TALKING DISPUTES No 18 27 October 2016 Geneva, Switzerland Talking Disputes Philip Morris v. Uruguay PD Dr. iur. Krista Nadakavukaren Schefer, Center for Human Rights Studies www.ictsd.org www.wtiadvisors.com
The Parties Abal Hermanos SA
The Regulations Single Presentation Requirement 80/80 Regulation
The Claims Violations of: Expropriation (Art. 5) Fair and Equitable Treatment (Art. 3.2) Use and Enjoyment (Art. 3.1) Observe Commitments (Art. 11) Denial of Justice The Requested Relief Withdrawal of measures + Compensation/Interest until award or Compensation of $22.267 million + Interest/Costs/Fees
Expropriation: CH-Uruguay BIT, Art. 5 «Neither [BIT Party] shall take, either directly or indirectly, measures of expropriation [ ] or any other measure having the same nature or the same effect against investments belonging to investors of the other [BIT] Party [unless for public purpose, with due process, non-discriminatorily, and against compensation].»
Indirect expropriation vs. Regulation «[ ] in order to be considered an indirect expropriation, the government s [measures ] interference with the investor s rights must have a major adverse impact on the Claimants investments.» (para. 192) «[ ] as long as sufficient value remains after the Challenged measures are implemented, there is no expropriation.» (para. 286)
Indirect expropriation vs. Regulation «The Tribunal s analysis might end here, [ ]. There is however an additional reason in support of the same conclusion that should also be addressed [ ]. In the Tribunal s view, the adoption of the Challenged Measures by Uruguay was a valid exercise of the State s police powers, with the consequences of defeating the claim for expropriation under Article 5(1) of the BIT.» (para. 287)
Indirect expropriation vs. Regulation Conditions for police powers measure to be «regulatory action»: - Taken in good faith - Goal of public welfare - Non-discriminatory - Proportionate
FET: CH-Uruguay BIT, Art. 3.2 «Each Contracting Party shall ensure fair and equitable treatment within its territory [ ].»
FET as Arbitrariness - ELSI standard - «For a country with limited technical and economic resources [ ], adhesion to the FCTC and involvement in the process of scientific and technical cooperation and reporting and exchange of information represented an important if not indispensable means for acquiring the scientific knowledge and market experience needed for [ ] ensuring the fulfilment of its tobacco control policy.» (para. 393) - «[ ] possible over- or under-inclusiveness of the SPR was unsurprising given the relative novelty of this regulation.» (para. 406)
FET as Arbitrariness SPR «In the end the Tribunal does not believe that it is necessary to decide whether the SPR actually had the effects that were intended by the State, what matters being rather whether it was a reasonable measure when it was adopted.» (para. 409) 80/80 «[ ] the present case concerns a legislative policy decision taken against the background of a strong scientific consensus as to the lethal effects of tobacco. Substantial deference is due in that regard [ ]. Some limit had to be set, and the balance to be struck between conflicting considerations was very largely a matter for the government.» (para. 418)
FET as Legitimate Expectations - «[ ] legitimate expectations depend on specific undertakings and representations made by the host State to induce the investors to make an investment. Provisions of general legislation [ ] do not create legitimate expectations that there will be no change in the law.» (para.426) - «Given the State s regulatory powers, in order to rely on legitimate expectations the investor should inquire in advance regarding the prospects of change in the regulatory framework [ ].» (para. 406)
FET as Legitimate Expectations SPR 80/80 «[FET does] not preclude governments from enacting novel rules, even if these are in advance of international practice, provided these have some rational basis and are not discriminatory. [FET] does not guarantee that nothing should be done by the host State for the first time.» (para. 430)
Use and Enjoyment: CH-Uruguay BIT, Art. 3.1 «Each Contracting Party shall protect within its territory investments [ ] and shall not impair by unreasonable or discriminatory measures the management, maintenance, use, enjoyment [ ] of such investments.»
Observe Commitments: CH-Uruguay BIT, Art. 11 «Either Contracting Party shall constantly guarantee the observance of the commitments it has entered into with respect to the investments of the investors of the other Contracting Party.»
