Plain Packaging Act: A New Era of Dispute Settlement?

10th Oct 2014 Investments

In 2011, the Australian government passed the Tobacco Plain Packaging Act. The Act has been passed with the objective of addressing public health concerns arising from smoking cigarettes. The plain packaging initiative is part of Australian government’s systematic strategy aimed at reducing tobacco consumption particularly amongst the youth. Public health experts believe that the legislation will assist in reducing the appeal of tobacco products to consumers. The increased space for health warnings will make a more lasting dissuading impact. Further, the measure will restrict the potential of retail packaging to mislead consumers about the ill effects of smoking. The effectiveness of a sustained regulatory effort to curb smoking is evidenced by a survey report launched by the Australian Institute of Health and Welfare. The key findings of the survey conducted in 2013 revealed that there was a decline in daily smoking from 15.1% to 12.8% between 2010-2013. This has halved from the daily smoking rate of 24.3% in 1991.  Further, younger people have delayed taking up smoking since 1995. In 1995, the average age at which 14-24 year olds smoked their first cigarette was 14.2, which has increased to 15.9 years in 2013.  Also, between 2010 to 2013 weekly consumption of cigarettes reduced from 111 to 96 per person. As is evident, the effectiveness of such measures doesn’t augur well for big tobacco companies, burning a hole in their profit margins. The measure has been challenged by Phillip Morris, which has approached different dispute settlement forums both directly and indirectly. The three forums include the Australian Supreme Court, Investor-State arbitration under the UNCITRAL rules, and dispute settlement at the WTO. The dispute channeled through different mechanisms signals a shifting trend in international dispute settlement with the burgeoning ability of big corporations to invest resources geared towards hiking international pressure, and forum shopping with the objective of deterring countries from implementing similar measures and achieving the best possible financial result.

Manipulation of Dispute Settlement Forums
Phillip Morris’ strategy indicates a desperate attempt to utilize different dispute settlement avenues with the objective of revoking the plain packaging law. Of the three forums, Phillip Morris has used the grey area in the respective international legal rules to advance its arguments in two forums, investor-state arbitration before the PCA and WTO Panel review with Cuba, Honduras, Dominican Republic, Ukraine and Indonesia as the complainants.

Invoking Hong-Kong-Australia BIT

Phillip Morris, invoked the provisions of the 1993 Hong Kong-Australia Bilateral Investment Treaty, through its Hong-Kong based subsidiary. Its claims relate to Article 6 and 2(2) of the said Treaty, whereby Phillip Morris argues that there has been expropriation of intellectual property without compensation, denial of fair and equitable treatment and denial of full protection and security. The claims also argue that Australia has violated its international commitments under the TRIPs, the Paris Convention for Protection of Industrial Property and WTO’s agreement on Technical Barriers to Trade. Interestingly, Phillip Morris Asia bought shares in its Australian arm 10 months after the announcement of Australian government’s plan to implement plain packaging regulations. This is indicative of a strategy aimed at establishing foreign investor interest for initiation of a dispute. It is pertinent to note here that this strategy was adopted to invoke the provisions of Hong-Kong- Australia BIT as there was no BIT between the US (where Phillip Morris is headquartered) and Australia. Prima facie, such practices aimed at manipulating investment treaties to launch disputes will have a chilling effect on the Host State’s regulatory power and dilute any attempt made towards addressing public health concerns. The Australian government has tasted success in the first phase of the arbitration, with the tribunal agreeing to admit Australia’s claim of PMA making false claims and stating wrong intention to acquire shares in its Australian arm. If Australia’s claim succeeds it will certainly deter “treaty shopping” as has been applied by major foreign investors in the past to challenge host state regulations but will not thwart the practice completely. In this regard, nations looking to implement public health regulations in general and plain packaging measures in particular should look towards reviewing their respective BITs and incorporate an exception within all such BITs for establishing measures taken in pursuance of public health concerns as unchallengeable.
As Sornarajah has pointed out, the current trend in international investment law is tilted in favor of a neo-conservative tenet (foreign investments are good) aimed at imposing a foreign investor friendly standard of governance at the cost of the host state’s power to regulate. Although foreign investment should be encouraged, there is no empirical evidence to suggest that treaty protection attracts the same. On the contrary, the current trend may only hamper the host state’s regulatory autonomy and preclude any well-intentioned public health measure from succeeding.

