Canada: ICSID Tribunal: State Imposed Tobacco Control Measures Do Not Violate Investment Treaty Obligations

The International Centre for Settlement of Investment Disputes (ICSID) tribunal recently released its decision in Philip Morris v. Uruguay, holding that tobacco control regulations implemented by a state to protect public health do not violate the state's investment treaty obligations.

The decision comes six years after Philip Morris Brand Sàrl (PMB), Philip Morris Products S.A. (PMP) and Abal Hermanos S.A. (Abal), (collectively Philip Morris or the Claimants) submitted their dispute to the ICSID against the Oriental Republic of Uruguay (Uruguay or the Respondent). The Claimants alleged that some of Uruguay's tobacco control measures regulating the tobacco industry violated an investment treaty between Switzerland and Uruguay because of Uruguay's treatment of the trademarks associated with cigarette brands in which the Claimants had invested.

The tribunal's decision confirms that, in matters involving protection of public health and interference with foreign investment, non-discriminatory and bona fide regulatory action undertaken by a state for the purpose of protecting public welfare does not constitute expropriation. The decision also confirms the high standard for establishing denial of justice to an investor by a state's judicial system.

BACKGROUND

In 1988, Switzerland and Uruguay signed the Agreement between the Swiss Confederation and the Oriental Republic of Uruguay on the Reciprocal Promotion and Protection of Investments (BIT) to strengthen economic cooperation between the two states. The BIT, which came into force in April 1991, included obligations of fair and equitable treatment; protection from expropriation, nationalization, or any measure having similar effect against the investments belonging to an investor of the other state; and consistent observance of the commitments entered into with investors from the other state.

Between 2008 and 2009, Uruguay implemented two tobacco control measures (Packaging Regulations) that led to the underlying dispute. The Packaging Regulations included a single presentation requirement that precluded tobacco manufacturers from marketing more than one variant (i.e. multiple presentations) of any cigarette brand (SPR), and the requirement to increase the size of health warnings appearing on cigarette packages from 50 to 80 per cent of the lower part of the main sides of every cigarette package (80/80 Regulation).

The Claimants alleged that the Packaging Regulations breached the Respondent's duties and obligations under articles 3(1) (impairment of use and enjoyment of investments), 3(2) (fair and equitable treatment and denial of justice), 5 (expropriation) and 11 (observance of commitments) of the BIT, entitling them to compensation. Specifically, the Claimants alleged that the SPR substantially impacted their company's value as they could no longer sell multiple product varieties under each of their brands and that the 80/80 Regulation (which only left 20 per cent of the cigarette pack for Philip Morris' trademarks, logos and other information) wrongfully limited their right to use legally protected trademarks and prevented them from displaying them in their proper form. The Claimants sought an order that the Respondent withdraw the Packaging Regulations or refrain from applying them against the Claimants' investments, or alternatively, pay damages of over US$22-million.

Uruguay maintained that the Packaging Regulations were adopted in compliance with its international obligations for the purpose of protecting public health, and were applied in a non-discriminatory manner to all tobacco companies, that was neither unreasonable nor arbitrary.

ARBITRAL DECISION        

The three-member ICSID tribunal, comprised of Gary Born, Professor James Crawford and Professor Piero Bernardini, dismissed all of the Claimants' claims and found that Uruguay had discretion to implement the Packaging Regulations in protection of public health. The tribunal also ordered the Claimants to reimburse the Respondent US$7-million in costs and to pay all tribunal fees and expenses as well as ICSID's administrative fees and expenses. The most interesting aspects of the tribunal's decision relate to issues of expropriation and denial of justice, which are discussed below.

Expropriation           

It was the Claimants' position that by implementing the Packaging Regulations, the Respondent effectively banned seven of Abal's 13 variants and substantially diminished the value of the remaining ones, resulting in expropriation of the Claimants' investment (i.e. the brand assets, including intellectual property and the goodwill associated with each of the brands) in breach of article 5 of the BIT.

