Tobacco Company Files Claim against Uruguay over Labelling Laws

10 March 2010

Measures taken by Uruguay to deter smokers have drawn a legal challenge by one of the world's largest tobacco companies under a treaty designed to protect foreign investors.

Philip Morris, the maker of Marlboro cigarettes, objects to three recent regulations enacted by Uruguay that restrict the branding that can be featured on cigarette packages. Under Uruguayan law, health warnings must cover 80 percent of each cigarette package. The company argues that this restriction prevents it from effectively displaying its trademarks.

Tobacco companies have complained in the past that cigarette-labelling measures violate international law. In 2001, for instance, Philip Morris argued that Canada's proposal to prohibit the descriptors ‘light' and 'mild' were in breach of certain investment provisions in the North American Free Trade Agreement.

While health warnings on cigarette packages are commonplace today, Philip Morris charges that Uruguay's measures are ‘extreme' and ‘unprecedented', going beyond what is necessary to reduce the harm caused by smoking.  The rules have required it to withdraw several brands of its Marlboro cigarettes, leading to a "very substantial loss of market share," a spokesperson for the company told Bridges.

The rules "won't stop people from smoking; it just makes people switch brands," said the Philip Morris spokesperson.

In response, three subsidiaries of the Swiss-headquartered company filed for arbitration on 19 February with the World Bank's International Centre for the Settlement of Investment Disputes, claiming violations of the Switzerland-Uruguay bilateral investment treaty.

Bilateral investment treaties provide a range of guarantees to foreign investors, typically including protection against expropriation and guarantees that investors will be treated fairly and not discriminated against vis-à-vis domestic investors. The definition given to ‘investment' also tends to be broad, encompassing intangible rights like trademarks.

In this case, Philip Morris argues that Uruguay has expropriated its intellectual property without compensation; has failed to treat its investment fairly and equitably; and has unreasonably impaired the use of its investment.

Philip Morris declined to estimate the damages it seeks in its claim, remarking only that they are ‘substantial'.

A TRIP to the WTO?

Philip Morris has long contested that so-called ‘plain-packaging legislation' - regulations that prohibit branding on cigarette packages - run afoul of international trade and investment rules.

Last year Philip Morris commissioned an opinion from the law firm Lalive, which concluded that requiring cigarettes to be sold in generic packages would breach several obligations under the WTO's Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

The law firm points out that TRIPS prevents governments from discriminating against trademarks based on the nature of a particular good or service.

"A plain packaging measure would ... create a two-tier system: one which severely restricts the use of trademarks and is only applicable to tobacco companies, and another which affords the minimum standards of protection to all other products," argues the firm.

While TRIPS allows measures to protect public health, Lalive argues that plain packaging "goes overboard." It is "clearly not the least restrictive measure available to protect public health."

Why investment arbitration?

Philip Morris's decision to challenge Uruguay under an international investment agreement highlights the different methods for settling investment and trade disputes. A WTO dispute would need to be taken up by a member government, while the Switzerland-Uruguay bilateral investment treaty, like many international investment agreements, permits the foreign investor to arbitrate directly with the host government.

In effect, the investor-to-state dispute mechanism extinguishes the political considerations inherent in the WTO's government-to-government procedure.

Indeed, a WTO challenge by Switzerland, home of Philip Morris International, seems highly unlikely given that the Swiss also introduced health warnings on cigarette packages in 2010. In Switzerland, 56 percent of the package must be covered by health warnings, and labels such as ‘light' and ‘mild' are prohibited.

ICTSD reporting.

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