NAFTA tribunal considers issues of res judicata and the customary international law minimum standard of treatment

In Apotex Holdings Inc. and Apotex Inc. v United States of America, (ICSID Case No. ARB(AF)/12/1), a NAFTA chapter eleven tribunal considered issues of res judicata and the customary international law minimum standard of treatment.

In a case notable for its discussion of res judicata and the customary international law minimum standard of treatment, a NAFTA Chapter Eleven tribunal has allowed jurisdictional objections over a significant part of the alleged claims. With respect to the claimants' remaining claims, the tribunal concluded, on the merits, that the US had not breached any of its commitments under international law.

The tribunal analysed international jurisprudence on res judicata in detail, applying a flexible approach to the question of when claims will be precluded by a prior decision. Following previous NAFTA awards, the award explored the complex relationship between the customary international law minimum standard and the guarantee of fair and equitable treatment and full protection and security contained in NAFTA Article 1105(1).

It did so in the context of the claimants' novel claims about the status of due process among the protections required by the customary international law minimum standard of treatment. However, the tribunal left for a future tribunal to decide whether NAFTA's guarantee of most-favoured-nation (MFN) treatment can be used to expand the substantive protections under Article 1105 – a critical topic, in the light of all NAFTA states' unanimous opposition to that interpretation. (Apotex Holdings Inc. and Apotex Inc. v United States of America, (ICSID Case No. ARB(AF)/12/1).)

BACKGROUND

NAFTA Article 1101(1) provides in relevant part:

"This Chapter [Eleven] applies to measures adopted or maintained by a Party relating to:

(a) investors of another Party;

(b) investments of investors of another Party in the territory of the Party;

[…]"

NAFTA Article 1102 requires each NAFTA Party to accord to investors of another Party (and to investments of such investors) "treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments." (emphasis added)

NAFTA Article 1103 requires each NAFTA Party to accord to investors of another Party (and to investments of such investors) "treatment no less favorable than that it accords, in like circumstances, to investors of any other Party or of a non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments." (emphasis added)

NAFTA Article 1105 requires each NAFTA Party to "accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security."

NAFTA Article 1120 provides investors with the option, subject to specified requirements, to submit claims to arbitration under (a) the ICSID Convention, (b) the ICSID Additional Facility Rules (ICSID AF Rules), or (c) the UNCITRAL Rules.

NAFTA Article 1130 provides that the seat of a NAFTA Chapter 11 tribunal must be in the territory of a NAFTA Party that is also a party to the New York Convention, unless the parties agree otherwise, selected in accordance with the ICSID Additional Facility Rules or the UNCITRAL Arbitration Rules if the arbitration is under those rules.

NAFTA Article 1136(1) provides that the award of a NAFTA Chapter Eleven tribunal "shall have no binding force except between the disputing parties and in respect of the particular case."

NAFTA Article 1139 includes the definition of "investment" for the purposes of NAFTA Chapter Eleven. It provides in part at subsections (g) and (h) that an investment includes, respectively, "real estate or other property, tangible or intangible, acquired in the expectation or used for the purpose of economic benefit or other business purposes" or "interests arising from the commitment of capital or other resources in the territory of a Party to economic activity in such territory,…"

Article II(6) of the US-Jamaica bilateral investment treaty provides: "Each Party shall provide effective means of asserting claims and enforcing rights with respect to investments, investment agreements, and investment authorizations granted by a Party's foreign investment authority."

Facts

The first claimant in the arbitration was Apotex Holdings Inc. (Apotex Holdings), a Canadian holding company in the pharmaceutical industry. Apotex Holdings indirectly owns and controls two other relevant entities: Apotex Inc. (Apotex Canada), a Canadian company that produces generic drugs (the second named claimant in the arbitration) and Apotex Corp. (Apotex US), a Delaware company that sells drugs produced by other Apotex entities, including Apotex Canada.

Apotex Canada's business involved producing drugs and exporting them to the US. It had obtained permission to export drugs under "quasi-import licenses" called Abbreviated New Drug Applications (ANDAs) which are approved by the Food and Drug Administration of the United States of America (FDA) (Award, para. 2.7.).

On 28 August 2009, the FDA issued an import alert, flagging concerns about the quality of drugs produced at two of Apotex Canada's manufacturing plants in Ontario, Canada. The effect of the import alert was to prevent the importation of drugs produced at those facilities for about two years, as well as to suspend the consideration of any further ANDAs for drugs produced at those facilities. The import alert was the "only measure impugned by the claimants in this arbitration (Award, para. 6.3.)."