Observe Commitments as Umbrella Clause «Uruguay entered into no commitment with respect to the investment by granting a trademark. It did not actively agree to be bound by any obligation or course of conduct. [ ] [ ] A trademark gives rise to rights, but their extent [ ] is liable to changes which may not be excluded by an umbrella clause: if investors what stabilization they have to contract for it.» (paras. 480-481)
Denial of Justice SPR High threshold for denial of justice claims Procedural irregularities insufficient for denial of justice 80/80 Discrepancy of decisions not enough on its own to rise to denial of justice Neither Supreme Court nor TCA violated its own jurisdiction or applicable criteria
Denial of Justice - Dissent SPR Denial of Justice arises from: No international practice/lack of evidence of effectiveness Complete lack of evidence of host State s consideration of measure 80/80 Denial of Justice arises from COMBINATION of: Irreconcilable decisions Each decision protected State against Investor No possibility of judicial review
TALKING DISPUTES No 18 27 October 2016 Geneva, Switzerland Talking Disputes Philip Morris v. Uruguay Implications for International Investment Law Sabina Sacco, Lévy Kaufmann-Kohler www.ictsd.org www.wtiadvisors.com 22
The Philip Morris v. Uruguay award and the State s right to regulate Context of the award The expropriation claim The fair and equitable treatment claim The other claims Concluding remarks 23
Investment law and regulatory change Do international investment agreements (IIAs) protect investors from regulatory change? Currently over 3000 IIAs that provide investors with: Substantive rights, including: No expropriation except under certain circumstances Fair and equitable treatment (FET) No impairment through unreasonable and discriminatory measures Observation of commitments ( umbrella clause ) Direct recourse against the State: International arbitration Domestic courts 24
Philip Morris v. Uruguay Claimants argue breach of Switzerland-Uruguay Bilateral Investment Treaty Challenged measures: Single Presentation Regulation 80/80 regulation Claims: Expropriation of their investments Breach of fair and equitable treatment Impairment of the use and enjoyment of their investments through unreasonable measures Violation of umbrella clause Denial of justice 25
PM s expropriation claim Article 5(1) of the Treaty: Neither of the Contracting Parties shall take, either directly or indirectly, measures of expropriation, nationalization or any other measure having the same nature or the same effect against investments belonging to investors of the other Contracting Party, Unless the measures are taken: for the public benefit as established by law, on a non-discriminatory basis, and under due process of law, and provided that provisions be made for effective and adequate compensation The amount of compensation, interest included, shall be settled in the currency of the country of origin of the investment and paid without delay to the person entitled thereto. 26
Analysis for an indirect expropriation claim 1. Is there an investment? 2. Has there been an expropriation? Substantial deprivation? Measure permanent? Legitimate exercise of the tribunal s police powers? 3. Is the expropriation lawful? Public purpose Non-discriminatory Due process of law Compensation 27
PM v. Uruguay: 1. Was there an investment? Undisputed that trademarks and goodwill are investments But preliminary questions: Did the Claimants own the banned trademarks? Question under Uruguayan law Tribunal assumes they are Does a trademark confer the right to use, or only the right to protect against use by others? No absolute right to use Only exclusive right to exclude others Subject to State s regulatory power But is asset that can be expropriated 28
PM v. Uruguay: 2. Was there an expropriation? 80/80 Regulation: Not even a prima facie case of indirect expropriation In the Tribunal s view there is not even a prima facie case of indirect expropriation by the 80/80 Regulation. The Marlboro brand and other distinctive elements continued to appear on cigarette packs in Uruguay, recognizable as such. A limitation to 20% of the space available to such purpose could not have a substantial effect on the Claimants business since it consisted only in a limitation imposed by the law on the modalities of use of the relevant trademarks. The claim that the 80/80 Regulation breached Article 5 of the BIT consequently fails. (Philip Morris v. Uruguay award, 276) 29
PM v. Uruguay: 2. Was there an expropriation? Single Presentation Requirement: No substantial deprivation Assessed in light of the Claimants investment as a whole Here, the Claimants continued to make a profit Conclusion: no expropriation But additional reason to dismiss expropriation claim (for both measures): Challenged measures were a valid exercise of the State s police powers 30
Analysis for an indirect expropriation claim 1. Is there an investment? 2. Has there been an expropriation? 1. Substantial deprivation? 2. Measure permanent? 3. Legitimate exercise of the tribunal s police powers? 3. Is the expropriation lawful? Public purpose Non-discriminatory Due process of law Compensation 31
Police powers doctrine Third Restatement of the Foreign Relations Law of the United States (Comment g to 712): A state is not responsible for loss of property or for other economic disadvantage resulting from bona fide general taxation, regulation, forfeiture for crime, or other action of the kind that is commonly accepted as within the police power of states, if it is not discriminatory, and is not designed to cause the alien to abandon the property to the state or sell it at a distress price. [ ] On this basis, the Philip Morris tribunal finds there is no expropriation at all 32
