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May 19 — An attempt by Philip Morris to obtain billions of dollars in damages from the Australian government because of a law requiring the sale of cigarettes in plain packaging constituted an abuse of an international investment treaty, said an arbitration decision released May 16.
The intergovernmental Permanent Court of Arbitration in The Hague released the text of its December 2015 decision after months of legal squabbling between the parties over which parts should be redacted (245 ITD, 12/22/15).
Although it had been known since December that the tribunal had thrown out the company's claim on jurisdictional grounds, the newly released text spells out that the company was found to have abused rights available under a 1993 bilateral investment treaty between Hong Kong and Australia.
Philip Morris had brought its action to force Australia to suspend its plain packaging laws or, in the alternative, pay for damages resulting from the law blocking its use of trademarks on cigarette packages.
This was Philip Morris' second failed attempt to stop the law. In 2012, the High Court of Australia rejected arguments that the plain-packaging law amounted to an unconstitutional acquisition of the tobacco companies' intellectual property.
Several countries have filed disputes before the World Trade Organization regarding Australia's plain-packaging law.
The basis for the treaty abuse finding was that the company had restructured in early 2011 for the main or sole purpose of taking advantage of a treaty at a time when a dispute with the Australian government over the issue of plain-pack legislation was foreseeable.
A dispute is foreseeable when there is a reasonable prospect “that a measure which may give rise to a treaty claim will materialize,” the tribunal said.
Article 10 of the Hong Kong-Australia Bilateral Investment Treaty (BIT) allows investors in one country to initiate arbitration proceedings against the other country for allegedly violating the treaty. It does not allow an investor to sue its own country.
The Australian government argued that when Philip Morris began to foresee the passage of the plain -packaging law, it restructured its corporate holdings so that its Hong Kong entity controlled all the shares of its Australian company, Philip Morris Limited. This control meant that the Hong Kong entity was an investor into Australia, allowing it to bring arbitration under the BIT.
In this case, it was foreseeable from April 29, 2010, that a plain-packaging law would be introduced in Australia, the tribunal said, referring to the date on which Prime Minister Kevin Rudd announced the government's plan to legislate on the issue.
“The tribunal is not convinced that political developments after 29 April 2010 were such that the claimant could reasonably conclude that the enactment of plain packaging measures and the ensuing dispute were no longer foreseeable,” the tribunal said.
Nor was there any substantive evidence offered by the company to back its claims that the restructure was part of a broader groupwide process, or carried out to gain tax benefits or assist with cash flow, the tribunal held.
Mark Jennings, who for several years headed the Australian government's defense team, told Bloomberg BNA May 18 that the finding was “an important development in the law” on treaty abuse.
There have only been a few other cases where a tribunal has found a company sought to abuse treaty rights, and they have involved attempts to “dress up domestic investments as foreign investments,” said Jennings, who is now a Canberra-based special advisor to law firm MinterEllison's international trade group.
However, Jennings cautioned that the finding doesn't necessarily mean the same standard will now be applied by arbitral tribunals “across the board,” as it doesn't set a binding precedent.
Jennings reiterated that the decision didn't provide any guidance on the merits of the claims made by Philip Morris about plain-pack legislation.
Philip Morris declined to comment on the release of the ruling, referring Bloomberg BNA to its December 2015 statement, when the tribunal announced it had rejected the company's claim.
In that statement, the company said the result did not validate Australia's plain-packaging law but instead “hinged entirely on a procedural issue.”
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The decision in ’Philip Morris Asia Limited (Hong Kong) v. The Commonwealth of Australia’ is available at https://pcacases.com/web/view/5.
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