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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 ($7million).
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.
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 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).
Grand River Enterprises Six Nations, Ltd., et al. v. US [United States] [January 12, 2011]
Several members of the tobacco industry contended that actions taken by various states in the U.S. to implement the 1998 Master Settlement Agreement violated their rights under NAFTA. The Tribunal found that it lacked jurisdiction over all but one of the claimants. The Tribunal ruled against the surviving claimant, finding that contrary to the claimants' expropriation claim, the claimant had not been deprived of ownership or control of his business importing and distributing cigarettes, he did not establish that he had been denied national or most-favored-nation treatment, and he failed to establish that his treatment did not conform to the customary minimum standard of treatment required by NAFTA.
Arnold Andre v. Landrat des Kreises Herford [European Union] [December 14, 2004]
A snus importer challenged the validity of a European Directive that directs member states to prohibit the marketing of any tobacco products designed for oral use, except those tobacco products designed to be smoked or chewed. The Court held that the Directive properly derived its authority from Article 95 EC, which provided the community with rule-making authority to ensure the internal consistency of the community market. The Court further held that adoption of the Directive was supported by sufficient scientific evidence and it satisfied the principles of proportionality and of non-discrimination. The Court approved of the adoption of the Directive and sent the case back to the national courts for further proceedings.
Feldman v. Mexico [Mexico] [December 16, 2002]
The claimaint, a US citizen and permanent resident of Mexico, operated a cigarette exporting business from Mexico. He sought damages from Mexico, alleging that various government taxation measures had resulted in a creeping expropriation of his property in contravention of Article 1110 of the North American Free Trade Agreement (NAFTA). The claimant further alleged that Mexico's taxation measures violated NAFTA Articles 1102 (national treatment) and 1105 (minimum level of treatment).
The facts of the case are somewhat convoluted; essentially, at all material times Mexico imposed a tax on the domestic sale and production of cigarettes, but no tax exported cigarettes. Domestic producers and re-sellers of cigarettes were still required to pay the tax, but were entitled to a rebate on export.
Due to industry agreements in the domestic market, the claimant's company was not able to buy cigarettes directly from producers but was forced to purchase them from bulk sellers such as Walmart. The cigarettes purchased by the company included the amount of the domestic tax, but the claimant was not always able to obtain the rebate on export because the invoices it supplied did not separately identify the amount of the tax. This led to a long-running dispute with the Mexican government: at various times the company was paid rebates notwithstanding the deficient invoices; at other times it was not. The law always remained the same but the enforcement of it changed from time to time. Finally, in December 1997, the law was amended to bar rebates to cigarette resellers such as the claimant's company, limiting rebates to the "first sale" in Mexico.
The Tribunal found that Mexico's taxation measures did not result in an indirect expropriation of the claimant's property because, amongst other things, the taxation measures were within the police power of the state: not every business problem experienced by an investor amounts to an expropriation. Further, neither NAFTA nor customary international law required Mexico to permit a "grey market" in cigarettes. The taxation measure could be rationally explained as directed to discouraging smuggling back into Mexico and to maintain high cigarette taxes to discourage smoking.
Notwithstanding that the claimant was unsuccessful on the expropration claim, the Tribunal found in his favor on the national treatment claim. The Tribunal found that there were domestic resellers in like circumstances with the claimant that were accorded more favorable treatment, because they were granted rebates at a time when the claimant was refused them. The claimant was accordingly awarded $9,464,627.50 Mexican pesos in damages, plus interest.
Note that Tribunal Member Mr Jorge Covarrubias Bravo dissented from this decision. The dissenting opinion, the Spanish language version of this decision, and other related decisions, are all uploaded here under "Related Documents".