Australia won on plain packaging — but it's not over yet

By David Donaldson

May 20, 2016

Two young rebels drinking and smoking

Despite the Australian government’s victory against Philip Morris over plain packaging, policymakers will have to wait until later this year to get a sense of how international trade law views governments’ ability to put such restrictions on tobacco products, according to experts.

That’s because Australia’s successful defence was based on a jurisdictional argument — rather than a judgment on the permissibility of plain packaging laws themselves — as was confirmed by the award decision published earlier this week by the Permanent Court of Arbitration. This follows the High Court of Australia some years ago finding against British American Tobacco on plain packaging.

So while Australia’s plain packaging laws will remain, the broader issue of whether tobacco companies can use trade and investment treaties to sue governments over valid health regulations has not been resolved.

“If Uruguay successfully defends the attack, this would mean the ability of governments to regulate commerce for the benefit of citizens was stronger than some have argued.”

Many legal experts, including Chief Justice Robert French, have expressed concerns that tobacco companies’ realisation they could use free trade agreements to sue states meant governments would be unable to regulate effectively for their citizens’ health. The uncertainty surrounding this unresolved issue has created “regulatory chill” — countries putting off or even abandoning similar plans out of concern over the huge potential costs of a successful challenge by a tobacco company. This is especially a problem for poorer states, which are also more likely to have high smoking rates and low quality health services.

The court found Philip Morris had moved its business from Switzerland to Hong Kong for the purpose of taking advantage of the Australia-Hong Kong bilateral investment treaty, which allows companies to sue Australia. Because the restructure took place after Australia announced it would introduce plain packaging, the court agreed with Australia’s argument that the impact of the policy “was foreseeable” and Philip Morris’ decision to bring the case was thus an “abuse of rights”, making it invalid.

But a similar case against between Philip Morris and Uruguay currently before the World Trade Organisation, which has already proceeded to examining merit arguments, will provide more clarity when it’s likely finalised later this year.

The Uruguay decision will be even more important in the fight for plain packaging than Australia’s case, remarked one participant at a Melbourne Law School Global Economic Law Network event on Thursday.

Despite the Australia v Philip Morris case being thrown out on jurisdictional grounds — after more than four years and many millions of dollars, mind you — many believe Philip Morris would have lost on substantive grounds if the case had continued. The Australian government was very confident of its arguments and many believe Uruguay has a good chance of winning, too.

Tactics and regulatory chill

But if Philip Morris didn’t have much of a case, why did it sue Australia? A Melbourne Law School event yesterday — under Chatham House rules, because it isn’t just governments who get sued — heard from experts that because the tobacco company knew the regulatory chill the case created would put a dent in the international momentum towards plain packaging, giving it a few years before other countries brought in similar rules.

Despite extensive media coverage of concerns about investor-state dispute settlement mechanisms in free trade agreements — that is, measures allowing companies to bring cases against governments — it may turn out that such fears were overblown. If Uruguay successfully defends the attack against its own tobacco control regime, this would mean the ability of governments to regulate commerce for the benefit of citizens was stronger than some have argued.

This is because the treaties under which the Australian and Uruguayan cases were initiated are both what’s known as “first generation” bilateral investment treaties, which are simpler than more recent agreements and have the lowest level of protection for governments against being sued. This bodes well for agreements such as the Trans-Pacific Partnership, which includes stronger measures, including a specific clause allowing countries to “carve out” tobacco control measures from the arbitration procedures created by the treaty.

But this is speculation. We’ll have to wait some months before we can find out if governments around the world really are free to implement strong tobacco control policies such as plain packaging.

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