Australia's big win in Philip Morris plain packaging arbitration

The AmeriKat is the epitome of
plain packaing....

Plain packaging has been a hot topic on the Kat this year, most recently with Guest Kat Niko's post on the topic here.  But if you thought that would be the last on the matter in 2015, think again.  From the AmeriKat's colleague, Jin Ooi (Allen & Overy), comes news of the latest development concerning Australia’s tobacco plain packaging legislation.  The latest news saw a "win" for the Australian government against Philip Morris Asia Limited (“PM Asia”) in which the arbitral tribunal seated in Singapore issued a unanimous decision that it has no jurisdiction to hear Philip Morris’ claim. Due to the confidentiality regime, it does not appear that the substance of the decision has yet been published.  Jin, who has been monitoring these proceedings, explains more below:

"Back in mid-2011, Hong-Kong based PM Asia launched a
UNCITRAL arbitration  against the Commonwealth of Australia over its proposed plain cigarette packaging legislation.  PM Asia argued that the legislation was in breach of the Australia–Hong Kong bilateral investment treaty (“A–HK-BIT”).  At the time, Philip Morris (Australia) Limited (“PM Australia”) (whose shares are owned by PM Asia and who owns 100% of the shares of Philip Morris Limited (“PML”)), was wrapped up in its own legal tussle.  PM Australia had earlier commenced a constitutional challenge to the legislation before the High Court of Australia (alongside challenges made by other tobacco companies).  In October 2012, a majority of the High Court ruled that even though the Tobacco Plain Packaging Act 2011 (Cth) restricted the intellectual property rights of the tobacco companies and regulated the packaging and presentation of tobacco products, the legislation was not an “acquisition” under section 51(xxxi) of the Australian Constitution, as there was no proprietary benefit or advantage conferred on the Commonwealth of Australia (JT International SA v Commonwealth; British American Tobacco Australasia Ltd v Commonwealth). As far as I am aware, this is the first ever investment treaty claim against Australia.

In the arbitration, PM Asia alleged that the legislation virtually eliminated Philip Morris’ branded business by depriving it of its valuable intellectual property and goodwill  This, in turn, undermined and diminished its investments in Australia.  Accordingly, PM Asia alleged that Australia breached its obligations under the A–HK-BIT because plain packaging:

• deprives PM Asia of its investments and intellectual property without compensation, amounting to unlawful expropriation;

• fails to accord fair and equitable treatment to PM Asia’s investments in Australia;

• impairs by unreasonable measures the management, maintenance, use, enjoyment or disposal of PM Asia’s investments in Australia;  

• fails to accord full protection and security for PM Asia’s investments in Australia; and  

• fails to observe Australia’s international obligations with regard to PM Asia’s investments by violating the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), the Paris Convention for the Protection of Industrial Property and the Agreement on Technical Barriers to Trade.

PM Asia sought an order for the suspension of the enforcement of the legislation or compensatory damages for the loss suffered by means of damage to its investments as a result of the enactment and enforcement of the legislation.  Although the amount was not specifically quantified it was understood to be in the order of billions of Australian dollars.

The Commonwealth of Australia raised objections as to the jurisdiction and overall merits of PM Asia’s claims. As to jurisdiction, the Commonwealth tethered much of its arguments on the fact that at the time PM Asia acquired its shares in PM Australia, the government had publicly committed to introduce the legislation by 2012.   In particular, it argued that:

• an investor (PM Asia), could not buy into a dispute by making an investment in full knowledge. that a dispute is either existing or highly probable;  

• the A-HK- BIT did not confer jurisdiction on any arbitral tribunal to determine pre-existing disputes that have been repackaged as BIT claims many months after the relevant governmental measure had been announced;

• the A–HK-BIT extends protection to indirect investments only where companies incorporated in a third state qualify as investors under the A–HK-BIT.  The assets of PM Australia and PML - two Australian-incorporated companies – do not constitute “investments” for the purposes of the A–HK-BIT; and  

• the A–HK-BIT does not extend to obligations owed by Australia to other states under multilateral agreements and that the arbitral tribunal is precluded from determining breaches of agreements under the auspices of the World Trade Organization (WTO) and under the Paris Convention since these treaties do not establish rights for private parties and contain their own dispute settlement procedures. 

Following a hearing regarding bifurcation of the proceedings in February 2014, the arbitral tribunal in April 2014 decided to split the proceedings into two phases.  The first would address the Commonwealth’s jurisdictional objections and the second phase would deal with the merits of the dispute. The hearing to address jurisdiction was heard in February 2015, resulting in last week's decision that the arbitral tribunal had no jurisdiction to hear PM Asia's claim.

This won’t be the last time Australia's plain packaging battles hit the news.  Challenges concerning Australia’s tobacco plain packaging requirements have also been brought before the WTO.  Following unsuccessful dispute consultations with Australia requested by Ukraine, Honduras and the Dominican Republic in 2012, and Cuba and Indonesia in 2013, each state filed a request with the WTO Secretariat for the establishment of a WTO dispute settlement panel to address the tobacco plain packaging measure. As a result, dispute settlement panels have been established by the WTO Dispute Settlement Body. Some 40 WTO members have also reserved their third-party rights to join the dispute on either side of the debate (or as a neutral party). In May 2014, the same panellists were appointed in all five disputes (although the Ukraine proceedings have since been suspended), and are expected to issue their final report to the parties not before the first half of 2016. "