For
nearly two decades, the tobacco industry has used international investment
rules to challenge government restrictions on cigarette marketing. In 1994,
R.J. Reynolds Tobacco Company threatened to bring a claim under the North
American Free Trade Agreement`s (NAFTA) investment chapter as part of its
successful lobbying campaign against Canada`s proposed “plain packaging”
legislation, which would have required that all cigarettes be sold in
standardized packaging without logos or trademarks. More recently, Philip
Morris has brought an investor-state claim challenging Uruguay`s restrictions
on cigarette packaging, and formally threatened the government of Australia
with an arbitration claim in response to its packaging rules.[i]
Philip
Morris`s challenge to Uruguay`s tobacco regulations raises a number of
fascinating (although not entirely new) issues concerning international
investment law, including the scope of fair and equitable treatment, the use of
most favored nation (MFN) provisions to invoke more lenient procedural
standards, and the availability of injunctive relief in investment arbitration.
The legal basis of Philip Morris`s notice of claim against Australia has not
yet been publicly disclosed, but the case promises to be closely watched in
Australia and abroad.
Perhaps
even more interesting, however, will be the response of governments to this use
of investor-state arbitration in the politically sensitive context of tobacco
regulation. Philip Morris has lobbied the United States Trade Representative
(USTR) to include strong investment protections for tobacco trademarks in the
proposed Trans-Pacific Partnership Agreement (TPPA). Australia, in turn, has
announced that it will oppose the inclusion of investor-state arbitration in
its future free trade agreements, including the TPPA, due in part to the threat
of challenges to its proposed plain packaging rules. The reaction to Australia`s
stance by the United States government, which is legally prohibited from
promoting tobacco exports or seeking the removal of non-discriminatory tobacco
regulations, will merit particular attention.
Threat
of investment arbitration used against Canada`s plain packaging proposal
Canadian
parliamentarians first seriously considered plain packing as a regulatory
option in early 1994. The tobacco industry had just won a lengthy campaign to
roll back high tobacco taxes, and Parliament sought to offset the health
effects of lower taxes by implementing plain packaging regulations.[ii]
Given
the widespread concern for tobacco`s negative health effects, the tobacco
industry was wary of debating plain packaging as a health issue. The industry
saw trade and investment rules, especially those included in the recently
enacted NAFTA, as an effective way to frame plain packaging as a legal issue
divorced from health concerns.[iii] Relying on NAFTA`s investment chapter, R.J.
Reynolds Tobacco Company sent a memorandum to the House of Commons Standing
Committee on Health arguing that plain packaging would constitute an illegal
expropriation of a legally protected trademark, requiring Canada to pay
hundreds of millions of dollars in compensation.[iv]
The
mere threat of investment arbitration had a powerful impact on Parliament`s
deliberations on plain packaging. Although it was the Canadian Supreme Court`s
invalidation of Canada`s Tobacco Products Control Act in 1995 that ultimately
put the plain packaging debate to rest, the NAFTA threat is widely believed to
have deterred the government from taking legislative action on plain packaging
prior to the Court`s ruling.[v]
Philip
Morris v. Uruguay
On
19 February 2010, Philip Morris filed a request for arbitration against Uruguay
with the International Centre for Settlement of Investment Disputes (ICSID).
Philip Morris alleges that recent tobacco regulations enacted by Uruguay
violate several provisions of the Switzerland-Uruguay bilateral investment treaty
(BIT).[vi] Specifically, Philip Morris is challenging three provisions of
Uruguay`s tobacco regulations: (1) a “single presentation” requirement that
prohibits marketing more than one tobacco product under each brand,[vii] (2) a
requirement that tobacco packages include “pictograms” with graphic images of
the health consequences of smoking (such as cancerous lungs),[viii] and (3) a
mandate that health warnings cover 80% of the front and back of cigarette
packages.[ix]
All
three measures, Philip Morris argues, violate Article 3(1) of the BIT, which
prohibits subjecting investments to “unreasonable” measures, because they are
overbroad and bear no rational relationship to their purported public health
objectives.[x] Philip Morris further alleges that the single presentation
requirement constitutes an expropriation of Philip Morris`s trademarks by
prohibiting their use on multiple brands.[xi]
The
scope of fair and equitable treatment
Philip
Morris`s most interesting claims implicate one of the more persistent areas of
debate in international investment law: the scope of the rights provided under
the “fair and equitable treatment” provisions of investment treaties. The most
restrictive interpretation of this language (and the position that the United
States has taken since 2002) is that it merely reflects the customary
international law standard of protection that is already guaranteed to foreign
investors under the right to the “minimum standard of treatment” under
international law.
Philip
Morris, however, asserts some of the more expansive interpretations of fair and
equitable treatment, including a right to a “stable and predictable regulatory
framework.” This right, Philip Morris argues, was violated by Uruguay`s single
presentation and pictogram requirements, which frustrated its “legitimate
expectations” concerning its investment in Uruguay.[xii] Philip Morris also
argues that Uruguay has denied it fair and equitable treatment by violating the
World Trade Organization`s Agreement on Trade Related Aspects of Intellectual
Property Rights (TRIPS), implicitly adopting the controversial position that
fair and equitable treatment includes rights under treaties in addition to
customary international law.[xiii]
Philip
Morris`s request for arbitration also raises interesting procedural questions
concerning the use of MFN clauses to avoid procedural obligations and the
availability of injunctive relief in investment arbitration.
