Philip Morris与乌拉圭之间关于香烟包装的国际仲裁案子引发了对在外商投资纠纷中政府权力原则的运用的讨论。

Expropriation and Regulation in the Public Interest

The international arbitration case regarding the regulation of cigarette packaging between Philip Morris and Uruguay raised questions as to the operation of the police power doctrine in foreign investment disputes1. Philip Morris International Inc., a multi-national company headquartered in the United States, successfully relied on the bilateral investment treaty between Switzerland and Uruguay to bring an expropriation claim against the government of Uruguay through its Swiss subsidiary. The dispute arose as to whether the measures taken by the government of Uruguay to implement health warnings and restrict forms of advertising on cigarette packaging amounted to expropriation and if so, whether Philip Morris should be entitled to compensation.

Bilateral Investment Treaties (BITs) developed in the 1960s contained expropriation clauses without specific rules as to the application of the expropriation clauses. Most Chinese BITs, for example, rely on the standard formula that Contracting States shall not "expropriate, nationalize or take similar measures... unless the following conditions are met:

  1. for the need of social and public interests;
  2. under domestic legal procedure;
  3. without discrimination;
  4. against compensation."2

More recently, developments have been made in the drafting of BITs, for example, the 2012US Model BIT provides some guidance on the matter of expropriation by specifically referring to expropriation through taxation measures under Article 21 and including Annex B, which attempts to explicate the concept of expropriation by referencing customary international law and including a statement on indirect expropriation as being:

"an action or series of actions by a Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure.

  1. The determination of whether an action or series of actions by a Party, in a specific fact situation, constitutes an indirect expropriation, requires a case-by-case, fact-based inquiry that considers, among other factors:

    1. the economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred;
    2. the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and
    3. the character of the government action.
  2. Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations."

While paragraph (b) above of the US Model BIT appears to accept the police power doctrine, the use of the language "rare circumstances" reflects certain tensions within US constitutional law.

The police power doctrine was promoted in the influential decision of Chief Justice Lemuel Shaw of Massachusetts in the case of Commonwealth v. Alger3 creating a distinction between the exercise of eminent domain, for which compensation was required, and police power, for which compensation was not a requirement.

However, in the case of Pennsylvania Coal Co. v Mahon 4, Justice Holmes of the Supreme Court of the United States stated that where the exercise of police power "goes too far it will be recognized as a taking" and compensation follows 5. Whether this statement refers to manner of the exercise of police powers or whether the statement refers only to the extent of the taking involved is a question of continuous uncertainty and debate 6. In other words, it is arguable that the single relevant criteria for the determination as to the existence of an expropriation is the effect upon the property owner, which has been termed the 'sole effects doctrine' 7.

The tension in US constitutional law was in a way reflected in the award of Philips Morris v Uruguay, dated the 8th of July 2016,where the arbitral tribunal essentially decided the case on two points of law 8. The first point was that the actions of the government of Uruguay did not amount to 'taking' in terms of the assessment of the impact of the regulations upon Philip Morris and in terms of an analysis of the proprietary nature of the rights being claimed.

The tribunal referred to the concept of 'substantial deprivation' as the requirement for establishing an indirect expropriation claim 9. The tribunal rejected the claim that the measures taken by the government of Uruguay substantially affected the claimant's profits, due to the fact that the Philip Morris' operations in Uruguay were still profitable, in spite of claim that operations would have been more profitable but for the regulations. In other words, the tribunal looked at the effect on the investment as a whole rather than the particular proprietary right. Similarly, the question as to whether tribunals should limit itself to looking at the investment as a whole or whether a part of an investment can be the relevantly protected by referencing a specific right, is also a contentious issue 10.

The second point was that the arbitral tribunal purported to confirm the application of the police power doctrine in international investment law 11. The tribunal stated that this case was one in which would clearly fit under the police power doctrine and that Uruguay would not be subject to a requirement to make payments for compensation because of the legitimate nature of the regulations.

