INVESTMENT TREATY DISPUTES:
TRADE DISPUTES:
- Australia — Plain Packaging
- US — Clove Cigarettes
- Dominican Republic – Importation and Internal Sale of Cigarettes
- Thailand — Customs and Fiscal Measures on Cigarettes
Investment Treaty Disputes
Philip Morris Brands Sarl v Uruguay
“Manufacturers and distributors of harmful products such as cigarettes can have no expectation that new and more onerous regulations will not be imposed” (¶429)
“It should be stressed that the [Challenged Measures] have been adopted in fulfilment of Uruguay’s national and international legal obligations for the protection of public health” (¶302)
- Full details of this case can be found on our dedicated pages here.
- A summary of the key findings of the tribunal can be downloaded here.
Challenged Measures: (a) 80% front and back picture health warnings; (b) Single Presentation Requirement (SPR)
Request for Arbitration: Feb 2010
Award: July 2016
Grounds of Claim:
- The Challenged Measures expropriated the property rights in PMI’s trademarks without compensation;
- The Challenged Measures were arbitrary because they were not supported by evidence to show they would work and so did not accord PMI with Fair and Equitable Treatment;
- The Challenged Measures 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;
- The Uruguayan courts had not dealt properly or fairly with PMI’s domestic legal challenges such that there was a Denial of Justice.
Defense: Uruguay argued that they were implementing measures consistent with their obligations under the WHO FCTC. The measures were a valid exercise of sovereign powers, in that they were bona fide non-discriminatory regulations for the purpose of protecting public health. Uruguay put forward extensive evidence relating to the efficacy of large health warnings and the need to combat packaging that mislead consumers about the relative harms of tobacco brand variants.
The Tribunal granted permission to the World Health Organization and the Secretariat to the WHO FCTC to file a joint amicus curiae brief providing evidence in support of Uruguay’s measures and information about the WHO FCTC. The Tribunal also granted permission to the Pan-American Health Organization to file a separate amicus curiae brief. The tribunal relied heavily on these briefs and referred to them throughout the award. These are now available [link to resources and related links page of the PMI v Uruguay pages].
Ruling: The tribunal dismissed all Philip Morris’ claims.
- 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.
- It also pointed out that manufacturers of harmful products such as cigarettes should expect more onerous regulations are imposed on them.
Dissenting Opinion: The arbitrator appointed by Philip Morris, Gary Born, issued a dissenting opinion in which he agreed with the other two arbitrators on most points but dissented in respect of the SPR on the basis that, in his view, there had been “no meaningful internal discussion or consideration” of the SPR in the Ministry of Health. This contributed to his finding that it was an arbitrary measure breaching the fair and equitable treatment terms of the treaty. In addition he found there had been a denial of justice due to inconsistent decisions in different domestic courts.
Implications for other countries: This highly anticipated award addressed a number of fundamental legal issues concerning the balance between investor rights and the ability of states’ to regulate for public health under international investment law.
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. The case also adds to the growing number of judicial decisions that are establishing the WHO FCTC as an international legal norm making it increasingly difficult for the tobacco companies to bring legal challenges to the measures set out within the treaty.
The dissenting opinion emphasizes the need for Ministries of health to undertake robust internal decision making procedures for tobacco control measures and to keep a careful record of them.
Philip Morris Asia Limited v Australia
“The Tribunal cannot but conclude that the initiation of this arbitration constitutes an abuse of rights” (¶ 588)
Challenges Measure: Plain Packaging of Tobacco Products
Notice of claim: June 2011
Award on Jurisdiction: December 2015
Grounds of Claim: Philip Morris Asia (PMA) claimed that the plain packaging laws were in breach of the Bilateral Investment Treaty between Hong Kong and Australia. The basis of this claim, as set out in the notice of arbitration, was that plain packing ‘expropriated’ the intellectual property rights in the trademarks that Philip Morris used on its tobacco packets. PMA also argued that it had not been afforded ‘fair and equitable treatment’ by the Australia Government because, it claimed, the laws would damage its business but would not work to achieve the policy’s public health objective of reducing smoking rates.