WTO Adjudication: trading of trading interests?
While there is no legal bar for any Member State to raise a dispute before the WTO, it would be interesting to analyze the economic basis of selected complainants in this case. As established by EC-Bananas III, a Member State has broad discretion in deciding whether to bring a case against another Member. In other word, a Member needn’t necessarily prove actual injury to raise a dispute. Thus without prejudice to the objective of the Dispute Settlement Understanding (DSU), let us examine the economic interest of Honduras, Dominican Republic and Ukraine in initiating the dispute.

1

Figure 1 shows the share of tobacco in total imports of Australia. It is abundantly clear from the figure that the share is minuscule and has been declining steadily. Now let us see the share of the select complainants in the total imports of tobacco into Australia.

2

Figure 2 shows that all three countries have a negligible share in total imports of tobacco in Australia. While Dominican Republic, has a greater share comparatively, Ukraine doesn’t have any exports of tobacco into Australia in the mentioned time period. Further, even Honduras’ share is negligible.

Let us now examine the importance of tobacco as an export commodity to the complainant parties.

3

The graph above shows that first complainant in this case, viz. Ukraine did not have major export interest in tobacco or tobacco products, with the share of tobacco in total exports not even touching 1%. The share of tobacco in the exports of two other complainants, viz. Honduras and the Dominican Republic was comparatively much greater – in the case of Honduras increasing to over 6% in 2011 and between 2-4% in the case of Dominican Republic. Further, while in the case of Ukraine this low share has remained stagnant or decreasing, in the case of Honduras it has shown an increase over the period displayed. In the case of Dominican Republic, it shows no discernible trend.
Let us juxtapose this trend with data representing the importance of Australia as an
export market for these countries. The figure below represents the total exports and tobacco exports as a percentage of total tobacco exports for each country.

 4

Figure 4 establishes that Australia remains a minor market for tobacco export for the three countries. Thus, these three complainants have very little economic interest to engage in a financially cumbersome dispute at the WTO. It is evident that Phillip Morris is providing the monetary and legal resources to these countries to pursue the dispute.

Smoking Strategy
We can infer from the foregoing findings and analysis that the Phillip Morris has engaged these forums as part of a long-term two-pronged strategy. First, it would appear that the ongoing dispute in multiple forums would prevent other countries from passing such measures lest they get embroiled in a tedious and expensive dispute. Second, a victory at the investment arbitration will ensure that Phillip Morris receives retrospective damages in the form of compensation for expropriation and WTO would offer them prospective remedies if the Panel finds that the plain packaging law is not in accordance with the relevant agreements under the framework of the Organization.

Insidious Design
The issue at hand may evolve into a sinister pattern in the future at the cost of public-spirited measures. Although forum shopping is not a new practice, particularly in the context of international trade, the growing prominence of big corporations in the international governmental sphere poses a threat to the regulatory powers of a nation.  The threat comes in the form of a long-term litigious and economic strategy targeted towards dilution of public oriented regulatory standards. Even if Phillip Morris were to lose the investor-state arbitration and the WTO dispute, it would not cease to initiate disputes against other states looking to develop similar frameworks for curtailing tobacco consumption.  This practice will affect developing and least developed countries significantly as they lack the resources and the legal expertise to engage in multiple dispute settlement forums. Although a victory for Australia in these forums will set a positive precedent, there is no concept of stare decisis in international law, to ward off future complaints of such nature. This is particularly important in the context of investor-state arbitration (As WTO still has a system of de facto stare decisis) , where treaty shopping and favorable arbitral atmosphere for foreign investors are commonplace.  Thus, as mentioned above, nations looking to follow suit in terms of implementing the plain packaging measure or addressing public health concerns through regulations would be well advised to review their existing BITs and incorporate a public health exception, to avoid infringement on their regulatory autonomy.

As for the plain packaging saga, it appears that Phillip Morris would want the dispute to linger as long as possible so as to prevent other countries from implementing similar regulations. However, nations must adopt a counter strategy to avoid the derailment of a well-intentioned and effective regulation for securing the health and future of humanity.

The author is a policy analyst at Oval Observer Foundation. The views expressed in the article are those of the author and don’t necessarily reflect the views of the Foundation, its partners and affiliates. Incidentally he is a smoker himself but wishes for the success of this measure so that future generations do not succumb to this fatal addiction.

This post first appeared on the Global Policy Journal