Australia-Hong Kong investment ruling released in plain packaging case

ICTSD | 25 May 2016

Australia-Hong Kong investment ruling released in plain packaging case

An investor-state investment dispute tribunal has published a redacted version of its decision in the high-profile case between Australia and the Asian subsidiary of Philip Morris, the tobacco giant, concerning the ramifications of Canberra’s plain packaging laws on the company’s Australian investments.

While the tribunal’s decision was made last December, it was only made public this month.

Under Australian law, tobacco goods cannot use logos, brand imagery, or promotional text, and must be sold in packaging that is uniform in size, colour, and format, among other rules.

In the dispute, Philip Morris (PM) Asia claimed that the policy went against the 1993 Australia-Hong Kong Bilateral Investment Treaty (BIT), unlawfully expropriating the company’s investment by effectively “banning” its trademarks and failing to provide that investment with fair and equitable treatment, full protection, and security.

A bilateral investment treaty (BIT) is usually signed by two countries for supporting and protecting investments made across country lines, and also features rules for adjudicating disputes between a foreign investor and a home state.

PM Asia also asked the tribunal to order Australia not to apply the plain packaging policy to its company’s cigarettes, and argued in favour of at least US$4.16 billion in compensation.

In the decision published last week, the tribunal deemed that PM Asia was “abusing” the investor-state arbitration process in the plain packaging case, and therefore rejected the company’s claims and declined to exercise jurisdiction over the dispute.

Australian legislation

Whether to institute plain packaging legislation was a debate in Australia that dated back decades, to the early 1990s. Between 2008 and 2009, Canberra undertook research and impact studies to determine what policy options may be available to address the growing problem of smoking, with a national taskforce recommending in June 2009 that plain packaging could be an important preventative health measure.

Australia’s parliament approved plain packaging legislation in 2011, with the changes taking effect from late 2012, in an effort to allow companies the necessary time to revise their manufacturing and sales processes.

This tobacco control measure aims to reduce Australia’s smoking rates, and has been touted as a key policy for fighting cancer and other tobacco-related diseases.

According to figures from the country’s Department of Health, smoking is responsible for the deaths of approximately 15,000 Australians annually. The economic ramifications, the agency says, add up to A$31.billion in annual costs.

In recent years, however, tobacco sales in the country have fallen to their lowest ever, with some health surveys showing a drop in smoking rates for key age demographics.

Philip Morris Asia in the picture

Philip Morris International Inc. (PMI) is among the leading sellers of cigarettes, with subsidiaries and affiliates spread out across various parts of the world.

In September 2010, PMI restructured the ownership and functions of several international affiliates. The following year, PM Australia was acquired by Philip Morris Asia Limited (PM Asia), a limited liability company incorporated under Hong Kong laws.

Under the Australia-Hong Kong BIT, Philip Morris Asia filed an investor-state suit against Australia in 2011, with the case being adjudicated under the Arbitration Rules of the United Nations Commission on International Trade Law as revised in 2010 (the UNCITRAL Rules).

A three-member tribunal was set up in May 2012 to hear the case, with the Permanent Court of Arbitration (PCA) acting as the registry in the arbitration. Two years later, the tribunal decided to split the process into two sections, first dealing with issues of jurisdiction and admissibility before dealing with substantive concerns.

The award

In the 2015 December award, the tribunal found, among other issues, that prior to the 2011 restructuring, all significant strategic and budgetary decisions of PM’s Australia subsidiary were taken by or subject to approval by PMI, rather than PM Asia.

Therefore, the tribunal said, PM Asia failed to prove that before its 2011 acquisition of PM Australia, it already held “control” with a “substantial interest” over the Australian investments within the meaning of the BIT. However, the three-member panel confirmed that PM Asia has Australia-based investments subject to BIT protection through restructuring undertaken in 2011, and that this occurred before the plain packaging policy became law.

