The Unified Patent Court and the frustrated promise of IP protection: Investors’ claims in (post-)Brexit Britain

A. The legal path towards the Unified project

The idea of a centralised management of patent judicial actions at the European level has been around for over fifteen years, ¹³ concomitantly receiving direct democratic mandate from European voters (which is quite a rare event), ¹⁴ but its path has proven rather bumpy. Indeed, whilst EU’s citizenry and policymakers seem to have it clear that only a shared IP system may entitle the EU to compete on equal footing with the IP markets of China and the United States, law-wise such a shared system triggers numerous dilemmas for EU institutions and Members alike.

The Court of Justice of the European Union (CJEU) ¹⁵ made it clear from the outset that an European and Community Patents Court located partly outside the EU architecture was unlawful: it would not be considered ‘international’ (nor ‘European’) insofar it could not be entrusted with an insulated application of EU primary and secondary legislation – although confined to a very limited field; ¹⁶ no jurisdiction on acts which review EU-law decisions can be conferred exclusively to courts other than the CJEU. ¹⁷ Although the Court motivated this decision also with the impossibility for Member States to allocate judicial powers to a non-domestic court, ¹⁸ its line of reasoning is anything but sound: provided that ultimate judicial review is left in the hands of the CJEU, there is nothing in the Treaties to prevent States from deciding to create a special forum ratione materiae; the elaboration of this route as the only possible one to safeguard the essential character of the EU’s institutional architecture is a purely judicial invention. ¹⁹ Judicial constructions of this calibre fall within the political desideratum of the EU market as a public (legal) space, where

[t]he emergence of EU public policy as a construct is in fact a relatively recent development. For most of its history, the European Union did not distinguish between EU law, on the one hand, and EU public policy, on the other. Nor did the treaties establishing the European Community, and thereafter the European Union, offer textual support for such a notion. Nevertheless, the ECJ has come to embrace the idea that certain legal norms are so essential to attainment of the EU’s most fundamental objectives that they must be treated as if mandatory, in the sense that private parties may not waive them, that choice of law clauses may not oust them, and that national courts are required to invoke and apply them regardless of the otherwise applicable law. (…) [P]ublic policy is an especially amorphous and sweeping notion with potentially far-reaching substantive implications. ²⁰

Remarkably, and contrary to the predictions of many, ²⁶ the CJEU later revised and smoothened its stance with the release of its ‘CETA Opinion’, ²⁷ carrying the implications for the judicial endorsement of the EU’s multilateralism (someone might say bilateralism) in IP protection which are shortly discussed later in this piece. ²⁸

B. The unsettled UK role and the British premature announcements

Now that all stakeholders have agreed not only in principle, but also on paper on how the UPS should work, much enthusiasm apparently hovers along UPC’s corridors in Paris and Luxemburg, where this intergovernmental organisation has even launched a second hiring campaign just a few months ago. ³⁰

When on 26 April 2018 the UK officially decided to join the UP system (to the dismay of many IP lawyers) ³¹ by ratifying the UPC Agreement, ³² its Atlantist turn was already set in stone, ³³ and almost two years had already gone by since British voters expressed by slim majority their willingness to leave the EU; ‘joining the [Agreement] at this point [wa]s a curious move and one which is inconsistent with the UK’s previous more general statements on Brexit’. ³⁴ This notwithstanding, the UK Government itself reassured multiple times all interested parties—although less officially—that regardless of Brexit, the UK would have remained a party to that system. ³⁵ Scholarly views on the legality of both this claim and its eventual operationalisation vary widely, keeping in mind that ultra vires acts performed by state representatives may engage state responsibility on the international plane, ³⁶ and the other treaty parties may bear a ‘complementary responsibility’ for not double-checking that the withdrawal is lawful under both domestic and international law. ³⁷ Among other controversies at stake, it seems that any adhesion to or withdrawal from international treaties, operated in the context of such an ‘all-changing’ scenario like Brexit, should not be a prerogative of the Executive alone. ³⁸

‘The unique nature of the proposed court means that the UK’s future relationship with the Unified Patent Court will be subject to negotiation with European partners as [the UK leaves] the EU’. ³⁹ This evasive declaration comes in dismissed tone after triumphant proclaims on the UK’s UPC ratification, and may appear deceptive to a foreign investor; it does not speak of possible withdrawal, rather, it sounds like if a ‘future relationship’ will anyway be in place (although its terms might need post-Brexit renegotiation). This is confirmed further by the fact that the UK attached no Brexit-related reservation or interpretative declaration to its notification to Brussels. ⁴⁰ ‘In reality, the issue of the UPC is now going to be put on top of the huge pile of issues to be negotiated as part of the final Brexit deal’. ⁴¹ If despite those (arguably premature and ill-informed) proclaims Brexit triggers the UK’s withdrawal from the UPC, investors might acquire serious grounds for claiming London frustrated their expectations and lowered the original convenience of their investments.

C. The UK’s reiteration of their diplomatic blunder

A technical note issued by the government five months later (September 2018) confirms confusion reigned unhindered, ‘stating simply that the UK will explore whether it is possible to remain in the UPC and unitary patent system following Brexit’. ⁴² One of the many hurdles to untangle is that while the UK pushes for ‘gaining back’ its judicial and ‘quasi-legislative’ independence from the CJEU ⁴³ (with investors ought to have known about this straightforward policy aim), the UPC accepts the primacy of UE law. ⁴⁴ Someone suggested to provide respect-for-EU-law safeguards in UK law, confined to IP protection; ⁴⁵ this shall be deemed unreasonable: nobody in the UK Parliament would support politically so clumsy an exit strategy, and legally—as justified later in this analysis—it is impossible to insulate one field from the exceedingly complex bundle of rights and duties the EU has grown up to embody. The first authoritative admission that a UK-participated UPC is not necessarily practicable came very recently from the new Prime Minister, Boris Johnson. ⁴⁶

