This article is part of a series about what the renegotiation of the North American Free Trade Agreement means for the knowledge economy in Canada and the people who turn ideas into innovations within one of the world’s largest free trade zones.
 

The United States has been the main driver of intellectual property (IP) protection in international trade agreements since the 1980s. It has set up a dynamic in which the United States makes demands of the IP laws of other countries, with those other countries resisting to the extent they can. But this dynamic overlooks a serious flaw: it does not address either discrimination or lack of reciprocity in the US patent system. This essay outlines some of the ways in which the US patent system discriminates against foreign firms and suggests ways for Canada, both within and outside the North American Free Trade Agreement (NAFTA), to address these.

While not a full elaboration of the strategies that Canada could pursue in the NAFTA renegotiations, the basic premises and strategies presented here are meant to prompt discussion and open pathways for ensuring that Canadian innovators are treated as fairly in the United States as US innovators are in Canada. Canada could take the opportunity of NAFTA 2.0 to level the playing field for Canadian innovators entering the US market.

While the United States positions itself as having the best or strongest patent system for innovators, it is not as open or as fair as it portrays itself. The substance of US patent law is well developed and generally well balanced, but parochial exceptions and unbalanced procedures relating to the enforcement and defence against a claim of patent infringement are not. As will be elaborated below, these include the combination of jury trials that studies suggest are biased against foreigners,1  significant inequalities in which foreign innovators can sue and be sued for infringement,2 separate procedures for the importation of products subject to patents that studies show are biased against foreigners, and sovereign immunity at both the federal3 and state levels. Together, these rules discriminate against foreign patent holders and defendants in the US patent system.

The United States starts the NAFTA renegotiation with the explicit goal of “prevent[ing] or eliminate[ing] discrimination with respect to matters affecting the availability, acquisition, scope, maintenance, use, and enforcement of intellectual property rights.” Canada and its negotiators ought to require the United States to live up to this standard by eliminating, where possible, and otherwise containing the sources of unfairness to Canadians and other foreigners in the US patent system.

 

Background
 

Starting on August 16, 2017, the governments of Canada, Mexico and the United States will review and likely revise NAFTA. Originally negotiated in the early 1990s, the agreement came into force on January 1, 1994. Its patent and other IP provisions borrowed from then-circulating drafts of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) under the World Trade Organization (WTO), and its language is largely the same.

Since 1994, the international landscape for patent law has changed significantly. Some of these changes have been environmental, such as the distrust of pharmaceutical company practices that seem to limit availability of essential medicines in developing countries, a decrease in the affordability of medicines in developed countries and a decreasing faith in the information that these pharmaceutical firms promulgate, exacerbated by a number of publicly reported scandals over the last decade. The political landscape has similarly evolved, to one in which states look less to multilateral fora, such as the WTO and the World Intellectual Property Organization (WIPO), to set patent policy. Instead, countries have moved to bilateral and plurilateral negotiations to set IP standards.

For Canada, the most significant of these plurilateral arrangements are the Comprehensive Economic and Trade Agreement (CETA) between the European Union and Canada, and the adjourned Trans-Pacific Partnership (TPP) Agreement. Legislation implementing CETA in Canada received royal assent in May 2017, although neither the legislation nor any implementing regulations have yet come into force. On the other hand, while the United States has withdrawn from the TPP, it may nevertheless attempt to impose that agreement’s IP provisions in NAFTA 2.0. The United States Trade Representative’s (USTR’s) Summary of Objectives for the NAFTA Renegotiation suggest this may be the case, although its objectives remain vague.

While imposing significant reform on Canada’s copyright regime, the TPP did not add any new obligation on Canada regarding patents beyond the two, admittedly significant, changes already accepted under CETA. Under the latter, Canada will, first, provide up to two years of supplementary protection to pharmaceutical patents due to delays in excess of five years between patent filing and market approval. In practice, this will almost always occur. Second, Canada is implementing changes to its Patented Medicines (Notice of Compliance) regulations to turn what are currently summary proceedings dealing narrowly with market approval into full trials on patent validity and infringement that can be fully appealed. Under the modifications, pharmaceutical patent holders will benefit from a two-year automatic stay on the issuance of market approval to generics, but the stay will not be extended to appeal should the patent holder lose. There is currently no evidence to suggest that, with careful case management, two years is insufficient to complete these trials.

