Philip Morris v. Australia: A Big Win for Public Health

By Kavaljit Singh | Commentary | December 29, 2015

Tobacco giant Philip Morris lost a major international legal battle to reverse Australia’s tobacco plain packaging laws using the Australia-Hong Kong Investment Promotion and Protection Agreement (IPPA) of 1993. On December 17, 2015, a three-member arbitral tribunal at Permanent Court of Arbitration (PCA) issued an Award on Jurisdiction and Admissibility in connection to the case between Philip Morris Asia Limited and Australia.

The full text of tribunal’s Award is yet to be made public but media reports confirm that the tribunal unanimously supported Australia’s position that Philip Morris had no jurisdiction to bring the case against Australia. In other words, Australia’s plain packaging laws banning all branding from cigarette packets will remain in force.

In 2011, Australia enacted Tobacco Plain Packaging Act and enforced Tobacco Plain Packaging Regulations which prohibit the display of brand trademarks, logos and designs on cigarette packets. Under these rules, the cigarette packets should follow standardized packaging (for instance, brand name can be displayed only in certain standard styles and at a particular place) besides graphic health warnings should be prominently displayed on the packets. The tobacco companies lost a case against plain packaging legislation in the domestic courts of Australia in August 2012.

Invoking Australia-Hong Kong IPPA

Australia’s IPPA with Hong Kong provides the investor-state dispute settlement (ISDS) mechanism under which foreign investors can sue host states directly and seek monetary compensation if they claim that their profits have been hurt due to introduction of policy or regulatory measures.

In 2011, Philip Morris Asia Limited (Hong Kong) initiated an ISDS claim under the UNCITRAL Arbitration Rules (2010). The arbitration hearings began in early 2015 at Singapore.

Philip Morris challenged Australia’s plain packaging laws on the grounds that the ban on trademarks breached the investment protection obligations listed under the Australia-Hong Kong IPPA. Relying primarily on the fair and equitable treatment (FET) provision, the company argued that the plain packaging laws constitutes an expropriation of its intellectual property rights and therefore it should be compensated for the loss suffered due to compliance with these laws. The company also demanded that the enforcement of these laws should be suspended.

The pursuit of a legitimate public policy objective

On its part, the Australian government claimed that plain packaging rules were implemented for a legitimate public purpose to protect public health by reducing tobacco consumption, particularly among the youth.

The government maintained that plain packaging measures would help in reducing the appeal of tobacco products whereas mandated graphic health warnings would educate consumers about the harmful effects of smoking. According to official estimates, smoking alone kills 15,000 Australians each year and costs more than A$30 billion in social and economic costs.

Australia is the first country in the world to implement tobacco plain packaging laws.

While stressing that the full effects of anti-tobacco measures will be seen over the long-term, the Australian authorities provided statistics to prove that the total consumption of tobacco and cigarettes has declined in the country with the introduction of these measures in 2012.

Australia is the first country in the world to implement tobacco plain packaging laws. It is important to note that plain packaging laws are consistent with WHO’s Framework Convention on Tobacco Control (FCTC). Adopted in 2003, the FCTC is the world’s first global public health treaty to address the challenges posed by the growing tobacco epidemic.

Treaty shopping

In its response to the arbitration case, the Australian government raised procedural objections and sought the dismissal of case on procedural grounds. In particular, the government raised objections to the manner in which Philip Morris restructured itself when its Australian subsidiary (Philip Morris Australia) became the wholly-owned by Philip Morris Asia Limited (Hong Kong) in February 2011. The Australian authorities argued that the rearranging of company’s assets was conducted to claim to be a Hong Kong company so as to cover themselves under the framework of Australia-Hong Kong IPPA. Since this agreement has ISDS provisions, the company saw an opportunity to pursue a claim against the Australian government which had made an announcement in April 2010 to introduce plain packaging laws by 2012.

The Australian government claimed that the sole intention of acquisition was to bring the claim under Australia-Hong Kong IPPA once the plain packaging laws were announced and the company made false statements before the concerned authorities at the time of acquiring the Australian subsidiary. The government contended that the commencement of the arbitration by Philip Morris shortly after the restructuring of assets should be considered an abuse of rights and the company is not entitled to an ISDS claim under the IPPA.