The UPC is currently conceived to be a Court set up by EU Member States and as such subject to EU law exclusively, including the judicial review of the CJEU; with Brexit, a UK-participated UPC would alter the fragile political and legal compromise on which it was founded, thereby becoming an international court managed by both EU and non-EU countries. ⁴⁷ As the UPC is tasked with the ascertainment of fundamental rights (from the right to property, to that of individual freedom of action), a so radical turn may prove disastrous. ⁴⁸ Beyond the most obvious hurdles such a scenario would face, another disparity comes when considering the potential interfaces between the UP judiciary and the arbitrators of international investment claims. When unsatisfied with the decisions of the UPC (issued, in theory, under the scrutiny of the CJEU and in conformity with EU law), Member States could not recur to ‘treaty shopping’ and switch to international investment tribunals as a sort of ‘last-resort’ or ‘third-instance’ (after the expected two of the UPC), because of the much-debated primacy of EU law which factually annuls the validity of any infra-EU investment arbitration; conversely, the UK (and more precisely, UK investors, when London is the claimant and decides to exercise diplomatic protection) theoretically could. This creates an unacceptable unevenness of treatment between the two ‘categories’ of beneficiaries of the same IP protection system, not to mention the legal uncertainty such a (non-)solution would bring with it.

If the whole UP system enters into force and it is then declared invalid by the CJEU because of the implications of Brexit on its functioning, both EU and UK investors would find their competitive environment jeopardised overnight, with grave consequences not only on future transactions, but also on past deals. The good news is that a legal path to circumvent the iceberg is available, subject to certain conditions. Following up the referral from a domestic court, the CJEU

can limit the temporal effect of a judgment [by] giving a preliminary ruling at the request of a Member State, but only (…) under strict conditions. It has taken such a step only where there was a risk of serious economic repercussions owing in particular to the large number of legal relationships entered into in good faith on the basis of rules considered to be validly in force, and where it appeared that both individuals and national authorities had been led to adopt practices that did not comply with Union law by reason of objective, significant uncertainty regarding the implications of Union law provisions, to which the conduct of other Member States or the Commission may even have contributed. These two conditions must be given cumulatively. ⁴⁹

Indeed, the ‘significant uncertainty’ of the UK would rest upon the ultimate shape of Brexit as emerging from the negotiations, whereas only residual uncertainty can exist in EU-law terms on the incompatibility in any case (that is, whatever the kind of Brexit which is finalised) of an extra-EU membership within the supposedly EU-body the UPC was crafted to be.

‘Although in the context of a preliminary ruling the CJEU may not rule on the compatibility of national law—or, for that matter, international law—with the Treaties, it has jurisdiction to provide the referring court with all the criteria of interpretation which may enable it to assess such compatibility on its own’. ⁵⁰ To this effect, European courts have a long history of dealing with legitimate expectations doctrines and claims by means of preliminary referrals, tracing back to the 1980s. ⁵¹ Eventually, past deals might seek this route to remain safe.

A. The ‘Europeanisation’ of patent protection in Europe

‘Europeanising’ the forum tasked with hearing disputes is of momentous importance in the field of intellectual property: in the EU, the exception-filled jurisdictional regime established with Article 24 of the 2012 recast of the Brussels I Regulation provides that disputes concerning the registration or validity of patents, trademarks, designs, or other registrable rights are regulated exclusively by the judicial fora of the Member State where the registration has been applied for. This is strictly interpreted and enforced, ‘and cannot be departed from either by an agreement purporting to confer jurisdiction on the courts of another country or by the parties’ submission to another forum’. ⁵² At present, patents in Europe work through the European Patent Convention (EPC), an international treaty independent from EU membership whereby ‘one must “validate” the patent in each of the participating [EPC] [S]tates where coverage is desired. The validation step can include filing fees of the national patent offices and translation costs, where translations are required’. ⁵³ Therefore, although it is true that the current ‘European Patent’ will not be affected by Brexit, it holds true just as much that the UPS would offer investors a notably higher legal certainty, freed from the logic of country-by-country judicial scrutiny, ‘to ensure that businesses have a streamlined process for enforcing patents through a single court where the patents are within the scope of the UPC’. ⁵⁴ Tangentially, this freedom is of special importance to foreign investors that find it very difficult to discern national, EU and other European institutions, competences and procedures; they would be able to challenge patents and request their revocation more easily. Not less importantly, it has been observed that ‘unless it participates in the [UPS], the United Kingdom and UK judges will miss out on defining the future requirements of European patenting, since the UPC’s decisions are likely to influence the jurisprudence of the EPC and its administrative appeals system’. ⁵⁵

B. Brussels’ mistrust for internal investment arrangements outside the reach of EU law

Further insulating EU law, the CJEU’s Achmea judgement confirmed the illegality of intra-EU BITs, and was followed by a Declaration whereby all Member States committed to terminate dozens of investment claims among themselves. ⁵⁶ The reasoning in Achmea stands in line with that in Opinion 2/13 (2014), ⁵⁷ whereby the Court held that the EU’s accession to the ECHR pursuant to the Draft Accession Agreement was contrary to EU ‘constitutional’ law. ⁵⁸ In that case, ‘the CJEU found a violation of Article 344 TFEU because the Draft Accession Agreement did not prevent Member States from bringing proceedings against each other for breach of the ECHR when implementing EU law’. ⁵⁹

