Type of Litigation: Trade Panel/Investment Tribunal/Arbitration

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Philip Morris SÀRL v. Uruguay [Uruguay] [July 08, 2016]

In February 2010, three subsidiary companies of Philip Morris International (PMI) initiated an investment arbitration claim at the International Centre for the Settlement of Investment Disputes (ICSID), an arbitration panel of the World Bank. PMI alleged that two of Uruguay’s tobacco control laws violated a Bilateral Investment Treaty (BIT) with Switzerland. PMI brought the claim after legal challenges in Uruguay’s domestic courts by the Philip Morris subsidiaries had failed. The panel of three arbitrators published their ruling on July 8, 2016, dismissing all PMI’s claims and awarding Uruguay its legal costs ($7 million).  

The two “Challenged Measures” required:

1.   Large graphic health warnings covering 80% of the front and back of cigarette packets; and

2.      The Single Presentation Requirement (SPR) that limited each cigarette brand to just a single variant or brand type (eliminating brand families to address evidence that some variants can mislead consumers and falsely imply some cigarettes are less harmful than others).

PMI alleged that the 80% health warnings left insufficient room on the packs for it to use its trademarks and branding as they were intended, and the SPR meant it could not market some of its brands such as Marlboro Gold. PMI therefore alleged that Uruguay had breached the terms of the BIT because the Challenged Measures: Expropriated the property rights in PMI’s trademarks without compensation; were arbitrary as they were not supported by evidence to show they would work and so did not accord PMI with Fair and Equitable Treatment;  did not meet PMI’s Legitimate Expectations of a stable regulatory environment or to be able to use their brand assets to make a profit; and that the Uruguayan courts had not dealt properly or fairly with PMI’s domestic legal challenges such that there was a Denial of Justice.

Philip Morris sought an order for the repeal of the Challenged Measures and for compensation in the region of $25 million.

The tribunal’s findings

This highly anticipated award addressed a number of fundamental legal issues concerning the balance between investor rights and the space available for states’ to regulate for public health. While there is no doctrine of binding precedent in international arbitration law, the development of an investment treaty case law and jurisprudence means that the wider value of each award can be very significant. This ruling highlighted the importance of the WHO Framework Convention on Tobacco Control (FCTC) in setting tobacco control objectives and establishing the evidence base for measures, and confirmed that states therefore need not recreate local evidence.  It addressed the wide ‘margin of appreciation’ and deference provided to sovereign states in adopting measures or decisions concerning public health. The tribunal also identified that a state need not prove a direct causal link between the measure and any observed public health outcomes – rather that it was sufficient that measures are an attempt to address a public health concern and taken in good faith.

The ruling sets an extremely high bar for any foreign investor seeking to bring an investment arbitration challenge against a non-discriminatory public health measure that has a legitimate objective and that has been taken in good faith.

Philip Morris Asia v Australia [Australia] [December 17, 2015]

Philip Morris Asia challenged Australia's tobacco plain packaging legislation under a 1993 Bilateral Investment Treaty between Australia and Hong Kong. This was the first investor-state dispute brought against Australia.

Philip Morris Asia initiated the arbitration in November 2011, immediately after the legislation was adopted. Australia responded with jurisdictional objections and sought a preliminary ruling on these issues. The tribunal bifurcated the proceedings and on 18 December 2015 issued a unanimous decision agreeing with Australia's position that the tribunal had no jurisdiction to hear the claim.

The main objection to jurisdiction was that at the time the dispute arose, Philip Morris Asia was not a foreign investor in Australia. The government announced its decision to proceed with plain packaging legislation in April 2010. At that time, 100% of the shares in Philip Morris Asia were owned by the parent company located in Switzerland (which had no investment treaty with Australia). Philip Morris International then undertook a restructure in 2011 which meant that Philip Morris Asia, located in Hong Kong, became the sole owner of the shares in the Australian subsidiaries. 

The Tribunal found that Claimant’s restructure was for the principal, if not the sole, purpose of gaining protection under the Treaty so as to bring a claim against the plain packaging legislation. As such Philip Morris Asia's claim was an 'abuse of rights'. This concluded the arbitration in Australia's favour, subject to finalisation of the costs claim.

Australia - Plain Packaging Requirement Applicable to Tobacco Products and Packaging [Australia] [October 27, 2014]

Information about this decision coming soon. 

Philip Morris Asia Limited v. Commonwealth of Australia (Procedural Order No.8) [Australia] [April 14, 2014]

Philip Morris Asia (PMA) commenced arbitral proceedings against Australia in relation to Australia's Tobacco Plain Packaging Act and associated regulations, pursuant to the Agreement between the Government of Hong Kong and the Government of Australia for the Promotion and Protection of Investments (the Treaty). An ad hoc Tribunal has been established to adjudicate the dispute, with its registry in the Permanent Court of Arbitration. For background on the case and earlier Procedural Orders, see related case: Philip Morris Asia Limited v. Commonwealth of Australia (Procedural Order No.4).

