Treaty shopping: How Philip-Morris cherry-picked worst case BITs | December 2, 2012

Treaty Shopping: How Philip-Morris Cherry-Picked Worst Case BITs

by Matthew Webb

Tobacco giant, Philip-Morris, has recently bought actions under investor-State arbitration mechanisms in investment treaties to challenge laws limiting (in Uruguay) or prohibiting (in Australia) the display of its trademarks in tobacco packaging. This has caused the Australian government to take a strong stance against any investor-State arbitration provisions in free trade agreements (FTAs), including exemptions from the proposed investor-state settlement provisions of the Trans Pacific Partnership Agreement (TPP), currently being negotiated. However, a closer look reveals a broad collection of older treaties that do not contain exceptions in modern treaties that could have avoided this situation. As a multinational-enterprise, Philip-Morris has attempted to evade these exceptions by going through subsidiaries to bring claims under more favorable treaties. This reveals that Australia’s new stance against investor-State arbitration may do nothing to prevent similar claims being brought in the future.

Investor-State Arbitration Provisions: Not All Treaties are Created Equal

In recent times, a vast proliferation of Bilateral Investment Treaties (BITs) and FTAs has created spaghetti bowls (and noodle bowls in Asia) with ridiculously complex frameworks for countries and investors to navigate. To date, Australia has already entered into a number of treaties that include mechanisms allowing investors to bring action against expropriation of assets, including intellectual property, outside Australia’s domestic courts. These include FTAs with ASEAN and New Zealand, Chile, Thailand, and Singapore; and BITs with Argentina, China, the Czech Republic, Egypt, Hong Kong, Hungary, Indonesia, Lao PDR, Lithuania, Pakistan, Philippines, Poland, Romania, Uruguay, and Viet Nam. The Australia – US FTA also states that the US and Australia “should consider” allowing investors to bring claims against the parties, but does not mandate it. Uruguay also has entered into treaties with investor-State arbitration mechanisms, includes BITs with the U.S. and Switzerland (in French).

Among these 19 Australian treaties with investor-state arbitration procedures (and the US treaty where it is optional), language varies concerning exceptions for limitations for intellectual property rights. The broadest language of these treaties contains two circumstances where exemptions are giving to expropriation obligations: for compulsory licenses and for “the revocation, limitation, or creation of intellectual property rights.” The language most often uses the following wording:

This Article does not apply to the issuance of compulsory licences granted in relation to intellectual property rights in accordance with the TRIPS Agreement, or to the revocation, limitation, or creation of intellectual property rights, to the extent that such revocation, limitation, or creation is consistent with [Chapter on Intellectual Property].

This language is found in the Australian FTAs with Chile, Singapore, and the US. It is also found in the US-Uruguay BIT and in the current US Model BIT (however these treaties direct to TRIPS instead of the IPR Chapter of the FTA). The ASEAN-Australia-New Zealand FTA and the Australia-Malaysia FTA (which does not have investor-State dispute resolution) include exceptions for compulsory licenses but not for “the revocation, limitation, or creation of intellectual property rights.”

Language within the Intellectual Property Chapters of many of the FTAs and in TRIPS allows for limitations for IP rights. Excerpts concerning limitations for trademarks from these treaties are often worded similar to the following language:

Each Party may provide limited exceptions to the rights conferred by a mark, such as fair use of descriptive terms, provided that such exceptions take account of the legitimate interest of the owner of the mark and of third parties. (US-Australia FTA, Article 11.7(5))

Additionally, TRIPS, expressly grants countries the right to pursue public health measures in relation to IPR obligations

Members may, in formulating or amending their laws and regulations, adopt measures necessary to protect public health . . . provided that such measures are consistent with the provisions of this Agreement. (TRIPS, Article 8.1)

The remaining English treaties, the Thai FTA and every Australian BIT with investor-State Dispute provisions (the Uruguay-Swiss BIT is only in French), provide no exceptions for exercising any limitation on intellectual property rights. These treaties give multinational enterprises the biggest room to challenge national laws that relate to intellectual property rights and public policy. This is seen directly in each of Philip-Morris’s actions.