To be true, well before Achmea (though to a lesser extent), Europe was already known among investors for progressively representing an arbitration-unfriendly land (despite being a large beneficiary of the IIL regime); ⁶⁰ paradoxically, exactly this judgement could transform the UK in a sort of ‘BIT heaven’, boosting its future attractiveness as an ‘European non-EU’ seat of arbitration, ⁶¹ thus eventually outpacing the EU’s Stockholm. Previously concerned with the incompatibility of certain clauses of certain BITs with EU law, the CJEU zealously imprinted an interventionist shift to its approach, by censuring many BITs pre-emptively, in accordance to the ‘hypothetical incompatibility’-doctrine. ⁶² Along similar lines, EU’s ‘political activism’ and suspicion towards international investment tribunals has come a long way since a couple of decades ago, when the Commission opened an infringement procedure before the then-ECJ against Ireland for bringing an arbitral claim against the UK in a field partly covered by exclusive EU competences. ⁶³

C. The EU’s interest in multilateral solutions to the protection of intellectual property rights

By any account, today’s CJEU’s (and EU’s, more generally) concern is not limited to infra-EU investment claims, as Brussels displays apparent discomfort also with investment claims involving an extra-EU and an EU party, ⁶⁴ yet resolved under non-EU rules only. In other words, the EU would prefer to have a say about how international investment disputes shall be handled, even when those disputes arise not between two (or more) EU Member States, but between a (or more) EU country and third countries. This is evidenced by the fact that when it negotiates bilateral or multilateral investment treaties, specularly to what for example Japan or the US do, ⁶⁵ the EU always tries to convince its partners about the convenience of establishing a two-instance specialised court for handling complaints arising therefrom, those complaints possibly contemplating the inclusion of an IP protection chapter. The EU negotiated it at the time of the Transatlantic Trade and Investment Partnership (TTIP), ⁶⁶ and successfully managed to include it in both the CETA and its most recent bilateral agreements; ⁶⁷ what is more, the EU never fails to express its eagerness to set up a multilateral investment court of global reach (which would arguably compete with the WTO panels in hearing IP-related cases), ⁶⁸ when not striving for a self-standing European investment tribunal under EU law. ⁶⁹

Prima facie, this would contrast strikingly with dissatisfaction at the finding that ‘investor-state dispute settlements, particularly those hosted by [ICSID], are dominated by high-powered, elite private lawyers or legal academics from Europe and the United States who have more experience in the primarily private and commercial law oriented investor-state arbitration system than in the more public law oriented dispute settlement system of the WTO’. ⁷⁰ However, the reasoning of EU policymakers is not to endorse such a trend: it is, rather, to acknowledge its existence and to provide an alternative able to serve at least in part Brussels’ public-policy priorities. Legally, it is irrefutable that the EU can enter into an agreement and submit to the special dispute settlement mechanism established with it: this is part of the treaty-making capacities of the European Union. ⁷¹ Politically, said proposals act as a barrier not to curb, but to regulate (by having a voice in) the so-called ‘assetisation of IP’, definable as ‘the incorporation of intellectual property rights as investment assets into bilateral investment treaties and investment chapters of free trade agreements’. ⁷² The arbitrators appointed for these multilateral arrangements are chosen to be first and foremost leading experts of public international law, which does not necessarily mean having a pro-State bias. ⁷³ This is vital for Brussels: ‘[w]ith more ISDS treaty commitments between countries in the “global North”, the number of filings against developed countries will continue to rise’. ⁷⁴

D. The background politics of preliminary rulings on investment matters

EU law does not define what a ‘court’ or a ‘tribunal’ are, yet the CJEU developed over time a set of criteria against which it usually assesses whether a dispute settlement body can qualify as a EU judiciary: establishment by (domestic) law, independence of its adjudicators, institutional autonomy, permanent nature, compulsory jurisdiction, respect for the rule of law, and inter partes proceedings; ⁷⁵ scholars and Advocates-General have lamented the CJEU’s scrutiny of mentioned indicators is still way too customised, and called for reaching consensus over a definitive, generalisable and binding definition. ⁷⁶

In any case (for the time being), differently from the UP judiciary, infra-EU investment tribunals are not defined by the CJEU as ‘courts and tribunals of the Member States’; resultantly, the Commission cannot start infringement proceedings against any Member if those tribunals misinterpret EU law. ⁷⁷ Most importantly, investment tribunals cannot defer to Luxemburg’s Court for the interpretation of EU law: not only they lack compulsory jurisdiction, ⁷⁸ but they may decide disputes ex aequo et bono ⁷⁹ (however rarely this occurs), proceeding beyond their usual considerations of reasonableness and fairness, and without applying the laws of the Members where they are based. Since the post-referral interpretations provided by the CJEU bear precedential weight, the lack of a case law in this regard encourages augmented fragmentation in international investment law, which is this way deprived of authoritative pronouncements and clear guidance over fundamental issues of compatibility with the EU’s legal order, thus operating in a vacuum. The predicament that ‘[i]ntra-EU BITs confer rights only in respect of investors from one of the two Member States concerned, in conflict with the principle of non-discrimination among EU investors within the single market under EU law’ ⁸⁰ is unfathomable, as any BIT by its own nature provides exactly the same set of rights and duties for both parties’ investors. ⁸¹