In this decision, the Tribunal ruled on Australia's request to have the proceedings bifurcated between arguments on jurisdiction and arguments on the merits. PMA objected to the hearing being bifurcated, primarily on the grounds that the issues to be decided significantly overlap and that Australia's jurisdictional arguments are not substantial.

Australia alleges that the Tribunal has no jurisdiction to hear the dispute on 3 grounds, as follows.

1) First, Australia alleges that PMA's "investment" in Australia was not admitted in accordance with the Treaty because PMA's Statutory Notice under Australia's foreign investment rules contained false and misleading assertions as to the purpose of the investment. Australia alleges that PMA's true purpose, which should have been stated on the Statutory Notice, was to place itself in a position where it could bring this claim under the Treaty.

2) Secondly, Australia alleges that PMA's claim falls outside the Treaty because it relates to a pre-existing dispute; or, alternatively, that it amounts to an abuse of right because PMA re-structured its investments with the express purpose of bringing this claim, after the Australian Government had announced its intention to implement plain packaging.

3) Thirdly, Australia alleges that PMA's assets - being only its shares in PML and PM Australia - do not constitute "investments" under the Treaty because PML and PM Australia's investments do not themselves enjoy the protections of the Treaty (not being investments in Hong Kong).

In this Order, the Tribunal ruled that Australia's first and second jurisdictional arguments should be bifurcated and heard first, but that the third argument should be joined with the merits of the dispute. The Tribunal reasoned that if Australia wins on either of the first or second arguments, it would dispose of the entire proceeding, whereas Australia winning the third argument would not be dispositive.

The Tribunal subsequently set down the hearing on jurisdiction for February 16, 2015 (see Procedural Order No.9, uploaded here under "Related Documents").

Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay [Uruguay] [July 02, 2013]

After passing a series of tobacco control laws, Uruguay instituted two additional regulations on tobacco packaging in 2009. The first requires graphic health warnings on 80% of the front and back of all tobacco products. The second restricts each brand to a single presentation, in order to prohibit brand variants that mislead consumers about the relative safety of tobacco products. Uruguay adopted these policies after the tobacco industry attempted to circumvent Uruguay’s ban on the use of the deceptive terms “light,” “low tar” and “mild” by using color-coded brand names such as “Marlboro Green (Fresh Mint).” Philip Morris affiliates challenged the regulations in Uruguay's domestic courts, but the Supreme Court upheld them as constitutional. 

In addition to the domestic constitutional challenge, Philip Morris affiliates are challenging the regulations as allegedly violating a bilateral investment treaty between Switzerland and Uruguay.  An arbitration panel, established under the International Centre on Settlement of Investment Disputes (ICSID), decided that it had jurisdiction to hear this case in July 2013 and instructed the parties to prepare substantive arguments in the case. The decision on jurisdiction did not discuss the merits of the case. 

Philip Morris Asia Limited v. Commonwealth of Australia (Procedural Order No.4) [Australia] [November 30, 2012]

Philip Morris Asia (PMA) commenced arbitral proceedings against Australia in relation to Australia's Tobacco Plain Packaging Act and associated regulations (the plain packaging legislation) pursuant to the Agreement between the Government of Hong Kong and the Government of Australia for the Promotion and Protection of Investments (the Treaty).

The plain packaging legislation mandates every aspect of the retail packaging of tobacco products including the appearance, size and shape of tobacco packaging. It prohibits the use of trade marks, symbols, graphics and other images, and mandates that brand names and variants must be printed in a specified font and size against a uniform drab brown background. The plain packaging legislation came into full effect on December 1, 2012.

PMA alleges that by implementing the plain packaging legislation Australia has violated several of its obligations under the Treaty. It says that the plain packaging legislation virtually eliminates its branded business by expropriating intellectual property, transforming it from a manufacturer of branded products to a manufacturer of commoditized products with the consequential effect of substantially diminishing the value of PMA's investment in Australia - in circumstances where PMA alleges that plain packaging will undermine rather than support the purported public health rationale of the legislation. On that basis, PMA alleges that, in contravention of the Treaty, Australia has: expropriated its investments; failed to provide its investments fair and equitable treatment; unreasonably impaired its investments; and failed to accord its investments full protection and security. PMA is seeking damages from Australia in the order of "billions" of dollars.

In its response, Australia asserts that PMA acquired its interest in PM Australia after the Australian Government had announced its decision to implement plain packaging, and therefore that PMA's claim must fail on both jurisdiction and on the merits. Further, even if that were not the case, Australia rejects each and every of PMA's claims of breach of its obligations pursuant to the Treaty. Further still, Australia says that the plain packaging legislation is a non-discriminatory regulatory action of general application designed and adopted by the Australian Government to achieve the most fundamental public welfare objective - the protection of public health (i.e. the police powers exception).

An ad hoc Tribunal has been established to adjudicate the dispute pursuant to the Arbitration Rules of the United Nations Commission on International Trade Law (the UNCITRAL Arbitration Rules), with its registry in the Permanent Court of Arbitration.

