Australia prevails over Philip Morris in cigarette plain packaging case

Posted on 22 Dec 2015 by Aiden Burgess

Investor State Dispute Settlements still a concern say campaigners.

US cigarette company Philip Morris has been unsuccessful in its challenge of Australia’s plain packaging laws after an international arbitral tribunal dismissed the multinational’s claims that plain packaging was in breach of the Australia-Hong Kong bilateral investment treaty signed in 1993.

The tobacco giant and owner of Marlborough claimed that plain packaging of cigarette packets went against the bilateral investment treaty signed by the two countries, after it took the extraordinary measure of restructuring its investment through an Asian subsidiary based in Hong Kong to take advantage of the 22 year-old investment treaty.

But the international arbitral tribunal, comprised of Australia’s appointee, Professor Don McRae, Philip Morris Asia appointee, Professor Gabrielle Kaufmann-Kohler, and presiding arbitrator, Dr Karl-Heinz Böckstiegel, ruled in favour of the Commonwealth of Australia and dismissed Philip Morris’ claims in a Decision on Jurisdiction and Admissibility issued on December 17.

Philip Morris treaty shopping

As a US-based company without an existing investor dispute clause to utilise, Philip Morris therefore rearranged its assets to become a Hong Kong investor in Australia, so that it could use the process in the Hong Kong agreement.

The investor state dispute settlement (ISDS) in the Hong Kong treaty allows a single foreign investor, like Philip Morris, to sue the Australian Government for damages in a specially constituted international tribunal if a law or policy, such as the plain packaging legislation, harms an investment.

The Commonwealth of Australia was able to convince the international arbitral tribunal that Philip Morris should not be permitted to plead the merits of its case because it had engaged in ‘treaty shopping’ – as it was a US investor when the plain packaging laws were introduced, but became a Hong Kong investor as a ‘flag of convenience’ to take advantage of the Australia-Hong Kong bilateral investment treaty and therefore access arbitration.

Matter of jurisdiction not merit

Senior campaigner at Getup, Danny Faddoul, said that the tribunal had found that Philip Morris had no jurisdiction, rather than no merit, to run the case against the Commonwealth of Australia.

Faddoul said the finding against Philip Morris does not lessen concerns that organisations such as Getup, which is running a current campaign against the TPP, have about the use of ISDS clauses in the TPP and other free trade deals.

“It’s important to clarify that it’s not a case of the decision was that the case has no merit but rather that Philip Morris had no jurisdiction to run the case,” he said.

“The Australian Government had two defences to the Philip Morris ISDS suit, the first one was Philip Morris had no jurisdiction because they had gone through a complicated restructuring process to claim to be a Hong Kong company, in order to cover themselves under the Hong Kong investment treaty, with the ISDS provision.

“The second argument the Australian Government ran was the argument that they’ve got a public interest in regulating health matters, that trumps any issues that Philip Morris wanted to raise in terms of what they had lodged as part of the ISDS case.

“The ISDS panel only ruled on the jurisdiction issue, they said Philip Morris didn’t have jurisdiction to launch an ISDS case, so as a result they didn’t make a ruling on the second issues, which is whether the Australian Government has the right to pass laws in the public interest around health issues, which trumps any claims or rights that Philip Morris believe that they had.”

The attempt by Philip Morris to use the Australia-Hong Kong treaty as a means of challenging and trying to overturn the plain packaging laws introduced in 2011 illustrates the wider dangers for public health resulting from free trade agreements.

Despite being unsuccessful after losing in the Australian High Court in 2012, Philip Morris thought it could still win its case at an international arbitral tribunal because the rules of international investment tribunals suit international investors, due to lacking the transparency and independence of national court systems.

Generally, the tribunal’s main focus is whether the investor has been harmed, not whether the legislation is in the public interest.

Other recent ISDS claims

Two cases in recent years lodged under the investor dispute rules of the North American Free Trade Agreement demonstrates the environmental effects on communities that result from free trade agreements.

A US mining company sued the Quebec provincial government for $250m over its decision for a moratorium on hydraulic fracking for coal seam gas, while the second case involved a US pharmaceutical company, Eli Lilly, lodging a claim against a Canadian decision to deny a patent for a ‘copycat’ drug, and to allow cheaper generic versions of the drug on to the market.

The investor state dispute settlement process used by Philip Morris in its legal challenge is a dangerous example of the practices used by corporations to challenge legislation.

The high cost of investor state dispute settlements makes the threat of arbitration and the subsequent costly legal defences from countries a potent legal weapon for the tobacco giants and other companies.

Unsubstantiated reports from publications such as the Sydney Morning Herald, indicated that Australia has spent $50m defending plain packaging in arbitration. But the Australian Attorney General’s office handled the case internally and did not outsource the case to an external law firm. It did use external barristers and international law experts in an advisory capacity, but convincing the tribunal to separate jurisdictional issues from the merits of the case and subsequently winning on jurisdiction was the fastest and cost effective way to have this case dismissed.

In contrast, Philip Morris’s treaty claim against Uruguay, which has proceeded to the merits of the case, has meant that Uruguay had to seek the support of an external law firm, resulting in higher costs. These costs have only been partially offset by generous support from a Michael Bloomberg established foundation.

Cigarettes vs the UK

After its unsuccessful attempt to overturn Australia’s plain packaging laws, Philip Morris will now turn its attention to taking on the UK government’s bid to remove all branding from cigarette packages from May 2016.

The new rules will force tobacco companies to sell their cigarettes in plain brown packs, with logos replaced by images of the diseases smoking can cause.

Philip Morris, as well as fellow tobacco companies British America Tobacco, Imperial Tobacco and Japan Tobacco International are suing the British government for infringing their trademark and intellectual property rights as a result of the government’s plain packaging legislation set to come into effect in May.

Philip Morris announced in August that it would “seek fair compensation” in response to the UK government’s decision to implement plain packaging from May 2016, stating that “Philip Morris International (PMI) is prepared to protect its rights in the courts and to seek fair compensation for the value of its property.”

Philip Morris said the value of this compensation could total “billions of pounds”, a figure it signified it hoped to seek in its submission to the UK Department of Health.

In its submission, Philip Morris quoted a 2014 Exane BNP Paribas report which estimated the value of compensation could be between £9b and £11b for tobacco branding in the UK.

As well as the large compensation figures which could be awarded to the tobacco companies and the potential ruling that their intellectual property rights were infringed by the plain packaging rights without compensation, the landmark hearing could have a domino effect across Europe, with 20 countries including France and Belgium also considering introducing similar plain package legislation.

With plain packaging legislation being implemented in countries such as Australia, Ireland and next year in the UK, the tobacco industry has responded by opposing the legislation by claiming that there is no proof that plain packaging reduces smoking. However a recent report report showed figures supporting the results of plain packaging.