Philip Morris v. Uruguay

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

(Published in 2018 in International Investment Law and Sustainable Development: Key cases from the 2010s and on this website on October 18, 2018. Read more here.)

Decision and award available at http://www.italaw.com/cases/460

Keywords

Expropriation – police power doctrine, fair and equitable treatment – margin of appreciation, legitimate expectations

Key Dates

Request for arbitration: February 19, 2010

Decision on jurisdiction: July 2, 2013

Award: July 8, 2016

Decision on the rectification of the award: September 26, 2016

Arbitrators

Piero Bernardini (president)

James Crawford (respondent appointee)

Gary Born (claimant appointee)

Forum and Applicable Procedural Rules

International Centre for Settlement of Investment Disputes (ICSID)

ICSID Rules of Procedure for Arbitration Proceedings

Applicable Treaty

Switzerland–Uruguay Bilateral Investment Treaty (BIT)

Alleged Treaty Violations

• Denial of Justice
• Expropriation
• Fair and equitable treatment
• Umbrella clause
• Use and enjoyment of investments

Other Legal Issues Raised

• Jurisdiction—definition of “investment”

1.0 Importance for Sustainable Development

Philip Morris v. Uruguay and Philip Morris v. Australia are among the prime examples of cases (together with the Vattenfall v. Germany case) that provoked significant public awareness of the critical implications of investor–state dispute settlement and investment treaties. The reason is that these are cases where an investor challenged a good-faith regulation that seeks to mitigate undisputed public health risks linked to tobacco consumption.

The Philip Morris v. Australia case was not examined on the merits. The tribunal found that the claims by Philip Morris were inadmissible because the initiation of the arbitration constituted an abuse of rights, as the corporate restructuring by which Philip Morris acquired its investment in Australia occurred when there was already a reasonable prospect that the dispute would materialize. Therefore, according to the tribunal, the restructuring was carried out for the sole purpose of gaining treaty protection. As such, the tribunal declined to exercise jurisdiction (award on jurisdiction and admissibility, December 17, 2015).[1] In Philip Morris v. Uruguay, the tribunal did uphold its jurisdiction and went further to examine the case on the merits, as discussed below.

From the viewpoint of sustainable development, the Philip Morris v. Uruguay award is highly welcome, as it recognized the right to regulate and a wide margin of appreciation for states in adopting measures concerning public health. The tribunal affirmed the police power doctrine and set out that a state does not need to prove a direct causal link between the measure and any observed public health outcomes. It stressed that it is sufficient that measures reflect a reasonable attempt to address a public health concern and are taken in good faith. At the same time, it is not clear whether the same approach would be taken with respect to other areas of public health or environmental protection, where the scientific evidence and consensus are not as clear and where no international legal frameworks like the World Health Organization’s (WHO) Framework Convention on Tobacco Control (FCTC) exist. Would a tribunal apply a similarly wide margin of appreciation?

2.0 Case Summary

2.1 Factual Background

Uruguay has one of Latin America’s highest smoking rates. Tobacco consumption in Uruguay has massive health implications for its population and affects the Uruguayan economy considerably. Against this background, Uruguay has engaged in important anti-smoking policy measures and adopted two principal regulations.

The first was the 2008 Single Presentation Requirement regulation. This instrument provides that tobacco manufacturers could no longer sell multiple varieties of their brand. It also required health warnings to be printed on 50 per cent of the area of cigarette packages. The second measure concerned the so-called “80/80 Regulation.” Under a 2009 presidential decree, the health warnings were to cover 80 per cent, instead of 50 per cent, of the packaging. This meant that only 20 per cent was left for the tobacco companies’ trademarks and other information.

Abal Hermanos S.A. is a Uruguayan company that is fully owned by Philip Morris Brands Sàrl, which is in turn a company registered in Switzerland. Philip Morris Products S.A., also incorporated in Switzerland, owns the relevant trademarks such as Marlboro, Fiesta, L&M and Philip Morris, which it licensed to Abal. Abal’s main activity has been the importation of cigarettes for sale in Uruguay.

2.2 Summary of Legal Issues and Award

Abal Hermanos S.A., Philip Morris Brands Sàrl and Philip Morris Products S.A. (hereafter: Philip Morris) initiated arbitration against Uruguay for breach of its obligations under its bilateral investment treaty (BIT) with Switzerland. In particular, Philip Morris targeted the two legislative measures mentioned above. First, the claimant alleged that the Single Presentation Requirement substantially affected the company’s value since it had to pull out 7 of its 13 product variants (paras. 10 and 274). Second, it argued that the 80/80 Regulation wrongfully limited Philip Morris’ right to use its legally protected trademark by infringing on its intellectual property rights and thus further reduced the value of its investment (para. 11).

In a majority decision, the tribunal dismissed all the claims made by Philip Morris and upheld the legality of the two tobacco control measures enacted by Uruguay for the purpose of protecting public health. The tribunal ordered Philip Morris to bear all arbitral costs and to pay Uruguay USD 7 million as partial reimbursement of the country’s legal expenses.

Claimant-appointed arbitrator Gary Born issued a dissenting opinion. He disagreed with the majority in its assessment of the Single Presentation Requirement, arguing that the requirement was not required or contemplated by the WHO FCTC. Furthermore, based on the factual background and evidentiary record in Uruguay, he considered that the Single Presentation Requirement was manifestly arbitrary and disproportionate and constituted a breach offair and equitable treatment.

