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NAFTA Panel Throws Out $1.5 Billion Case Over FDA Import Alert

Friday, August 29, 2014
Sandler, Travis & Rosenberg Trade Report

A NAFTA arbitral tribunal rejected this week all claims brought against the U.S. by two Canadian pharmaceutical companies that had sought up to $1.5 billion in damages for losses allegedly caused by an import alert issued by the Food and Drug Administration. An Aug. 27 State Department notice called the decision “an important recognition of the NAFTA parties’ authority to take nondiscriminatory enforcement action to protect public health.”

According to the notice, FDA inspections of two of the companies’ manufacturing facilities in Canada conducted in 2008 and 2009 in response to complaints about the companies’ drugs revealed significant deviations from current good manufacturing practice. FDA subsequently issued an import alert signaling to its district offices that drugs offered for import from these facilities were deemed to be adulterated and could be detained at the border without physical examination. The facilities were removed from the import alert in 2011.

The companies initiated arbitration against the U.S. in February 2012, claiming that the import alert violated the United States’ obligations under NAFTA Chapter Eleven to accord them and their U.S. investments national and most-favored-nation treatment. Specifically, press reports indicate, the companies argued that they were treated more harshly than another pharmaceutical company that experienced similar problems at about the same time. The companies also claimed that the U.S. adopted the import alert without due process in violation of the customary international law minimum standard of treatment. The companies said the alert essentially shut them out of the U.S. market for two years, costing them $520 million in lost sales.

However, the State notice said, the tribunal unanimously concluded that the import alert was a lawful and appropriate exercise of FDA’s regulatory authority and therefore did not violate the United States’ obligations under NAFTA Chapter Eleven. The tribunal also (by a majority) concluded that the Canadian companies were barred from relitigating the issue of whether their abbreviated new drug applications constituted investments in the U.S. for purposes of NAFTA Chapter Eleven given a previous tribunal’s determination on that issue. The companies were ordered to reimburse 100 percent of the United States’ legal costs and to pay 75 percent of the costs of arbitration.

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