Police powers doctrine no consistency among tribunals Santa Elena v. Costa Rica: Expropriatory environmental measures no matter how laudable and beneficial to society as a whole are, in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies: where property is expropriated, even for environmental purposes, whether domestic or international, the state s obligation to pay compensation remains. 33
Police powers doctrine no consistency among tribunals Saluka v. Czech Republic: [T]he principle that a State does not commit an expropriation and is thus not liable to pay compensation to a dispossessed alien investor when it adopts general regulations that are commonly accepted as within the police power of States forms part of customary international law today. Methanex v. United States: [A]s a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation. 34
Police powers doctrine Requirements: Bona fide measure for the purpose of protecting public welfare (health, safety, environment) Non-discriminatory Proportionate Irrespective of the existence of a contractual deprivation, the Tribunal considers in any event that the measures challenged by the Claimant constituted a valid exercise of the Respondent's police powers. [The State authority] took measures within its mandate, in a non-discriminatory manner, motivated by the increasing awareness of the dangers presented by lindane for human health and the environment. A measure adopted under such circumstances is a valid exercise of the State's police powers and, as a result, does not constitute an expropriation. (Chemtura v. Canada, 266) 35
Police powers doctrine incorporated to new treaties U.S. Model BIT (2012): Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriation. CETA: For greater certainty, except in the rare circumstance when the impact of a measure or series of measures is so severe in light of its purpose that it appears manifestly excessive, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objective, such as health, safety and the environment, do not constitute indirect expropriations. 36
PM s Fair and Equitable Treatment Claim Article 3(2) of the Treaty: Each Contracting Party shall ensure fair and equitable treatment within its territory of the investments of the investors of the other Contracting Party. This treatment shall not be less favourable than that granted by each Contracting Party to investments made within its territory by its own investors, or than that granted by each Contracting Party to the investments made within its territory by investors of the most favoured nation, if this latter treatment is more favourable. 37
What does fair and equitable treatment mean? Originates in minimum standard of treatment under CIL [T]he minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candour in an administrative process. Has evolved: Need not be egregious or in bad faith Protection of legitimate expectations (Waste Management II) 38
PM s FET claims Single Presentation Requirement and 80/80 regulation were: Arbitrary In breach of their legitimate expectations In breach of Uruguay s obligation of legal stability Tribunal rejects all arguments 39
Measures are not arbitrary Measures were aimed at legitimate public purpose Legitimate connection between public purpose sought and utility of measures Deference to State s judgment Only question is whether there is manifest lack of reasons The responsibility for public health measures rests with the government and investment tribunals should pay great deference to governmental judgments of national needs in matters such as the protection of public health. In such cases respect is due to the discretionary exercise of sovereign power, not made irrationally and not exercised in bad faith involving many complex factors. As held by another investment tribunal, [t]he sole inquiry for the Tribunal is whether or not there was a manifest lack of reasons for the legislation. (PM v. Uruguay, 399) 40
SPR not arbitrary: The Tribunal does not believe that it is necessary to decide whether the SPR actually had the effects that were intended by the State, what matters being rather whether it was a reasonable measure when it was adopted. Whether or not the SPR was effective in addressing public perceptions about tobacco safety and whether or not the companies were seeking, or had in the past sought, to mislead the public on the point, it is sufficient in light of the applicable standard to hold that the SPR was an attempt to address a real public health concern, that the measure taken was not disproportionate to that concern and that it was adopted in good faith. The effect of the SPR was to preclude the concurrent use of certain trademarks, without depriving the Claimants of the negative rights of exclusive use attached to those trademarks. (Philip Morris v. Uruguay, 409) 41
80/80 regulation not arbitrary: [T]he present case concerns a legislative policy decision taken against the background of a strong scientific consensus as to the lethal effects of tobacco. Substantial deference is due in that regard to national authorities decisions as to the measures which should be taken to address an acknowledged and major public health problem. The fair and equitable treatment standard is not a justiciable standard of good government, and the tribunal is not a court of appeal. [ ] In the end, the question is whether the 80% limit in fact set was entirely lacking in justification or wholly disproportionate, due account being taken of the legitimate underlying aim viz., to make utterly clear to consumers the serious risks of smoking. [ ]. How a government requires the acknowledged health risks of products, such as tobacco, to be communicated to the persons at risk, is a matter of public policy, to be left to the appreciation of the regulatory authority. (Philip Morris v. Uruguay, 418-419) 42
Confirmation of past cases: Saluka v. Czech Republic: For a state s conduct to be reasonable, it must bear a reasonable relationship to rational policies [ ]. AES v. Hungary: Two elements required: the existence of a rational policy; and the reasonableness of the act of the state in relation to the policy A policy is rational when the state adopts it following a logical (good sense) explanation and with the aim of addressing a public interest matter, An action is reasonable when there is an appropriate correlation between the state s public policy objective and the measure adopted to achieve it. 43
