Investment Arbitration Reporter | 3 March 2010

Uruguay : Philip Morris files first-known investment treaty claim against tobacco regulations

By Luke Eric Peterson
http://www.iareporter.com

One of the world’s largest tobacco companies, Philip Morris International, has filed an arbitration claim against the Republic of Uruguay challenging tobacco industry restrictions introduced by Uruguayan health authorities.

The firm contends that a series of measures taken by Uruguay to dampen tobacco use in that country have given rise to breaches of the Switzerland-Uruguay bilateral investment treaty.

The move is certain to be closely watched by international lawyers and policymakers alike, as it will serve as an early test-case of the little-used intellectual property protections contained in BITs. What’s more, the arbitration appears likely to grapple with the thorny relationship between investment treaty protections and public health regulation by governments.

Notably, the arbitral claim comes fast on the heels of concerns raised by tobacco companies in relation to public health measures being debated in the United Kingdom (and discussed in our previous edition* of IAReporter).

Philip Morris International turned to arbitration on February 19, lodging a request with the World Bank-affiliated International Centre for Settlement of Investment Disputes (ICSID).

A spokesperson for PMI tells IAReporter that the ICSID claim seeks to challenge 3 separate measures which have come into force in recent months, and which harm the company’s trademarks and market share in Uruguay.

Among the disputed measures are ones which seek to stamp out the use of misleading marketing descriptors such as “light” and “mild”, as well as further branding techniques used to convey such descriptions.

PMI complains that these measures are excessive and far-reaching. Company spokesperson, Morgan Rees tells IAReporter :

“It is without precedent anywhere in the world and arbitrarily limits each brand family to a single variant. As a result, we had to withdraw from the market 7 of 12 brand variants we sold there. In the case of Marlboro, this means that we now only sell Marlboro Red in Uruguay and have had to withdraw Marlboro Gold, Blue and Green.”

PMI also seeks to challenge pictorial health warnings on cigarette packaging that go “well beyond” their intended purpose, as well as a recently-enacted requirement that 80% of a cigarette package be devoted to public health warnings.

Mr. Rees says :

“The large size of these warnings prevents us from effectively displaying our trademarks and goes beyond what could reasonably be considered appropriate to inform consumers of the well-established health risks of smoking. Again, this is without precedent anywhere in the world.”

Of particular interest, the company seeks not just compensation for losses to its investments in Uruguay, but also suspension of Uruguay’s recent regulatory measures.

(The latter type of arbitral order remain largely untested in investment treaty arbitration contexts. As earlier reported** in IAReporter at least one tribunal has ruled that it has the power under an investment treaty to order a state to perform specific actions, rather than simply pay compensation for treaty breaches. However, this politically-sensitive power has yet to be exercised in the case in question.)

Uruguay in vanguard of tobacco crack-down

Uruguay is viewed within public health circles as having taken some of the most aggressive measures to curb tobacco use.

Cynthia Callard, Executive Director of a Canadian organization which campaigns for stricter tobacco regulation both at the national and international level, tells IAReporter that Uruguay has “pushed the envelope” by introducing strict measures,

Callard, of Physicians for a Smoke-Free Canada, says that the decision by Philip Morris International to bring a claim against Uruguay may be viewed as a shot across the bow of other Latin American countries contemplating more rigorous regulation.

Indeed, she notes that Uruguay is to play host to the next Conference of the Parties of the WHO Framework Convention on Tobacco Control, an international treaty which encourages states to regulate tobacco products more stringently. She anticipates that the Philip Morris claim will be widely-discussed in the lead up to that meeting of the Convention Parties.

Relationship of BITs and Tobacco Control pact could be probed in arbitration

As was noted in an earlier IAReporter article*, the relationship between the obligations in bilateral investment treaties and the WHO Tobacco Control Convention remain unclear. However, it appears that this issue could become a live one in the recently-filed ICSID arbitration.

For its part, Philip Morris International has shown a particular interest in recent years in the use of international trade and investment agreements to combat tighter tobacco regulation globally.

In mid-2009, the firm commissioned a legal opinion from the Swiss law firm Lalive on the international legality of proposals to require tobacco products to be sold in plain-packaging.

IAReporter understands that the same law firm represents PMI in the arbitration claim, although a member of that law firm was unable to comment on the matter at press time.

Uruguay is not a complete stranger to BIT arbitration

Although Uruguay is little-discussed in investment treaty arbitration contexts, IAReporter is aware of the state having been warned of potential treaty claims by a Finnish investor concerned to protect its investments in a controversial pulp mills (which have been the subject of a major diplomatic row with Argentina). Because Uruguay stood behind the investment in question, no arbitration claim was filed by the investor.

Furthermore, IAReporter is also aware of an earlier claim lodged by a French-Moroccan investor, Stephane Benhamou pursuant to the France-Uruguay bilateral investment treaty. In that claim which arose out of the politically sensitive privatization of an Uruguayan bank, arbitrators ruled in favour of Uruguay in an unpublished 2002 award. Arbitrators in that UNCITRAL rules proceeding were Dr. Andres Rigo Sureda (Chair), Françoise Lasry (investor’s nominee), and Jorge Tálice (respondent’s nominee).

* See "Plain packaging of tobacco products decried as expropriation, contrary to treaties ; long-running debate rejoined", IAReporter, Feb 9, 2010
** See "ANALYSIS : Are stakes higher in Micula v. Romania case given tribunal’s signal that it could order restitution of legal framework ?", IAReporter, May 11, 2009