Philip Morris v. Uruguay: all claims dismissed; Uruguay to receive US$7 million reimbursement

Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7

The long-expected final award has been rendered in the high-profile case initiated by tobacco giant Philip Morris in early 2010 against Uruguay over its tobacco control measures. On July 8, 2016, a tribunal at the International Centre for Settlement of Investment Disputes (ICSID) dismissed all claims by Philip Morris, ordering it to bear the full cost of the arbitration and to pay Uruguay US$7 million as partial reimbursement of the country’s legal expenses.

Background

Claimants were Philip Morris Brand Sàrl and Philip Morris Products S.A., both Swiss companies, and Abal Hermanos S.A. (Abal), a Uruguayan company acquired by the Philip Morris group in 1979. U.S.-based Philip Morris International Inc. is the ultimate parent company of the three claimants, jointly referred to as “Philip Morris” in this summary.

To counter the public health and economic impacts of the country’s high smoking rate, Uruguay became a party to the 2003 Framework Convention on Tobacco Control (FCTC) of the World Health Organization (WHO) and enacted a series of domestic measures of tobacco control. In particular, the measures challenged by Philip Morris were Ordinance 514 of August 18, 2008 (the Single Presentation Regulation [SPR]) and Presidential Decree 287/009 of June 15, 2009 (the 80/80 Regulation).

SPR required graphic and textual anti-smoking warnings to be printed on the lower half of cigarette packs. It also prohibited the use of variants of any brand. To comply, for example, Philip Morris had to remove Light, Blue and Fresh Mint, keeping Marlboro Red only. The 80/80 Regulation increased the size of the warnings from 50 to 80 per cent.

In addition to challenging the two measures before Uruguayan courts, on February 19, 2010 Philip Morris filed with a request for ICSID arbitration, claiming that Uruguay expropriated its investment and denied it fair and equitable treatment (FET), among other breaches of the Switzerland­­–Uruguay bilateral investment treaty (BIT).

Indirect expropriation: claims and structure of tribunal’s analysis

Philip Morris argued that the SPR expropriated several of its brand variants, including the associated goodwill and the intellectual property rights. Furthermore, it argued that the 80/80 Regulation destroyed the brand equity of the remaining variants, by depriving Philip Morris of its ability to charge a premium price for them and thus affecting its profits. Uruguay denied that the measures were expropriatory and argued that, even if they were, they did not reduce the value of the business substantially.

The tribunal started from the undisputed point that trademarks and the associated goodwill are protected investments under the BIT, and assumed that Philip Morris’s brands continued to be protected under Uruguayan trademark law even after the changes motivated by the challenged measures. It then focused its analysis on two questions: first, whether a trademark confers a right to use or only a right to protect against use by others, and second, whether the measures expropriated Philip Morris’s investment.

Trademarks give an exclusive right to exclude others from use, not an absolute right of use

To answer the first question, the tribunal analyzed the legal framework applicable to trademark protection in Uruguay: Law No. 17,011 (Trademark Law), the Paris Convention for the Protection of Intellectual Property (Paris Convention), the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) and the Protocol on Harmonization of Intellectual Property Norms in MERCOSUR in the Field of Trademarks, Indications of Source and Appellations of Origin (the MERCOSUR Protocol).

The tribunal found that, under all these applicable sources of law, “the trademark holder does not enjoy an absolute right of use, free of regulation, but only an exclusive right to exclude third parties from the market so that only the trademark holder has the possibility to use the trademark in commerce, subject to the State’s regulatory power” (para. 271).

The SPR and the 80/80 Regulation did not expropriate Philip Morris’s investment

The tribunal also dismissed the expropriation claim regarding the 80/80 Regulation. Considering that the brands continued to be printed on cigarette packs, it held that the limitation to 20 per cent of the package merely restricted the modalities of the use of trademarks, but could not have a substantial effect on the claimants’ business.

Rather than considering each brand that Philip Morris had to discontinue when the SPR was enacted as an individual investment, the tribunal looked at Philip Morris’s investment as a whole, “since the measure affected its activities in their entirety” (para. 283). From this standpoint, the tribunal concluded that the SPR was far from causing a substantial deprivation of the value of Philip Morris’s investment. Even if it could have been more profitable in the absence of the SPR, the tribunal held that there could be no indirect expropriation as sufficient value remained after the implementation of the measure.

