Protection of Intellectual Property Rights in Investor- State Arbitration: Underlying Challenges and Perspectives Protection of Intellectual Property Rights in Investor- State Arbitration: Underlying Challenges and Perspectives

This article provides an analysis of existing international mechanisms for protecting intellectual property rights and concludes whether investment arbitration can be an effective forum for resolving intellectual property disputes. It focuses on an examination of the scope of intellectual property rights protection by bilateral investment agreements, as well as the specifics of the investment dispute resolution procedure. In addition, the analysis includes an assessment of the territoriality principle of intellectual property rights and its application in Ukrainian law, as well as an examination of international investment treaties concluded with Ukraine to determine the scope of protection afforded to intellectual property.


Introduction
Intellectual property (hereinafter -"IP") has become a valuable intangible asset for generating profits, promoting technological innovation and stimulating an economic development. It gives the IP holders exclusive rights to use their intellectual creations for a certain period of time to prevent unauthorized use by third parties or to set conditions of such use.1 Pursuant to Article 2 of the Convention Establishing Intellectual Property Organization, the definition of "intellectual property" includes the rights relating to: (i) literary, artistic and scientific works, (ii) performances of performing Additionally, the IPRs holders can rely on the means for protecting the IPRs as a form of foreign investments under bilateral investment treaties (hereinafter -the "BITs"). In general, the BITs allow IPRs holders to benefit from the substantive and procedural protection of foreign investments, as well as from the investor-state dispute settlement mechanism (hereinafter -"ISDS") under the applicable treaty. This offers significant advantages to IP holders, as they can initiate dispute resolution proceedings against the state without exhausting all local remedies and without resorting to diplomatic protection to defend their interests.7 On the other hand, the scope of IP rights protection is different from that of any other asset that constitutes a foreign investment, which consequently raises the question of whether investment tribunals can be the appropriate forum for resolving the IP disputes.

I. Peculiarities of the IP dispute resolution through investment treaty arbitration
Although the IPRs are widely recognized as valuable intangible assets, their protection is significantly impaired by a specific territorial scope. This implies that the IP protection afforded by the national legislation of a certain country exists only within the territory of that country and does not extend beyond the borders.8 In particular, the territorial principle of IPRs protection is enshrined in the Ukrainian legislation. Pursuant to Article 37 of the Law of Ukraine "On Private International Law," the law of the state in which protection of IPRs is sought applies to legal relationships involving the protection of those rights.9 Specifically, under paragraph 4 of part 1 of Article 77 of this Law, the jurisdiction of Ukrainian courts is exclusive if the dispute relates to the registration of an IPR which requires the issuance of a certificate (patent) in Ukraine. Consequently, the IP holders are restricted in their choice of a suitable dispute resolution forum.
In Ukraine, the territoriality principle does not apply to IPRs that are subject to protection from the moment of their creation in a particular form (e. g.copyright), as opposed to the issuance of a protection document (patent).10 According to part 3 of Article 3 of the Law of Ukraine "On Copyright and Related Rights" copyright and (or) related rights holders, irrespective of their citizenship, whose works or objects of related rights were first promulgated in the territory of another state, or those that were not promulgated but are located in an objective form in the territory of another state, shall be granted legal protection in accordance with the international agreements of Ukraine.11 Therefore, the national laws of Ukraine provide ample scope for foreign investors to recognize and protect copyrights due to the absence of strict territoriality rules.
It is worth noting that the international legal instruments only provide minimum standards of IP protection to which countries should adhere. For instance, Article 16:1 of the Agreement in Trade-Related Aspects of Intellectual Property Rights (hereinafterthe "TRIPS Agreement") grants the IP holders an exclusive right to prevent third parties from using "identical or similar signs for goods or services which are identical or similar to those in respect of which the trademark is registered where such use would result in a likelihood of confusion." 12 While this provision places a legal obligation on states to facilitate the exclusive right of IP holders, states are free to choose how to implement this obligation into national law and practice.13 In addition, the TRIPS Agreement harmonizes the legislative approaches to IP protection among different countries and raises the levels of protection previously established by the Paris Convention and the Berne Convention.14 Considering that the TRIPS Agreement was adopted within the framework of the World Trade Organization (hereinafter -"WTO"), the Member States are entitled to rely on the WTO dispute settlement procedures to resolve international IP disputes.