Conversely, that ‘by setting up an alternative system of dispute resolution, intra-EU BITs take away from the national judiciary litigation concerning national measures and involving EU law’ ⁸² can be deemed solely partly accurate, in that the political will not to entrust investment tribunals with the possibility to make preliminary reference to the CJEU should be charged on Brussels in the first place. Likewise, the EU could have simply required investors to exhaust courtroom forms of local remedies ⁸³ before turning to arbitrators, so that at least the first instance could be covered by the chance for the seized domestic courts to make preliminary references, and subsequent arbitrators could not have argued EU law differently from the EU Court ⁸⁴ (if needed, they could have only applied other alternative sources of law, such as international customary norms on investment protection). Inexplicably, the CJEU was once satisfied to observe that since arbitration agreements and arbitral awards frequently end up in litigation before national courts anyway, those national courts could themselves proceed with the preliminary reference, which is not excluded under the Council Regulation 44/2001 which transposed the Brussels Convention into EU law. ⁸⁵ This notwithstanding, the reasoning is fallacious and does not take any account of the situation on the ground: preliminary reference ‘is voluntary in practice if not in theory, in that the national court may choose not to refer even if it is supposed to do so’. ⁸⁶ One must be cautious with generalising data, ⁸⁷ and yet, requests for preliminary ruling are not yet common practice. Furthermore, not all jurisdictions permit to turn to domestic courts for IIL matters; for instance, very relevantly in this context, ‘France do[es] not permit annulment of arbitral awards on the grounds of an error of law’. ⁸⁸ Moreover, ICSID final awards cannot be challenged directly before the domestic fora of the New York Convention’s state parties. ⁸⁹

Referring to investment tribunals that could apply EU law without being able to seek advice from the CJEU, scholars have wondered why, ‘[i]f there are sound policy reasons for preserving the structural integrity of the EU court system and refusing to permit issues of EU law to be resolved outside the tribunals anticipated in the EU treaties, litigants’ consent should override so fundamental a policy goal’; ⁹⁰ the reason is straightforward: investment tribunals’ awards are extremely tailored not only to the mandate given by, but equally to the expectations of, the parties (whether private or public), and bear no precedential value. ⁹¹ Even when ‘governed’ by ICSID or working under UNCITRAL rules, their disrupting effects on the coherence of EU-law interpretation are modest, when not negligible. Evidently, the CJEU reasoned differently: it ‘held that arbitration proceedings (…) were different from commercial arbitration, because in case of the former, Member States, not private parties, had agreed to remove those disputes from their judicial systems and thus the EU system’. ⁹²

The importance of this sub-section lies in the conclusion that, as will be elaborated infra, even a non-EU UK being supervised by the CJEU as far as Unified Patents are concerned, would not offer investors the chance to request the CJEU to issue a preliminary ruling on issues arising from their pending arbitration cases.

A. Impaired access to the EU market and ‘commercial space’

Under the current framework, apart from national patents, the UK is the third most-chosen forum for the validation of EPO-granted patents, after Germany and France, and before Italy, Spain and The Netherlands. ⁹³ Due to post-grant legal hurdles (for example, parallel patent-infringement litigation) and costs (registration, translation, renewal, and so on), those patents ‘are relatively rarely validated in central and eastern European countries, with validation rates way below 10%’; ⁹⁴ this means that a Unified Patent would open up an enormous and still uncharted market to investors in the UK, and perhaps contribute to a stronger Eastward-looking pan-European (industrial) integration.

Phrased differently, a turnaround on the UK participation to this centralised IP project would damage investors significantly on multiple tables, and the conceptual umbrella for such a significance is represented by the evidence that patents are as market-sensible as for example M&E operations, in that their innovativeness and profitability highly depend on the relevant markets where they are granted and exploited. ⁹⁵

More broadly, being ostracised from the EU legal order precludes an investor the benefits of a ‘common commercial policy (…) based on uniform principles, particularly with regard to (…) the commercial aspects of intellectual property’, ⁹⁶ and of a dynamic system able to keep pace with legal innovation: whilst the international legal order changes at slow (and often contested) pace, the EU’s one has undertaken a profoundly certain self-renovating path since its foundation time. ⁹⁷ EU-governance scholars talk indeed of ‘widening and deepening’, and it is exactly this double-sided process to cause inter-regime legal frictions. ⁹⁸ As the EU acquires more and more competences by touching upon private international law areas, the chance for conflict between the EU legal order and IIL increases accordingly. ⁹⁹

The European Commission specified that the Achmea judgement should not alarm European investors, but rather be welcomed in the context of the overall protection that sector-specific EU legislation grants to investments, including in terms of IP; ¹⁰⁰ arguably, the UP project should then be seen as a complementary mechanism to the ‘new’ orientation of CJEU’s jurisprudence, linked by the final goal of ‘Europeanising’ the legal protection to IP-intensive investments within the European Union. Besides questions of what is allowed by the law itself, this confirms once more the political and entrepreneurial convenience of either joining the system entirely or rejecting it as a whole. In other words: even if the UK could legally remain a party to the UP system whilst withdrawing its EU membership, this would make little sense to an investor for the systematic protection of its IP rights.

B. Unaffordable litigation costs: Denial of justice?

On top of the higher administrative and bureaucratic costs outlined above, ¹⁰¹ UPC fees in the UK would be ‘dwarfed by the private legal costs of undertaking litigation at the court, which typically amount to more than £1million for each side’. ¹⁰² Especially for SMEs (particularly start-ups), these litigation costs may factually amount to ‘denial of justice’, which for example in the 2004 US Model BIT is listed among the possible fair and equitable treatment (FET) breaches. The conceptual link between unaffordable fees and denial of justice stands as FET breach not in absolute terms, but when the investor was previously promised or granted a substantially cheaper access route. Domestically, the UK already recognises—although on paper only—that high costs may render justice inaccessible. ¹⁰³

C. ‘This is not simply about patents’: An all-encompassing human rights system

EU law’s impact on UK’s legislation and court system, once calculated as an external variable in terms of spillover effect, is now taken for granted in a blended fashion to the extent that entire substantial and procedural areas of UK law draw massively from European values and practices, or are directly shaped by EU primary and secondary legislation as much as judgements delivered by the CJEU. ¹⁰⁴ That the UK’s Supreme Court labelled Brexit as a fundamental change in the country’s constitutional framework cannot leave anybody surprised: ‘the Supreme Court supported the reasoning of the lower courts, which had focused on the loss of certain individual rights vested in domestic law that would be removed by virtue of the withdrawal’ from the EU; ¹⁰⁵ among them, of course, lie those of investors who incorporated their business in the UK, and especially of those amid them who aimed at protecting their IP rights under the umbrella of the supposedly-forthcoming UP system offering a level-playing field all throughout the world’s largest single-market. Amidst other changes, the EU’s Charter of Fundamental Rights, listed in the UPC Agreement’s Preamble, will no longer apply to investors’ rights.