Defense: Australia made substantive and procedural defenses in its response.
Australia denied that there was any expropriation of property. The laws were non-discriminatory regulatory actions of general application designed and adopted by the Australian Government to achieve the protection of public health. Australia denied an breach of the ‘fair and equitable treatment’ clause and set out the detailed procedural steps that had been taken in developing and adopting the laws, together with the evidence base and the international mandate provided by the recommendations in the Guidelines to the WHO FCTC.
But before the tribunal considers whether there was a substantive breach of the treaty, Australia claimed that there was no jurisdiction to hear the claim because Philip Morris Asia was not a genuine foreign investor.
Philip Morris Asia (based in Hong Kong) had only acquired its shareholding in the Philip Morris Australia business on 23 February 2011, 10 months after the Australian Government had announced, on 29 April 2010, that it would introduce plain packaging. Before that time the shares were owned by Philip Morris' parent company based in Switzerland. There was no investment treaty between Switzerland and Australia and it was argued that the changes in corporate structure were only made so that Philip Morris could take advantage of the investment treaty between Hong Kong and Australia. The Australian government argued that the initiation of the proceedings therefore constituted an ‘abuse of right’.
Ruling on Jurisdiction: In its award, the Tribunal agreed with the Australian Government’s argument that the initiation of the proceedings constituted an ‘abuse of rights’. The Tribunal concluded that, the dispute that materialized was foreseeable to PMA at the time of the restructuring. It held that ‘at least after the 29 April 2010 announcement, it was reasonably foreseeable that legislation equivalent to the Plain Packaging Measures would eventually be enacted and, consequently, a dispute would arise’. (¶569) The Tribunal concluded ‘that the main and determinative, if not sole, reason for the restructuring was the intention to bring a claim under the Treaty, using an entity from Hong Kong’ (¶584).
Implications for other Countries: The tribunal’s ruling is positive because it means that tobacco companies will not be able ‘treaty shop’ just by shifting their corporate structures. However, the parent companies of the four big tobacco corporations’ are incorporated in the UK, Netherlands and Switzerland. These countries have the some of the most bilateral investment treaties in force especially with lower- and middle-income countries. Therefore, there are many countries in the world where the tobacco companies could potentially bring claims under existing investment treaties without restructuring.
Trade Disputes
Australia — Plain Packaging
Complainant nations: Honduras; Dominican Republic; Cuba; and Indonesia (DS435, DS441, DS458 and DS467) (Ukraine also initiated a dispute but later withdraw the complaint in May 2015).
Commenced: April 2012, July 2012, May 2013, and September 2013. Complaints combined into one panel.
Ruling pending: The panel’s final report was due in the second half of 2017 but it has not yet been published. It has been reported that a leaked copy of the panel’s interim report shows that Australia has won the case.
Complaint: The complainant countries claim that Australia’s plain packaging laws fail to provide certain protections for trademark rights as required by the Trade Related Aspects of Intellectual Property (TRIPS) Agreement and unjustifiably encumber the use of those trademarks in breach of Article 20. They also claim that the laws are more trade restrictive that is necessary to fulfill the objective of the policy of reducing smoking rates and so breach Article 2.2 of the Technical Barriers to Trade (TBT) Agreement.
The claims largely rely on the complainants’ position that the policy will not work to reduce smoking and so is not necessary or justified. In making this argument the complaints seek to argue that advertising does not impact smoking related behavior and that packaging does not constitute advertising or promotion – typical tobacco industry arguments that have been dismissed by numerous courts around the world.
The claimants also rely on an argument that the TRIPS Agreement provides an implied right for a trademark owner to use its registered trademarks.
Defense: Australia argues that the policy is both justified and necessary and has put forward evidence which it says demonstrates that plain packaging will be effective at meeting the policy’s objectives of reducing the appeal of tobacco products, increasing the effectiveness of the health warnings and reducing the ability of packs to mislead consumers. It has commissioned an economic regression analysis that demonstrates one quarter of the reduction in smoking prevalence that occurred in the 34 months following implementation (0.55 percentage points) resulted from plain packaging. Australia states that the claimants have the burden of proving that plain packaging will make no contribution to its public health objective.