Nowadays, a significant number of IP disputes are transboundary in nature, which involve two or more jurisdictions and can arise from a variety of sources, including cross-border licenses, technology transfer agreements, joint research and development projects, distributorship arrangements, non-disclosure agreements, branding determinations, adoption of domain names, and product design decisions. the cross-border IP disputes in national courts can cause significant difficulties and may not lead to the necessary result due to lengthy court procedures, legislative deficiencies and a lack of special expertise of judges. Moreover, the WTO dispute settlement system also has many disadvantages, including the requirement of state representation of IP holders based on the principle of diplomatic protection.16 Therefore, the IP holders face the problem of choosing the most effective mechanism to protect their IPRs and legitimate interests, which can be resolved by recourse to investment treaty arbitration.
The investor-state dispute settlement (hereinafter -"ISDS") is a specific procedural mechanism for resolving legal disputes between foreign investors and the states relating to breaches of the bilateral and multilateral investment treaties.17 In other words, if an investor from one country made an investment in another country, both of which have agreed to ISDS, and the host state violates its obligations under the BITs (namely, fair and equitable treatment, most-favored nation or national treatment), the investor may bring an international claim before the arbitral tribunal.18 Arbitral tribunals are composed of party-appointed arbitrators who hear the case based on the procedural rules set out in the BITs and are entrusted with interpreting the applicable investment treaties.19 Moreover, the BITs limit the jurisdiction of arbitral tribunals with respect to specific subject-matter (definition of "investment"), claimant's nationality (definition of "foreign investor") and time limits for bringing a claim into arbitration (e. g., cooling off period, statutes of limitation).20 Therefore, to initiate investment arbitration the IP holders must prove that the arbitral tribunal has jurisdiction to hear the dispute against a particular state.
The definition of foreign investment included in the BITs is crucial in determining whether arbitral tribunals have jurisdiction over the IP disputes. IPRs are fundamentally different in nature from the classic example of an investment, which should include (i) the transfer of funds, (ii) a longer-term project, (iii) the purpose of regular income, (iv) 16 Evaluation the participation of the person transferring the funds, at least to some extent, in the management of the project, and (v) a business risk.21 Furthermore, the similar criteria for determining the existence of foreign investment, which is known as the Salini test, have been developed by the arbitral tribunal's practice, namely: contribution of the investor, certain duration of the project, existence of operational risk and contribution to the host state's development.22 In turn, while being intangible assets which increase the value of income, IPRs do not satisfy all of the abovementioned criteria. Although IPRs differ from the classical understanding of investments, the plethora of BITs concluded with Ukraine offers IPRs investment protection. In particular, according to Article 1 of the Slovenia -Ukraine BIT, the term "investment" includes, among others, intellectual property rights, including rights with respect to copyright, patents, trademarks, tradenames, industrial designs and rights in technical processes, goodwill and know-how.23 Some BITs provide a specific list of IPRs that may qualify as investments (e. g. the Belgium -Ukraine BIT),24 whereas the others cover the IPRs in general without mentioning any particular type (e. g. the Canada -Ukraine BIT).25 In addition, several BITs protect uncommon IPRs, such as sound recordings and inventions in all fields of human endeavor,26 literary and artistic works, semiconductor mask words, etc.27 The Japan -Ukraine BIT contains the most extensive list of the IPRs that constitute an investment, namely, rights relating to utility models, layout-designs  Moreover, considering that most of IPRs have territorial scope, the national law plays a significant role in determining the legality of IP investments.30 For instance, Article 1 of the Finland -Ukraine BIT defines the term "investment" as every kind of asset established or acquired by an investor of one Contracting Party in the territory of the other Contracting Party in accordance with the laws and regulations of the latter Contracting Party.31 Consequently, when establishing the existence of a protected investment within the meaning of the BIT, investment tribunals should further ascertain whether the investors' IPRs are recognized by the host state, in particular, by examining whether the IPRs have been duly registered under national law.
In addition, the possible attribution of IPRs to protected investments is confirmed by the practice of investment tribunals. For instance, in the case CME Czech Republic B. V. v. the Czech Republic, the Claimant argued that it has made an investment in the Czech Republic, which includes both tangible and intangible property, in particular, buildings, studio equipment, and intellectual property rights, such as rights to air licensed programmes and the legal interest in maintaining the exclusive business arrangement between two companies.32The arbitral tribunal accepted the Claimant's allegations on existence of foreign investment as a matter of fact and did not pay a particular attention as to whether the IPRs can qualify as protected investment.