It must be noted that Brexit’s impact on the British protection of IP rights held by foreign investors far exceeds the mere UPC dossier. This is because, after Lisbon, ‘[t]he wording of Article 207 TFEU does not contain any explicit limitation regarding the extent of competences for “foreign direct investments”. For reasons of efficiency and practicability (effet utile) the EU should possess the competence for all possible aspects of (foreign direct) investment promotion and protection’, including IP rights that can be regulated at EU level without leaving the decision on what constitutes ‘indirect expropriation’ to the single States. ¹⁰⁶ As far as IP is concerned, the determination of the conditions under which the expropriation of this particular type of property might take place falls within the remit of said Article. ¹⁰⁷

The overarching observation is that even if the UK decided (and this seems politically untenable) to accept the jurisdiction of the CJEU limited to UPC decisions’ review, and even if the CJEU accepted this compromise (which is highly likely to be reputed legally unfeasible), UK investors would not be protected by EU law’s ‘bundle of rights’, but only by a one-off deference to EU law that would operate in a vacuum. Needless to stress, this path for patent protection only makes sense as long as it is exercised within the context of the EU’s legal order altogether.

D. The dissociation between the CJEU and ‘its’ domestic courts

Even if the UK is eventually able to retain its prospected membership in the UPS and accepts in principle the CJEU’s ‘supervision’ over the UPC, the CJEU would not accept requests for preliminary rulings submitted by UK-based investment tribunals even if the UK is no longer an EU party and therefore Achmea does not apply to it anymore; this holds true even though at the same time the CJEU would accept such requests by UK domestic courts. The salient point is that those requests would need to be strictly related to patent issues in a very narrow sense, as the CJEU ‘supervision’ would be limited to those issues and could not trespass into the whole bundle of rights investors would normally join under EU law (the importance thereof having been briefly recalled in the preceding sub-section).

E. When are legitimate expectations truly…legitimate?

In both EU law and international investment law, ‘legitimate expectation’— meaning, what is ‘reasonably predictable’ after well-informed decision-making—derives from the principle of fairness in administrative law. Although part of the scholarship does claim that ‘policy-induced expectations should not properly be regarded as illustrations of the doctrine of legitimate expectations’, ¹⁰⁸ English courts have repeatedly supported the idea that legitimate expectation ‘should be treated as a mandatory relevant consideration when a discretion comes to be exercised’ ¹⁰⁹ – and there is little more discretionary in the legal panorama than investment arbitrations. Despite this, in Eli Lilly Canada pleaded that this doctrine has not customarised enough for its possible disattending to be considered a violation of IIL’s minimum standard of treatment under NAFTA. ¹¹⁰

What constitutes a ‘legitimate expectation’ of an investor under EU law and international investment law may obviously differ: the clash between a sui iuris system like the EU law one ¹¹¹ and a self-regulating system of public international law such as IIL makes it unavoidable; in casu, there is no much support on the customary law side, either. ¹¹² A ‘particular interpretation of EU law could be necessary in light of the ISDS mechanism’s interpretation of investment treaty standards if the same, or essentially the same, standards also exist as norms of EU law and require identical interpretation. In the presence of such multi-sourced equivalent norms the interpretation by the ISDS mechanism could de facto bind the CJEU to a specific interpretation of EU law’. ¹¹³ In such cases, it is necessary to establish (a) whether the norm actually exists under both regimes/orders; ¹¹⁴ (b) if so, whether it is comparable in scope and aim; (c) in the positive, whether the normative force of the international norm is able to drive the interpretation of its European counterpart, despite the former’s loose terminological accuracy – the extent to which international investment law preserves its indeterminacy is a fortiori astonishing in light of the demonstration that mainstream arbitrators (those who preside over top arbitrations able to shape the field) are ‘always the same people’, ¹¹⁵ part of an elitist club and applying standards as they are conceptualised and applied in the Anglo-American tradition, ¹¹⁶ regardless of where, under what law and among whose parties the disputes are to be settled.

EU law considers legal certainty to be part of the legitimate expectations of an investor, but the extent to which the latter shapes the former differs from a Member State to another; for this reason, if investors litigate their case before ordinary domestic courts, those courts should ensure the uniform interpretation and application of EU law (yet minor discrepancies may de facto be noticed), as such investors may rely more confidently on their most recent caselaw. If, rather, investors start an arbitration proceeding, the forum, rules, and composition of the tribunal might bring to the delivery of totally opposite outcomes. The Achmea judgement now prevents the second scenario, and yet, foreign investors may decide to litigate in Europe or before European arbitrators, under international investment law (for example, ICSID rules). Since, as recalled above, this field’s terminology is loose in itself as much as inconsistently applied both regionally and globally, those arbitrators might issue decisions embedded in the legacy of different ‘pre-Achmea’ European judicial cultures on investment. A German arbitrator, for example, or an arbitration taking place in Germany (factually or nominally), may involve a good deal of the German-law understanding of ‘legitimate expectations’. There, this concept derives from ‘the principle of Vertrauensschutz, which is concerned with the promotion of confidence and trust in the public administration’; whereas a legitimate expectation is an individual status to be weighed against numerous variables, legal certainty is built on two objective elements only: laws’ non-retroactivity and content-wise stability. ¹¹⁷ Needless to say, the second element is the problematic one. Someone claims that ‘[t]he German position has likely influenced the development of the principle in EU law, where it is considered a general principle of EU law’; ¹¹⁸ this would be relevant for the CJEU (and possible referrals thereto by Member States’ domestic courts), yet arbitrators, save for their inescapable cultural influences, enjoy wider room for case-tailored discretion. At any rate, what emerges clearly is that a purely formalistic approach to the subject is of no assistance: turning to economic considerations, as done by a number of investment tribunals in Latin America, ¹¹⁹ and trying to assess (quasi-)scientifically those considerations on a case-by-case basis, as regrettably not done by those same tribunals, should be bearing more fruits.