Australia further argues that the rights of trademark owners are set out clearly in TRIPS and these do not include a ‘right to use’ registered trademarks, but rather a right to exclude others from using the trademark. Any other reading of the TRIPS agreement would mean sovereign states could not restrict or prohibit the use of trademarks for any public policy reason.
An important aspect of Australia’s case is that its decision to implement plain packaging was based on the explicit recommendations in the FCTC Guidelines and that these amount to international standards such that Article 2.2 TBT does not apply to them. The panel’s analysis of the status of the FCTC and its guidelines under the WTO agreements will be a critical element its ruling.
Further information: 34 WTO member states have made third party submissions to the panel – more than any previous WTO dispute procedure, a demonstration of the critical issues that this panel is required to determine in the balance between issues of free trade and the rights of nations to regulate freely for public policy. The WHO and FCTC Secretariat have submitted an amicus curiae brief to the panel.
Philip Morris and British American Tobacco are providing financial and legal support to Dominican Republic and Honduras respectively to bring the WTO complaints.
There is almost no trade in tobacco products between the complainant nations and Australia. The only complainant national with any trade in tobacco products to Australia is Indonesia and the levels are extremely small (less than $4million of exports in 2013).
An executive summary of Australia’s submissions can be found here.
An executive summary of the Dominican Republic’s submissions can be found here.
Whatever the outcome of the dispute panel, it is likely that the case will be referred to the WTO Appellate Body. Parties have up to 60 days from the circulation of the panel report to notify their intention to appeal. The Appellate Body is supposed to circulate its report within 90 days of notification of appeal although it can often take longer.
The WHO FCTC Knowledge Hub has more information and links to the published documents from the case.
US — Clove Cigarettes
Complainant nation: Indonesia (DS406)
Commenced: April 2010
Decided: Panel report - Sept 2011; Appellate Body report - April 2012
Complaint: A US law prohibited the sale of cigarettes containing characterising flavours but exempted menthol from that ban. Indonesia argued that this was discriminatory treated Indonesian clove cigarettes less favorably than ‘like’ menthol cigarettes of US origin and that this violated Article 2.1 of the TBT Agreement and Article III:4 of GATT. Almost all clove cigarettes in the US were imported from Indonesia and almost all menthol cigarettes consumed in the US were domestically produced.
Indonesia also claimed that the measure was more trade restrictive than was necessary to achieve any legitimate health objective and so breached Article 2.2 of TBT.
Defense: The US argued that the measure is non-discriminatory because it applies to all flavored cigarettes irrespective of the place of origin and exempts all menthol cigarettes irrespective of origin. It also argued that the distinction between clove cigarettes and menthol cigarettes was made on health grounds (not because of where they were made). In particular the US argued that clove cigarettes were used disproportionately by young people whereas menthol cigarettes are attractive to youth and adult smokers and are smoked by millions of adults in the US.
The US further argued that the high volume of menthol cigarettes consumed meant that a ban would lead to increases in the illicit market.
Ruling: The panel found that each type of cigarette imparts a characterizing flavor that reduces the harshness of tobacco, and that each is attractive to youth and therefore they were ‘like’ products in terms of the regulatory objective being pursued. In other words they both posed an equal risk to public health. The Appellate Body found that the two products were in a competitive relationship with each other and so were ‘like’ products. The panel determined that less favorable treatment had to be in some way related to the foreign origin of the product but concluded that in this case it was because it held there was no legitimate health reason for treating the two products differently. The Panel found that the law breached TBT Article 2.1.
Importantly, the panel disagreed with Indonesia that the ban on flavors was more restrictive than was necessary to achieve health objectives. The panel found that there was a near unanimous scientific view that banning flavors would deter young people from smoking and it relied on the partial guidelines for Article 9 and 10 of the FCTC. Therefore the ban on flavours did not breach Article 2.2 of TBT.
Many public health commentators criticized the ruling on the basis that it interfered with the sovereign right of nations to protect public health by prioritizing trade issues in respect of a measure that was clearly intended as a public health measure.