While the United States positions itself as having the best or strongest patent system for innovators, it is not as open or as fair as it portrays itself.

It is within this landscape that Canada will enter into the upcoming NAFTA 2.0 negotiations. While the focus here is on patent law, there are obviously other issues that will critically affect Canada’s ability to develop and implement a forward-looking innovation strategy. These include not only copyright and trademark, but investor-state dispute resolution (NAFTA has an outdated mechanism that has been improved, if imperfectly, in CETA), regulatory data protection for biologics, immigration, infrastructure investments and procurement rules.

The USTR’s Summary of Objectives sets a general goal of “ensur[ing] provisions governing intellectual property rights reflect a standard of protection similar to that found in U.S. law.” Given the commonly held assumption that the United States provides more patent-holder friendly laws than do other countries, one may think this would require additional concessions by Canada. Certainly, the US pharmaceutical lobby group, PhRMA, is pushing for additional changes to Canadian patent law, although these are vaguely stated and seem to go well beyond what the United States accepted under the TPP.

Canadian patent law is, in fact, friendlier to US patent holders than US patent law is to Canadians. In light of this, there is little justification for additional concessions by Canada in NAFTA 2.0. On the other hand, there is much the United States ought to do to level the playing field for Canadian innovators.

 

Discrimination and Lack of Reciprocity in the US Patent System
 

Rather than acquiesce to a US narrative about its patent law superiority, it is worth reviewing both areas in which US law overtly or implicitly discriminates against foreign firms or where the United States does not reciprocate advantages offered in other countries. As Canada is one of the NAFTA parties, the focus of this article is on the effects on Canadian firms, although there are some obvious implications for other foreign firms.

The literature suggests that, because of fears of jury bias, foreign patent holders are less likely to sue in the United States than are domestic patent holders; when they do, they put forward only their strongest patents.4 While jury bias is a serious problem, it is made worse by venue rules that limit actions to the jurisdiction in which the infringer is either incorporated or “has committed acts of infringement and has a regular and established place of business.” The combination of limited venue choices and jury trials gives US domestic infringers a clear — and discriminatory — home court advantage. On the other hand, US patent holders can sue Canadian firms for infringement in any jurisdiction, allowing the patent holders to select venues they believe to be the most friendly to them (and biased against alleged infringers).

Foreign importers face additional hurdles, due to practices at the International Trade Commission (ITC), that domestic firms producing in the United States do not face. An independent study found that the ITC is more likely to rule both procedurally and substantively against imported goods than are the Federal Courts that rule on domestic cases of infringement. Other countries do not have similar tribunals limited to imports, suggesting that the ITC is both discriminatory in practice and that its jurisdiction over patents shows a lack of reciprocity. The result is that Canadian and other goods producers outside of the United States face a different and higher burden than do domestic US firms.

Two sources of unfairness derive from the US Constitution: jury trials and sovereign immunity. While it is obviously not possible to abrogate those rules, both can be managed so as to lead to fairer results for Canadian (and other foreign) entities.

For example, the worst forms of jury bias (and hence discrimination) can be mitigated not only by process rules, but by enabling Canadian and other foreign firms to have greater flexibility in terms of venue. Sovereign immunity can be overcome by the passage of laws, at the federal and state levels, that subject those governments to full patent liability, adjudicated through the same process as applies to any defendant. This would restore reciprocity between the United States and Canada, as the latter is already subject to the full force of patent law. Alternatively, Canada could consider setting up separate administrative procedures to obtain redress for patent infringement by governments and their contractors in the same manner as the US federal government.

 

Strategies to Level the Playing Field
 

There are six steps that Canada can take to help innovators. Some of these require changes to NAFTA, while others can be implemented by Canada alone (provided that nothing in the revised NAFTA prohibits it). Canadian negotiators can thus be proactive in seeking redress for Canadian firms in the US patent process, as well as protecting existing flexibilities to equalize the playing field. Collectively, the strategies aim to assist Canadian innovators — most of which are small and medium-sized enterprises — to scale up to US markets.

