McCade Centre : For Law and Cancer

Philip Morris Asia Challenge under Australia – Hong Kong Bilateral Investment Treaty

Philip Morris Asia (PMA) has challenged Australia's plain packaging legislation under the 1993 Agreement between the Government of Australia and the Government of Hong Kong for the Promotion and Protection of Investments (Treaty).

PMA is a company incorporated in Hong Kong. It is the regional headquarters for the Asia Region of the Philip Morris International group of companies. PMA owns 100% of the shares of Philip Morris Australia (PM Australia), which in turn owns 100% of the shares of Philip Morris Limited (PML), a trading company incorporated in Australia, engaged in the manufacture, import, marketing and distribution of tobacco products for sale within Australia and for export to New Zealand and the Pacific Islands.[1]

PMA has made a number of arguments, including that the plain packaging legislation expropriates its intellectual property, and that PMA has not been afforded fair and equitable treatment. PMA is seeking an order that the Australian Government suspend enforcement of the legislation and compensate PMA for loss suffered through compliance with the legislation; or compensate PMA for loss suffered as a result of the enactment and continued application of the legislation. [2]

The Australian Government is defending the proceedings. It argues that:

The plain packaging legislation forms part of a comprehensive government strategy to reduce smoking rates in Australia. This strategy is designed to address one of the leading causes of preventable death and disease in Australia, which kills around 15,000 Australians each year, causes chronic disease for many others and is a significant burden both on productivity and on Australia's health care system. The implementation of these measures is a legitimate exercise of the Australian Government's regulatory powers to protect the health of its citizens. [3]

The Australian Government argues that the case should be dismissed on jurisdictional grounds without requiring a hearing on the merits of the claim. On 14 April 2014, the Tribunal granted the Australian Government's request that the proceedings be ‘bifurcated', with the Australian Government's procedural objections heard in a preliminary phase of the proceedings.

The proceedings are governed by the United Nations Commission on International Trade Law Rules of Arbitration 2010 (UNCITRAL Rules). The Tribunal's procedural orders are available on the website of the Permanent Court of Arbitration or through the website of the Australian Attorney-General.

The Australian Government's Procedural Objections

The Australian Government has made three procedural objections:

1. That PMA's purported ‘investment' - i.e. its acquisition of shares in PM Australia - has not been admitted in accordance with the requirements of the Treaty, which provides that an ‘investment' must be ‘admitted by [Australia] subject to its law and investment policies applicable from time to time'.

Under Australia's Foreign Acquisitions and Takeovers Act 1975, the Australian Treasurer can make an order prohibiting an investment if satisfied that the investment ‘would be contrary to [Australia's] national interest'. To allow this assessment to be made, foreign investors must submit a Statutory Notice and provide supplementary information stating the reasons for the acquisition and whether the investment could impact Australia's national interest. It is a criminal offence for foreign investors to mislead the Australian Treasurer.

The Australian Government argues that PMA's application for admission contained ‘false and misleading' assertions. It argues that the true purpose of PMA's investment was to place PMA in a position where it could bring the claim once the legislation had been enacted. It argues that the Philip Morris group was aware that this true purpose would be directly relevant to assessing whether the investment was contrary to Australia's national interest. [4]

2. That PMA's claim either falls outside the scope of the Treaty because it relates to a pre-existing dispute or amounts to ‘an abuse of right' because PMA cannot restructure its investment to gain Treaty protection over a pre-existing or reasonably foreseeable dispute.

The Australian Government argues that an investor cannot buy into a dispute by making an investment at the time when a dispute is either existing or highly probable. When PMA acquired its shares in PM Australia (on 23 February 2011), the Government of Australia had already publicly committed (on 29 April 2010) to introduce plain packaging legislation by 2012. [5]

3. That neither the shares in PML nor PML's assets constitute ‘investments' for the purposes of the treaty.

The Australian Government argues that the Treaty extends protection to indirect investments only where companies incorporated in a third State qualify as investors under the Treaty, and that the assets of PM Australia and PML - two Australian-incorporated companies - do not enjoy protection as investments. The Australian Government argues that only PMA's shares in PM Australia would be eligible for protection under the Treaty. It argues that PMA does not have any ownership rights in respect of the relevant intellectual property rights, nor is it a party to relevant licence agreements. [6]

The Tribunal's Decision to Bifurcate the Proceedings

The Australian Government requested that its procedural objections be heard in a preliminary phase of the proceedings, in advance of any consideration of the merits of PMA's claim. It argued that the resolution of these objections could dispose entirely of PMA's claims, or at the very least, confine the scope of the claims, saving time and expense for both Parties. [7] PMA opposed this request, arguing that the nature of the issues in dispute, their interrelationship, and the stage which the proceedings have reached, call for a single hearing and award. [8]

The tribunal examined each of the objections against three criteria:

1. Is the objection prima facie serious and substantial?

2. Can the exception be examined without prejudging or entering the merits?

3. Could the objection, if successful, dispose of all or an essential part of the claims raised?[9] 

In reaching its decision, the Tribunal noted that ‘should the proceedings reach the merits phase, they will be extremely large and complex in the submissions, documents, witness and expert testimonies, and issues to be evaluated'. If the preliminary objections prevail with the result that consideration of the merits becomes unnecessary ‘this would result in a major saving of work and costs'. [10]

The Tribunal decided that Australia's first and second procedural objections should be heard in a preliminary phase. Each of these could be determined without too great an overlap with consideration of the merits of the case. If either of these objections is upheld by the Tribunal, the proceedings would be disposed of in favour of the Australian Government. [11] In the case of the third objection, the Australian Government's arguments relating to PMA's lack of ownership and control of its investments ‘factually largely overlap with the merits'. Further, if the Australian Government's objection were upheld, this would not dispose of the proceedings. [12]

Next Phase of the Proceedings

On 16 May 2014, the Tribunal set down a timetable for the next phase of the proceedings. It ordered that the Hearing on Preliminary Objections be held in Singapore starting on 16 February 2015 for three business days (and two additional days in reserve) or until the Tribunal determines it should conclude. It set out a timetable for the production of documents, and the filing of submissions and evidence, in advance of the hearing.

For more, see our page on the earlier ruling on the Confidentiality of Proceedings.

Footnotes:

[1] Procedural Order No. 8: Regarding Bifurcation of the Procedure (14 April 2014) [6]

[2] Notice of Arbitration (21 November 2011) [1.7]

[3] Response to Notice of Arbitration – Australia (21 December 2011) [3]

[4] Procedural Order No. 8: Regarding Bifurcation of the Procedure (14 April 2014) [35-38]

[5] Procedural Order No. 8: Regarding Bifurcation of the Procedure (14 April 2014) [39-43]

[6] Procedural Order No. 8: Regarding Bifurcation of the Procedure (14 April 2014) [44-45]

[7] Procedural Order No. 8: Regarding Bifurcation of the Procedure (14 April 2014) [47]

[8] Procedural Order No. 8: Regarding Bifurcation of the Procedure (14 April 2014) [61]

[9] Procedural Order No. 8: Regarding Bifurcation of the Procedure (14 April 2014)  [109]

[10] Procedural Order No. 8: Regarding Bifurcation of the Procedure (14 April 2014) [106]

[11] Procedural Order No. 8: Regarding Bifurcation of the Procedure (14 April 2014) [110-123]

[12] Procedural Order No. 8: Regarding Bifurcation of the Procedure (14 April 2014) [124-130]

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