Plain packaging legislation and international investor rights: a challenge to Australia’s regulatory sovereignty

by Sarah Joseph

The much-discussed plain packaging legislation for cigarettes will come into force until December 2012.  Tobacco companies plan to wage a sustained campaign of “lawfare” against it, including a likely constitutional challenge and arbitral proceedings under a Hong Kong/Australia bilateral agreement. There is also the possibility of proceedings against Australia in the World Trade Organization by tobacco exporters such as Cuba or the Dominican Republic.

Constitutional Challenge

I believe the constitutional challenge will fail.  The relevant constitutional provision is s. 51(31) which requires the federal government to pay fair compensation whenever property is compulsorily “acquired” under federal legislation.  Certainly, the trademarks of tobacco manufacturers, the display of which will be forbidden on cigarette packets under the legislation, are “property” for the purposes of s. 51(31).  However, nobody will “acquire” those trademarks; rather their use on cigarette packs will be extinguished. Otherwise, the trademarks will remain, for use for example on company stationery and buildings, and wholesale packaging.

WTO proceedings

Any future WTO proceedings would likely be based on the Agreement on Trade Related Aspects of Intellectual Property, known as TRIPS.  Under TRIPS, States must protect intellectual property [IP] rights from unauthorized use by third parties.  It is far from certain that TRIPS guarantees IP holders the right to actually use their rights as they wish, for example displaying their trademarks on cigarette packets.  Again, I suspect such a challenge would lose, though I am less confident than with my conclusions on s. 51(31) above.

Challenge under Hong Kong/Australia investment treaty

The most problematic challenge for the Australian government arises from tobacco giant Philip Morris’s claims under a Hong Kong/Australia bilateral investment treaty from 1993. This agreement grants rights to compensation for investors (from and against Hong Kong and Australia, respectively) if their property should be expropriated.  Philip Morris will argue, amongst other claims, that the plain packaging legislation effectively expropriates its trademarks.

Under the investment treaty, Philip Morris and Australia have three months to attempt to settle the dispute.  Failing settlement, which is surely unlikely, Philip Morris will seek to have the dispute arbitrated by an international arbitral panel which may make a binding decision on whether Australia’s legislation does or does not breach Philip Morris’s treaty rights.

The decision of the arbitral panel will be subject to no appeal.  The proceedings may be held in secret.  There is no binding system of precedent in international arbitral law, so it is difficult to predict how the arbitral panel will interpret and apply the notion of “expropriation”.  Furthermore, there is no explicit “public health” exception in the treaty.

There is a possibility that Australia will lose in such proceedings. If so, Australia will either have to pay compensation (potentially amounting to billions of dollars) or risk its reputation as a venue for foreign investment by disobeying the panel.  The continuing payment of compensation would render the retention of the legislation untenable.  Therefore, this legislation, enacted by the democratically elected Parliament of Australia and (unusually in these times) supported by both sides of politics (albeit reluctantly by the coalition), may be effectively overturned by an unappellable decision of the majority of three appointed commercial arbitrators after proceedings which may be closed to the public.  Due weight will undoubtedly be given to Philip Morris’s rights, as they are explicitly protected under the treaty, but due weight may not be given to the countervailing public interest in health.  Is this scenario not an outrageous challenge to Australia’s sovereignty, and its ability to regulate for the public good?

Bilateral Investment Treaties and Human Rights

Bilateral investment treaties [BITs] emerged in the mid-twentieth century in the wake of decolonization, to protect the former coloniser’s investors from very real threats to their long-term investments, such as arbitrary expropriation of infrastructure by nationalistic post-colonial governments.  The hostile and punitive sentiment towards foreign investors by post-colonial governments has largely waned, yet BITs have proliferated and now also grant international rights for investors against developed States like Australia.

Subsequent arbitral proceedings under BITs have often been subjected to criticism over their impact on the regulatory powers of sovereign states. At worst, BIT arbitral proceedings can threaten the human rights of third parties, as the regulatory measure at issue may seek to limit the rights of a foreign investor in order to protect those third party rights.  Yet those third parties are excluded from the proceedings, and their countervailing interests will often be unprotected in the relevant BIT, just as the public health concerns of Australians are absent from the explicit text of the Hong Kong/Australia BIT.  While amicus briefs by third parties may be submitted, arbitral panels have no duty to receive them and there is no guarantee that due weight will be given to them even if they are accepted.  Indeed, it may be possible to frame the upcoming Philip Morris battle as one in which the IP rights and business interests of a tobacco company are pitted against the rights to health of the Australian population.

BIT proceedings of particular concern regarding their impact on the enjoyment of human rights have arisen with regard to rights to water in Cochabamba, Bolivia, as well as in Tanzania, health and environmental measures in Mexico, and affirmative action in favour of the previously oppressed black majority in South Africa.  Certainly, while investors have often lost such cases, the threat of costly arbitral proceedings and massive compensation orders can dissuade States, particularly poorer developing States, from adopting measures for the public good which displease foreign investors.