The claimants alleged that the import alert infringed protections guaranteed to them under NAFTA and, by way of the MFN provisions of NAFTA Article 1103, the US-Jamaica bilateral investment treaty (BIT). The claimants appear to have framed their claims under the US-Jamaica BIT because, in the claimants' view, the BIT's provisions respecting "effective means" (in Article II(6)) provided a higher standard of treatment than that guaranteed by NAFTA (Award, para. 9.67).

THE SEAT OF ARBITRATION AND ARBITRAL RULES

On 6 March 2012, the claimants' filed their Request for Arbitration under the ICSID AF Rules against the US. At the time of the Request, Canada had not yet become a contracting party to the ICSID Convention (which it did on 1 December 2013), meaning that it was only open to the claimants to commence arbitration under the ICSID AF Rules or UNCITRAL Arbitration Rules.

The claimants argued that the seat of arbitration should be Toronto because the Canadian courts would treat all the parties with equality. They argued against the selection of New York in part because of the canon of interpretation that requires US courts to give "great deference" to the views of the US Government in interpreting US treaties, including NAFTA. The US argued that the seat should be Washington DC or New York, submitting that the tribunals in each previous NAFTA Chapter 11 case against the US had determined that it was appropriate for those arbitrations to be seated in the US. The US further argued that the canon of interpretation in favour of the US government's interpretation of treaties is not as powerful in practice as the claimants had argued. (Award, Appendix A, para. A.43).

JURISDICTIONAL OBJECTIONS

NAFTA Article 1101(1)

The US asserted that NAFTA Article 1101(1)'s "relating to" requirement operates as a jurisdictional threshold and that the challenged measure did not "relate to" the claimants as investors or any investments in the US. In other words, the US argued that an effect upon an investor or an investment is insufficient to found the jurisdiction of a NAFTA tribunal unless the claimant also demonstrates a "legally significant" causal link between a challenged measure and the investor and/or its investment.

Res Judicata

Whilst not disputing that Apotex US was an investment, the US objected that Apotex Canada's finally approved ANDAs were not within the definition of investment set out in NAFTA Article 1139. In raising this objection, the US argued that the award in a previous NAFTA Chapter Eleven arbitration (the "Apotex I & II Award") – in which the tribunal found that tentatively approved ANDAs were not investments for the purposes of NAFTA Chapter Eleven – should operate as res judicata on this issue, precluding the tribunal from exercising jurisdiction over claims based on Apotex Canada's finally approved ANDAs.

The claimants argued that the effects of the Apotex I & II Award were confined to the holdings in the dispositive portion of the award and applied solely to that arbitration, such that it could have no res judicata effect in a different case.

DECISION

Seat of arbitration

The tribunal selected New York as the seat of arbitration, although it noted in a statement of reasons for its choice that "the tribunal might have wished to choose a legal place of arbitration neutral for all Parties; but such a choice was not open to the Tribunal in this arbitration" (Award, Appendix A, para. A.3).

NAFTA Article 1130 requires the seat to be in the territory of a NAFTA Party that is also a party to the New York Convention. The tribunal stated that "it was common ground between the Parties that it was not open to the Tribunal to choose [a] legal place of arbitration […] [other than] (i) Toronto, (ii) Washington DC, or (iii) New York".

In ruling that the place of arbitration was New York, the tribunal discounted the utility of the previously mentioned deference canon in US law due to the international character of the proceeding. It admonished in strong terms that it "would regard the invocation of any deference argument by the [US] in any future litigation between the Parties over an award by this Tribunal as being wholly inconsistent with the [US] commitment to international arbitration under NAFTA Articles 1116 and 1117" (Award, Appendix A, para A.47).

Arbitrator J. William Rowley, appointed by the claimants, dissented from the tribunal's selection of New York. He credited the claimants' deference argument, finding that it tipped the balance of "comparative levelness of the legal playing fields" in favour of Toronto (Award, Appendix A, paras. A.50 – A.51).

Res Judicata

The tribunal concluded that the claimants were precluded by res judicata from arguing that finally approved ANDAs were investments within the meaning of NAFTA Article 1139.

Noting the similarities between Article 1136(1) and Article 59 of the Statute of the International Court of Justice (ICJ), the tribunal reasoned that Article 1136(1) does not bar the doctrine of res judicata. Having concluded that the US could invoke res judicata, the tribunal turned to consider its substance under international law. Starting from the understanding that res judicata is a general principle of law within the meaning of NAFTA Article 1131 (and thus applicable in the arbitration), the tribunal noted that international courts and tribunals have found it to operate in a variety of circumstances.