PM s other FET claims Violation of legitimate expectations Failure to maintain legal stability 44
Tribunal on legitimate expectations No legitimate expectation that there would be no regulation No specific assurances or representations Expectations are even lower for harmful products such as tobacco: Manufacturers and distributors of harmful products such as cigarettes can have no expectation that new and more onerous regulations will not be imposed [ ]. On the contrary, in light of widely accepted articulations of international concern for the harmful effect of tobacco, the expectation could only have been of progressively more stringent regulation of the sale and use of tobacco products. (PM v. Uruguay, 429-430) 45
Tribunal on legal stability No right to stability of legal framework Confirms prevailing view: [T]he fair and equitable treatment standard does not give a right to regulatory stability per se. The state has a right to regulate, and investors must expect that the legislation will change, absent a stabilization clause or other specific assurance giving rise to a legitimate expectation of stability. (Micula v. Romania, 666). 46
Other claims PM s other claims regarding the SPR and 80/80 Regulation Impairment of the use and enjoyment of their investments through unreasonable measures Breach of commitments entered into by Uruguay with respect to the use of their trademarks (umbrella clause) Tribunal rejects them both Measures not unreasonable Trademark registration not a specific commitment entered into with the Claimants with respect to their investments 47
Concluding remarks Confirmation of State s right to regulate Expropriation perspective: General, bona fide regulation that is not discriminatory directed to the protection of public welfare (health, safety, environment) will not be expropriatory Impact of measure must be proportionate to its goal FET perspective: Requires measure to be reasonably related to rational policy Great deference to States in policy decisions Manufacturers of harmful products: no reasonable expectation of regulatory stability Possible exceptions: specific assurances or stabilization clauses 48
TALKING DISPUTES No 18 27 October 2016 Geneva, Switzerland Talking Disputes Philip Morris v. Uruguay Prof. Ernst-Ulrich Petersmann, European University Institute Comments from the perspective of WTO law www.ictsd.org www.wtiadvisors.com
Comments from WTO perspective focus on 2 questions: 1. How should courts of justice respond to forum shopping and rules shopping by tobacco traders? > legal methodology questions discussed by Hart/Dworkin > how to define the applicable law + interpretation methods? How to respond to theoretical disagreements? How to promote integrity? (cf my 2012 book on INTERNATIONAL ECONOMIC LAW IN THE 21 ST CENTURY, Oxford Hart, 2012) 2. How should WTO dispute settlement bodies interpret indeterminate and under-theorized WTO rules and principles in GATT, TBT and TRIPS Agreements? Should they respond to tobacco litigation in fragmented jurisdictions and to related rules shopping? How to respond to incomplete WTO rules? (cf my 2016 book on MULTILEVEL CONSTITUTIONALISM FOR MULTILEVEL GOVERNANCE OF PUBLIC GOODS METHODOLOGY PROBLEMS IN INTERNATIONAL LAW, Oxford: Hart, 2016)
Legal fragmentation > competing conceptions of IEL and Adjudication 1. IEL among states > ICJ (e.g. investment disputes, UN Agencies like WHO) 2. IEL as commercial law > arbitration (3 competing conceptions, NYC, ICSID) 3. IEL as multilevel economic regulation > WTO (not limited to states, disconnected from domestic courts due to diplomatic power politics) 4. IEL as global administrative law (UN/ILO administrative tribunals, ITLOS) 5. IEL as multilevel constitutional law (CJEU, EFTA Court, ECtHR) = tobacco disputes can arise in all these jurisdictions; applicable laws and judicial procedures differ; but common customary law requirements: inclusive legal positivism (= VCLT + WTO law acknowledge general principles ) legal integration requirement (= Art.31 VCLT, sustainable development); yet diverse contexts of justice (cf. Art. XXIII GATT) and theoretical disagreements Indeterminate and incomplete rules require linguistic, jurisprudential, doctrinal and judicial justifications and judicial comity > constitutional justice vs power politics?
Q2: Tobacco disputes in WTO law and adjudication Plain-packaging dispute differs from previous tobacco disputes in GATT/WTO: eg non-discriminatory measures; FCTC (= Art. 31:3,c VCLT?); TRIPS; Doha Declaration on Health Protection; judicial comity? No violation of GATT Arts III/IX:4? > GATT Art. XX > necessity justifiable by (1) importance of health protection; (2) evidence-based contribution, (3) complex protection system (FCTC), and (4) need for high level of health protection. Art. 2:1,2 TBT violation? > TBT Preamble = similar balancing principles (AB Clove Cigarettes) > FCTC = technical regulations for tobacco reductions? Non-discriminatory and proportionate TRIPS violations? > Arts 7+8 reflect similar balancing principles > limitations are justifiable (Arts.20, 2, 3, 15, 16, 22, 24 TRIPS) Judicial comity? > trademarks as negative rights ; non-discriminatory; no taking /expropriation ; does FCTC justify judicial deference, changing the burden of proof and limiting abuses of rights by tobacco traders?
Conclusion: (1) Customary law requires judges to use principles of justice (e.g. right to health protection, balancing ) for coherent interpretations, legal justifications and avoidance of injustices caused by incomplete rules and legal fragmentation (2)WTO balancing principles and evidence-based FCTC justify WTO consistency of non-discriminatory plainpackaging of cigarettes/cigars