The recommendations are ordered into three categories: those that ought to be incorporated in the NAFTA text; those that could be implemented by Canada unilaterally, provided that nothing is added to NAFTA that would limit Canada’s flexibility; and some long-term strategic options that need development but could produce benefits to Canadian firms in the longer term.

Recommendations for the NAFTA Text

The first recommendation is the simplest. Following a recent Supreme Court of Canada decision that significantly altered and lessened Canada’s patent utility requirement, Canada ought to adopt the US utility standard of requiring inventions to have a “specific, substantial and credible utility.” It should do so through specific language in NAFTA to make it clear that this change in utility rules — and their subsequent judicial development — complies with NAFTA 2.0. Article 17.9(13) of the Australia-US Free Trade Agreement accomplishes this through the following language: “Each Party shall provide that a claimed invention is useful if it has a specific, substantial, and credible utility.” Despite this provision, Australia maintains different rules than the United States does to determine an invention’s utility. For example, the explanatory memorandum to the law implementing that agreement stated: “Broadly speaking the claimed invention must actually achieve what is promised by the patentee.” In a run-up to negotiations for a free trade agreement with the United States, New Zealand also adopted the specific, substantial and credible utility standard.

Given the Australian and New Zealand experiences, the United States would presumably be pleased if Canada were to follow their lead. Adoption of the more forceful US utility standard would permit Canadian courts to return to a state of balance that would assist our innovators. In particular, doing so would dispose of the troublesome “scintilla” standard in Canadian patent law that allows any use, no matter how insignificant, to be enough. The scintilla standard threatens to clog up the Canadian patent system in a way that obstructs Canadian innovators from bringing their products to market. Instead, the US specific, substantial and credible standard will constrain the issuance of low-quality patents.

A second recommendation to be implemented through NAFTA is, as noted above, to address jury bias against foreign firms. This direct form of discrimination against foreign firms needs immediate redress. Jury trials are constitutionally mandated in the United States and thus cannot be eliminated. The Canadian strategy therefore ought to focus on limiting the potential for bias by building in procedural mechanisms that would allow Canadian (and other foreign) firms to engage on a more level playing field. One strategy would be to allow Canadian innovators to sue in any district; that is, giving those innovators the same rights that US patent holders have against them. Alternatively, the United States could agree to change its venue rules in 28 USC § 1391(c)(3) to limit the jurisdictions in which alleged Canadian patent infringers could be sued. This would not overcome the jury bias problem for innovators, and so would be a second-best solution. Without some change in venue rules, Canadian innovators will continue to face discrimination and not be able to forcefully protect their market shares in the United States.

Third, ideally, the United States should agree to eliminate the ITC’s jurisdiction over IP infringement in 19 USC § 1391(a)(1)(B), returning all patent-related matters to the Federal Courts. The existence of a separate procedure for patent infringement opens the door to the type of documented bias and, thus, discrimination noted earlier. Eliminating the ITC’s jurisdiction will bring the United States back in line with international standards and will address the bias of the ITC. Realistically, the United States is not going to agree to this request, but its persistence with a procedure that is both discriminatory and has no counterpart elsewhere in the world should give US negotiators pause before requiring Canada to make any changes. If pointing out this form of discrimination and lack of reciprocity does nothing else than protect the existing interests of Canadian innovators, this will be of some benefit.

Recommendations for Unilateral Canadian Action

The next category of recommendation — in which Canada can implement changes alone, provided that the revised NAFTA does not remove an existing flexibility — contains only one recommendation: that Canada ought to align the fees it charges patent applicants and holders with those in the United States.5 One justification for an increase in fees is to fund the Canadian Intellectual Property Office (CIPO) so that it can take on a significantly greater role in supporting education and providing assistance to Canadian innovators to develop an international (rather than simply Canadian) IP strategy. CIPO could use the extra revenue not only to fund educational programs, but to offer vouchers to Canadian innovators to develop and implement global patent strategies. Doing so would maintain its revenue-neutral funding practices, ensuring compliance with international best practice. At the same time as it raises fees, Canada ought to preserve, or even deepen, the small to medium enterprise discount — something that is common across the world — so that innovators can better participate in the patent system.