The Claimants' claim was essentially for indirect or de facto expropriation that required establishing that the Packaging Regulations amounted to a "substantial deprivation" of the value, use, or enjoyment of the Claimants' investment. Noting that under Uruguayan law as well as international convention, a trademark holder does not enjoy an absolute right of use but only an exclusive right relative to third parties that is subject to the state's regulatory power, the tribunal rejected the Claimants' position. Notably, the tribunal held that there was not even a prima facie case of indirect expropriation by the 80/80 Regulation. Moreover, the SPR effects did not deprive the Claimants of the value of their business or cause a substantial deprivation of the value, use, or enjoyment of the Claimants' investments. In reaching these conclusions, the tribunal held that limiting the space available on cigarette packages for trademarks and logos to 20 per cent could not have a substantial effect on the Claimants' business and that the Claimants' business had to be considered as a whole in determining whether the SPR had an expropriatory character. Because their business had grown more profitable since the SPR implementation, there was no expropriation.

Interestingly, the tribunal's analysis went further and held that Uruguay's adoption of the Packaging Regulations was also a valid exercise of its police powers for the protection of public health. Emphasizing that the SPR and the 80/80 Regulation had been implemented in fulfilment of Uruguay's national and international legal obligations for the protection of public health and were adopted in good faith and in a proportionate, effective, non-arbitrary, and non-discriminatory manner, the tribunal concluded that the Packaging Regulations could not constitute an expropriation of the Claimants' investment.

Denial of Justice      

The Claimants also alleged that the Respondent, through its judicial system, committed two denials of justice in breach of the fair and equitable treatment standard under article 3(2) of the BIT. The first claim was rooted in alleged contradictions in the reasoning of two courts (one by Uruguay's Supreme Court of Justice (Supreme Court) and the other by Tribunal de lo Contencioso Administrativo (TCA)) involving rulings relating to the 80/80 Regulation's validity. The other claim was based on the TCA's alleged failure to address the Claimants' arguments and evidence in the course of a decision involving a challenge to the SPR and basing its decision on the record brought by a different claimant in a different proceeding.

Noting that the obligation of fair and equitable treatment may be breached if a host state's judicial system subjects an investor to a denial of justice, the tribunal confirmed that arbitral tribunals are not courts of appeal and a high standard of proof is warranted in denial of justice cases given the gravity of a claim that condemns a state's judicial system. Amongst other things, a denial of justice claim may only be asserted after all other means offered by the state's judiciary to redress the denial of justice have been exhausted. Moreover, it is insufficient to simply have an erroneous decision or an incompetent judicial procedure. Rather, there must be clear evidence of an "outrageous failure of the judicial system" or a demonstration of "systemic injustice" or that "the impugned decision was clearly improper and discreditable."

With respect to the Claimants' first claim for denial of justice, an important consideration for the tribunal was that the Supreme Court and the TCA are co-equal under the Uruguay constitutional system, both having original and exclusive jurisdiction (the Supreme Court to determine the constitutionality of a law and the TCA to declare the validity of an administrative act) and the TCA is only bound by a Supreme Court decision holding a law unconstitutional (but not its reasoning or interpretation).

Although the tribunal was of the view that the Uruguayan judicial system and the TCA's failure to follow the Supreme Court's interpretation was unusual, a majority of the tribunal held that it did not amount to a denial of justice. In reaching this conclusion, the tribunal noted that arbitral tribunals should not act as courts of appeal or bodies charged with improving a state's judicial architecture. With respect to the Claimants' second claim, the tribunal held that although there had been procedural improprieties and a failure of form, there was no denial of justice given the similarities between the two cases and the claims made in them. In substance, the Claimants' arguments had been addressed by the TCA.

CONCLUSION

The tribunal's decision is significant for disputes involving interplay between issues relating to interference with foreign investment and protection of public welfare objectives. The decision demonstrates that ICSID tribunals will broadly interpret a state's police powers and exercise deference in deciding whether a sovereign nation has breached its obligations to a foreign investor by implementing regulatory measures geared towards protecting public health. The decision also confirms that investment tribunals will be deferential to a state's unique judicial structure and will impose a high threshold before ruling that a state's judicial system denied justice to a foreign investor.

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