In English courts, ‘legitimate expectations are an application of the concept of abuse of power[, following a doctrine that] simply collapses into a principle of fairness because there is no real content or indication on what is lawful or unlawful’. ¹²⁰ Fairness is way more dangerous than the already-unhelpful ‘content-wise stability’ mentioned before, as the relevant question is then: ‘fair, yes, but whom to? Who are all stakeholders?’. For example,

[protecting] expectations only procedurally, as the English court did in R v Secretary of State for Health, ex p US Tobacco International Inc, means to deny that the company’s financial interest would override the interest in public health, and to merely recognize that the company should have been granted an opportunity to comment on the scientific evidence on which the ban was based. The development of substantive protection of expectations under English law has been slow and difficult. ¹²¹

F. Estoppel in unilateral declarations

London’s post-Brexit governmental statement expressing their willingness to not being removed from the UP process is a unilateral declaration; indeed, unilateral declarations are usually expressed in writing or orally, in extra-negotiation settings, by those representing a country in international relations. ¹²⁹ They can be later qualified in special circumstances, ¹³⁰ only when their effect on third-parties has not yet materialised. The International Law Commission has collected the view that the principle of estoppel governs the law of unilateral declarations, ¹³¹ preventing States from asserting policies contrary to what previous oral or factual promises had led to believe, even though prospected rights are obviously not the same as acquired ones. Whilst the exact scope of estoppel varies jurisdiction to jurisdiction, its substance as principle of international law is clearly derivative of the obligation to conduct international affairs in good faith, ¹³² including pacta sunt servanda. On the UK part, retracting the possibility for investors to obtain IP protection under the upcoming EU unified system, after promising to remain a party to the UP system despite being aware of compatibility hurdles with EU, may be deemed illegitimate as contrary to the (international formulation of the) principle of estoppel (even ante acceptationem ¹³³ ).

Nevertheless, similar claims can be advanced about investors who knowingly (deliberately) acquiesced to such a bad-faith move, without seeking clarifications (as a minimum), ¹³⁴ in order to subsequently plead their damage case. In Temple of Preah Vihear, the ICJ hinted at the possibility that ‘the principle of estoppel serves as a mechanism that eventually validates given circumstances which otherwise would have permitted the nullification of the legal act in question’; ¹³⁵ in the situation under scrutiny, it follows that the acquiescing investors, with their behaviour, automatically validate the UK’s promise to them, despite the promise’s compatibility with EU law remains unsatisfied. The practical outcome would be that the UK is forced to renegotiate its position, whilst investors cannot claim any damage arising out of the incautious declaration released by the British government.

G. Indirect expropriation

The recalled disparity of treatment bears one face more. Indirect expropriation concretises when the transfer of property does not materialise, yet disruptive changes in the regulatory environment make such a transfer unnecessary: property rights are then rendered so meaningless and unprofitable that the value of the investment decays dramatically. ¹³⁷ Although it is universally acknowledged that TRIPS-consistent patent rejections (whose criteria may vary even significantly country by country) cannot be assimilated to indirect expropriations, what is a TRIPS-consistent rejection is still open to debate, and investment tribunals are invested with the discretion of deciding exactly that. ¹³⁸ Let us see this applied to a scenario where the UK remains a party to the UPC without accepting the primacy of EU law more broadly. Whereas EU investors would be unable to invoke investment tribunals’ decision on this matter in infra-EU disputes, thus being prevented from challenging said consistency across the whole spectrum of UP participating countries, UK investors (claimants) in the EU and EU investors in the UK (defendant) could launch such a challenge which would have effect only on the UPC members concerned (the UK in the second case, and the EU countries where UK investors incorporated their businesses in the first).

A. Avoiding ‘chilling effects’ on public policy definition and implementation

As they stand at the moment, investors’ ‘abuses’ of the IIL regime to make States accountable for supposed violations of their patent rights might fall into what literature calls ‘chilling effects’; for the sake of exemplification, ‘the possibility of being ordered to pay a huge amount of money as compensation to an investor may deter [S]tates from implementing measures relating to intellectual property that can subsequently be challenged before an investment tribunal’. ¹⁴⁰ Corporate investors might easily face the same counterclaims Canada availed itself of in Eli Lilly: common law jurisdictions’ legal framework is subject to faster and more frequent alterations when compared to civil law jurisdictions, as judges may create binding jurisprudential precedents, and investors must be aware of this beforehand. ¹⁴¹ It has been convincingly posited ¹⁴² that recording (or expecting) few legislative amendments explicitly linkable to threat of arbitral litigation does not suffice for minimising the (potential) chilling effect of litigating IP rights: most challenges are administrative, and the confidentiality of governmental bureaucracy makes it impossible to assess what one may define as ‘hidden effects’, occurring when an executive refrains from even proposing a legislative change that would plausibly be challenged multiple times before investment tribunals.