Implications for other countries: The main implication for governments is that when considering a ban on flavored tobacco, the prohibitions should be applied to all characterising flavors, with no exemptions. As the WTO panel found, there is good evidence to support a prohibition on all flavors - exempting one particular flavor can undermine the public health objectives of the policy and potentially be found discriminatory.
More broadly, governments should take account of the ruling which indicates that tobacco products, even those in different categories, will ordinarily be considered ‘like’ products under WTO rules. Therefore if any tobacco regulation happens to fall hardest on imported products rather than domestically produced products, the regulating nation may need rely on good evidence of a legitimate public health reason (or other legitimate regulatory reason) for applying the measure to one product but not another.
Dominican Republic – Importation and Internal Sale of Cigarettes
Complainant Nation: Honduras (DS302)
Commenced: October 2003
Decision: Panel report - Nov 2004; Appellate Body report - April 2005
Complaint: Honduras complained about requirements that tax stamps be fixed to cigarette packs at the point of importation into the Dominican Republic. This meant that imported cigarettes had to be unpacked and stamped on importation which increased the costs as compared to domestically produced cigarettes where the stamps could be affixed during production.
Defense: The Dominican Republic tried to rely on Article XX(d) of the GATT, which permits measures necessary to secure compliance with laws or regulations which are themselves compatible with the GATT. Honduras argued that Dominican Republic could provide secure stamps for exporters. The Dominican Republic argued that these other means would be more subject to fraud or abuse.
Ruling: The measure resulted in less favorable treatment for imported cigarettes and so was in breach of Article III:4 of the GATT. The panel agreed with Honduras that there were less restrictive means of achieving the objectives.
Implications for other countries: This case did not rely on public health objectives. The concerns were about combatting illicit trade. WTO Members should be careful to ensure that measures to target specific points in the tobacco supply chain are necessary to secure compliance with the tax requirement and that there not less restrictive measures that could achieve the same objectives. In a globalized market at a time when many countries are considering complex track and trace systems to combat the illicit trade this is an important factor to take into account.
Thailand — Customs and Fiscal Measures on Cigarettes
Complainant Nation: Philippines (DS371)
Commenced: February 2008
Decision: Panel report - Nov 2010; Appellate Body report – June 2011.
Complaint: Philippines brought a claim against Thailand concerning treatment of Philip Morris cigarettes imported from the Philippines. The claim did not concern tobacco control measures but was about the tobacco tax system. Philippines complained about a prohibition on the import or export of tobacco products without a license and the refusal by Thai authorities to approve import permits over a lengthy period. Other complaints related to the process of Customs valuations of imported tobacco products because tariffs and taxes are based on the assessed value of the goods. Philippines complained that its tobacco imports were being overvalued as compared to the valuation of domestically produced products.
Defense: Thailand argued that the measures were necessary for enforcing legitimate tax laws. It also highlighted that Philip Morris International was both the exporter from Philippines and the Importer in Thailand and that the transactional value was lower than the true value of the imported cigarettes. Thailand also sought to rely on GATT Article XX(b) as a defense, arguing that the measures were necessary to protect human life or health.
Result: The Panel and Appellate body ruled against Thailand and found that the Thai measures were inconsistent with GATT which prohibits quantitative restrictions. Thailand had not properly made out its defense that the measures were necessary to protect human health. The panel 'accepted that smoking constituted a serious risk to human health and that consequently measures designed to reduce the consumption of cigarettes fell within the scope of Article XX(b)'. However other less restrictive measures were available such as banning cigarette advertising and increasing cigarette prices. It found that Thailand had departed from its standard methods for calculating VAT and this had the result of increasing tax on imported products but not domestic products.
Implications for other Countries: The outcome may have led to the price of imported cigarettes in Thailand reducing. The ruling also calls into question the ability of WTO members to raise questions about transactional costs where the importer and exporter are in effect one company. However, these issues do not impact on public health tobacco control measures. The outcome appears quite specific to the way in which the Thai laws were implemented. In addition, the use of taxes to reduce smoking rates are best applied by using taxes which apply equally to all tobacco products and using specific taxes rather than ad valorem taxes.