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July 18, 2016

Experts Split On Precedent In Uruguay's ISDS Victory Over Philip Morris

from Inside US Trade

Related: Public Health Takes a Hit Even as Uruguay Prevails in Infamous Philip Morris Investor-State Attack

Philip Morris' challenge of a number of Uruguayan tobacco control measures was brought to an end on July 8 after arbitrators sided with the South American country in a split decision, but experts are divided on what the outcome means for future challenges of anti-tobacco laws and regulations under investor-state dispute settlement provisions.

ISDS experts disagreed over two issues, the first being whether Philip Morris' unsuccessful challenge in Uruguay will lead that and other multinational tobacco companies to be wary of bringing future ISDS cases against public health measures. Second, those experts differed on whether the outcome of the Uruguay dispute is precedent-setting in favor of anti-smoking public health measures and against tobacco companies seeking to challenge them.

Central to the belief that tobacco companies will not be deterred from bringing cases against public health measures is the fact that the process of a dispute itself incurs a potentially overwhelming financial cost on countries seeking to limit domestic tobacco demand, regardless of which party is successful in the litigation, some experts contend. The threat of that cost alone may be enough to cause governments to hesitate when considering tobacco control measures, creating a “chilling effect” on anti-smoking regulations.

“I do not necessarily think the industry will bring fewer challenges. I think the industry has proven to be aggressive in the use of challenges, or using the possibility of challenges to go after lower-income nations,” said Thomas Bollyky, a senior fellow for global health, economics and development at the Council on Foreign Relations, in an interview with Inside U.S. Trade.

Bollyky expects those cases to continue to be brought over anti-tobacco measures “in part because the industry's future is in those [lower-income] nations.” Specifically, Bollyky and other experts pointed to Sub-Saharan Africa as one region ripe for government tobacco controls that could draw challenges from the tobacco industry.

Howard Mann, senior international law adviser to the International Institute for Sustainable Development, told Inside U.S. Trade that while Uruguay undoubtedly was victorious in the dispute, the “bigger picture” points to a system in which companies such as Philip Morris can outspend developing countries in legal battles and compel governments to consider delaying anti-tobacco regulations out of fear of litigation.

Mann said the case likely created regulatory chill even for governments such as New Zealand, Canada and the United Kingdom, where such cases would pose budgetary headaches, as well as in multiple governments in Sub-Saharan Africa.

This sentiment was echoed by Public Citizen's executive director of Action on Smoking and Health Laurent Huber in a July 8 statement. “This is a moment to celebrate, but also a moment for sober reflection. [Philip Morris International] will no doubt shed some public crocodile tears, but their main goal in launching the suit has been realized -- six years and millions of dollars have been spent defending a nondiscriminatory law that was intended purely to protect public health. This has already resulted in 'regulatory chill' in other countries, preventing tobacco legislation that would have saved lives,” she said.

Philip Morris spent about $7 million on the dispute, according to the final decision document.

But Simon Lester, a trade analyst at the Cato Institute, said he would be surprised if further challenges to tobacco control measures were brought under ISDS provisions, largely because he believes tobacco companies now understand that those cases are essentially impossible to win. Lester took this stance based on what he characterized as poor legal footing that most anti-tobacco cases would find themselves on and the fact that public opinion is significantly tilted against tobacco companies.

Pointing to the Uruguay dispute as an example, he said a tobacco company might be able to convince one of three judges to side with it, but in all but the most legally clear-cut cases, the industry would have trouble getting a majority to decide in its favor because anti-tobacco public health measures have enough political backing to make them more easily justifiable.

Mann echoed some of Lester's analysis of the political landscape surrounding the case by arguing that public health measures may be easier to defend against so-called “bad actors,” such as the tobacco industry, which he said has misled consumers numerous times on the safety of its product.

However, Lester said that individual ISDS cases -- including the Uruguay-Philip Morris dispute -- have little precedent-setting effect on future challenges. The different forums for ISDS challenges to be heard along with a variety of arbitrators available to hear them, added to the already broad and vague nature of legal standards central to ISDS disputes, make it unlikely that one decision's jurisprudence will bleed into a separate case.

Mann also sided with Lester on the precedent-setting question, noting that on questions such as the standard of fair and equitable treatment -- which was relevant in the Uruguay case -- many divergent views exist on how much leeway a government should have when regulating for purposes of public health, and that those views vary from case to case.

This outcome, Mann said, does not bring clarity to those divergent views, especially given that the case was decided in a two to one split decision, with the majority heavily favoring the government's right to regulate, while the dissenting view sided with the investor.

One legal expert however disagreed with Lester and Mann, arguing that the Uruguay decision is massively important for future ISDS cases involving tobacco control measures.

That source said that due to the fact this case was the first ISDS challenge of tobacco regulations decided on its merits -- as opposed to procedural grounds as occurred in Philip Morris' challenge of Australia's plain-packaging laws -- the language of the decision can be adopted by other ISDS tribunals as well as national courts.

Furthermore, the expert said there are very few arbitrators who serve on ISDS panels, implying that some or all of the panelists in the Uruguay dispute could hear another tobacco case in the future, and apply their past experience of the issue in that case.

At issue in the dispute were two anti-tobacco public health measures the Uruguayan government instituted in 2008 and 2009. The first measure, called the single presentation requirement, restricted tobacco companies from selling only one brand of their cigarette products in Uruguay in a bid to prevent misleading branding causing some consumers to believe some cigarettes are healthier than others.

For example, as a result of the single presentation requirement, Philip Morris elected only to sell Marlboro Reds in Uruguay out of its suite of products, including Marlboro Golds, Marlboro Light, and so on.

The second measure Philip Morris challenged was an increase in the required percentage of a cigarette pack that a health warning pictogram must cover from 50 percent to 80 percent.

Philip Morris broadly charged that those measures resulted in a loss of profit for the company in violation of the Switzerland-Uruguay Bilateral Investment Treaty, under which ISDS is allowed, and that causality between the measures and tobacco consumption in Uruguay could not be proven. Philip Morris argued that this resulted in a violation of fair and equitable treatment, constituted expropriation of their investment, and impaired their investment in Uruguay.

The two panelists who sided with Uruguay, determined that there was evidence linking the measures to a decline in smoking, and that the measures did not result in a decline in Philip Morris' profits to a large enough degree to trigger a violation of the BIT provisions.

They also agreed with Uruguay on the claim that the measures were in line with the World Health Organization's Framework Convention on Tobacco Control, bolstering the claim that they are legitimate restrictions based on public health interests.

The two majority arbitrators were Piero Bernardini and James Crawford.

The dissenting panelist, Gary Born, said there was insufficient evidence linking the measures to a decline in smoking, while philosophically disagreeing on how much leeway governments are allowed in terms of the right to regulate. -- Jack Caporal (jcaporal@iwpnews.com)

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