Notwithstanding the above, and from the perspective of an ‘economic’ approach to public law, a strong opposition operated by the British government in court against claims actioned by in-good-faith investors who were left disappointed by the Executive’s mismanagement of the situation, would represent a double defeat for London. Economic analysis of public law attributes a quantitative value to the trusteeship between the public and private components of societies, with the latter relying on the former for—and entrusting it with—the satisfaction of specific needs. ‘When individuals plead protection of their reliance interest in court, ex post facto, the government may appear uninterested in this protection. But the government’s interest in protecting individual reliance should be evaluated through an ex ante perspective, when refraining from discouraging future individual participation in state initiatives would appear vital (…). Failure to consider [this reliance] is an externalization of costs, which may ultimately lead to inefficient results’. ¹⁴³ A cynical dismissal of investors’ expectations leads to protracted mistrust between the private and the public, which translates into systemic public policy failure. ¹⁴⁴ There is obviously a difference between a slight updating to the laws and a radical transformation of the overall institutional framework against which the law is framed. ¹⁴⁵ This seems to be indeed the only argument by which a post-Brexit investor’s claim before English courts may get a chance to succeed, since in the Canadian case it was not persuasive enough but would sound more convincing in the circumstances under scrutiny here. To say it all, it was not convincing in the Philip Morris case either, as the overarching stability of Uruguay’s legal framework was not ‘impaired enough’ by the specific measure Morris contested, ¹⁴⁶ especially if exercised in pursuance of a public interest as momentous as the right to health. ¹⁴⁷

B. Investors bear the burden of proving they could not expect these consequences

One can make the argument that since the UK joined the UPS after the Brexit referendum, investors ‘should have known’ this could have caused some troubles to the UK’s continued membership to the system; however, such an argument would be misleading. First, the UP system came into force in January 2013, when only a few experts could have predicted not even the result of the Brexit referendum, but the very holding of the referendum. The mere sentiment of mistrust or even open hostility towards the EU (or even the UP itself) which was on display during the UK’s 2015 general elections, ¹⁴⁸ and which has proven in recent years common to a number of EU governments and citizens, could not alone be deemed sufficient to mark that path. Further, one can doubt about the motives of investors choosing the UK for patenting their inventions after the referendum ¹⁴⁹ or immediately before, but those who invested in 2013-2015 cannot reasonably be said to have acted mala fide (unless otherwise proven). Second, even those who knew about Brexit could have reasonably seen in the UPC a last-resort relief, alternative to the upcoming withdrawal of both the CJEU ¹⁵⁰ and ECtHR protection (since the UK plans on leaving the Strasbourg’s court as well ¹⁵¹ ). Third (and as an accessory argument only), it cannot be expected that all investors are equipped with the most sophisticated knowledge on the legal interfaces (read ‘intricacies’) between international investment law, public international law, EU law, UK law, and so forth: it seems more reasonable to admit that a fortiori in these uncertain times due to Brexit, the UK Government should have adopted more moderate and professional a stance, ¹⁵² instead of promising its belonging to an IP protecting environment prior to acquiring certainty on the legal feasibility of such a solution.

The somewhat comparable investment claim Electrabel v. Hungary was dropped because of the complete absence of assurances or promises, ¹⁵³ which in this case do exist. What investors could have expected is for Brexit to be codified in a pact whereby the pillars which have shaped the EU’s external action remain influential (if not ‘valid’ or ‘applicable’) over at least a transitional period; this is relevant as Article 207(1) TFEU provides that the common policy on the commercial aspects of intellectual property shall be uniformly ‘conducted in the context of the principles and objectives of the Union’s external action’.

C. ‘We could not know it would have taken so long’

To be fair, timing-related issues can be argued from both sides: the UK could have been unprepared to foresee the big picture as all pieces of the puzzle were coming together in a randomised fashion. Initially, one of the most promising plans on the table was indeed the one named ‘join then leave’, ¹⁵⁴ consisting in joining the UPC to then withdraw from it after Brexit had taken effect, ¹⁵⁵ perhaps after a period of transition. This process, which would have partly protected investors, was reasonably conceived for a system expected to be in full operation by the end of 2017 at the very latest; unfortunately, the formal opening of the Organisation is still pending in Karlsruhe before Germany’s Federal Constitutional Court. ¹⁵⁶ This means that the UK could have not known at the time, but should have still rectified its position in accordance with the aforementioned delays. This stands even truer in light of the consequences of mentioned procrastinations: Germany has officially announced ¹⁵⁷ that it will not ratify the UPC Agreement prior to receiving full information about the British position on the matter in all transitional and post-Brexit scenarios. Although the legal implications of this announcement will not be scrutinised in detail here, it is worth mentioning that Germany’s cautionary decision seems prima facie justifiable; accordingly, if the UPC does not eventually enter into force due to these delays, the UK Government’s irresponsible proclaims could still entail legal responsibility, or—to say the least—raise serious concerns on the political trustworthiness of UK’s leadership.

A. Framing cross-domain IP claims: potential clashes of applicable laws

The way said investment claims would be handled is anything but clear: several scenarios can be foreshadowed for the submission of BIT-breach claims because of the UK’s inability to proficiently manage the legal consequences of Brexit in its interfaces with the UPS; the main four ones are briefly explicated in what follows.

In the ‘EU country’s investor v UK’ case before the UK definitely leaves the EU, the only applicable law is the EU one, and in light of the Achmea judgement it shall be litigated outside the investment tribunals circuit. ¹⁵⁸ If the same case presents itself once the UK has left the EU, a possibly hybrid legal regime will apply, recalling that transitional adjustments may see segments of EU law being still applicable to such litigations. If a foreign (extra-EU) country’s investor sues the UK before it leaves the EU, the applicable regime is IIL, but the UK holds additional public-policy defences as a party to the European Union, as long as it is able to convince the tribunal that following Brussels’ dictates (on both timing and substance) has contributed to its decisions. The last—but most probable—scenario, if a foreign country’s investor sues London after Brexit has occurred, international investment law, with its principles and priorities, fully applies to the dispute. In addition, ‘the ability of UK courts to issue anti-suit injunctions is generally limited to prohibiting litigants from maintaining litigation outside of the EU’: ¹⁵⁹ this will change after Brexit, whereas those courts’ ability to issue said injunctions to prevent a party from maintaining an earlier-filed vexatious (that is, frivolous or oppressive) arbitration proceeding where arbitration is indeed the ‘essential subject matter’ ¹⁶⁰ is independent from membership in the EU, as already allowed by the Brussels Regulation’s recast. An investor submitting a claim before English courts after Brexit, however, cannot expect any award of damages, ¹⁶¹ contenting itself with declaratory reparation.

