On July 8, an arbitral panel established under a bilateral investment agreement between Uruguay and Switzerland rejected the claims of the tobacco company Philip Morris that Uruguay had unlawfully seized its property by enacting legislation controlling the use of trademarks on cigarette packaging.

Uruguay had adopted legislation that mandated health warnings covering at least 80 percent of cigarette packaging, besides imposing strict limitations on the form of trademarks that could be used by tobacco companies on their packs.

Philip Morris, as an “investor”, had argued that the regulations adopted by Uruguay confiscated its valuable intellectual property, and argued that Uruguay had adopted its regulations without adequate public health justification.

The arbitral tribunal emphasized that Uruguay has the sovereign authority to adopt legislation protecting and promoting public health, and that governments have substantial discretion to exercise their police powers. Uruguay’s legislative and regulatory efforts were consistent with the widely-adopted World Health Organization Framework Convention on Tobacco Control and its implementing guidelines.

The tribunal also observed that it is difficult to determine which specific measure among tobacco control measures is going to have a significant public health impact, and that a government does not need to demonstrate in advance that a particular measure will have a beneficial effect. It is enough that the government adopts its measures in a process that reasonably evidences an intention to protect public health.

Protecting the public Uruguay’s internal processes manifestly demonstrated the government’s commitment to protecting the public from the harms of cigarette smoking. That cigarette smoking causes disease and death among a large percentage of smokers has been conclusively demonstrated from a scientific standpoint, and this was not challenged by the tobacco company.

Philip Morris was ordered to pay the legal fees of the Uruguayan government.

This decision, delivered through the World Bank’s International Centre for Settlement of Investment Disputes, strikes another blow against tobacco companies trying to prevent governments from restricting cigarette promotion by controlling the use of trademarks. In Australia, the United Kingdom and France, “tobacco plain packaging” legislation restricts trademark use to a standard size, colour and font, restricting attempts to make tobacco packages attractive to consumers.

Trade with caution Though the arbitral panel in Philip Morris vs Uruguay rejected the tobacco company claim, the fact remains that an investment agreement forced the government of Uruguay to commit substantial resources in personnel, time and money to defend the case. This raises serious questions over the incorporation of “investor to state dispute settlement” (ISDS) mechanisms in trade agreements.

In a similar case, US-based originator pharmaceutical company Eli Lilly is challenging the decisions of Canadian federal courts invalidating two of its patents, also alleging arbitrary confiscation of its intellectual property rights, and demanding $500 million in compensation from the Canadian government.

Investor to state dispute settlement mechanisms basically assume that foreign investors will not be treated fairly by the courts of host countries, such as India. A foreign investor bringing a claim in one of these disputes is not subject to any type of financial risk other than perhaps paying legal fees, as Philip Morris was asked to do. The host government does not have a financial counterclaim against the complaining investor.

With the sovereign rights of a host country to regulate matters such as public health being at stake, the incorporation of ISDS in trade agreements should be approached with great caution. At the very least, there must be tight limits on the potential scope of claims.

 

Frederick M Abbott

The writer is the Edward Ball Eminent Scholar Professor of International Law, Florida State University College of Law. Views expressed are personal

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