Tobacco giant Philip Morris has notified the Australian government that it intends to request arbitration over Canberra’s draft law regarding plain packaging requirements for cigarettes. Hong Kong-based Philip Morris Asia Limited (PMA), owner of Australian affiliate Philip Morris Limited, claims that the law would violate Australia’s obligations under a bilateral investment treaty (BIT) with Hong Kong.

“The forced removal of trademarks and other valuable intellectual property is a clear violation of the terms of the agreement,” Philip Morris said “Legal action is not a course we take lightly, but the government has unfortunately left us with no other option,” Anne Edwards, spokesperson for PMA, added.

Australia’s Tobacco Plain Packaging Bill 2011, a draft law that aims to make tobacco products less attractive to consumers, would prohibit all logos, along with different colouring and layout on cigarette packs; it would also require that health warnings cover a substantial portion of each package. Though other countries, including New Zealand, the UK, and Uruguay, have previously attempted to adopt similarly strict requirements for cigarette packaging, Australia would be the first country to actually implement such measures.

“We’re going to deliver cigarette packages in that drab green, with no logos, nothing attractive or enticing about the package,” Australian Prime Minister Julia Gillard explained in an interview with ABS Melbourne. “We are confident of our reforms – confident we can deliver them and confident that they will make a difference to the number of people smoke and that’s what this is all about,” she added.

Tobacco giant’s action follows developing country-led WTO debate

PMA’s announcement comes only a few weeks after the same legislation was the subject of heated discussions in the WTO’s Council on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

The Dominican Republic led a group of developing countries in criticising Canberra’s draft legislation on similar grounds as the ones currently being posed by the tobacco giant, but in the context of intergovernmental WTO rules.

The group argued that the law could be inconsistent with Australia’s obligations under the TRIPS agreement, particularly Article 20, which deals with trademarks. The Dominican Republic noted that producers in small and medium-sized economies could have a challenging time remaining competitive in the Australian tobacco market because of the bill, as it feared that new packaging requirements would make it difficult to distinguish cigarette brands from one another.

Canberra, on the other hand, maintains that the law is in line with its TRIPS obligations, and that the measure is just one part of a multi-pronged approach to tackle the public health problems posed by tobacco consumption at home.

Australia will “not be intimidated by Big Tobacco’s tactics, whether they are political tactics, whether they are public affairs kind of tactics out in the community or whether they are legal tactics,” Gillard commented in response to the great stir that the draft legislation has caused even before its final adoption.

She also underlined that Australia believes it is not in violation of any international rules: “We are very confident of our position,” she insisted with regard to the legal claims.

Legal loss could have costly implications

Losing the case, however, could cost Australia billions of unexpected public spending. Unlike other international law proceedings, investor-state arbitration usually allows for the imposition of damages, which the government would be compelled to pay. In the area of regulatory expropriation in particular, some arbitrators have interpreted this right for compensation in a rather liberal manner by requiring governments to pay high amounts to the investors.

“We believe we have a very strong legal case and will be seeking significant financial compensation for the damage to our business,” Edwards said on the tobacco company’s behalf.

Philip Morris’ notice of claim to Australia marks the formal starting point of international investor-state arbitration. Canberra has now three months to reach a negotiated solution; at that point, PMA can then request obligatory arbitration.

Philip Morris has announced that they will request arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) and has proposed Singapore as a potential arbitration centre.

If PMA follows through with this measure, it would not be the first time that cigarette packaging legislation found itself subject to investor-state arbitration. In 2001, Philip Morris launched a case against Canada that soon became infamous, with arbitrators finding that a Canadian ban of descriptors such as “mild” and “light” violated investment provisions of the North America Free Trade Agreement (NAFTA).

Uruguay and Norway are currently struggling with similar cases brought by Philip Morris In the area of investment law, past arbitration panels have often ruled that there is no exception to the requirement of just compensation. Even measures taken in the interest of public health have triggered damages in past cases.

WTO law, on the other hand, provides for a general exception clause that allows, under certain circumstances, trade restrictive policies necessary for public health (GATT Article XX). Moreover, in the specific case of TRIPS, the 2001 Doha Declaration has reiterated ”the TRIPS Agreement does not and should not prevent Members from taking measures to protect public health.”