For one thing, the CJEU seems to have strengthened the supremacy, autonomy and ‘self-containedness’ of EU law ¹⁶² by ruling that non-commercial infra-EU investment disputes must be solved by the EU judiciary, ¹⁶³ echoed by sharp approval by the Commission ¹⁶⁴ and by Member States’ commitment to terminate BITs among themselves. ¹⁶⁵ On the other hand, not only investment tribunals have dismissed the apparent scope of this decision ¹⁶⁶ (supported by the ‘arbitration community’ more broadly ¹⁶⁷ ), but the UK will no longer be a Member State. Additionally, a non-negligible number of those investors frustrated with the UK no longer being eligible to UPC’s membership would likely be extra-EU.

Yet, the most intriguing and controversial consequence is another one. As soon as Brexit turns out to ‘have a date’ (most probably because following domestic elections, the UK reaches a new compromise with the EU and such a renegotiated deal is finally backed by the UK Parliament), no specific agreement on the UPC is reached and the UK leaves the UPS contextually, one would expect a wave of international investment claims by infra- and extra-EU investor arguing that their reasonable expectations in terms of IP protection were frustrated. At that point, eventual investment claims submitted before the UK judiciary could not be referred by the latter to the CJEU as EU law would no longer, then, be applicable by UK judges. As such, it is rather essential to mention the hypothetical scenario of an investment claim brought before the UK judiciary prior to Brexit actually realising, and yet after its upcoming realisation had been confirmed. Within that time frame, EU law would still be applicable and UK courts could still, consequently, refer their judgements ‘last-minute’ to the CJEU.

B. Anticipating the CJEU’s approach and response

Forced into the path just depicted, the Luxembourg’s Court, de facto prevented from refusing to answering the question, ¹⁶⁸ would find itself in the unenviable position of having to provide a EU-law reasoning while aware of the weak enforcement mechanisms which would be in place after the judgement is delivered and, arguably, the UK has meanwhile withdrawn from the European Union.

The CJEU’s approach to infra-EU investment claims is blatantly resolved in favour of the primacy of EU law ¹⁶⁹ and mutual trust ¹⁷⁰ amid EU national judiciaries, ¹⁷¹ but two conditions might make this approach untenable in the case at stake: first, the above-mentioned political climate might depreciate the legal force of EU-law primacy; second, most claims would originate from extra-EU investors incorporated in the UK. ¹⁷² And that is not all: if the UPC Agreement is amended as to specify that EU membership was necessary at the time of joining, it arguably becomes an international treaty stripped from EU-law exclusivity.

To investigate even deeper the interests at stake, it is extremely intriguing to look at the problem from the reverse standpoint: that of the tension between promises made by States to investors prior to joining the EU, ¹⁷³ and the new legal framework where those States find themselves to operate because of their accession to the Union – that is, when joining the EU allegedly impairs investors. AES Summit Generation v. Hungary illustrates how awarding compensation to investors who had been promised state aid which subsequently turned out being illegal under EU law, may mould more problems than those it solves. ‘Any payment on such an award would then itself constitute a violation by Hungary of EU state aid rules since the damages would de facto re-allocate to the enterprise the forbidden economic benefit and thus perpetuate the illegal distortion of the market’. ¹⁷⁴ This does not come as a surprise, since ‘EU law provides also for investor protection but only within the much broader context of establishing the Internal Market as the regulated level playing field that is the backbone of the European integration project’. ¹⁷⁵ In a pre-accession scenario like this, the EU’s judiciary upholds the rights of EU citizens first, prioritising the exigences and best welfare of EU Members’ taxpayers (the best balance between solidarity and competitiveness ¹⁷⁶ ) over the interests of third-party investors. ¹⁷⁷ When the same rationale is applied to a pre-withdrawal scenario, those ‘rights of EU citizens first’ would entail an interpretation of investment rules the most favourably possible towards the citizens of the other countries (those which are not leaving the EU). Metaphors aside, the CJEU would be expected to treat the UK as a ‘quasi-Member’ or ‘leaving Member’, in a judgement where political considerations on the internal market creep into the ordinary (supposed) legalism of its judicial delivery. The hypothetical scenario would involve an EU investor incorporated in the UK, that investor being backed by its mother-company’s (EU) State exercising diplomatic protection in claiming that the UK has violated the terms of an infra-EU BIT. In such a case, the dispute would be referred to the CJEU as formally contraposing two full Member States; however, providing that Brexit has meanwhile acquired a certain delivery date, the CJEU would de facto face ‘purely-EU’ interests to be pondered against ‘quasi-EU’ ones.

The trend of freeing IPR litigation from its historical isolation was inaugurated with its incorporation in the WTO system. ¹⁷⁸ Since then, IPRs dialogue at ever-increasing complexity with several other branches of law. Regardless whether Brexit materialises, the best equation sees both competition and patent claims being judged by the same courts through similar empirical methodologies: ¹⁷⁹ either both under British law, or both subject to the ultimate judicial review powers of the CJEU. This holds especially true for standard-setting patents, technological interoperability and standardisation bodies, since Europe aims at standing at the forefront of global innovation, ¹⁸⁰ but ‘premature adoption of an industry standard might forestall market experimentation with alternatives. Once a standard is developed there is often little value in producing incompatible products or processes, even though they might be technologically superior’. ¹⁸¹