In reaching the conclusion that the regulations imposed by Uruguay were of a legitimate nature of the kind that does not demand compensation, the tribunal looked at the expectations of the parties, the nature of the regulation by the government, and the effect of the regulations upon the investor. The tribunal held that "in light of widely accepted articulations of international concerns for the harmful effect of tobacco, the expectation [of the claimant] could only have been of progressively more stringent regulation of the sale and use of tobacco products" 12.

As a side note, the issue of the lawfulness or unlawfulness of expropriation is not to be confused with the question as to the application of the police power doctrine. BITs clearly provide that lawful expropriations also require the element of compensation, however, the concept of unlawful expropriation may have certain implications on the calculation of the amount of compensation 13.

As background to Philip Morris v Uruguay, Australiawas the first to introduce plain tobacco packaging legislation in 2011 under the Tobacco Plain Packaging Act 2011 (Cth). In response, claims were brought by tobacco companies under the section 51(xxxi) of the Australian Constitution 14. Chief Justice French of the High Court held that right holders should not be under any illusion that their intellectual property rights would not be subject to regulation. French CJ accepted that intellectual property rights were of the relevant proprietary characteristic that might be subject to section 51 and that the legislation did reduce the value of the trademark and therefore amounted to 'taking'. However, the Australian Constitution only requires compensation for an 'acquisition' as distinct from the concept of 'deprivation' and so no compensation was required.

The decision of the High Court of Australia left open the issue as to the standard of expropriation existing under a country's international obligations and Philip Morris brought an investment arbitration case against Australia. No international instruments between Australia and the US provided for investor-state arbitration, and Philip Morris' Australian subsidiary transferred its interests to Philip Morris Asia in the attempt to rely on the Hong Kong and Australia BIT, but was unsuccessful as the PCA tribunal in Singapore held that the claim was inadmissible 15.

Corresponding with the investor-state arbitration, the governments of Ukraine, Indonesia, Cuba, Honduras and the Dominican Republic lodged complaints against Australia's measures under the WTO system for trademark violations, however, it is to be noted that Ukraine subsequently suspended its proceedings against Australia in May 2015. While the parties to the dispute have issued their submissions to the DBS panel established according to the DSU, the report of the panel is pending.

As international arbitrations are not necessarily tied to any particular jurisdictional courts or precedent, the need for consistency in international arbitration is ever pressing. While this case might be considered 'easy' in the sense that there is no real public support and only limited political support for tobacco companies, the debate as to the applicability of police power doctrine in international investment law does raise doubts as to whether arbitrators are appropriately positioned to make decisions relating to the balancing of interests between states and investors in matters involving the public interest. The updating of BITs may help settle these issues, providing more guidance to arbitrators and more certainty for investors and states alike.

Footnotes

[1] 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

[2] Agreement Between the Government of the People's Republic of China and the Government of the Republic of Croatia Concerning the Encouragement and Reciprocal Protection of Investments.

The BIT between Switzerland and Uruguay also contains a similar provision without further explanation as to the application of the rule against expropriation.

[3] 61 Mass. (7 Cush.) 53, 86 (1851)

[4] 260U.S.393 (1922)

[5] Ibid. at 415

[6] Barros, B., 2004, "The Police Power and the Takings Clause", University of Miami Law Review, vol. 58, No. 2

[7] Mostafa, B., 2008, "The Sole Effects Doctrine, Police Powers and Indirect Expropriation under International Law", Australian International Law Journal, vol. 15, iss. 1 at pg. 267

[8] 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 ("Philip Morris v Uruguay")

[9] Philip Morris v Uruguay,8 July 2016 Award, at para. 192

[10] Isakoff, P.D., 2013, 'Defining the Scope of Indirect Expropriations for International Investments', the Global Business Law Review, vol. 3, iss. 2, 189, para. 198

[11] Philip Morris v Uruguay July 2016 Award, at para. 292

[12] Ibid. at para.430

[13] ADC Affiliate Limited and ADC & ADMC Management Limited v. Republic of Hungary (ICSID Case No. ARB/03/16)

[14] JT International SA v Commonwealth of Australia; British American Tobacco Australasia Limited v The Commonwealth [2012] HCA 43

[15] Philip Morris Asia Limited v. The Commonwealth of Australia, UNCITRAL, PCA Case No. 2012-12

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