Canada: Cross-border NAFTA: The First Trade Treaty to Protect IP Rights

Article by John Terry, Lou Ederer and Jennifer Orange

Published in IP Value 2005.

The North American Free Trade Agreement (NAFTA), which came into force in January 1994, was the first international trade agreement to include obligations to protect intellectual property rights. Although the World Trade Organisation subsequently adopted the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs), the intellectual property provisions of the NAFTAremain an important source of obligations for the three NAFTA state parties (the United States, Canada and Mexico) and of the rights of intellectual property holders in these countries.

The rationale for incorporating intellectual property provisions in a trade agreement is to ensure that intellectual property law enforcement is consistent with free trade principles of market access and non-discrimination. Trade will be inhibited if the laws of one country do not protect the intellectual property of its trading partners, but over-zealous enforcement of intellectual property rights can also inhibit trade by putting importers at a competitive disadvantage.

To strike the required balance, the NAFTA takes a three-step approach. First, the NAFTA establishes minimum standards of intellectual property protection, based on the principles set out in the major international intellectual property conventions, and requires the enforcement of these standards. Second, the NAFTA requires effective enforcement of intellectual property rights at the borders of NAFTA states to ensure that intellectual property rights holders are protected from infringement by imported products. Finally, the NAFTA establishes a dispute-settlement procedure with traderelated sanctions and, in some cases, damages payable to intellectual property holders, to provide effective recourse against infringements of intellectual property rights. The result is that intellectual property holders in the three NAFTA countries gain an additional avenue for enforcing intellectual property rights when domestic law does not adequately protect them.

NAFTA’s Chapter 17, which sets out the provisions on intellectual property rights, defines the scope of intellectual property rights broadly to refer to: "[C]opyright and related rights, trademark rights, patent rights, rights in layout and design of semiconductor integrated circuits, trade secret rights, plant breeders’ rights, rights in geographical indications and industrial design rights" (Art 1721).

The first article of Chapter 17 (Art 1701(1)) establishes a similarly broad obligation for each NAFTA state party: to provide nationals of other NAFTA countries with adequate and effective measures to protect and enforce intellectual property rights while ensuring that such measures do not become barriers to legitimate trade. Each NAFTAparty is required to implement the substantive provisions of the key international intellectual property conventions, including the Geneva Convention for the Protection of Producers of Phonograms Against Unauthorised Duplication of the Phonograms, the Berne Convention for the Protection of Literary and Artistic Works and the Paris Convention for the Protection of Industrial Property. In addition, each NAFTA party is required to grant national treatment to nationals of other parties in protecting and enforcing intellectual property rights. In other words, a state party cannot grant more favourable intellectual property protection to its own nationals than to nationals of other NAFTA parties.

Chapter 17 then sets out a series of obligations relating to each area in its definition of intellectual property. These obligations replicate many of the key provisions of the pre-existing intellectual property conventions but also add a series of minimum standards of protection and enforcement, including the following.

NAFTA parties are required to protect all kinds of computer programs as literary works, and all types of data as compilations. Copyright owners of computer programs and producers of sound recordings are permitted to prohibit the rental of their products by others.

The trademark provisions enable the owner of a registered trademark to prevent the use of identical or similar signs for goods or services that are identical or similar to the trademarked goods or services if a likelihood of confusion would result.

The parties are required to give patent owners the opportunity to obtain product patent protection for pharmaceutical and agricultural chemical inventions for which product patents were previously unavailable. Notably, the NAFTAallows state parties to exclude from patentability inventions that must be prevented to protect public order or morality, and human, animal or plant life; or to avoid serious prejudice to nature or the environment. NAFTA parties may also exclude from patentability diagnostic, therapeutic and surgical methods for the treatment of humans or animals, plants and animals other than micro-organisms, and essentially biological processes for the production of plants or animals.

NAFTAparties must ensure that the enforcement procedures set out in the NAFTA are available under domestic law so that effective action can be taken against infringers. Consistent with the goals of the NAFTA intellectual property provisions, enforcement procedures must be applied in a manner that avoids creating barriers to legitimate trade and safeguards against abuse. The NAFTA further stipulates that procedures must be fair, equitable, not unnecessarily complicated or costly, and that administrative decisions must be subject to judicial review. Each country is to provide for criminal procedures and penalties in the case of wilful trademark counterfeiting or copyright piracy on a commercial scale, with penalties that include monetary fines and imprisonment.

To ensure that intellectual property rights holders are protected from infringing imported products, the enforcement provisions of Chapter 17 require that customs administrators in each country be given the right to suspend the release of counterfeit trademark goods or pirated copyright goods. Procedures must also be put in place for the rights holder to lodge an application to prevent the release of such goods into free circulation. To prevent abuse of this provision, authorities may require that applicant rights holders post security.