While the "triple identity test" of "persona, petitum, causa petendi" (the identity of the parties, the relief sought, and the legal arguments relied upon) is frequently cited, the tribunal pointed out that many cases have used a "simpler analysis" that instead looks more generally at whether there is identity between the parties and the question or subject matter at issue in multiple proceedings (Award, paras. 7.13 – 7.16).

The tribunal referred to the case of Rachel S Grynberg and ors v Grenada, ICSID Case No.ARB/10/6, where the triple identity test was not satisfied with respect to the parties, relief sought or legal arguments. Nevertheless, the Grenada tribunal ruled that "[a] finding concerning a right, question or fact may not be relitigated (and, thus, is binding on a subsequent tribunal), if, in a prior proceeding: (a) it was distinctly put in issue; (b) the court or tribunal actually decided it; and (c) the resolution of the question was necessary to resolving the claims before that court or tribunal."

Here, the identity of the parties was not at issue: Apotex Canada and the US were parties to the previous arbitration, and Apotex Holdings was treated as a "privy" of Apotex Canada (Award, paras. 7.38 – 7.40). Apotex Holdings' relevant claims in this arbitration, albeit made in its own right and in its own name, depended upon Apotex Canada's ANDAs as investments under NAFTA Articles 1116 and 1139.

The tribunal noted that the dispositive portion of the Apotex I & II Award did not address the specific claims advanced in this arbitration. Accordingly, the claimants had submitted that the Apotex I & II Award did not act as res judicata to preclude it from raising claims advanced in the arbitration. (Award, para. 7.17.)

After reviewing international jurisprudence from numerous sources on this issue, the tribunal concluded that the operative part of a previous decision "can and should" be read with the relevant reasons given for it (Award, Para 7.42). On that basis, the tribunal gave res judicata effect to the operative part and the reasons given in the Apotex I & II Award for the conclusion that ANDAs do not qualify as investments under NAFTA Article 1139.

The tribunal reasoned that, although the claims in Apotex I & II pertained to "tentatively approved" ANDAs rather than the "finally approved" ANDAs at issue in this case, the status of ANDAs generally as investments under NAFTA had been "put distinctively in issue" and decided in the earlier case. In the view of the tribunal, the reasons given in the Apotex I & II Award made it clear that "the parties put distinctively in issue ANDAs generally, not limited to tentatively approved ANDAs but also including finally approved ANDAs; that the tribunal actually decided the issue; and that, as that tribunal saw it, that decision…was necessary to resolve the parties' dispute…" (Award, Para 7.50).

Award not made in the territory

The tribunal went on to state that it was "attracted" to the argument that NAFTA Article 1139, read together with NAFTA Article 1101, required the investment to be made "in the territory" of the host state. Thus, even if this issue had not been decided by way of res judicata, the tribunal would have disposed of claims based on Apotex Canada's ANDAs on the basis of territoriality (Award, para. 7.62).

Dissent

The tribunal reached its conclusions on the res judicata objection by a majority. Arbitrator Rowley took the view that the Apotex I & II Award had "neither decided, nor needed to decide…whether Apotex Canada's finally approved ANDAs plus associated products are to be characterised as 'property' for the purposes of NAFTA Article 1139(g)” (Award, para. 7.64). In dissent, Arbitrator Rowley pointed to a number of facts that, for him, supported the finding that a finally approved ANDA is properly characterised as an investment:

(i) Apotex's finally approved ANDAs were being used for the purposes of economic benefit at the time of the Import Alert; (ii) such ANDAs are regularly bought and sold in the US (often for substantial amounts); (iii) FDA regulations explicitly recognise that ANDAs are owned by the applicant; and (iv) US tax law treats ANDAs as franchises or intangibles for the purposes of the US tax code…(Award, para. 7.66).

MERITS

In practical terms, the tribunal's decision to dismiss claims relating to Apotex Canada's ANDAs meant that it had only to determine the merits of Apotex Holdings' residual claims, for itself and on behalf of Apotex US. Although Apotex Canada's claims had been dismissed, the close commercial relationship between Apotex Canada and Apotex US led the tribunal to continue to refer in its discussion of the merits to the "Claimants", collectively (Award, para. 8.1).

NAFTA Articles 1102 (National Treatment) and 1103 (Most Favoured Nation)

The tribunal approached these standards together, as both involve the treatment afforded to the claimants relative to that afforded to investors or investments in like circumstances. The parties agreed that "the requirements for establishing a violation of NAFTA Article 1103 are the same as establishing a violation of NAFTA Article 1102, except that the applicable comparator…is a foreign (non-US based) investor or its investments" (Award, para. 8.5).

The claimants argued that, by way of the import alert and the manner in which it had been put in place, they had been afforded less favourable treatment than three domestic and two foreign comparators.