The Australian government further argued that the Philip Morris Asia Limited did not carry out acquisition of shares in Philip Morris Australia as per the norms provided under Article 1 the IPPA which states that an investment must be “admitted by the other Contracting Party [Australia] subject to its law and investment policies applicable from time to time.”

What next?

The unanimous decision by the arbitral tribunal upholding the tobacco control measures has been welcomed by public health experts and civil society groups throughout the world. Needless to say, a win by Philip Morris could have resulted in billions of dollars of cost to Australian taxpayers besides a possible reversal of plain packaging regime.

Unofficial estimates suggest that the Australian government might have spent anywhere between A$30 and A$50 million in defending this case. At the time of writing, there is no communication from the Australian authorities on how much public money has been spent on defending this case. Nor is there any confirmation whether Philip Morris would be asked to reimburse the costs incurred by the government.

Unofficial estimates suggest that the Australian government might have spent anywhere between A$30 and A$50 million in defending this case.

While the PCA is yet to put details of decision in the public domain, it is widely speculated that Philip Morris may appeal the decision as it has already questioned the outcome based on procedural grounds. In the words of Marc Firestone, Philip Morris International’s Senior Vice President and General Counsel: “It is regrettable that the outcome hinged entirely on a procedural issue that Australia chose to advocate instead of confronting head on the merits of whether plain packaging is legal or even works.”

It is difficult to predict the next move by the global tobacco industry which is facing the heat with the implementation of WHO’s FCTC and other measures by several countries. The arguments put forward by tobacco industry against plain packaging measures are not supported by empirical evidence. Therefore, it would indeed be a herculean task to prove that such measures do not yield positive outcomes.

A domino effect

In all likelihood, this verdict may encourage many other countries to implement anti-tobacco measures within their jurisdictions. New Zealand is expected to soon pass the Smoke-free Environments (Tobacco Plain Packaging) Amendment Bill which is currently awaiting Parliament’s nod.

Recently France, Ireland and the UK have also announced their plans to introduce tobacco plain packaging. France has passed a similar legislation which will come into force in mid-2016. In the UK, Philip Morris, British American Tobacco and other big companies have challenged the legality of a move to introduce plain packaging in 2016. The outcome of this legal challenge will be known next year.

France, Ireland and the UK have recently announced their plans to introduce tobacco plain packaging.

Not long ago, Philip Morris had filed a claim against Uruguay when the country attempted to implement similar plain packaging rules on tobacco products. The claim was filed under the Switzerland-Uruguay bilateral investment treaty.

The battle is not over

Despite tribunal’s dismissal of arbitration case, Australia is facing another legal battle against plain packaging rules at the World Trade Organization (WTO). In 2012, Ukraine, Honduras, Indonesia, Dominican Republic and Cuba have challenged Australia’s plain packaging regime on the grounds that it is inconsistent with country’s obligations under the WTO’s Trade-Related Aspects of Intellectual Property Rights (TRIPS) and Technical Barriers to Trade (TBT) Agreements. However, Australia has rejected this claim.

This case has highlighted that the investor-state arbitration has substantial financial implications even if the host state wins the case.

In June 2015, Ukraine decided to drop its legal proceedings against Australia but the rest four tobacco producing countries are still pursuing the case at the WTO and a decision is expected in 2016. It is no secret that big tobacco firms have actively lobbied with Honduras to pursue legal action against Australia via the WTO.

This case has, once again, highlighted that the investor-state arbitration has substantial financial implications even if the host state wins the case. Hence, India, Indonesia and other countries that are currently revisiting their investment treaty regime should rethink about the inclusion of ISDS mechanism in future investment treaties and trade agreements.

The inclusion of the tobacco carve-out in the negotiated text of investment chapter of recently concluded Trans-Pacific Partnership Agreement (TPPA) is viewed by many as a major victory for public health, but the grim fact remains that Australia is a signatory party to more than two dozen agreements (with ISDS obligations) that grant foreign investors the right to challenge tobacco plain packaging and other initiatives to protect public health.

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