In addition to the provisions in Chapter 17 of the NAFTA, the more general enforcement provisions in Chapters 11 and 20 apply to the enforcement of intellectual property rights. Chapter 20 provides a procedure for one state party to bring a complaint against another, to be settled by means of a specified dispute resolution process. Chapter 11 allows a private investor to bring a claim directly against a NAFTA state party. As a result, an intellectual property rights holder, such as a pharmaceutical company resident in one NAFTA party, may bring an arbitral claim directly against a NAFTAparty that has allegedly infringed its intellectual property rights and caused damages. The Chapter 11 provisions specifically include intangible property rights in the definition of investment. However, the Chapter 11 provisions do not apply to all violations of Chapter 17. For a rights holder to establish that a state party has infringed Chapter 11, it must establish a breach of one of the provisions of Chapter 11, such as discrimination, unfair or inequitable treatment not in accordance with international law, or expropriation without compensation. The Chapter 11 remedy has proven to be a very effective means for a rights holder to launch expeditiously an action against a state and claim substantial damages for the alleged infringement.

The following three case studies describe current intellectual property disputes between NAFTA parties and the implications of Chapter 17 for these disputes.

The exponential growth in sales of pharmaceutical products from Canadian internet pharmacies to US residents raises a number of issues under the NAFTA. The US and Canada operate in different paradigms regarding the price of prescription drugs. The US allows drugs to be sold at market prices. Canada, however, has price controls, administered by the Patent Medicines Prices Review Board (PMPRB), which sets price caps on the factory gate prices for drug products in Canada. The resulting retail prices of Canadian prescription drugs can be over 50 per cent less than the same drug sold in the US.

In 2001, internet pharmacies began to capitalise on the price difference by selling Canadian drug products through websites to US residents. In 2003, drug sales of Canadian internet pharmacies were valued at between US$600 million and US$1 billion. In many cases, these drug products are made in the US, shipped to Canada for sale, and then exported back to the US by internet pharmacies. Even though US FDA officials have taken the position that these sales are illegal in the US, internet pharmacy exports continue to grow as various US states, cities and other bulk buyers of prescription drugs propose to purchase their drug products from Canadian internet pharmacies. To date, Canada’s federal and provincial governments have taken few, if any, active steps to prevent trade by Canadian internet pharmacies, even though such trade is contrary to many provincial laws regulating pharmacies and physicians.

This internet pharmacy trade raises a number of NAFTA issues. First, does this trade violate the patent rights under the NAFTA of US pharmaceutical companies that hold patents for these products in the US? Article 102(1)(d) of the NAFTA states that one of the objectives of the NAFTA is to "provide adequate and effective protection and enforcement of intellectual property rights in each party’s territory". Article 1709(5) of the NAFTA requires each party to ensure that a "patent shall confer on the patent owner the rights to prevent other persons from making, using or selling the subject matter of the patent, without the patent owner’s consent". Canada’s policies may be contrary to Article 1709(5) in that they are encouraging, without the consent of the patent holder, the sale in the US of products that are licensed for sale only in Canada. This issue raises the question whether the US rights of a US patent holder would be exhausted through a sale in the Canadian market, so that further sale by an internet pharmacy would not violate patent rights. In Europe, the competition and trade provisions of the European Union treaties have been interpreted so that exhaustion of patent rights, for the purposes of sales in Europe, occurs so long as the product has been sold in any one European country. This issue has not yet been tested in the North American context.

Second, does this internet pharmacy trade violate the rights of US pharmaceutical manufacturers as investors with investments in Canada, under Chapter 11 of the NAFTA? Article 1105 requires that the Canadian investments of US investors (which include the Canadian subsidiaries of US-based pharmaceutical companies) be granted full protection and security under Canadian law. Currently, some Canadian provincial governments are turning a blind eye to, or are even encouraging, internet pharmacy trade, contrary to their own health and safety laws. As a result, it can be argued that Canada has failed to grant full protection and security to US pharmaceutical companies selling their products in Canada, contrary to Article 1105, and therefore owes damages to the affected pharmaceutical companies.

Third, if, as is now being discussed, the US government decides to allow internet pharmacy sales from Canada but not from Mexico, will this violate the right of Mexican pharmacists to sell drug products into the US? Chapter 12 guarantees nondiscrimination in the provision of services, which include pharmaceutical services. If the US allows drug products to be exported to the US from Canada only, Mexico could bring a complaint alleging a violation of Chapter 12, or a Mexican investor may be able to bring a claim directly under Chapter 11 of the NAFTA.

The proliferation of parallel imports, or grey market goods, often fosters the development of their more sinister cousins - counterfeit goods. Unlike grey market goods, which are authorised goods sold through unauthorised distribution channels, counterfeit goods are unauthorised and, indeed, fake goods that lack any connection with the legitimate manufacturer or trademark owner.

Typically, a manufacturer or trademark owner will want to control, or at least authorise, each step in the distribution chain so that the particular goods get to their intended destinations. When parallel markets develop, and goods are re-routed or diverted to unauthorised destinations, the distribution chain tends to break down and the manufacturer or trademark owner can no longer be certain that its goods are going to be properly distributed. Counterfeiters take advantage of these breakdowns in the distribution chain by injecting wholly illegitimate goods into these markets and passing them off as merely diverted goods.