Current arbitral proceedings by Chevron against Ecuador concern long-running claims against Chevron by Indigenous peoples in the Lago Agrio oilfields.  In February 2011, the plaintiffs won an $8 billion judgment against Chevron in Ecuador in respect of egregious oil pollution, and associated environmental, health and cultural impacts, caused by the operations of its predecessor company, Texaco over nearly three decades to 1990.  While Chevron is appealing that decision in Ecuador, it is concurrently calling on an arbitral panel to order Ecuador to stymie the Lago Agrio litigation, or otherwise compensate Chevron for any liability arising from them.  The arbitral proceedings are taking place (though no panel has yet confirmed jurisdiction over the matter) without the participation of the Lago Agrio plaintiffs.  An amicus brief submitted by NGOs on their behalf was refused without reasons being given, even though their interests are surely a key factor which must be taken into account in determining Chevron’s rights.  Arguably, Chevron is effectively appealing to an unaccountable panel the decision of an Ecuadorian court, which has heard all of the witnesses and the evidence over nearly ten years, over the interpretation, in the main, of Ecuadorian laws.

The range of potential challenges by foreign investors against important public interest regulation in many States, for example regarding the environment, health, utilities reform and any rollback of privatization, is enormous, given the myriad and massive constellation of BITs in the world.  BITs in fact confer extraordinarily powerful rights on foreign investors, which are simply not balanced by international recognition of countervailing rights.  Human rights treaties, for example, which recognize rights for individuals against States, are not nearly as powerful a constraint on the regulatory powers of States (with the possible exception of the European Convention on Human Rights).

Consider this: foreign investors rarely have to pursue local remedies before proceeding to seek international remedies.  Indeed, Philip Morris is activating claims under the Hong Kong/Australia BIT without concluding any domestic legal action in Australia.  In contrast, under human rights treaties, victims have to exhaust domestic remedies prior to seeking international remedies, which are, as noted, generally weaker than those available under BITs.

One rationale for the leapfrogging of domestic legal avenues for investors under BITs arises from the historical background to BITs:  they were “born” in an era of complete mistrust of the motivations of post-colonial governments in their dealings with foreign investors, so the legitimacy and fairness of local proceedings in such circumstances was widely doubted.  And yet the torture victim who, one would guess, has every reason to mistrust and fear the responsible government, is expected to pursue available remedies before that government’s legal apparatus prior to proceeding to the international stage.

Conclusion

The upcoming arbitral proceedings against Australia, which seem inevitable given Philip Morris’s dogged opposition to the plain packaging legislation, pose a significant threat to that legislation. This is because, in 1993, Australia blithely granted wide-ranging international rights to foreign investors based in Hong Kong in return for wide-ranging international rights for our investors against Hong Kong.  As many developing States have discovered to their detriment and often to their surprise, those rights may significantly undercut and undermine the Australian government’s legitimate and necessary regulatory power.

POST SCRIPT 16 AUGUST 2012

So it turns out that Big Tobacco did lose its High Court challenge. And WTO dispute settlement proceedings have been launched, by the Dominican Republic, Honduras, and Ukraine. I remain confident that those proceedings will not succeed in bringing down the plain packaging laws.

Regarding the investment law challenge, which I highlighted last year as the gravest threat to the laws, an interesting fact has come to light. The Hong Kong based company is Philip Morris Asia, which now owns Philip Morris Australia. However, it purchased Philip Morris Australia on 23 February 2011, nearly ten months after the government announced its plain packaging policy.  Therefore, it purchased Philip Morris Australia in full knowledge of the impending harm to its investment. Perhaps it is even arguable that it purchased Philip Morris Australia with the purpose of launching an investment action in respect of the policy.

It remains to be seen whether this fact kills off the investment law challenge. Philip Morris Asia will presumably respond that the law was not actually in place until late 2011.  Surely Philip Morris Asia did not think that the date of its acquisition could be hidden, so it presumably has legal advice indicating that the date is not fatal to its case. Either that, or Big Tobacco is so worried about these laws that it will pursue any avenue, no matter how hopeless, to try to stave them off. After all, there are already signs of other countries following suit.

I doubt that any of the proceedings will succeed. However, the investment proceedings remain the most problematic challenge, especially given the unpredictable nature of such proceedings.

8 comments

  • I actually found this amazing posting , “Plain packaging legislation and international investor
    rights: a challenge to Australia’s regulatory sovereignty |
    Castan Centre for Human Rights Law”, really interesting and the blog post
    was in fact a very good read. Regards,Niki

  • “There is a problem with your suggestion that “hitherto uncontemplated” issues lie outside BITs. That principle wouldn’t be very satisfactory in interpreting human rights treaties”.

    That’s not quite the position I was putting. Both positively or negatively, uncontemplated issues need fresh consideration. Thus, technological change has altered what we think the term “publishing” means for the purposes of IP or national laws on child protection and so forth. Someone the other day calimed that a person using an iPad app to track his stolen iPad had “trespasssed” on his property by radiowave. When not statute law but matters of contractual or treaty obligation are affected in ways hitherto uncontemplated, it becomes unclear that the underlying “meeting of the minds” has taken place — and doubly so when the contracting parties are not the same. My more general point was not to demand the regime move in ways that would toss out all BITs as illegitimate, but reserve the right to depart from parts of it that would be at odds with what a reasonable person should have thought was specified at the time.

