07/18/2014 08:47 EDT | Updated 07/18/2014 08:59 EDT

Eli Lilly Trying To Create 'Supranational Court' With Lawsuit Against Canada, Feds Say

This Tuesday, July 17, 2012, photo shows the Eli Lilly corporate headquarters in Indianapolis. Eli Lilly and Co.'s second-quarter net income tumbled 23 percent on an expected drop in sales for its antipsychotic Zyprexa, but the performance topped Wall Street expectations, and the drugmaker raised its 2012 earnings forecast. The Indianapolis company said Wednesday, July 25, 2012, that sales for Zyprexa, its all-time top-selling drug, sank 73 percent to $379.5 million in the quarter.(AP Photo/Michael Conroy)

The federal government has accused a U.S. pharmaceutical giant of trying to turn the North American Free Trade Agreement’s arbitration panel into a “supranational court of appeal.”

Indiana-based Eli Lilly last fall went to the NAFTA arbitration panel and filed a lawsuit for $500 million against the Canadian government, after Canadian courts invalidated two of its drug patents.

In a response to Eli Lilly’s suit, the Department of Foreign Affairs (DFAIT) called Lilly a “disappointed litigant” (read: sore loser) which is trying to re-write Canadian patent law by way of NAFTA.

Many groups opposed to trade liberalization have argued that arbitration panels set up in free trade deals amount to courts that have the ability to override national laws. But it is rare for such a concern to appear in federal government documents.

“Having lost two patent cases before the Canadian courts, [Eli Lilly] now seeks to have this Tribunal misapply NAFTA Chapter Eleven and transform itself into a supranational court of appeal from reasoned, principled, and procedurally just domestic court decisions,” DFAIT lawyers said in a filing.

Under Chapter 11 of NAFTA, companies can sue a member state for “regulatory expropriation.” That can include a loss of value to the company, such as a loss of patents, due to actions taken by the government.

Canadian courts in recent years have invalidated two of Lilly’s patents -- one for Zyprexa, an anti-psychotic, and one for Strattera, an attention deficit drug.

Lilly says the courts’ actions have already cost it more than $1 billion, and the company may be forced out of Canada.

Activist groups say Lilly’s move, if successful, could mean U.S. and Mexican companies could be immune from Canadian law. The activist group launched a petition last fall urging Eli Lilly not to sue Canada simply “because it didn’t make enough profit.”

In its defense against the suit, the federal government noted that various courts of appeal upheld the initial court rulings against Eli lilly’s patents. In the cases of both patents, the courts ruled Eli Lilly’s applications had failed to meet the standards needed to issue a new drug patent.

Lilly argues Canadian courts have been “retroactively” applying a new, tougher standard for patents since 2005.

These new patent rules “are inconsistent with international norms and Canada’s treaty obligations,” Lilly said in an email to the Wall Street Journal.

“Nothing in Canada’s Statement of Defense changes our view that Canada has violated its international obligations under NAFTA Chapter 11.”

The DFAIT filing stops little short of accusing Lilly of trying to rewrite Canadian patent law.

Lilly “seeks to elevate its own competing views of how Canadian law “ought” to have been applied to its patents … into legally enforceable “expectations,” and argues that failure to live up to these “expectations” amounts to a breach of international law,” the department said in the filing.

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