The Tribunal has made a number of Procedural Orders (see under "Related Documents"). In this Order (Procedural Order No. 4), the Tribunal ruled on Australia's request that the proceedings be bifurcated so that a ruling on Australia's jurisdictional arguments would occur before a substantive hearing on the merits of the case. PMA resisted bifurcation. Following written and oral arguments, the Tribunal ruled that a decision on bifurcation should be postponed until after a Statement of Claim and full Statement of Defence on all aspects of the case were submitted.

The hearing of argument on bifurcation was subsequently held in February 2014, and decided in Australia's favour. See: Philip Morris Asia Limited v. Commonwealth of Australia (Procedural Order No.8).

Indonesia v. United States [United States] [April 04, 2012]

The United States Federal Food, Drug, and Cosmetic Act (“FFDCA”) prohibits the production and sale in the United States of cigarettes with characterizing flavours (such as clove, strawberry, or chocolate), but does not prohibit regular or menthol cigarettes. Indonesia, which exports clove cigarettes to the United States, brought this case before the World Trade Organization.  Here, the Appellate Body upheld an earlier Panel's findings that FFDCA is inconsistent with provisions of the Technical Barriers to Trade ("TBT") Agreement. The Appellate Body, however, disagreed with the Panel's interpretation of “like products” and “treatment no less favourable” in the TBT Agreement.

The Appellate Body considered that the determination of whether products are “like” within the meaning of the TBT Agreement is a determination about the competitive relationship between the products.  Regulatory concerns underlying a measure, such as the health risks, may be relevant to the determination of “likeness” to the extent they have an impact on the competitive relationship between the products.  Based on this interpretation, the Appellate Body agreed with the Panel that clove and menthol cigarettes are “like products.”

In determining whether a measure's detrimental impact on imports constitutes "less favourable" treatment, the Appellate Body found that a panel must carefully scrutinize the particular circumstances of the case, namely the design, operation, and application of the regulation, and, in particular, whether that regulation is even handed.  Based on this interpretation, the Appellate Body found that these factors  strongly suggests that the FFDCA has a detrimental impact on competitive opportunities for clove cigarettes and reflects discrimination against the group of like products imported from Indonesia.

Finally, the Appellate Body upheld the Panel's finding that the United States acted inconsistently with the TBT Agreement by allowing only three months between publication and entry into force.

Philip Morris Norway AS v. The Norwegian State [Norway] [September 12, 2011]

An importer of tobacco products sued Norway before the Oslo District Court, alleging that the Norwegian ban on tobacco advertising, which included a prohibition on visual product displays in retail locations, was incompatible with the European Economic Area Agreement (EEA). Accordingly, quantitative restrictions on imports and measures having the same effect are prohibited unless they are justified by non-arbitrary and non-discriminatory public health grounds. Prior to issuing an opinion in the case, the district court requested two preliminary rulings from the Court of Justice of the European Free Trade Association States (EFTA) Court (presented in this decision.)  The EFTA Court determined that if the ban did not affect the tobacco products manufactured in Norway as much as it affected the tobacco products imported from other EEA States, the ban would be incompatible with the EEA. Further, the EFTA Court declared that the district court would have to decide whether Norway’s ban was necessary -- that Norway’s legitimate health objective of reducing tobacco use could not be achieved by measures less restrictive than a tobacco product display ban.

Indonesia v. United States [United States] [September 02, 2011]

Indonesia brought a claim against the United States regarding a statutory ban on the production or sale in the United States of cigarettes containing certain additives including clove. Indonesia alleged that the measure is inconsistent with various provisions of the General Agreement on Tariffs and Trade 1994 (GATT), the Agreement on Sanitary and Phytosanitary Measures (SPS) and Agreement on Technical Barriers to Trade (TBT), as the United States excluded from the restriction the production and sale of menthol-flavored cigarettes. Indonesia claimed that the ban on clove cigarettes was discriminatory and unnecessary. The WTO Panel found the menthol-flavored and clove-flavored products similar and held that the ban was contrary to the TBT Agreement because it treated clove cigarettes less favorably than menthol-flavored cigarettes. Nonetheless, the WTO Panel held that restriction was consistent with the TBT Agreement as far as it was not more trade-restrictive than necessary to satisfy the legitimate objective of reducing youth smoking. Finding that the United States had acted inconsistently with the TBT Agreement, the Panel recommended that the United States bring its actions into conformity with its obligations under the TBT Agreement.

The Parties settled the case while negotiating appropriate remedies. In addition to other commitments, the United States agreed to not arbitrarily or unjustifiably discriminate against cigars or cigarillos from Indonesia. 

Thailand v. Philippines [Thailand] [June 17, 2011]

Thailand appealed a WTO Panel Report finding that Thailand acted inconsistently with trade law by subjecting imported cigarettes to Value Added Tax (VAT) in excess of that applied to domestic cigarettes and in other ways treating imported cigarettes less favorably than like domestic cigarettes. The Appellate Body upheld all of the Panel's findings concerning Thailand's unequal treatment of imported versus domestic cigarettes and recommended that Thailand bring its policies into conformity with its international trade obligations.