Canada and the United States sometimes disagree on trade and investment issues. This is not surprising for a commercial relationship that fosters nearly $1 trillion of two-way trade in goods and services annually and hosts two-way direct investment stocks exceeding $600 billion. Quite often, pro and con arguments in these disputes are approximately balanced on their merits, illustrated by the long-running softwood lumber battle. But in the latest patent dispute it seems hard to find merit in Canada's position.
As a result of several court rulings, Canada is now applying an extraordinarily demanding test for patent validity that goes beyond what other advanced countries apply.1 Using this unique Canadian interpretation, Canadian courts have rejected 18 US and EU pharmaceutical patents since 2005.2 Coincidentally and conveniently, the rejections are a boon to Canada's generic pharmaceutical industry.
As a result, Canadian authorities are depriving innovators of their patent rights. Were this standard to be adopted by other jurisdictions, it would threaten the financial incentives underpinning medical innovation in the United States and elsewhere. This is untenable. Canada is a rich country. The Canadian health system must contribute to the financial cost of pharmaceutical innovation on a par with the United States, Europe, and other advanced nations.
A bit of legal background helps explain the situation. Common norms require three elements to grant a patent: The item must be new, it must not be obvious, and it must be useful. These tests, established in national legislation, are codified in the North American Free Trade Agreement (NAFTA, Article 1709.1) and the World Trade Organization's Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS, Article 27.1).
Patent challenges almost always center on the "new" and "not obvious" tests. "Usefulness" is seldom questioned for a key reason. Case law in national patent courts has uniformly held, until the recent Canadian decisions, that the bar for determining usefulness is low. The relevant test is simply whether the new product is "capable of industrial application." For example, if a new compound kills harmful bacteria in vitro, then the compound has utility. Additional evidence of utility may arise later when sales are made to willing buyers. But the patent application itself need only point to a possible application that has commercial use.
New Doctrine from the North
A Canadian Supreme Court decision in 2002 unwittingly opened the door for a striking departure from international norms.3 In the language of the Canadian Supreme Court, the patent application should "demonstrate" or "soundly predict" the effectiveness of a drug in order to establish its usefulness. The Supreme Court's decision was subsequently stretched by the lower Canadian courts to move the goal posts in determinations of usefulness. Essentially the lower courts rejected numerous pharmaceutical patents on the ground that the evidence of usefulness set forth in the patent applications did not support the patent's implicit promise. For example, if a patent application claim said a new drug would treat glaucoma, a court might read into the claim a more particularized promise that was not stated in the patent application, such as a promise that the new drug would effectively treat glaucoma over the long term. In such a circumstance, the patent would fail the court's own exaggerated promise of utility.
Patent applications are usually filed soon after invention, to ensure both that the firm is first to file (the test for priority) and that the item has not been previously described in the technical literature, thereby undercutting the claim of novelty. At the moment of invention, patent applications for better mousetraps, and most other items, can easily describe their utility.
At the moment when a new pharmaceutical is discovered, however, the firm can seldom "demonstrate" or "soundly predict" the extent to which it will alleviate a particular disease. Before it can be marketed, lengthy and costly animal and human tests are needed to establish that a new drug is both safe and effective. As a by-product, these tests will indicate the length and extent of the relief. But the tests usually cost hundreds of millions of dollars and take years. By the time the patent is challenged by a generic pharmaceutical firm, the product may already be on the market and dispensed by Health Canada—clear evidence of usefulness.
But Canadian common law, as it has evolved in the past few years, traps the pharmaceutical inventor in a Catch 22. Lower Canadian courts ignore any postpatent application evidence of utility.4 So the pharmaceutical inventor is faced with a choice. The firm must either attempt to conduct its animal and human trials in secret, risking hundreds of millions of dollars before filing a patent application that fully describes the utility of the new drug in terms that meet the common law doctrine that has recently evolved from Canadian cases. Or, at the moment of invention, the firm must "demonstrate" or "soundly predict" exactly what the future animal and human tests will eventually show and inscribe these predictions to the patent application. Predictions may be wrong, and in vitro demonstrations may not suffice to satisfy the court's exaggerated reading of the "promises" of usefulness.
As earlier stated, Canada's movable goal posts, if widely adopted, would threaten the financial lifeblood of medical innovation. Meanwhile they permit Canada's health system to escape any contribution to the significant R&D costs of discovering new pharmaceuticals, unlike the health systems of the United States, Europe, and other advanced nations.
Solutions to Canada's Departure from International Norms
By far the best and quickest solution would be a fresh Canadian Supreme Court review of a rejected patent, using the case to bring the lower courts into conformity with international norms: namely returning to the low threshold of usefulness determinations established by courts around the world prior to 2002. In addition, as a constructive supplement to its prior holding with respect to "demonstrations" or "sound predictions" in the original patent application, the Supreme Court could direct the lower courts to consider postpatent application evidence. A fresh review almost happened in May 2013, but the Canadian Supreme Court ultimately declined to hear an appeal against the denial of a patent for Eli Lilly's drug Zyprexa.
Alternative solutions entail international arbitration, both under NAFTA and TRIPS. With respect to the Zyprexa case, and a related case involving the drug Strattera, Eli Lilly has filed an investor-state claim against Canada under NAFTA Chapter 11, seeking damages of $500 million. Any damages awarded, in this case, will be paid by Canadian taxpayers. Additionally, the US government might file a case in the WTO, citing the TRIPS agreement, seeking appropriate Canadian compliance with established norms.
In the end, it might depend on the Canadian Parliament to end this unfortunate dispute by enacting remedial legislation that aligns Canada's tests for determining usefulness with accepted international practice.
1. Canadian courts are declaring invalid patents that were previously granted by the Canadian Intellectual Property Office (CIPO). CIPO is now applying the newly coined court doctrine of "promised utility" in deciding whether to approve patent applications.
2. Some US and EU pharmaceutical companies have lost more than one patent. The companies affected are Abbott, AstraZeneca, Eli Lilly, GSK, Lundbeck, Merck, Novartis, Pfizer, Sanofi Aventis, and Shire Biochem.
3. The Canadian Supreme Court decision, Apotex Inc. v. Wellcome Foundation Ltd.,  4 S.C.R. 153, ironically affirmed the validity of Glaxo Wellcome's patent for AZT (an HIV/AIDS drug) by finding utility in the pharmaceutical, prior to human testing, based on the doctrine of "sound prediction." In its patent application, Glaxo Wellcome had relied on in vitro tests to predict the efficacy of AZT in curbing HIV/AIDS. In subsequent cases, lower Canadian courts read exaggerated promises into patent claims and denied the relevance of postapplication evidence of utility.
4. Neither NAFTA nor TRIPS requires that courts take into account postpatent application evidence of usefulness, though this is often done.