The Philip-Morris Case

Following the enactment of the Tobacco Plain Packaging Act 2011, Philip-Morris Asia brought a claim against the provisions of the act under the Australian-Hong Kong BIT. The company is claiming that the prohibition of the use of their intellectual property on tobacco packages constitutes an expropriation, to which they are entitled to compensation under international investment commitments by Australia.

The first thing you should notice is that it is brought by Philip-Morris Asia, even though its parent company, Philip-Morris International, is incorporated in Virginia. Philip-Morris Asia, however, is located in Hong Kong.

So why didn’t this American company go through the American treaty? Because that treaty (1) does not guarantee investor-state dispute, and (2) provides for exemptions to expropriation obligations for limitations on intellectual property rights. Phillip-Morris faced a greater likelihood of failure under the US treaty.

The Hong Kong BIT is also a particularly good choice for Phillip-Morris because, unlike other treaties, it does not include prohibition on claims brought by investors owned by citizens or entities of countries not party to applicable treaty. For example, the BIT with the Czech Republic states:

Article 2(2): Where a company of a Contracting Party is owned or controlled by a citizen or a company of any third country, the Contracting Parties may decide jointly in consultation not to extend the rights and benefits of this Agreement to such company.

Had the Hong Kong BIT contained this language, Australia could have stopped Phillip Morris International from going through their Asian subsidiary in bringing this claim.

Philip-Morris also adopted a similar strategy to challenge the Uruguay law. The US-Uruguay BIT also includes the same exception for “the revocation, limitation, or creation of intellectual property rights” as the US-Australian BIT. However, instead of using a subsidiary, Philip-Morris went through a treaty with Switzerland, where it has had its headquarters since 2001. Unfortunately, I cannot read the French BIT, but I would bet money that it does not include the above exception.

Potential Solutions

This Philip-Morris claim is a prime example is how a multinational enterprise, with presence in many countries around the world, can go through subsidiaries (or even potentially create subsidiaries) in other countries to take advantage of bad treaties. Australia is not the only country that is a party to some of these bad treaties. Though US BITs and Investment Chapters of FTAs now include language allowing for limitations in IPR, older US BITs lack also these exceptions, similar to the Australian-HK BIT.

Though would be a monstrous endeavor, the only way to prevent another attack on similar public health policies is to re-negotiate the bad language of the already existing investment treaties. The TPP could also be a forum to harmonize investment provisions of FTAs and BITs to eliminate worst case language. With 11 negotiating countries and the potential to add more countries, it could be a starting place to prevent treaty shopping by multinational enterprises allowed by the spaghetti and noodle bowls of bilateral agreements.

The Vienna Convention (used for interpretation for most, if not all, of these treaties) expressly allows for amendments to treaties in Part IV if long as all of the Parties to the original treaty are notified and are allowed to participate in the negotiations. Article 41 also allows for some Parties to a multilateral treaty to amend obligations between themselves separately from the other Parties of the treaty—as long as they meet certain criteria.

This would allow all of the TPP countries to amend the treaties that are exclusively between TPP countries, and potentially allow for limited amendments to the treaties where ASEAN is a party (although there is a question as to whether the ASEAN treaties would allow this), since not all ASEAN members are a part of the TPP. The TPP could attempt to replace the entire investment provisions of older FTAs and BITS (much harder) or only seek to add certain language to those provisions, such as:

This Article does not apply to the issuance of compulsory licenses granted in relation to intellectual property rights in accordance with the TRIPS Agreement, or to the revocation, limitation, or creation of intellectual property rights, to the extent that such revocation, limitation, or creation is consistent with TRIPS.

Upon enactment of this Agreement, [insert a long list of treaty names] shall be amended to include the language in the preceding paragraph in [insert another long list of Articles within the respective treaties where the language will be located].