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Argument: Reactionary Regulation

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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.

British American Tobacco of Peru S.A.C. v. Congress of the Republic [Peru] [July 22, 2015]

British American Tobacco of Peru sued the Congress of the Republic, challenging the prohibition on sales of tobacco packages containing less than 10 cigarettes alleging that such a prohibition violates the freedom of enterprise and industry. This decision, from a Civil Chamber, rejects British American Tobacco’s appeal of the initial decision which had rejected the lawsuit. The Chamber agrees with the first decision and finds that the measures comply with the proportionality principle.

British American Tobacco of Peru S.A.C. v. Congress of the Republic [Peru] [July 24, 2014]

British American Tobacco of Peru sued the Congress of the Republic, challenging the prohibition on sales of tobacco packages containing less than 10 cigarettes alleging that such a prohibition violates the freedom of enterprise and industry. This decision, from the Specialized Constitutional Court of Lima, rejects British American Tobacco’s claim, after performing a proportionality test of the measure.

Philip Morris (Thailand) Limited et al. v. Ministry of Public Health [Thailand] [August 23, 2013]

Tobacco manufacturers brought case to stop the Minister of Public Health from implementing a rule that would expand the size of the combined picture and text health warnings from 55% to 85% of the front and back of cigarette packaging. The tobacco companies argued, among other things, that the Minister lacked the legal authority to make the rule, the rule infringed on their property rights, and that the rule did not meet necessity and proportionality standards under administrative law.  The court granted a temporary injunction, preventing implementation of the larger health warnings until the court issues a final decision on the merits of the case.  

Sinclair Collis Ltd. v. Lord Advocate for Scotland [United Kingdom] [October 10, 2012]

A tobacco vending machine company challenged the legality of a section of a tobacco control law prohibiting tobacco vending machines. The petitioner argued that the law violates the right to free movement of goods between EU member states and infringes their right to property.  In this appellate decision, the court looked to the treaties in addition to European Court of Justice and UK case law to test the proportionality of the Scottish law.  Agreeing with the lower court’s finding that the law was necessary and appropriate to the goal of protecting the health and safety of young people, the court upheld the ban on vending machines for tobacco products.

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.

R.J. Reynolds Tobacco Co. v. U.S. Food & Drug Administration [United States] [February 29, 2012]

Five tobacco companies sued the U.S. Food and Drug Administration over a regulation requiring companies to label tobacco products with one of nine graphic warnings. The companies argued that the government-mandated warning infringed upon the companies’ First Amendment right to free speech.  In order to assess the claim, the district court first determined that the graphic warnings did not fall into the narrow exception that allowed government-mandated disclosures when protecting consumers from confusion or deception.  Without the exception, the court was required to view the graphic warnings using the most stringent standard of judicial review. The court found that the government’s purpose was not to inform or educate smokers but to encourage cessation and discourage potential new smokers. This purpose could have been accomplished using a variety of other methods that would not have infringed upon the companies’ First Amendment rights.  Because the government had other options, the graphic warnings were not narrowly tailored enough to allow for the infringement.  The court concluded that the images violated the First Amendment and found in favor of the tobacco companies.

5000 Citizens v. Article 3 of Law No. 28705 [Peru] [July 19, 2011]

Five thousand Peruvian citizens brought action before the Constitutional Court challenging the constitutionality of an article of the tobacco control law that completely prohibits smoking in certain public places, including outdoor areas of educational facilities.  They argued that these limits infringed on the right to personal autonomy, right to commerce, and right to economic freedom and that smoking should be allowed in outdoor areas of institutions for higher learning for adults and in special smoking areas. The Court dismissed the plaintiffs' suit and confirmed the constitutionality and legality of the law. The Court held that the law was strictly proportional, placing the right to health above the alleged violated rights, and that the smoking ban was the ideal means to comply with provisions of the Framework Convention on Tobacco Control (FCTC) that require protection from exposure to tobacco smoke. 

Izmir Association of Coffeehouses v. Prime Minister [Turkey] [February 26, 2011]

Coffeeshops owners challenged a national smoke-free law which applied to all restaurants including coffeehouses. The owners claimed the law violated the constitutional guarantees of private enterprise, property rights, freedom, equality, as well as the principles of proportionality and necessity. The court rejected the owner's arguments, and upheld the smoke-free law.

Mercier, et al. v. Correctional Service of Canada, et al. [Canada] [October 23, 2009]

The Commissioner of the Correctional Service of Canada published a new directive banning both indoor and outdoor smoking in federal prisons, with only a religious exception. Prisoners challenged the constitutionality and validity of the directive. The Court held that the directive went too far because the blanket ban is not the least restrictive means to protect non-smokers from second-hand smoke.

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