Injunctive
relief as a remedy in investor-state arbitration
In
addition to monetary damages, Philip Morris is requesting that the tribunal
order Uruguay to suspend the application of the challenged regulations.[xiv]
Investor-state tribunals typically provide relief in the form of monetary
damages; there has been relatively little discussion of the availability of
injunctive relief. At least one prominent commentator, however, has concluded
that “the [ICSID] Convention`s drafting history indicates that an ICSID
tribunal has the power not only to award monetary damages, but also to order a
party to perform a specific act or to desist from a particular course of
action.”[xv]
Using
MFN provisions to bypass procedural requirements
Prior
to bringing an investor-state claim, Article 10 of the Switzerland-Uruguay BIT
requires an investor to attempt to negotiate a resolution of a dispute with the
host country for at least six months, and then to attempt to litigate the
dispute through the domestic courts of the host state for at least eighteen
months. Philip Morris argues, however, that it need not comply with either
requirement because the BIT contains an MFN provision that entitles
it
to the standard of treatment that Uruguay provides to investors from other
countries under BITs that permit investors to proceed directly to arbitration.
A
similar strategy was used in the well-known Maffezini v. Spain arbitration to
bypass a provision in the Argentina-Spain BIT that requires an investor to
pursue available domestic remedies for at least eighteen months before bringing
an arbitration claim.[xvi] Other tribunals have rejected attempts to use MFN
clauses in investment treaties to gain access to more favorable dispute
settlement provisions in other agreements.[xvii]
Tobacco
regulations and the Trans-Pacific Partnership Agreement
The
potential use of investment arbitration to challenge tobacco regulations has
also become a source of controversy in the negotiations on the TPPA, a free
trade agreement being negotiated by Australia, Brunei, Chile, Malaysia, New
Zealand, Peru, Singapore, the United States and Vietnam. Philip Morris has
moved aggressively to use the TPPA negotiations to limit restrictions on
tobacco marketing. In comments submitted to USTR, Philip Morris argued that
Australia`s plain packaging regulations would be “tantamount to expropriation”
of its intellectual property rights, and complained of the broad authority
delegated to Singapore`s Minister of Health to restrict tobacco
marketing.[xviii] In order to address these “excessive legislative proposals,”
Philip Morris urged USTR to pursue both strong protections for intellectual
property and inclusion of the investor-state dispute settlement mechanism in
the TPPA.
More
recently, Philip Morris served the government of Australia with a notice of
claim, setting in motion a three-month period of negotiation before arbitration
proceedings can be commenced. Philip Morris is relying on the Australia-Hong
Kong BIT, as its Australian operations are owned by the Hong Kong-based Philip
Morris Asia Limited. Announcing the notice of claim on 27 June 2011, a
spokesperson for the company said “damages may amount to billions of dollars”.
Australia
renounces investor-state arbitration and greater rights for foreign investors
Even
before its notice of claim was sent in June, Philip Morris`s aggressive use of
investment law to challenge tobacco regulations may have backfired. In April,
Australia`s government announced that it would no longer support the inclusion
of investor-state arbitration in its free trade agreements, explicitly linking
its new position to the attempts to “limit [Australia`s] capacity to put health
warnings or plain packaging requirements on tobacco products . . .”[xix]
Significantly,
Australia also indicated that it would support equal treatment for foreign and
domestic investors, but would oppose provisions in future agreements that would
provide foreign investors with greater rights. This stance echoes the Calvo
Doctrine that many Latin American governments once espoused, as well as the
United States Congress`s mandate that U.S. investment agreements should not
provide foreign investors with greater substantive rights than those enjoyed by
domestic investors.[xx]
Australia`s
initiative on plain packaging is consistent with its status as a Party to the
World Health Organization Framework Convention on Tobacco Control (FCTC), the
world`s first global public health treaty. Article 11 of the FCTC requires all
signatories to enact strong packaging and labeling regulations, consistent with
those enacted in Uruguay and proposed in Australia.[xxi] Another prospective
member of the TPPA and signatory to the FCTC, New Zealand, has indicated that
it may also impose plain packaging regulations on tobacco products,[xxii]
further heightening tension over the issue in the TPPA negotiations.
Conflict
between investment rules and U.S. law supporting tobacco regulations?
The
controversy over plain packaging regulations and investor-state arbitration
puts the United States in an awkward position in the TPPA negotiations. Since
1997, an amendment to the annual appropriations bill sponsored by Congressman
Lloyd Doggett has prohibited USTR from using government funds—
to
promote the sale or export of tobacco or tobacco products, or to seek the
reduction or removal by any foreign country of restrictions on the marketing of
tobacco or tobacco products, except for restrictions which are not applied
equally to all tobacco or tobacco products of the same type.[xxiii]
Executive
Order 13193, signed by President Clinton in 2001, similarly prohibits U.S.
agencies from promoting the sale or export of tobacco or seeking to reduce or
remove foreign governments` advertising restrictions on tobacco products.[xxiv]
Arguably,
USTR routinely violates these restrictions by negotiating provisions in U.S.
trade agreements that potentially restrict the ability of governments to
regulate the marketing of tobacco products. U.S. FTAs typically include many of
the same provisions that Philip Morris is currently invoking in its arbitration
against Uruguay, including protection for intellectual property rights,
investor-state dispute settlement, a prohibition on uncompensated
expropriation, and a guarantee of “fair and equitable treatment.” Nevertheless,
in light of the significant media coverage that Australia`s stance on plain
packaging and investor-state arbitration has received, it appears likely that
USTR`s compliance with the Doggett Amendment and Executive Order 13193 in the
TPPA negotiations will attract substantial scrutiny.
Conclusion
The
tobacco industry`s aggressive use of investment rules could prove to be an
effective strategy for opposing restrictions on tobacco marketing. Yet given
the widespread support for tobacco regulations, it seems just as plausible that
this strategy could result in a backlash against investor-state arbitration.
Accordingly, the growing tension between tobacco regulations and investor-state
arbitration should be a subject of interest not only for tobacco companies and
public health advocates, but also for anyone interested in the future of
investor-state arbitration.