The company is demanding compensation for court decisions that invalidated its patents for Strattera, a treatment for attention-deficit/hyperactivity disorder, and for Zyprexa, which is used for the treatment of schizophrenia and bipolar disorder.
Canadian courts struck down the disputed patents under the "promise doctrine," which Eli Lilly said violates NAFTA.
Under Canadian patent rules, a drug's usefulness must be demonstrated or soundly predicted as of the date the patent application is filed.
"Patent decisions in Canada over the last decade not only fly in the face of long-established international standards, but they’re subjective and completely unpredictable," said Doug Norman, Eli Lilly's general patent counsel.
"The standard seems to be that there is no standard."
The challenge comes amid ongoing debate regarding investor protection rights in Canada's trade agreements with China and Europe. Critics have raised concerns the trade deals will give foreign corporations the ability to challenge Canadian policy decisions.
The Department of Foreign Affairs, Trade and Development said Friday it was assessing the notice of arbitration.
"Our government's actions will continue to reflect our commitment to ensure Canadians continue to have access to the affordable drugs they need, while promoting innovation and job creation," spokeswoman Caitlin Workman said in a statement.
Richard Gold, a patent law professor at McGill University, said Eli Lilly has no grounds for its case.
"To me this is frivolous and vexatious and should really have never been put forward," he said.
Gold dismissed the company's assertion that Canada is unique and out of step with international standards, noting that Australia and New Zealand use similar patent rules, while the United States and Britain use different rules.
"There are no set of international norms. Many of us would like there to be international norms because it would make life a lot easier, but they don't exist," he said.
The Federal Court struck down Eli Lilly's patent for Strattera in 2010. The Federal Court of Appeal dismissed Eli Lilly's appeal in July 2011 and the Supreme Court of Canada denied leave to appeal that decision in December of that year.
The Zyprexa patent was first rendered invalid in October 2009 by the Federal Court, but that decision was overturned by the Federal Court of Appeal in July 2010.
However, the Federal Court invalidated the patent a second time in November 2011 and that decision withstood an appeal in September 2012. The Supreme Court denied leave to appeal in May of this year.
The request for arbitration, which will likely take years to resolve, follows a 90-day period of negotiations between the government and the company in an attempt to resolve the dispute.
Jim Keon, president of the Canadian Generic Pharmaceutical Association, said Eli Lilly overpromised and underdelivered.
"I think the suggestion that Canadian law is weak and out of step is incorrect," he said in an interview from Edmonton.
"Eli Lilly promised certain things in their patents that they could not demonstrate."