The tribunal went on to hold that, in adopting both the SPR and the 80/80 Regulation, Uruguay complied with its national and international legal obligations for protecting public health. It further stated that both measures were taken in good faith, in a non-discriminatory manner and proportionately to the intended objective. As such, in the tribunal’s view, the measures were a valid exercise of Uruguay’s police powers, which cannot constitute an expropriation. Accordingly, the tribunal dismissed the expropriation claims entirely.

FET claim rejected in absence of arbitrariness and breach of legitimate expectations 

The tribunal started its FET analysis addressing Philip Morris’s allegation that the challenged measures were arbitrary. Referring to the international law standard under the ELSI case, which defines arbitrariness as a “wilful disregard of due process of law, an act which shocks, or at least surprises, a sense of juridical propriety” (para. 390), the tribunal concluded that the measures were not arbitrary. Rather, it agreed that Uruguay adopted them in good faith and in order to protect public health. Furthermore, contrary to Philip Morris’s contention that the measures were adopted without scientific support, the tribunal indicated that they were based on the FCTC process, which in turn was supported by scientific evidence.

In view of the circumstances of their adoption, the tribunal held that both measures were reasonable, and not “arbitrary, grossly unfair, unjust, discriminatory or […] disproportionate,” with “minor impact” on Philip Morris’s business (paras. 410 and 420). A unanimous tribunal concluded that the adoption of the 80/80 Regulation did not breach the BIT. A majority tribunal concluded the same with respect to SPR.

However, the claimants’ appointee to the tribunal, Gary Born, dissented on this point, finding single presentation a manifestly arbitrary and unreasonable requirement, “because it is wholly unnecessary to accomplishing its only stated objective,” (para. 196 of the dissent) namely, “protecting consumers against deceptive uses of trademarks” (para. 172 of the dissent).

According to Philip Morris, Uruguay’s measures “eviscerated” its legitimate expectations to explore its brand assets and enjoy its intellectual property rights, as well as undermined the legal stability of Uruguay’s legal framework. However, relying on EDF v. Romania and El Paso v. Argentina, the tribunal noted that only specific undertakings or commitments could create legitimate expectations, and that Philip Morris did not provide evidence of specific commitments made by Uruguay regarding tobacco control measures. Furthermore, in view of the limited impact of the measures on Philip Morris’s business, it held that the challenged measures did not change the legal framework beyond the “acceptable margin of change” tolerated under the El Paso standard.

Tribunal dismisses Philip Morris’s denial of justice claims

Philip Morris alleged that contradictory decisions of two Uruguayan courts—the Supreme Court of Justice (SCJ) and the Tribunal de lo Contencioso Administrativo (TCA)—concerning the 80/80 Regulation amounted to a denial of justice. However, according to the majority, although “unusual” and “surprising,” the contradiction was not serious enough to amount to a denial of justice. “Outright conflicts within national legal systems may be regrettable but they are not unheard of,” the majority reasoned (para. 529).

According to dissenting arbitrator Gary Born, the contradictory decisions, in both cases rejecting Philip Morris’s claims, “amounted to ‘Heads, I win; tails, you lose’ treatment” (para. 40 of the dissent), and Uruguay’s failure to provide Philip Morris access to a judicial forum to address the contradiction consisted in a denial of justice.

A second denial of justice claim was that the TCA rejected Philip Morris’s application to partially annul the SPR not based on Philip Morris’s own arguments, but on those brought by British American Tobacco in a different proceeding challenging the same regulation. While recognizing the procedural improprieties, the tribunal considered that the cases and claims were very similar and that Philip Morris’s arguments were addressed, concluding that there was no denial of justice.

Notes: The ICSID tribunal was composed of Piero Bernardini (President appointed by ICSID’s Secretary-General, Italian national), Gary Born (claimant’s appointee, U.S. national) and James R. Crawford (respondent’s appointee, Australian national). The award, including the Decision on Jurisdiction of July 2, 2013 as an annex, is available at http://www.italaw.com/sites/default/files/case-documents/italaw7417.pdf.

Martin Dietrich Brauch is an International Law Advisor and Associate of IISD’s Investment for Sustainable Development Program, based in Latin America.