In order to preserve procedural fairness, both Canada and the United States would maintain independence in terms of any litigation or administrative processes concerning an issued patent.
Recommendations for Long-term Strategic Change

The last two recommendations are more radical and thus require more development and debate. Nevertheless, they are worth considering now in order to map out future developments that may have an impact on Canada’s negotiating stance today.

First in this category is the recommendation that US and Canadian patent law be substantively harmonized, much as the European Patent Convention (EPC) has done in Europe. That is, the standards — subject matter, utility, non-obviousness, novelty, description and enablement — that patent offices use to determine whether to grant a patent ought to be the same. As a consequence, both the United States Patent and Trademark Office (USPTO) and CIPO would be able to issue patents that are effective in both the United States and Canada. This is essentially the function of the European Patent Office in Europe. CIPO should examine and issue patents from Canadians, while the USPTO does the same for US applicants. When one office issues a patent, the other office would simply adopt it, again as is done at the national level in Europe.

In order to preserve procedural fairness, both Canada and the United States would maintain independence in terms of any litigation or administrative processes concerning an issued patent. Again, this mirrors what currently occurs under the EPC, where each country independently determines whether to uphold the patent (based on the common standard set out in the EPC) and whether there has been infringement. While having separate litigation in the 38 countries belonging to the EPC leads to wasted resources and inconsistent decisions within the European Union’s single market (currently involving 28 of the 38 members of the EPC), this is not a major concern in North America. Only two countries are involved (on the assumption that Mexico would be unwilling to undertake the formidable changes required to move from a European-type patent system to an Anglo-American system) and the two markets are not fully integrated.

Substantively harmonizing US and Canadian patent law has many advantages and significant costs. First, in terms of advantages, it builds on and completes the current Patent Prosecution Highway between Canada and the United States that does half the job of examining patents. Adding the other half would greatly reduce costs of obtaining patent protection in both countries. Currently, CIPO awards 87 percent of the patents it grants to foreign (mainly US) firms, while Canadians patent almost three times as much in the United States as in Canada. Having a single patent office grant patents that would be valid in both countries would lead more Canadians to use the Canadian system. (It would also lead more US firms to use the Canadian system, which could be considered a cost, but as Canadian innovators already operate in the United States, likely an acceptable one.) Second, it would free up the time that Canadian patent agents spend on filing the same patent in Canada that was submitted to the USPTO. There is a sense that Canada lacks sufficient patent agents to serve Canadian innovators. By removing one piece of work — that frankly does nothing but increase costs — the liberated patent agents would have more time to serve Canadian clients. Not being able to rest on a stable income from US patentees, they would even need to compete for business with Canadian innovators, reducing costs. Third, harmonizing the two patent systems sets up clear incentives — that currently do not seem to exist — to focus the attention of Canadian innovators, early on, on the US market and on US patent rules. Law schools would teach the common patent law and there would be more experts on US patent law available in Canada to serve Canadian innovators.

Harmonization also comes with costs. There would be significant disruption as patent agents, lawyers and courts adjust to the new rules. Canada would need to phase in the harmonization and invest in significant re-education of patent professionals and judges. While significant, this would be a one-time cost that — although further study is required — should be more than offset by the benefits. A second cost would be to the ability of the Canadian government to alter the substantive content of patent law without agreement from the United States. Given that policy over substantive patent law — as opposed to procedure — has been set by the courts, rather than by Parliament, this cost also seems acceptable. It does point to the need to maintain Canadian sovereignty over the procedures for challenging patents, defining competition law and what constitutes abuse, and determining when and how the Minister of Health can allow generics to enter the market.

