13 May 2016

Treaty shopping in investor-state arbitration: butts out for Phillip Morris’ claim against Australia

Philip Morris’ billion dollar challenge to Australia’s plain packaging legislation has failed, with an international investment treaty arbitration Tribunal dismissing the claim.

Philip Morris’ complaint was against Australian laws which banned the sale of branded tobacco products. These laws had the effect of requiring all vendors of tobacco in Australia, including Philip Morris, to sell their products, such as cigarettes, without any of their trademarks. Instead, all tobacco products are required to be sold in plain packages, marked with confronting health warnings. Philip Morris’ case was that these laws extinguished its intellectual property rights, and therefore impaired the value of its investment in Australia.

The cornerstone of Philip Morris’ case, whether Australia’s regulatory acts, done in the interests of public health, were nonetheless acts which require the Australian government to compensate it, is a question of great interest to governments globally. Sovereigns want to encourage foreign investment through offering investment protection, but want to safeguard their right to regulate in the public interest (for example in relation to health, the environment etc.) without those regulatory measures resulting in the state having to compensate foreign investors in a way that it would not have to compensate domestic players.

The Tribunal dismissed the claims on the basis that it had no jurisdiction to consider the case. Philip Morris’ claim was made pursuant to the bilateral investment treaty between Hong Kong and Australia, which gives Hong Kong incorporated investors, such as Philip Morris, the right to initiate claims directly against the Australian government for breaches of the investment protections in the treaty. At the time of writing, the award, and therefore the reasoning of the tribunal, remains confidential. However, it appears that the ground upon which the claim was dismissed was a procedural matter, that Philip Morris had no standing to bring its claims under the Hong Kong Australia BIT, as it had only transferred its assets into a Hong Kong incorporated company for the purpose of brining the claim. While Tribunals have often been tolerant of investors who structure their investments in such a way as to attract investment treaty protection, less indulgence is extended to claimants who take such steps when a claim is already known to exist.

This claim is seen as a vindication of states’ rights to regulate in the public interest, as Australia will not be required to compensate Philip Morris, despite it no longer being permitted to use its intellectual property on tobacco products in Australia. While it is true Australia will not be required to compensate Philip Morris, the issue of whether Australia’s public health regulations nonetheless required Australia to compensate foreign investors was not tested.

Rather, this case is an example of a Tribunal ensuring that only genuine investors, who meet the requirements of the relevant treaty at the time of making their investment, will be afforded the protections of bilateral investment treaties.


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Download Crossing Borders: International Arbitration Insights - Where will we be in 2028?

Crossing Borders is a periodic review of developments in international arbitration across the world. Included in this special 10th edition, we explore what arbitrations will be like going into 2028 - where, how and by whom disputes will be decided.

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