The risk to the public posed by counterfeit goods is particularly acute in the pharmaceutical industry. While the concoctions cooked up by counterfeiters may look like the real thing, they often lack active ingredients, include contraindicated or detrimental substances, and are manufactured under insanitary, if not appalling, conditions. Pointing out these problems, the US Food and Drug Administration (FDA) and US Customs, which conducted an investigation, found that 88 per cent of imported pharmaceuticals examined contained unapproved drugs, many of which could be harmful.

The pharmaceutical industry is, however, far from alone in facing the problems posed by counterfeiting. In fact, nearly all consumer products, from automotive and aeroplane parts to cigarettes, electronics, apparel and luxury goods, are targets for the counterfeiter. In fact, the International Chamber of Commerce has estimated that the counterfeit market is worth more than US$350 billion a year.

To remedy the counterfeiting issue, member countries must, as noted above, ensure that the enforcement procedures set out in the NAFTA are available under domestic law to permit effective action to be taken against infringers. Canada had to make changes to both the Copyright Act and the Trademarks Act to reach the NAFTA’s minimum standards. Despite these changes, however, tension remains between the US and Canada over whether Canada is doing enough to prevent counterfeit goods from crossing its borders.

Chief among the criticisms of Canada’s efforts to comply with the NAFTA’s requirements is the failure to provide Canada’s border enforcement system with any real enforcement powers. In the US, trademark owners can record their marks with customs and provide information concerning the identification of potential counterfeit goods, which then allows customs to inspect and detain suspected counterfeit goods on its own initiative. In contrast, the trademark owner in Canada must identify potential counterfeit goods on a specific shipment-by-shipment basis. The owner must then apply to a court, with supporting affidavits that provide detailed information regarding the identity of the importer, exporter or vendor; the country of export or origin; the method of importation; the quantity and value of the counterfeit goods; the estimated date of arrival in Canada; and the identity of the means of transport on which the counterfeits will arrive. This information is often difficult for the trademark owner to obtain, and the Canadian border detention procedures are, not surprisingly, extremely under-utilised. In fact, one trade association has noted that from 1996 through 2002 there were about 30,400 US customs seizures. During that same time period, there were six Canadian court orders for border measures.

For these reasons, among others, Canada has been listed on the 2004 Special 301 Report Watch List published by the Office of the United States Trade Representative (USTR), listing countries that have been identified as having unfair trade practices. Specifically, the USTR’s Special 301 Report "urges Canada to take effective measures to strengthen border enforcement, including the enactment of legislation that would allow Canada’s customs officials to conduct ex officio searches of incoming and outgoing products suspected to be pirate or counterfeit".

Articles 1711(5) and (6) of the NAFTA establish data protection provisions that require NAFTAstate parties to grant at least five years’ protection to undisclosed test and other data. Article 1711(6) provides expressly, with respect to this data, that "no person other than the person that submitted [the data] may, without the latter’s permission, rely on such data in support of an application during" the next five years.

US pharmaceutical manufacturers argue that this provision should apply any time a second person (e.g., a generic manufacturer) relies on a previous filing by an innovative pharmaceutical manufacturer in support of its generic filing. This is how the data protection provisions are applied in the US, Europe and Australia, among other countries. However, Canadian courts have interpreted the five-year data protection as applying only where Health Canada officials actually examine the data — that is, pull the file and review it. This overly narrow interpretation has opened the door for generic drug manufacturers to file copycat drugs that rely for their safety and efficacy on the previous filings and approvals of the innovative drug manufacturer.

Unless Canada changes its practice in this respect, one can anticipate a challenge from the US government or a US pharmaceutical manufacturer claiming lack of compliance by Canada with its NAFTA data protection requirements.

John Terry
Partner, Toronto
John Terry practises civil litigation, with an emphasis on business, international trade and public law. He appears as counsel at all levels of court in Canada, in commercial arbitrations and before a variety of administrative tribunals. Mr Terry provides advice to corporations and federal, provincial and municipal governments on NAFTAand WTO matters. He regularly advises and acts for multinational pharmaceutical companies on trade-related intellectual property issues.

Lou Ederer
Partner, New York
Louis Ederer heads up Torys’ Intellectual Property Department in New York. His practice focuses on intellectual property law, covering trademark, patent and copyright litigation, prosecution and counselling. He has a specialty in anti-counterfeiting and piracy law. Mr Ederer is an experienced trial lawyer who has been involved in precedent-setting cases that have explored trademark and trade dress protectability and enforceability, and expanded the limits set by the courts for recovery of damages and profits in counterfeiting cases.

Jennifer Orange
Associate, Toronto
Jennifer Orange practises civil litigation in a variety of areas, including corporate/commercial, class actions, administrative, trade and constitutional law. She has appeared before the Supreme Court of Canada and arbitration tribunals. She has acted for multinational corporations in health regulatory and trade law.

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