The United States is likely to welcome the recommendation to harmonize substantive patent law, as doing so would meet its goal of “ensur[ing] provisions governing intellectual property rights reflect a standard of protection similar to that found in U.S. law.” The United States has attempted to pursue harmonization over substantive patent law through WIPO’s failed attempts to negotiate a Substantive Patent Law Treaty. American firms would benefit both from lower fees and from the reduction of uncertainty. The United States will likely accept the procedural independence proposed, as it would not be willing to give up its sovereignty over court and other proceedings.

The final recommendation is to allow a faster and less expensive way for each country to accept decisions on points of law determined by judges of the other jurisdiction. Much elaboration is needed here. The idea is that decisions of judges, rather than of juries, would be homologized more easily. While juries tend to be biased against foreigners, there is no such tendency apparent with judges. Recognizing decisions of judges in the other jurisdiction may speed up, and lessen the cost of, enforcing patent rights.

 

Conclusion
 

The US patent system can no longer — if ever it could — be considered the fairest to foreign patent holders. Canada has already done a lot to address the concerns of foreign firms. Whatever remaining complaints US firms may have concerning technical aspects of Canadian patent law, they are less than the uncertainty and fear of bias imposed by a system governed by a jury system. This situation has been made worse by the differential treatment of domestic and foreign patent infringers resulting from the US Supreme Court's recent changes to venue rules.

In ensuring that NAFTA 2.0 provides a level playing field for innovators in Canada and the United States, the onus is on the United States to provide greater fairness to Canadian innovators. While the United States is constrained by constitutional rules that require the maintenance of jury trials, the federal and state governments can go a long way to rebalancing the US patent system to be fair to Canadians. As noted, greater flexibility in venue selection, the adoption of laws at the federal and state levels that provide redress through the same courts as adjudicate other patent claims, and addressing the bias of the ITC, would be positive steps toward fairness.

Beyond these fixes to the US system, substantive harmonization, whether in respect of the utility requirement only or all patentability requirements, would provide Canadian innovators with as much protection in the United States as US innovators now have in Canada.

As Canadian negotiators enter the NAFTA renegotiations, they ought to ask the United States to live up to its own principles of eliminating discrimination and ensuring reciprocity.

1 See Kimberly A Moore, “Xenophobia in American Courts”; Kimberly A Moore, “Populism and Patents,” but compare Paul M Janicke & LiLan Ren, “Who Wins Patent Infringement Cases?” and John R Allison, Mark A Lemley & David L Schwartz, “Understanding the Realities of Modern Patent Litigation.”

2 The US Supreme Court decision in TC Heartland LLC v Kraft Foods Group Brands LLC (2017) has a particularly limiting effect on foreign patent holders.

3 See Richard J McNeely, “Governmental Indirect Patent Infringement: The Need to Hold Uncle Sam Accountable under 28 U.S.C. § 1498” and Lavanya S Ratnam, An Empirical Examination of the Adjudication and Settlement of Patent Infringement Lawsuits in the United States Court of Federal Claims.

4 See Moore, “Xenophobia”, note 1 at 1505. Not all studies found a similar outcome, notably Allison, Lemley and Schwartz, “Realities of Modern Patent Litigation” (note 1), and Janicke and Ren, “Who Wins?” (note 1). Allison, Lemley and Schwartz focused on inventorship, not ownership of the patent, assuming that inventors and assignees reside in the same country. This assumption seems doubtful, at least in the case of Canada. See Joe Castaldo, “Why does Canada give away its best ideas in AI?”: “Out of the 100 or so patents related to machine learning that have been developed in Canada over the past 10 years, more than half have ended up in the hands of foreign companies.” Janicke and Ren found that foreign firms — as both defendents and patent holders — did slightly better than did domestic firms, but that Canadian patentees did worse than those of any other country (“Who Wins?” at 23). The authors suggest that their results may arise because foreign patent holders are less likely to fully engage the US patent system: “It is possible that foreign entities are less sanguine about the benefits of ‘hanging in’ rather than reaching settlement accords” (page 24).

5 This idea was suggested by Jim Hinton of Bereskin & Parr.

About the Author

Richard Gold is a senior fellow with CIGI’s International Law Research Program (ILRP), effective October 2016. He is also a James McGill Professor and associate dean (graduate studies) with McGill University’s Faculty of Law. 
The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.