That's one of the issues in an ongoing NAFTA Chapter 11 case. Pharmaceutical maker Eli Lilly is making an Article 1110 expropration claim related to the invalidation of certain of its patents in Canadian courts (it also makes an Article 1105 minimum standard of treatment claim). More background on the case here and here.
With regard to the expropriation issue, here's an excerpt from Canada's Statement of Defence on the expropriation issue:
106. Article 1110 does not apply to the procedurally fair invalidation of a patent by a domestic court. Patent grants are invalidated each year by courts in all major jurisdictions. That this does not amount to either a direct or indirect expropriation flows both from general international law and, in this case, from the application of NAFTA Article 1110(7).
a) The procedurally fair invalidation of a patent by a court cannot amount to an expropriation
107. In all but rare circumstances, a determination by a domestic court concerning the existence of a property right, including an intellectual property right, cannot amount to an “expropriation” at international law.
108. Where a court of competent jurisdiction, applying full due process and reaching a decision pursuant to its mandate, determines that a presumed property right is legally invalid (i.e. that it does not exist), this does not amount to a “taking”, but rather, constitutes juridical determination of the existence and scope of rights at law.
109. This rule applies in all but extraordinary circumstances, where the powers of the court have been abusively applied (abus de droit) or in cases of gross procedural injustice amounting to denial of justice, i.e. only where the court is in effect not acting in a true judicial capacity.
110. The rule was considered and applied in the very first NAFTA Chapter Eleven decision, where the tribunal considered a claim that a domestic contract had been “expropriated”, after a domestic court found that contract invalid. The tribunal held as follows:
The possibility of holding a State internationally liable for judicial decisions does not, however, entitle a claimant to seek international review of the national court decisions as though the international jurisdiction seised (sic) has plenary appellate jurisdiction. This is not true generally, and it is not true for NAFTA. What must be shown is that the court decision itself constitutes a violation of the treaty. Even if the Claimants were to convince this Arbitral Tribunal that the Mexican courts were wrong with respect to the invalidity of the Concession Contract, this would not per se be conclusive as to a violation of NAFTA. More is required; the Claimants must show either a denial of justice, or a pretence of form to achieve an internationally unlawful end. […] For if there is no complaint against a determination by a competent court that a contract governed by Mexican law was invalid under Mexican law, there is by definition no contract to be expropriated.
[…]
A denial of justice could be pleaded if the relevant courts refuse to entertain a suit, if they subject it to undue delay, or if they administer justice in a seriously inadequate way. There is no evidence, or even argument, that any such defects can be ascribed to the Mexican proceedings in this case.
There is a fourth type of denial of justice, namely the clear and malicious misapplication of the law. This type of wrong doubtless overlaps with the notion of “pretence of form” to mask a violation of international law. In the present case, not only has no such wrong-doing been pleaded, but the Arbitral Tribunal wishes to record that it views the evidence as sufficient to dispel any shadow over the bona fides of the Mexican judgments. Their findings cannot possibly be said to have been arbitrary, let alone malicious.111. The same reasoning applies here. A patent is a domestic statutory creation, granting a national limited-term monopoly subject to the fulfilment of certain conditions. However, the right is granted in Canada on the basis that the initial administrative grant is only presumptive and may ultimately be revoked further to court review. As patents are a statutory creation in Canada, the grounds both for the initial grant and for ultimate invalidation of that grant are identical: the patent application must, upon initial administrative and ultimate judicial review, fulfil all of the statutory conditions for the grant of a patent. In Canada, statutory responsibility to conduct judicial review lies primarily with the Federal Court. Where that court determines, in the exercise of its statutory mandate, applying full due process, that the patent in question fails to fulfil such criteria, the property right in effect never existed. In the circumstances, Article 1110 is not even engaged vis-à-vis the invalidation of a patent by a court decision.
112. In the present case, Claimant has not even alleged abusive application of the reviewing power of the court, nor any gross procedural misconduct. Nor could such allegations be articulated in good faith. The Federal Court in the two decisions at issue invalidated Claimant’s patents further to careful review of an enormous factual and expert record, in light of the policy considerations underlying the Patent Act, and further to careful review of the relevant statutory provisions and related jurisprudence. Its decisions were principled and rational. For purposes of expropriation, the analysis effectively stops there: as investment tribunals repeatedly have held, they do not sit as courts of appeal of domestic legal determinations, either on their appreciation of the facts or on their application of the law. Just as this is true in the Article 1105 context, it is equally true in the Article 1110 context.
What I wonder is, have domestic courts ever dealt with claims that patent invalidation results in regulatory expropriation? It seems like it must have come up somewhere. If so, can that jurisprudence help inform this NAFTA tribunal's consideration of the issue?