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.