Investor-State Tribunal Dismisses Philip Morris Case Against Uruguay Cigarette Packaging

14 July 2016

An investor-state arbitration tribunal last Friday dismissed the claims of Philip Morris, the tobacco giant, against Uruguay’s packaging regulations for cigarettes. The case was filed nearly six years ago under a 1988 bilateral investment treaty (BIT) between Switzerland and the South American country.

In addition to dismissing the company’s claims, the tribunal has also asked Philip Morris to reimburse Uruguay for its legal expenses.

Uruguay policy context

Citing the health risk and economic impact of smoking, Uruguay has adopted several strict regulatory measures for tobacco control in recent years, such as advertising restrictions, higher taxes, and mandatory health warnings.

Among these policies was a 2008 decision banning tobacco manufacturers from marketing “more than one variant of cigarettes per brand family” – referred as the “Single Presentation Requirement (SPR),” along with requiring health warnings to be prominently displayed on tobacco packaging.

Uruguay subsequently increased the required size of this health warning from 50 to 80 percent, with only one-fifth of the package left for displaying trademarks and related information. The SPR and the increased health warning size requirements were contested by Philip Morris in the investor-state dispute.

Uruguay has been a party to the Framework Convention on Tobacco Control (FTFC) at the World Health Organization (WHO) since 2004. Switzerland is a signatory but not a party to the FCTC.

The FTFC provides “a framework for tobacco control measures to be implemented by the parties at the national, regional, and international levels in order to reduce continually and substantially the prevalence of tobacco use and exposure to tobacco smoke.” It also contains provisions on packaging and labelling of tobacco products.

The framework also established in 2008 “evidence-based” guidelines for implementing its provisions, such as calling on countries to consider enlarging health warnings above 50 percent to the maximum size possible, and urging countries to “prevent packaging and labelling that is misleading or deceptive and to adopt plain packing or restrict as many packing design features as possible.”

Last week, the tribunal noted that the share of smokers in Uruguay’s overall population has dropped between the years 2008 to 2015, citing other figures also indicating decreases in smoking.

After the SPR, Philip Morris in Uruguay eliminated seven of its thirteen variants, which accounted for roughly 20 percent of its domestic sales in the country. Its market share was 13.5 percent in 2008, rose to 20.4 percent and then fell back to 13.9 percent in 2013.

The tribunal noted that estimate illicit trade rose from 17 percent of total sales prior to 2008 to almost 23 percent in 2010, and then ranged from 17 to 25 percent in 2011 and 2012.

Philip Morris’ legal actions

After the 2008 changes, Philip Morris’ Uruguayan subsidiary filed challenges to the country’s policies in domestic courts, without success. The claim under the Swiss-Uruguay BIT came two years later, and was tabled by two Swiss subsidiaries of Philip Morris, together with an Uruguay subsidiary fully-owned by one of the company’s Swiss subsidiaries.

The proceedings were conducted according to the legal instruments of the International Centre for Settlement of Investment Disputes (ICSID), and ended this past May, with the tribunal issuing its decision to the parties last week.

Philip Morris claimed that Uruguay’s tobacco control measures – the SPR and the increased health warning size requirement – “effectively banned” seven of the company’s thirteen variants and “substantially diminished” the value of those that remained on the market. The company claimed that this was tantamount to an expropriation of its brand assets, “including the intellectual property and goodwill associated with each of its brand variants.”

Traditionally, international investment agreements protect foreign investors from uncompensated direct or indirect expropriations.

The tribunal reviewed whether Uruguay’s measures amounted to “indirect expropriation,” as the tobacco company “remained the registered owner or licensee of the relevant trademarks and continued to be entitled to protect them by an action for infringement.”

This “indirect expropriation” under this specific BIT would need to have an “equivalent” effect to nationalisation or expropriation, and its interference with the investor’s rights must have “a major adverse impact” on the relevant investments, according to the tribunal. 