    “By the way, you said earlier that Hong Kong is a party to some other treaty, presumably the ICESCR.”

    It was the WHO FCTC — and China, on behalf of HK is the contracting party.

  • It’s hard to imagine that action could succeed under TRIPs since this refers to unauthorised use of TM by third parties — not the state itself. As to the BIT, I see no problem with repudiating the treaty entirely if it cannot be amended to exclude action of this type retriospectively. Either the stakeholders don’t care at all,. or if they do, they will grant the amendment.

    • I agree that TRIPS is not a problem. But I have doubts the government would agree that repudiation of the BIT is an option. If we do that, our investors can’t expect to ever properly be protected by a BIT again. Now, you may not care very much about that. And I certainly have issue with BITs. But I doubt the government shares those thoughts.

      • I suppose the issues, defined narrowly are

        a) Was this use of BIT contemplated by the contracting parties? One suspects not. It’s one thing to declare expropriation of physical assets out of order, and quite another to contrive to have what is apparently an artificial entity become the holder of virtual property (i.e. a TradeMark) for the purpose of BIT — and that after the fact of the law.

        b) Relief from the requirement to attempt resolution of the matter in the local jurisdiction where there are functioning courts at arms’ length from the executive seems unreasonable.

        c) The idea of a non-appellable body arbitrating without being required to hear and consider all germane material nor give reasons that can be dicta for other judgements does seem perverse and a recipe for poor outcomes.

        d) Following the GATT/WTO rules, which allow considerable scope for jurisdictions to evade running foul of restaint of trade where actions reflect the need to give effect to international treaties, or protection of some public good (where the no-discrimination test is satisfied) it seems that one could press for an exemption on grounds of public health. The WHO FCTC came into force in February 2005. Australia was one of the original contracting parties. 168 countries are now contracted and 175 are parties. Uzbekistan just had the treaty come into force on Monday. The FCTC covers price and tax increases, tobacco advertising and sponsorship, labelling, illicit trade and second-hand smoke etc …

        China is contracting party and has been since 2005 with it in force from 2006. The specifically declared that the provisions of the WHO FCTC would apply to the “Hong Kong (and Macao) Special Administrative regions” from 2005.

        It sounds like a slam dunk case for interpreting the BIT so as not to infringe a treaty to which HK and Australia were parties.

        • Yes. But that is not the nature of BITs at all. Eg Point (a) could be said about the thousands of BITs signed in 50s, 60, 70s, and 80s, which suddenly exposed countries to liabilities in the 90s, when BIT arbitration gained momentum. Also, BITs might promise something completely different to Australian constitution so in that sense (b) is irrelevant. (c) is true and is the way it is. (d) if the exemption does not exist, it is up to the arbitrators to decide if it does – there is no requirement that BITs follow the WTO – many were drawn up beforehand (indeed this one was).

          Australia has said it won’t sign any more of these things, probably for the very reasons you outline. But it has signed them, including this one. And it will have to wear the consequences of a fairly unpredictable process.

          If this all sounds outrageous, or at least potentially outrageous, that is because it is.

          • Yes Sarah … I did grasp the distinction you’re making — that for essentially cultural-political reasons the Australian Govt may not like the smell of appearing to be abrogating a BIT. OTOH, it does seem to me that even a totally craven regime such as the one we have could press the more narrow points – not that BITs should be junked but that there should be clarification about their scope in relation to international treaty obligations to which the parties are signatories and the procedural matters attached thereto.

            In short, they wouldn’t be creating a significant precedent in challenging the force of BITs generally or their general pplication in areas where the issues were clearly what was contemplated but merely narrowing where hitherto uncontemplated and treaty-based obligations were in ostensible conflict.

          • There is a problem with your suggestion that “hitherto uncontemplated” issues lie outside BITs. That principle wouldn’t be very satisfactory in interpreting human rights treaties. Human rights are not frozen in time according to what they were thought to be at the time the treaty was drawn up. Or they shouldn’t be – dynamic interpretation is common as social mores change. For example, the extent of recognised same sex rights these days is far more than would have been contemplated in 1966 when the Covenants adopted. Ditto rights re abortion, domestic violence as a human rights issue, rights in the private sphere generally, and umpteen other issues. In fact, most rights have expanded a lot since those times. Human rights would be a sorry area indeed if “uncontemplated” issues were outside their remit today.

            I’m also not convinced that this sort of issue wasn’t foreseen at the time the BIT concluded in 1993. Certainly, more would have been foreseen in 1993 compared to what was foreseen in BITs of 50s, 60s, 70s and 80s which have nevertheless been used to enforce extraordinary rights at times.

            By the way, you said earlier that Hong Kong is a party to some other treaty, presumably the ICESCR. It’s not. It isn’t a party to any human rights treaty (or many treaties at all) coz it’s not a country.

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