Bilateral Investment Treaty (BIT) Arbitration

PHILIP MORRIS ASIA LIMITED & THE COMMONWEALTH OF AUSTRALIA

Plain Packaging of Tobacco Products in Australia:

As of December 1, 2012, all tobacco products sold in Australia must comply with the country's new packaging rules. These rules removed logos, colors, designs and other differentiating elements of branding – as well as trademarks, other than the product's name – from retail packaging of tobacco products.

Australia’s pictorial guidelines dictate that every tobacco companies’ products must use the same color and typeface – both of which the government mandated – and comply with many other rules that essentially eliminate packaging design in favor of a homogenized product appearance. Cigarette packaging must also carry larger graphic health warnings on the pack, occupying 75% of the front and 90% of the back.

Challenge to Australia’s Violation of its Bilateral Investment Treaty with Hong Kong:

Australia’s tobacco plain packaging rules resulted from legislation that the Parliament passed on November 21, 2011. On that day, Philip Morris Asia (PMA) brought a claim against Australia under the Australia-Hong Kong Bilateral Investment Treaty (BIT). PMA is a Hong Kong corporation that owns and controls Philip Morris Limited in Australia. PMA had notified the Australian government on June 27, 2011 that it would take legal action if Australia were in fact to enact plain packaging.

Hong Kong and Australia signed this BIT in 1993 to “create favorable conditions for greater investment” and to “promote economic cooperation” by protecting cross-border investments between the two countries.

Australia has 20 BITs in place  with countries around the world. These treaties protect brands, intellectual property, branding, ongoing business enterprises and other forms of investment. Domestic law must be consistent with the provisions of an investment treaty. Under Australian law, a damage award under a BIT is enforceable in domestic courts (i.e., as though it had come in a domestic proceeding).

In the arbitration, PMA alleges that Australia's plain packaging rules breach its obligations under the BIT, causing substantial financial injury to PMA. More specifically, PMA claims that the Australian government violated the BIT by:
- Depriving PMA of the real value of its investments in Australia (i.e., its brands, branding, and intellectual property)
- Denying PMA and its investments "fair and equitable treatment"
- Unreasonably impairing PMA’s investments. 

In its August 2012 decision in a separate domestic case challenging this law, Australia’s High Court agreed that plain packaging is a deprivation of tobacco companies’ valuable intellectual property rights. Yet the High Court ruled in favor of Australia because of the unique nature of the country’s constitution, which also requires the government to receive a proprietary benefit.

International Investment Dispute Tribunal Overview:

PMA is asking an arbitration panel to suspend the law and award substantial compensation for the financial damage that plain packaging will cause by commoditizing the cigarette market in Australia.

The arbitration is proceeding in accordance with the provisions of the BIT and the Arbitration Rules of the United Nations Commission on International Trade Law 2010 (UNCITRAL Rules). Those provisions empower a Tribunal of three arbitrators to hear and decide disputes under the treaty. The Permanent Court of Arbitration at The Hague provides certain administrative assistance to the Tribunal. 

PMA and Australia each appointed one arbitrator: PMA appointed Professor Gabrielle Kaufmann-Kohler, a Swiss national. Australia appointed a dual New Zealand and Canadian national, Professor Donald McRae. The Permanent Court of Arbitration appointed Professor Karl-Heinz Bockstiegel to serve as Presiding Arbitrator.

Current Status & Timeline:

The Tribunal selected Singapore as the seat of the arbitration, which could contribute through 2017

The first hearing in the arbitration took place in July 2012 and focused on procedural matters. Thereafter, the Tribunal issued an order on confidentiality. The final award and other orders in the case will be public and each party can publish its own submissions. The hearings and corresponding transcripts in the arbitration will be confidential.

In accordance with a schedule that the Tribunal established, PMA filed its Statement of Claim at the end of March 2013 and Australia filed its Statement of Defense in October 2013.

On February 20 and 21, 2014 the tribunal held a hearing where the parties presented arguments on whether the Tribunal should split the case into two phases to address jurisdictional arguments and the merits of the dispute separately.

On April 14, 2014 the tribunal decided to divide the proceedings in the case into two phases – one to decide certain questions related to jurisdiction and a second to hear the arguments at the core of the case.

About Investor State Dispute Settlements:

This Investor-to-State Dispute Settlement (ISDS) mechanism was introduced more than a half century ago to international trade and investment treaties. This tool – which is modeled on basic tenets of democratic legal systems - promotes economic development by protecting investors from unequal and arbitrary action on the part of governments.

Governments have won nearly half of the known cases brought since the first of more than 2,700 treaties began to include the measure nearly 50 years ago.

Like many businesses both large and small, PMI invests significantly in infrastructure, hiring a workforce and building brands in the places where business is done. Our supply chain partners from farmers to packaging suppliers do the same. These investments are based, in-part, on the understanding that we share the same protections under the law as any other investor in a given country. 

PMI has brought two ISDS claims forward, one against Australia’s plain packaging law and another against Uruguay’s equally arbitrary laws that destroy brands. Neither of these claims has blocked a single tobacco regulation from implementation and together they represent less than one percent of all known ISDS claims.

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