3.0 Select Legal Issues

3.1 Support From the “International Public Health Community” and the Role of the Framework Convention on Tobacco Control

The participation of the WHO, the Pan American Health Organization (PAHO) and the FCTC Secretariatby submitting amicus briefs in these proceedings is interesting to highlight, since the evidence provided by these entities was crucial for the tribunal’s assessment on the effectiveness and reasonableness of the disputed measures. As the WHO and FCTC Secretariat noted, large graphic health warnings are an effective means of informing consumers of the risks of tobacco consumption and of discouraging tobacco consumption. Therefore, the submissions supported that the Uruguayan measures are effective means of protecting public health (para. 38). The PAHO amicus brief stated that “Uruguay’s tobacco control measures are a reasonable and responsible response to the deceptive advertising, marketing and promotion strategies employed by the tobacco industry, they are evidence based, and they have proven effective in reducing tobacco consumption” (para. 43).

The award underscored the importance of the WHO FCTC in setting tobacco control objectives and establishing the evidence base for measures. It suggests that where evidence has been established internationally, states do not need to establish evidence at the domestic level. In light of sustainable development goals, the important weight that the tribunal gave to international health standards shows how and to what extent investment tribunals can take a more systemic integration approach toward different branches of international law.

3.2 Indirect Expropriation: Affirmation of the police powerdoctrine

Philip Morris argued that the Single Presentation Requirement and the 80/80 Regulation constituted an indirect expropriation of its brand assets, including intellectual property and goodwill associated with each of its brand variants (para. 180). According to Uruguay, the measures could not constitute an expropriation mostly because they were a legitimate exercise of its sovereign police powerto protect public health (para. 181).

The tribunal by unanimity agreed with Uruguay’s argument. Firstly, it confirmed that the measure did not have the effect of substantial deprivation of the investment since Philip Morris was able to continue its business of selling tobacco products in Uruguay. The tribunal could have stopped there, but considered it relevant to discuss Uruguay’s police powers to further support its finding that there was no expropriation (para. 287).

In the tribunal’s view, Uruguay’s adoption of the challenged measures was a valid exercise of the state’s police powers (para. 287). The award makes it very clear that public health policy relates to heightened public welfare concerns. As such, it stated that protecting public health has long been recognized as an essential manifestation of the state’s police powers (para. 291). The tribunal concluded that the Single Presentation Requirement and the 80/80 Regulation have been adopted in fulfillment of Uruguay’s national and international legal obligations for the protection of public health (para. 302). The measures also satisfied the conditions of the police power doctrine as they were adopted in good faith andfor the purpose of protecting public health and were non-discriminatory and proportionate (para. 305).

Interestingly, the expropriation provision contained in the Switzerland–Uruguay BIT does not include a reference to the police power of states. However, the tribunal considered that the provision must be interpreted in accordance with Article 31(3)(c) of the Vienna Convention on the Law of Treaties (VCLT), which requires that the provision must be interpreted in light of “[a]ny relevant rule of international law applicable to the relations between the parties.” This directed the tribunal to customary international law, which includes, according to the tribunal, the police power of states.

3.3 Fair and Equitable Treatment: Wide margin of appreciation for the national legislator and the question of “reasonableness”

Philip Morris further claimed that the measures were arbitrary, since they failed to serve a public purpose but caused substantial harm, and thus breached the fair and equitable treatment (FET) standard. Uruguay counter-argued the claim by stressing once more that the measures were adopted in good faithand in a non-discriminatory manner and that they were logically connected with the state’s public health objectives (para. 310).

The majority of the tribunal dismissed Philip Morris’s arguments. In its analysis, the tribunal made reference to the margin of appreciationas developed in the jurisprudence of the European Court of Human Rights. In particular, the tribunal held that the responsibility for public health measure rests with the government and that investment tribunals should pay great deference to governmental judgments for national needs in matters such as the protection of public health (para. 399). Referring to the Glamis Gold v. United States award,[2] the tribunal held that the sole inquiry for the tribunal is whether or not there was a manifest lack of reasons for the legislation (para. 399). Accordingly, the majority of the tribunal found the Single Presentation Requirement to be reasonable because it was an attempt to address real public health concerns (paras. 409 and 410). With respect to the 80/80 Regulation, the majority further underlined the importance of deference that has to be given to the state when it has to balance between conflicting considerations, and ultimately held that the 80/80 Regulation was a reasonable measure adopted in good faith to implement an obligation assumed by the state under the FCTC (paras. 418–420).

As mentioned before, arbitrator Gary Born dissented with respect to the FET assessment. He rejected the applicability of the margin of appreciation in the BIT context and found that the Single Presentation Requirement breached FET on the basis that it was arbitrary and irrational and did not bear a logical connection to the policy objective. In his dissenting opinion, he further stated that substantial deference to the regulatory sovereignty of states was essential, but that any measure would still need to satisfy a minimum level of rationality and proportionality.

3.4 Dismissing Legitimate Expectations for a Stable Regulatory Environment as Regards Tobacco Regulations

Philip Morris also claimed that Uruguay breached the FET standard because its legitimate expectation that the regulatory environment would not drastically change had been frustrated.

The tribunal dismissed these arguments and stated that legitimate expectations could not exist when general legislation changes. In particular, such changes were not prevented by the FET standard “if they [did] notexceed the exercise of the host State’s normal regulatory power in pursuance of a public interest and [did] not modify the legal framework relied upon by an investor at the time of its investment ‘outside of an acceptable margin of change’” (para. 423).

The tribunal found that, on the contrary, in the light of the “widely accepted articulations of international concern for the harmful effect of tobacco, the expectation could only have been of progressively more stringent regulation of the sale and use of tobacco products” (para. 430).

Notes

[1] Philip Morris v. Australia, PCA Case No. 2012-12, Award on Jurisdiction and Admissibility, December 17, 2015, https://www.italaw.com/sites/default/files/case-documents/italaw7303_0.pdf.

[2] Glamis v. United States, UNCITRAL (NAFTA), Award, June 8, 2009, https://www.italaw.com/sites/default/files/case-documents/ita0378.pdf.