Having considered the evidence, with regard to the domestic comparators, the tribunal concluded that they were not in "like circumstances" because of the different legal and regulatory frameworks that apply to US-based manufacturers and foreign manufacturers. It also ruled that the foreign comparators were not in "like circumstances" with the claimants and rejected the claimants' NAFTA Article 1103 claims. (Award. para. 8.73)

Article 1105 (Minimum Standard of Treatment) and the US-Jamaica BIT

In 2001, the NAFTA Free Trade Commission stated in a binding Note of Interpretation that the text of NAFTA Article 1105 does "not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens" (Award, paras 9.3 – 9.4).

The claimants alleged that they were denied access to specific procedural protections, and that those protections were required by customary international law as a part of the minimum standard of treatment (Award, para. 9.8). The tribunal identified the question before it as "not whether the abstract notion of due process has acquired sufficient status in customary international law, but whether the specific procedural protections claimed by the Claimants in this case are required by customary international law" (Award, para. 9.27). After examining jurisprudence and state practice, including the conduct of health regulators in Canada, New Zealand, Australia, and the EU – which the tribunal pointed out have "legal systems sensitive to due process" – the tribunal concluded that the specific procedural safeguards claimed by the claimants are not required by customary international law (Award, para. 9.40).

The tribunal considered two further questions:

• Is an obligation to provide some form of due process a part of the customary international law minimum standard?
• If yes, by what standard should an international tribunal assess whether it has been met?

Having analysed a series of previous NAFTA cases, the tribunal endorsed Professor Patrick Dunberry's conclusion in The Fair and Equitable Treatment Standard: A Guide to NAFTA Case Law on Article 1105 (2013) that all NAFTA tribunals have "emphasised that a high threshold of severity and gravity is required in order to conclude that the host state has breached any of the requirements contained within the [fair and equitable treatment] standard under Article 1105" (Award, para. 9.47). It then concluded that the conduct of the US challenged by the claimants did not approach the "high threshold of severity and gravity" required to breach NAFTA Article 1105.

The award dealt briefly with the claimants' attempt to use NAFTA's MFN clause to obtain the benefit of the protections of Article II(6) of the US-Jamaica BIT.

The tribunal dismissed the claimants' claims under the US-Jamaica BIT, holding that the plain meaning of Article II(6) only applies to adjudicatory proceedings, not administrative decisions such as the FDA’s decision to issue the import alert in this case..

Having determined on the merits that the application of Article II(6) of the US-Jamaica BIT would not assist the claimants' case, the tribunal expressly did not decide whether the MFN provision in NAFTA Article 1103 is capable of modifying the content of NAFTA Article 1105. Noting that the three NAFTA parties asserted that it cannot, the tribunal stated that "whether the NAFTA Parties are correct will have to await the decision of another NAFTA tribunal” (Award, para. 9.71).

COMMENT

The award's analysis of res judicata under international law identified a number of approaches that have been taken by international courts and tribunals. While acknowledging the convenience of the triple identity test, the tribunal instead adopted a flexible approach that was sensitive to strong public and private interests in bringing disputes to a final and binding end (Award, para. 7.60). The tribunal reasoned that "the purpose of the res judicata doctrine under international law is to put an end to litigation; and it would thwart that purpose if a party could so easily escape that doctrine by 'claim-splitting' in successive proceedings" (Award, para. 7.58).

Complex international disputes may warrant or require proceedings in multiple forums for strategic, practical, or other purposes. The broad reasoning employed to preclude certain claims in this case may be employed in future proceedings to attack multi-faceted dispute resolution strategies. That risk will apply even where there is no suggestion of abuse, although the intersections between abuse of process and a broad understanding of res judicata may come up for decision in future claims. (The tribunal made it clear that the Apotex case did not "raise any issue of bad faith or abuse of process by the claimants. Indeed, the contrary was not suggested by the respondent") (Award, para. 7.53).

The practical impact of this decision is to underline that clients and their counsel should carefully consider the flexibility of the res judicata doctrine under international law when formulating dispute resolution strategies. The award also demonstrates the elusiveness of a precise legal test for the operation of res judicata given the sensitivity of the doctrine to the circumstances of a case. In particular, whilst the identity of the parties was not an issue in this case, the preclusive effect (if any) of prior decisions dealing with identical facts and claims, but different parties, will no doubt arise in future disputes.

For further information, please contact Tim Hughes, Associate, or your usual Herbert Smith Freehills contact.

A version of this article has previously been published by Tim Hughes, Herbert Smith Freehills LLP on PLC Arbitration.