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.
India’s Investment Treaty Regime
According to the Indian government’s Department of Economic Affairs, India has signed at least 70 bilateral investment treaties that entered into force, approximately nine of which remain in force.7 Other sources record additional investment treaties signed by India that entered into force, as well as investment chapters contained in multilateral investment treaties to which India is a party.8 Nearly all of these investment treaties contain the protections identified above, although Indian investment treaties often do not contain umbrella clauses.
In the wake of adverse investment treaty awards that caused it to rethink its investment treaty regime, India sent numerous notices in 2016 that sought to terminate most of its existing BITs. This included 22 BITs with EU member states, which hold significant investments in the pharmaceutical sector.
India’s efforts to terminate BITs do not necessarily mean that investors affected by its export restrictions cannot bring investor-state claims. First, India has not terminated all of its BITs.9 Second, many of the BITs that India sought to terminate contain “sunset clauses,” which provide that the BITs continue to protect existing investments for 10 to 20 years after the termination notice.
India’s BIT with the Netherlands, which India purported to terminate on September 22, 2016, provides an instructive example. Article 16 of the BIT extends treaty protection to investments that existed at the time of termination for an additional 15 years. As this type of provision – which is contained in numerous other treaties signed by India – demonstrates, investors may still be able to bring claims, even if India terminated the treaty under which those claims would be asserted.
Potential Claims Investors Might Bring
While a full review of potential claims is beyond the scope of this alert, covered investors could claim that India’s pharmaceutical export restrictions breached one or more of the common standards of treaty protection. For instance, international tribunals have held states liable for breaching the fair and equitable treatment standard by imposing export restrictions on products that could previously be exported freely.10 While investors would likely face force majeure and necessity defenses, they may nevertheless have viable claims.
Immediate Action Items
Life sciences investors should assess whether their Indian investments are protected by BITs or MITs to determine whether potential investment treaty claims are possible.
In the process of making that assessment, investors should explore:
- Applicable investment protections – is there an applicable investment treaty covering one or more investment entities, is it in force or otherwise available, and what protections does it afford?
- Government dealings – has the Indian government, through contract, law, or otherwise, given any specific assurances with respect to the export of the products in question?
- Umbrella clause – does the applicable treaty have an umbrella clause that could assist with broadening the scope of potential claims?
- Most favored nation and national treatment clauses – does the relevant BIT contain an MFN or national treatment clause that might permit the investor to benefit from better treatment afforded to host State nationals or nationals of a third State?
- Dispute resolution provisions – what dispute resolution fora are available under the applicable investment treaty?
Understanding now what options for treaty protection are available could be critical for developing an appropriate response to India’s export restrictions to ensure optimal positioning for a positive outcome in negotiations or an arbitration should a formal dispute arise.
- See Reed Smith Client Alerts: “India Restricts Drug Exports Over Coronavirus Fears and International Arbitration Claims Are Likely to Follow,” (March 6, 2020).
- “India Restricts Exports of Common Drugs on Fear of Coronavirus Shortages,” Bloomberg (March 3, 2020).
- “India to Restrict 10% of Medicine Exports Due to Coronavirus,” European Pharmaceutical Review (March 4, 2020).
- Notification No. 50/2015-2020, Indian Ministry of Commerce & Trade (March 3, 2020).
- “India Restricts Exports of Common Drugs on Fear of Coronavirus Shortages,” Fortune (March 3, 2020); “India Restricts Exports of Common Drugs on Fear of Coronavirus Shortages,” Bloomberg (March 2020).
- See “Indian Pharmaceutical Industries Report,” India Bran Equity Foundation (December 2019).
- Department of Economic Affairs: List of Bilateral Investment Treaties (available at: dea.gov.in).
- See “India: overview of investment treaty programme,” Global Arbitration Review (September 25, 2019) (available at globalarbitrationreview.com).
- Parties should also verify that any purported termination complied with that treaty’s specific termination provisions and/or Article 56(2) of the Vienna Convention on the Law of Treaties, as applicable.
- See, e.g., Mobil Exploration and Development Argentina Inc. Suc. Argentina and Mobil Argentina Scoiedad Anónima (ICSID Case No. ARB/04/16) Decision on Jurisdiction and Liability (April 10, 2013), para 984.
Client Alert 2020-094