31
The Agreement between the Government of the Republic of Finland and the Government of In the recent case Bridgestone v. the Republic of Panama, the Claimants stated that they hold IPR, namely, the licenses to use trademarks in Panama which qualify as protected investment under the United States -Panama Trade Promotion Agreement. They also argued that by issuing the Supreme Court Judgment, which "undercuts one of the fundamental rights of trademarks, namely, the right to oppose the registration of potentially confusingly similar marks," the Republic of Panama denied to the American investor fair and equitable treatment.33 Even though the arbitral tribunal dismissed the claim on the merits, it has established the jurisdiction to hear the dispute arising out of trademark licenses already registered in Panama by American investor. In contrast, the arbitral tribunal in the case Cortec Mining v. the Republic of Kenya found that IPRs, including know-how, such as geological and drilling data, resource analyses, feasibility studies, technical processes and project development plans, did not qualify as protected investment since the Claimants have failed to comply with the laws of Kenya for obtaining a mining license.34 Thus, in practice, arbitral tribunals have granted only duly registered IPRs the status of a foreign investment without applying the generally recognized investment criteria.
The main advantage of resolving IP disputes through investment arbitration is the opportunity to bypass the procedural hurdles inherent in most national court systems. However, there are relatively small numbers of foreign investors resorting to IPRs protection through inter-state arbitration. Considering that IPRs have fallen under the scope of application of international investment treaties since the beginning of BITs negotiations,35 it is unclear why foreign investors do not choose this forum for protecting their intangible assets. Thus, it is important to identify existing problems of IPRs protection through investment treaty arbitration in order to establish the prospects for IP disputes to be resolved by this forum.

II. Substantive protection afforded to foreign IPRs holders by the BITs
Foreign investors are guaranteed a certain standard of protection under the BITs which can be raised if the host state neglects foreign investments.36 As illustrated by the case law, substantive protection afforded to foreign investments include: a) protection against expropriation or measures equivalent to expropriation without fair compensation; b) fair and equitable treatment; c) full protection and security; d) protection against arbitrary and discriminatory treatment; e) national and most-favored-nation treatment (hereinafter -"MFN"); f) free transfer of funds and assets, and g) protection against host state's breach of its investment obligations and undertakings.37 Consequently, BITs incorporate a legal mechanism used to compensate investors through the substantive investment standards for the breach of treaty obligations by a particular state.
Although the TRIPS Agreement provides similar substantive standards (e. g., MFN and national treatment), the scope of investment protection under the BITs differs from what has been provided by the TRIPS Agreement. In particular, the WTO Panel in the EC -Trademarks and Geographical Indications clarified that "the TRIPS Agreement does not generally provide for the grant of positive rights to exploit or use certain subject matter, but rather provides for the grant of negative rights to prevent certain acts. This fundamental feature of intellectual property protection inherently grants Members a freedom to pursue legitimate public policy objectives since many measures to attain those public policy objectives lie outside the scope of intellectual property rights." 38 Consequently, the problem arises as to whether the scope of protection afforded to foreign investments under BITs is suitable for IPRs or whether it needs to be adjusted to reflect the special IP nature.
The differences in the scope of protection provided by the TRIPS Agreement and the BITs may be illustrated based on the fair and equitable treatment standard (hereinafter -"FET"). Under Article 41(2) of the TRIPS Agreement, "procedures concerning the enforcement of intellectual property rights shall be fair and equitable. They shall not be unnecessarily complicated or costly or entail unreasonable timelimits or unwarranted delays." 39 Thus, the TRIPS Agreement refers to the FET in relation to the IPRs enforcement procedures and does not provide it as the substantive standard for IPRs protection.
In contrast, the FET standard is an absolute standard of investment protection and is often invoked in investment treaty arbitrations.40 In theory, the FET appears to be an evolving standard that requires the host state to maintain a stable investment environment and protect legitimate expectations of foreign investors.41 The scope of FET is usually linked to the minimum standard of treatment required by customary international law.42 In the case Apotex Holdings Inc, Apotex Inc. v. the United States the Claimant contended that the import alert that banned certain pharmaceuticals produced in Canada violated MFN and the minimum standard of treatment (FET), since it has prevented the foreign investor from carrying its business activity for two years and damaged the company's interests. However, the investment tribunal dismissed the claim on the basis that the Claimants did not establish the existence of specific procedural rights required by customary international law that the challenged import alert would violate.43 Thus, in this case the foreign investor lost the case for the lack of proper justification of the FET breach by the Respondent with respect to the Claimant's intangible assets.