Nevertheless, the tribunal considered that the main and determinative reason for the 2011 restructuring was in order for the tobacco giant to bring a legal claim under the BIT Treaty, using a Hong Kong-based entity.

The tribunal concluded that “the commencement of treaty-based investor-State arbitration constitutes an abuse of right (or abuse of process) when an investor has changed its corporate structure to gain the protection of an investment treaty at a point of time where a dispute was foreseeable.”

To reach this conclusion, the tribunal referred to records about the company restructuring process, including legal advice on how the tobacco company could protect its investments through international treaties, specifically in the context of plain packaging.

In rejecting Philip Morris’ argument that plain packaging was not “reasonably foreseeable” before the 2011 restructuring, the tribunal said that the timeframe of the legislative process in Canberra for introducing the plain packaging policy is normal for democratic states and therefore not decisive in determining whether the measure could be “foreseen.”

The Australian government has been consistent in its support of plain packaging, with the tribunal affirming that “what became uncertain was not whether the Government intended to introduce plain packaging, but whether the Government could maintain a majority or would be replaced.”

The tribunal therefore dismissed Philip Morris’ claims and ended the dispute proceedings, with the exception of a pending decision regarding the costs of arbitration.

Other legal fights, global policy context

This is not the first time that Australia’s plain packing legislation has faced legal action. For example, the law already faced a constitutional challenge domestically, brought by British American Tobacco and Japan Tobacco International. The challenge failed, with Australia’s High Court upholding the law. (See Bridges Weekly, 12 September 2012)

The issue has also been raised at the WTO, with Cuba, the Dominican Republic, Honduras, Indonesia, and Ukraine all filing complaints with the global trade body in 2012 and 2013, citing concerns that the policy is unnecessarily trade restrictive. By undermining protections provided to trademarks and geographical indications, they say, it is difficult for their premium products to stand out in the marketplace, thus affecting their ability to compete on a level playing field. (See Bridges Weekly, 1 May 2014)

While Ukraine later dropped dispute settlement proceedings, opting to seek a mutually agreed solution with Australia, a panel has been set up to hear the other cases together, with its report expected this year. (See Bridges Weekly, 11 June 2015)

Despite the pending WTO ruling, other countries have advanced in adopting their own versions of plain packaging legislation, particularly given the provisions of the World Health Organization’s (WHO) Framework Convention on Tobacco Control, a global treaty that has been in force since 2005.

The Geneva-based health agency estimates that tobacco is responsible for at least six million deaths annually, with nearly 80 percent of the world’s estimated 1 billion smokers based in countries on the lower to middle end of the income spectrum. The costs of tobacco deaths and illness, according to the UN health agency, are manifold, and can pose a significant hindrance for economic development.

Some of the recent policies being adopted domestically to tackle tobacco through plain packaging have prompted legal challenges, often backed by major tobacco companies.

For example, the UK’s plain packaging policy, approved by lawmakers last year, has faced multiple complaints from several tobacco companies in front of the High Court in London, with the suits struck down earlier this month. (See Bridges Weekly, 19 March 2015)

Separately, the European Court of Justice also confirmed this month that the 28-nation bloc has the legal right to adopt its own packaging legislation, among other tobacco control measures.

Additionally, the recently-signed Trans-Pacific Partnership (TPP) Agreement contains a “carve-out” for tobacco control measures from investment arbitration. In other words, a party to the trade pact can choose not to permit investor-state dispute settlement for tobacco control-related claims. (See Bridges Weekly, 12 November 2015)

That agreement, while signed, is now in the ratification stages for the 12 current signatories. (For more on the TPP, see related story, this edition)

ICTSD reporting; “U.K. Court Strikes Down Tobacco Industry Challenge to Plain Packaging,” WALL STREET JOURNAL, 19 May 2016; “European Court of Justice Upholds Strict Rules on Tobacco,” THE NEW YORK TIMES, 4 May 2016.

source: ICTSD