The Fate of Plain Packaging: Balancing Free Trade and Health Regulation in the International Forum

Alicia McCaffrey Vol. 37 Associate Editor Vol. 38 Note Editor

Many law students are familiar with the Argentina bonds arbitrations because of their popularity in Transnational Law classes. These Argentina bonds arbitrations are one example of a genre of cases debating the legality of strict government regulations. These scenarios generally involve a government wanting to place fairly extreme regulations on a multinational corporation in order to reach some sort of public policy goal, and a multinational corporation that argues the regulations are so extreme as to be practically expropriating its business or violating the “fair and equitable treatment” provisions in the countries’ bilateral investment treaty (BIT). A new set of these kinds of cases has emerged recently as multinational corporations, together with the countries in which they are headquartered, challenge the Australian government’s “plain packaging” requirements for cigarettes. In 2010 Australia committed to implementing strict packaging requirements for cigarette packaging by 2012.1 The packaging, commonly referred to as “plain packaging,” mandates that cigarette packages display large images and warnings about the health effects of smoking. Only the name of the brand is displayed in small, plain text at the bottom of the package. Britain and Ireland have similar regulations.[i] The first arbitration regarding the validity of plain packaging resulted in a minor but definitive victory for the Australian government. On June 27, 2011, Philip Morris Asia brought claims against Australia under the 1993 BIT between Hong Kong and Australia. They argued that plain packaging violated Article 2(2) of the agreement mandating fair and equitable treatment and constituted an Article 6 expropriation warranting compensation from the government.1 Philip Morris Asia’s claims were to be heard by an arbitration tribunal acting under the United Nations Commission on International Trade Law (“UNCITRAL”) Arbitration Rules 2010.2 Australia raised various jurisdictional concerns. Firstly, the Australian government argued that Philip Morris Asia’s purchase of shares in Philip Morris Australia did not qualify as an investment under the BIT.3 According to Australia’s Foreign Acquisitions and Takeovers Act 1975 foreign investors must provide the Australian Treasurer with “Statutory Notice” of their intentions for investment.[ii] The Australian Treasurer then has the power to approve or deny foreign investments due to public policy reasons.[iii] The government argued that the Statutory Notice that Philip Morris Asia provided explaining the reason for its investment in Philip Morris Australia was misleading, thus its investment did not qualify for protection under the BIT.[iv] Secondly, the government argued that the Tribunal could not hear the claim under the BIT because the claim related to a pre-existing dispute. Essentially, though Philip Morris Asia invested in Australia before the laws requiring plain packaging were implemented, Philip Morris Asia should have been, and likely was, aware that the packaging requirements were forthcoming because the disputed regulations had been approved the year prior to investment.[v] Lastly, the government argued that in regards to certain investments, Philip Morris Asia does not qualify as an investor under the BIT.[vi] Philip Morris Asia fully owns Philip Morris Australia, which fully owns Philip Morris Limited.[vii] While Philip Morris Asia is a foreign investor in Philip Morris Australia (thus, its interests are protected under the BIT), Philip Morris Australia is an investor in Philip Morris Limited.[viii] Both Philip Morris Australia and Philip Morris Limited are Australian corporations, so they do not qualify as foreign investors under the BIT, and thus do not qualify for protection.[ix] Philip Morris Asia cannot claim indirect rights to Philip Morris Limited. Because of these jurisdictional arguments, on April 14, 2014, the Tribunal decided that the proceedings of the arbitration would be bifurcated—the first half of the proceedings would determine whether the Tribunal had jurisdiction, and (if determined that the Tribunal did have jurisdiction) the second half would determine substantive issues.[x] The decision to bifurcate the proceedings rested on the determination that (1) Australia’s objections were prima facie serious and substantial; (2) the jurisdictional issues could be decided without determining the substantive issues; and (3) if the jurisdictional concerns were well-founded, they could dispose of an essential aspect of the claims (in this case, the foundation of the claims themselves).[xi] The first phase of the proceedings lasted from February 16 to February 21, 2015.[xii] On December 18, 2015, the Tribunal determined that due to the jurisdictional issues Australia raised the Tribunal did not have jurisdiction.[xiii] Because the official opinion of the Tribunal has not been released yet because of confidentiality concerns, there is no certainty about which of Australia’s arguments the Tribunal found compelling and which it did not. Certainly more in depth analysis will be required when the official opinion is released in the forthcoming weeks.[xiv] However, the practical result of the proceedings is that, at least for the time being, Australia is free to continue its strict plain packaging regulations. The decision has already influenced the behavior of other states by providing more confidence in the legality of plain packaging. After the Tribunal’s decision France announced that it intends to enact similarly strict regulations.[xv] However, these kinds of regulations still face legal questions both from domestic law and international law: the Australian regulations have survived two constitutional challenges.[xvi] Even more concerning for plain packaging, later this year the WTO will decide a dispute that Ukraine, Honduras, Indonesia, the Dominican Republic, and Cuba have brought against Australia because of plain packaging requirements.[xvii] While the Tribunal might have lacked the jurisdiction to decide the substantive legality of Australia’s regulation, the WTO will likely provide a more conclusive determination on whether plain packaging will survive the future legal challenges brought against it. While the issue is far from decided, governments can learn from the recent Australia arbitration. To bracket off the normative question of whether these kinds of regulations should be implemented and whether they are truly effective tools to promote public health, if governments want to enact progressive legislation to promote aggressive public policy goals they should be wary of the capability of BITs to significantly limit governmental sovereignty when the government finds itself opposed to multinational corporations. The Philip Morris Asia v. Australia decision can be read as an illustration of the importance of carefully crafting BITs in order to narrow the claims that multinational corporations can bring against the state and create strict standing requirements regarding which corporate entities can bring claims. Though the Philip Morris Asia v. Australia decision is not necessarily satisfying in a substantive legal way, it does present an example of how specific BIT provisions can provide governments with procedural avenues to save strict regulations and allow for the further pursuit of public policy goals.

1 See McCabe Center for Law and Cancer, Philip Morris Asia Challenge under Australia- Hong Kong Bilateral Investment Treaty Dismissed, 2 See Daniel Hurst, Australia wins international legal battle with Philip Morris over plain packaging, The Guardian (17 Dec. 2015), 3Australian Government Attorney-General’s Department, Tobacco Plain Packaging—Investor-State Arbitration, 4 Id. 5 McCabe Center for Law and Cancer, Philip Morris Asia Challenge under Australia- Hong Kong Bilateral Investment Treaty Dismissed, 6 Id. 7 Id. 8 Id. 9 Id. 10 Id. 11 Id. 12 Id. 13 Id. 14 Id. 15 Id. 16 Id. 17 Id. 18 Id. 19 Agence France-Presse, France votes for plain cigarette packaging for 2016, The Guardian (17 December 2015), 20 Australian Government Attorney-General’s Department, Tobacco Plain Packaging—Investor-State Arbitration, 21 Id.