In practice, foreign investors frequently allege the expropriation of their IPRs by the host state without any compensation. A change of the political course or an economic crisis may result in host states trying to gain economic advantages by expropriating foreign investments.44 BITs usually refer to direct and indirect expropriation or measures equivalent or tantamount to expropriation.45 Direct expropriation means a mandatory legal transfer of the title to the property or its outright physical seizure, whereas an indirect expropriation involves the deprivation of an investment without formal transfer to title or outright seizure.46 As illustrated by an arbitral practice, an expropriation must involve a substantial deprivation of the value, use or enjoyment of an investment and not merely a loss of profits.47 For instance, in case Philip Morris and Abal Hermanos S. A. v. Uruguay, the Claimants argued that the Respondent expropriated their investment by banning most of their brand variants and diminishing the value of the remaining ones. Claimants contended that they have been foreign investors within the meaning of the BIT since they possess a direct or indirect interest in the "brand assets" that they have developed in Uruguay, namely, the brands, brand families and variants of cigarettes, as well as the trademarks associated with the brand markings on the products and a goodwill. In turn, the Respondent claimed that adoption of restrictions on marketing tobacco products did not result in expropriation since it has exercised its sovereign power to protect public health. The arbitral tribunal dismissed the claim on expropriation of foreign investment on the basis that the BIT "does not prevent Uruguay in the exercise of its sovereign powers from regulating harmful products in order to protect public health after investments in the field have been admitted." 48 Hence, the arbitral tribunal decided that the Respondent did not expropriated the Claimants' investments since it validly exercised its police powers for the protection of public health.49 In another case Eli Lilly and Company v. Canada the Claimant stated that the retroactive application of the promise utility doctrine by national courts to Claimant's patents has resulted in the unlawful indirect expropriation of foreign investment and the Respondent's failure to provide the minimum standard of treatment. In turn, the Respondent argued that a foreign investor "cannot circumvent an adverse determination of its rights at domestic law simply by pointing to an alleged inconsistency with some other, independent international obligation owed between States." 50 The arbitral tribunal supported the Respondent's arguments and emphasized that the tribunal cannot review the decisions of the national judiciary. Moreover, the tribunal found that the challenged decision cannot constitute a breach of investment treaty, since the Canadian legal system has evolved and resulted in later decisions that found the initial patent grants to be invalid. Consequently, the tribunal rejected the claim due to the Claimant's failure to establish the factual premise of its claims.51Therefore, in order to prove the expropriation of IPRs by the host state, the foreign investor must provide sufficient evidence that the state has substantially diminished the value of its IPRs and that such actions were not necessary to achieve a specific public goal.
In addition, some BITs include special exceptions regarding application of expropriation standard to IPRs. Under Article 13.5 of the Canadian Model BIT, "the provision of this Article [Expropriation] shall not apply to the issuance of compulsory licenses granted in relation to intellectual property rights, or to the revocation, limitation or creation of intellectual property rights, to the extent that such issuance, revocation, limitation or creation is consistent with the WTO Agreement." 52 In other words, this provision prevents foreign investors from invoking a violation of the expropriation standard by the issuance or revocation of compulsory licenses. Hence, when analyzing the prospects of filing an investment dispute against a state, the foreign investor should consider whether the text of the BIT contains any reservations related to the IPRs treatment.
To summarize, the practice of arbitral tribunals confirms that the scope of protection afforded to IPRs under investment treaties is insufficient to make the ISDS an effective forum for resolving IP disputes. This can be explained by the fact that national laws and domestic policies play an important role in determining violations of investment protection standards, such as the FET and the expropriation standard. As a result, a foreign investor has relatively less opportunity to justify a breach of BIT.

III. Conclusion
Although arbitral tribunals have confirmed that IPRs can be protected investments, the substantive standards of investment protection provided in the BITs are not suitable for the effective IPRs protection. The case law shows that foreign investors encounter difficulties in proving a violation of BITs, in particular, since (i) the states usually invoke a special public policy goal to justify their actions (e. g., the tobacco plain packaging regulations), (ii) some BITs specifically contain the reservations that prevent application of substantive standards to IPRs protection, (iii) it is necessary to prove the registration of IPRs in the territory of the host state against which the dispute is filed, and (iv) substantive standards of investment protection are not flexible in relation to IPRs. Accordingly, unless the substantive standards provided in the BITs are modified to accommodate the specific nature of IP protection, the investment arbitration will not 51 Paras. 225 and 418. dispute resolution and international arbitration. She has advised on disputes arising from contract law issues and non-contractual liability, bankruptcy and debt collection, as well as on exports and imports of goods and services.
Oksana Zadniprovska is an Attorney-at-law and a Partner at Axon Partners. She advises the IT companies on privacy, including data protection and compliance, intellectual property and contract law. She has acted as a counsel to technocrats, the IT business of any size and categories (start-ups and incubators, outsourcing companies, product companies, etc.).