they were intended for the manufacture of products abroad.
Finally, the Tribunal found that conducting litigation in the
United States and establishing an agent in the country to assist
with FDA submissions, constituted an ordinary part of doing
business and did not amount to an investment. Consequently
the Tribunal held that no "investment" had been made by
Apotex in the territory of the United States within the scope of
NAFTA Chapter Eleven and that Apotex itself did not therefore
qualify as an "investor" under the treaty. This
finding was sufficient for the Tribunal to dismiss Apotex's
claims in their entirety.
The United States had, in addition to the above jurisdictional
objection, argued that: (i) Apotex had failed to pursue available
remedies within the United States Court system with respect to its
Pravastatin claim, such that the judicial acts complained of lacked
sufficient finality to form the basis of claims under NAFTA Chapter
Eleven; and (ii) the time bar in NAFTA Article 1116(2) precluded
Apotex's allegation in its Pravastatin claim that the FDA's
letter decision of 11 April 2006 (determining that a 180-day
exclusivity period had not been triggered) itself constituted a
violation of Articles 1102, 1105 and 1110 of NAFTA. Despite
having already dismissed Apotex's claims in their entirety, the
Tribunal went on to address these additional jurisdictional
objections, finding in favor of the United States in both
instances. Particularly noteworthy is the Tribunal's
rejection of Apotex's argument that it had satisfied the
requirement to exhaust local legal remedies because appealing to
the United States Supreme Court would have been "obviously
futile," based primarily on the small number of cases that
this Court entertains each year. The Tribunal held that to
accept such an argument would be, "to write the US Supreme
Court out of the exhaustion of remedies rule in almost all
cases." The tribunal, having rejected
Apotex's jurisdictional defenses, ordered the company to pay
the United States' legal costs as well as the costs of the
arbitration.
It is noteworthy that Apotex chose, for unknown reasons, not to
advance three arguments that could conceivably have resulted in it
overcoming the jurisdictional objections of the United
States. First, the award focused on investments the company
claimed it had made in the U.S., as opposed to investments
that it intended to make in the country. Apotex's
apparent failure to focus on the investments it intended
to make is surprising given that the company's attempts to
bring new drugs to market in the United States could arguably be
interpreted as Apotex "establishing, acquiring"
and "expanding" its investments in the
country. A "pre-establishment" argument with
respect to Apotex's national treatment claim under NAFTA
Article 1102(2) (which states that, "Each Party shall
accord to investments of investors of another Party treatment no
less favorable than that it accords, in like circumstances, to
investments of its own investors with respect to the
establishment, acquisition,
expansion, management, conduct, operation and
sale or other disposition of investments") might arguably
have stood a greater chance of success than the more
straight-forward investment argument advanced by Apotex.
Second, the Claimant could also have argued that its activities in
the U.S. were covered by NAFTA Article 1139 (which states that,
"investor of a Party means a Party or state enterprise
thereof, or a national or an enterprise of such Party,
that seeks to make, is making or has
made an investment.") As both NAFTA Articles
1102(1) and 1103(1) explicitly extend treaty protection to
"investors" as well as
"investments", Apotex could well successfully
have argued that its attempts to sell generic drugs in the U.S.
were those of an investor "seeking to make" an
investment in the United States. A final, albeit
controversial, argument that could have been advanced was that the
U.S. is obliged to extend NAFTA protection to the wider category of
"investments" defined in that country's
bilateral investment treaties with non-NAFTA states, as a
consequence of the "most favored nation" clause
contained in NAFTA Article 1103 (which states that, "each
Party shall accord to investors of another Party treatment no less
favorable than it accords, in like circumstances, to investors of
any other Party or of a non-Party with respect to the
establishment, acquisition, expansion, management, conduct,
operation, and sale or other disposition of
investments.") This wider category of investments
would, based on the definitions of "investment"
contained in a number of older U.S. BITs that remain in force (such
as, for example, the U.S.-Congo BIT), likely be deemed to have
included the "investment" made by Apotex in the
United
States.
Conclusions
In light of the Apotex award, U.S., Mexico and
Canada-based companies with investments in other NAFTA signatory
countries should be aware that the barriers to jurisdiction in
NAFTA Investor-State proceedings are continuing to grow
higher—particularly when compared to those in other
treaty-based Investor-State arbitrations—though they are by
no means insurmountable. Whilst host countries continue
aggressively to fight NAFTA claims brought against them, successful
outcomes for investors remain possible if the system is navigated
wisely, for instance by ensuring that claims are brought under the
most appropriate provisions of the treaty. The tribunal's
finding that Apotex's failure to exhaust local legal remedies
in the U.S. would, in any event, have been fatal to its claim
should also not be overlooked. It is a cautionary tale which
demonstrates that investors in the U.S., if a NAFTA claim is on the
horizon, should be sure to file a pro forma certiorari appeal to
the Supreme Court to ensure that all local U.S. legal remedies have
been exhausted. Jones Day has significant experience
representing claimants in NAFTA proceedings and will continue
closely to monitor developments in NAFTA jurisprudence. We
would be happy to discuss any questions or concerns you may have
regarding the protection of investments in the United States,
Canada or Mexico, including through the arbitration of investment
disputes under NAFTA's Chapter Eleven.
James Egerton-Vernon of the Washington Office assisted in the preparation of this Commentary.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.