Australian Government defeats tobacco company challenge to Plain Packaging Cigarette Legislation

  • 23 May 2016

In a decision eagerly awaited globally an international investment treaty arbitration tribunal came down in favour of the Australian Government in respect to the challenge by Philip Morris Asia Limited to Australia’s Tobacco Plain Packaging Regulations 2011 made pursuant to the Australian Tobacco Plain Packaging Act 2011 (collectively “the Legislation”).  The Arbitral Tribunal was constituted under the 1993 Bilateral Investment Treaty for the Promotion and Protection of Investments between the Governments of Hong Kong and Australia (“the Treaty”).  The Treaty gives Hong Kong incorporated investors the right to initiate claims directly against the Australian Government for breach of investment protection in the treaty which is commonplace in investment treaties between different States.  The proceedings were conducted under the 2010 Arbitration Rules of UNCITRAL.  The arbitral hearing took place in Singapore in February 2015 and the award was handed down on 16 May 2016.  The award runs for 200 pages.

Philip Morris alleged that the Legislation which banned the sale of branded tobacco products had the effect of requiring all sellers of tobacco in Australia including Philip Morris to sell their products including cigarettes without any trademarks.  The Legislation required cigarettes to be sold in plain packages marked with a stark health warning.  Philip Morris said that these laws extinguished its intellectual property rights and therefore lessened the value of its investment in Australia and as such was in breach of the treaty, thereby entitling it to compensation.  The Australian Government argued that the treaty did not prevent it from passing bona fide laws to protect matters of public interest such as health, in respect of which no compensation was payable.  It argued that countries want to encourage foreign investment through offering investment protection but want to safeguard their rights in the public interest in such areas such as health, public safety and the environment without those regulatory measures resulting in the State having to compensate foreign investors in a way in which they would not have to compensate domestic investors.

What was particularly unusual in this case was that after Australia announced its intention to legislate for plain packaging of cigarettes Philip Morris re-structured its investment in Australia so the investment was owned by a Hong Kong company before the Legislation came into effect.  The Tribunal found that the principal, if not sole purpose of the corporate re-structuring in Hong Kong was to gain protection under the Treaty and this was not permitted.  Accordingly the Philip Morris claim for compensation failed.  In other words the Tribunal found that it was not open to Philip Morris to re-structure its Australian operations after the Legislation had been announced in a way which was tantamount of deliberate evasion of that legislation.

Governments and corporations involved in cross-border business around the world have been awaiting the outcome of the arbitration.  The arbitral award is a vindication of a state’s rights to regulate in the public interest without having to compensate the investor despite the investor no longer being permitted to use its intellectual property on tobacco products in Australia.   Having found for the Australian Government on that preliminary issue the Tribunal did not have to determine whether the Legislation breached the investment protections in the BIT.

One of the lessons from the award is that if businesses want to consider structuring an investment in a particular jurisdiction to obtain potential benefits of bilateral investment treaties, they need to consider these matters at the time of making the investment rather than wait until political changes are announced as by then it might be too late for the company to take advantage of potential investment treaty protections.  Just as there may be legitimate reasons to engage in tax minimisation for instance by incorporating companies in jurisdictions with low tax rates, there can be legitimate reasons for incorporating companies in jurisdictions which will give the investor benefits in the host jurisdiction, but to engage in corporate re-structuring purely or mainly to avoid host country legislation and then to seek to claim compensation from the host country the consequences of that legislation on the investment is not permitted, and can be regarded as a form of a sham.  In the context of the unprecedented interest in off shore tax shelters as a result of the publication of the Panama Papers, this arbitral award comes at an interesting time.  However the award leaves open the question whether a country’s entitlement to legislate in the public interest (health in this case) necessarily precludes any form of compensation for alleged lost investments.  That is for another day.

It will be interesting to see whether this award calms the concerns expressed in some circles about the potential effect of some of the intellectual property provisions of the Trans Pacific Partnership (“TPP”) to weaken a state’s right to legislate to protect matters of public interest, what some critics have seen as an attack on intellectual property rights.  Australia is one of the 12 states signed up to the TPP.

Post by Derek Luxford 

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