Regarding the nature of trademarks, the tribunal explained that Uruguayan law and international conventions do not give the holder an “absolute right of use, free of regulation,” but rather gives a right to exclude third parties from the market “so that only the trademark holder has the possibility to use the trademark in commerce, subject to the State’s regulatory power.”

Nonetheless, “trademarks being property, their use by the registered owner is protected,” said the tribunal. This meant that the tobacco company had “property rights regarding their trademarks capable of being expropriated.”

Observing that Philip Morris’ brand and “other distinctive elements” continued to appear on cigarette packs and were recognisable, and that the company’s overall business in Uruguay has grown more profitable since 2011, the tribunal ultimately did not find expropriation in this case.

Furthermore, the tribunal concluded that “the challenged measures were a valid exercise by Uruguay of its police powers for the protection of public health” and are therefore not the equivalent of expropriation.

Fair and equitable treatment

Philip Morris also claimed that the measures violated the BIT’s requirement of “fair and equitable treatment” of investments made by foreign actors.

The tribunal clarified that a breach of this nature involves state conduct that is “arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional and racial prejudice.”

The tribunal took into account Uruguay’s active participation in the FCTC negotiations and implementation, its domestic scientific and technical research on tobacco control, the legitimate aim of the measures, and the relatively minor impact on the company’s business. The majority of the tribunal’s members concluded that the measures were reasonable and adopted in good faith.

The tribunal also said that Philip Morris “had no legitimate expectations that such or similar measures would not be adopted and further considering that their effect had not been such as to modify the stability of the Uruguayan legal framework.”

Furthermore, Philip Morris raised its legal history in front of Uruguay’s domestic courts, claiming that those courts made mistakes amounting to denial of justice and thus violating the BIT’s “fair and equitable treatment” obligation.

Although one member dissented, the tribunal pointed out that its role is not that of an appeals court, arguing that under international law, the issue of denied justice is a much more difficult standard to meet – and that while the allegedly inconsistent decisions or procedural issues resulting from Uruguay’s domestic courts may be unusual or problematic, that is insufficient for fulfilling such a standard.

The tribunal also dismissed the claims of Philip Morris relating to “impairment of use and enjoyment of investment” and “observance of commitments” under the BIT.

International developments

This is not the first legal setback for Philip Morris at the international level regarding tobacco control measures. Another tribunal announced in May that it was declining jurisdiction over the company’s claims under a BIT between Australia and Hong Kong against Canberra’s plain packaging laws, deeming the company was “abusing” the investor-state arbitration process. (See Bridges Weekly, 25 May 2016)

Philip Morris and other multinational tobacco companies previously lost out in the legal fight against the tobacco control laws at the domestic level in Australia. (See Bridges Weekly, 12 September 2012)

Meanwhile, a series of WTO disputes were tabled between 2012 and 2013 by Cuba, the Dominican Republic, Honduras, Indonesia, and Ukraine, citing alleged violations of the WTO’s rules on intellectual property rights and other areas. Among these concerns, they claimed that the Australian policy is unnecessarily “trade-restrictive” and makes it difficult for them to compete fairly. (See Bridges Weekly, 1 May 2014)

While Ukraine subsequently chose to pursue a mutually agreed solution with Australia, a panel is reviewing the remaining four complaints jointly, with a decision slated for this year. That result could later face appeal, should the parties wish to challenge legal-related elements of the ruling. (See Bridges Weekly, 11 June 2015)

Meanwhile, other countries such as the UK and Norway have taken steps to implement their own plain packaging measures, among other tobacco control policies. In addition, various countries are also trying to make it more difficult for tobacco companies to use investment and trade deals to bring more legal challenges – such as the recent “carve-out” for tobacco control measures from investment arbitration under the recently-signed Trans-Pacific Partnership (TPP) Agreement. (See Bridges Weekly, 12 November 2015)

ICTSD reporting.

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