Reed Smith Client Alerts

As our March 6, 2020 alert described,1 India recently restricted the export of certain pharmaceutical products to protect its domestic supplies in the wake of the COVID-19 coronavirus outbreak. In addition to signaling global supply chain disruptions that are likely to result in international commercial arbitration claims, export restrictions could also spawn investment treaty claims. This alert examines the background to India’s restrictions and recommends actions life sciences companies with investments in India and elsewhere should consider now to determine whether potential investment treaty claims might be possible.

Background to India’s Export Restrictions

As the March 6, 2020 alert explained, FDA Commissioner Stephen Hahn told the U.S. Congress on March 3, 2020 that “India has restricted the export of 26 active pharmaceutical ingredients” to protect its domestic supplies, “which represents about 10 percent of their export capacity.”2 The export restrictions will impact products such as “paracetamol, several antibiotics ... [including] tinidazole and erythromycin, the hormone progesterone and vitamin B12.”3 On March 3, 2020, the Indian Director General of Foreign Trade wrote that those restrictions – which were formerly permitted to be exported freely – will continue “until further orders” are issued.4

India is the world’s largest manufacturer of generic drugs and supplies approximately 20 percent of the global market.5 A significant portion of India’s pharmaceutical sector is foreign-owned and/or structured through foreign entities,6 so India’s export restrictions will significantly impact foreign investments. Foreign-owned pharmaceutical companies impacted by those export restrictions should therefore consider whether they can pursue claims under investment treaties that India has signed.

Investment Treaty Protection 

Investment treaties establish certain standards that host states must observe when taking measures that negatively impact investments held by covered foreign persons or entities. Those treaties can be either bilateral (BITs) or multilateral (MITs), and typically contain the following protections:

  • Expropriation: prohibits direct and indirect investment expropriation without due process and compensation.
  • Fair and equitable treatment: obligates host states to observe investors’ legitimate expectations and prohibits actions that are arbitrary, lack consistency or transparency, are taken in bad faith, or do not entail due process.
  • Full protection and security: requires host states to provide a secure investment environment and to protect investments from harm by its entities and third parties.
  • Discriminatory treatment: prohibits host states from treating a party’s investments worse than investments from host state nationals or nationals of any third state.
  • Umbrella clause: requires host states to observe any obligations they have accepted with respect to covered foreign investments, whether in a contract or otherwise.

Investment treaties permit investors to seek direct recourse against the host state for violating any of the protections set forth above by allowing investors to commence an international arbitration directly against the host state.