This week’s legal action by tobacco giant Philip Morris to overturn the federal government’s plain packaging proposals is not its first attempt to stifle anti-tobacco legislation.

Philip Morris is also taking action against the Uruguayan government under the Switzerland-Uruguay bilateral investment treaty.

Firstly, what are bilateral investment treaties?

Australia has 22 bilateral investment treaties (BITs) and another six free trade agreements (FTA). Of the latter, four have investment chapters that are like bilateral investment treaties.

BITs generally have two components, which are respectively substantive and procedural.

The former sets out international law protections for foreign investment, such as protections from discrimination and preventing states from expropriating foreign assets without compensation.

These substantive protections are matched by procedural mechanisms. Typically in international law, disputes occur between state parties. But BITs are different because they give non-state actors – in this instance, foreign investors – the right to bring treaty complaints against state parties.

Phillip Morris Asia is based in Hong Kong and as a foreign investor in Australia, it has the right to lodge an investor-state complaint against the Australia under the Hong Kong-Australia BIT.

Dispute resolution for BITs is undertaken as a process of arbitration. There is no standing body for dealing with this kind of dispute such as in the World Trade Organisation (WTO). Instead, an ad hoc organ is established for resolving this particular dispute. Moreover, unlike the WTO, there is no appellate organ in investment arbitration. Once a state loses, it has no right to appeal the legality of the award issued against it.

Typically, foreign investors only bring an investor-state claim once they’ve incurred a loss because the usual remedy in this system is an award of damages. In this case, however, the Tobacco Plan Packaging Bill is not yet law so it is interesting to consider what Philip Morris is seeking in this case.

This is in fact the second claim made by Philip Morris against tobacco legislation. It has also brought a claim against Uruguay for breach of the Switzerland-Uruguay BIT and that action might offer some insights into Philip Morris’ legal strategy against Australia.

So what lessons can we learn from Philip Morris' action against Uruguay?

The Uruguayan tobacco legislation is less stringent than the scheme proposed by the Australian Government.

The South American country has increased the size of health warnings to 80% of the size of cigarette packages and mandated “single presentation” of each cigarette brand.

“Single presentation” means that a cigarette producer can only have one product in the Uruguayan market, so Marlboro, for instance, could sell either Marlboro Red or Blue but not both.

Under the Uruguayan scheme, tobacco companies can still use their trademark (which is a protected asset under most BITs). But in the proposed Australian law, those companies would be precluded entirely from using their trademarks on cigarette packages

Phillip Morris' request for arbitration against Uruguay was lodged in February 2010 and the case has not been decided yet.

But the Uruguayan case is relevant because we can get a sense of the likely remedy that Philip Morris will seek against Australia. Philip Morris is seeking monetary compensation for loss incurred by the new Uruguayan legislation. But it is also seeking a “suspension” of the application of the legislation against it.

This same type of injunctive remedy might well be sought against the Australian Government in addition to any claim for damages (once the law comes into operation).

In general, injunctive relief of this sort is exceptional in investor-state arbitration. There is, however, nothing in the Hong Kong – Australia BIT to preclude a tribunal from issuing a suspension order.

More generally, this is the first claim that has been brought against Australia for breach of a BIT.

Classically, the reason why developed states like Australia entered into BITs was to protect their national companies from the under-developed regulatory and judicial institutions of transition economies.

Investor-state arbitration gives foreign investors the right to bypass the domestic courts of developing states and prosecute claims entirely in the international sphere.

Developed states assumed that this system would work largely to protect their nationals operating abroad but they are now finding out that claims can in fact be brought against them.

The Australian Government is deeply concerned about this mechanism. In its new Trade Policy Statement (issued in April 2011), it has declared that it will no longer include investor-state dispute settlement provisions in future trade agreements.

The Australian Government is also clearly aware of the specific litigation risk that it is running with the Tobacco Plain Packaging Bill. For instance, section 11 of the Bill sets out a saving provision which preserves certain parts of the scheme if “its operation would result in an acquisition of property from a person otherwise than on just terms”.

This is a response to Section 51(xxxi) of the Commonwealth Constitution which prevents the Commonwealth Government from acquiring property unless it does so “just terms”.

A similar sort of protection against expropriation can be found in Article 6 of the Hong-Kong BIT. Indeed, one would expect Philip Morris’ primary legal claim against Australia to argue that the plain packaging scheme expropriates Philip Morris’ property (by preventing the use of its registered trademarks in Australia).

Is it possible to claim an exception for public health?

Under the WTO, there are a series of exceptions that allow states to plead exceptions for regulation undertaken for public health purposes. There are no equivalent exceptions in the Hong Kong-Australia BIT.

This does not necessarily mean that Australia’s proposed scheme will be found to breach the protections in the BIT.

There is a long line of cases where states have regulated for legitimate health purposes and succeeded in their defence of an investor-state arbitral claim.

One such instance is the 2005 NAFTA case of Methanex v USA. In that case, California had prohibited the use of a gasoline additive MMT because it was found to have contaminated groundwater supplies.

Methanex, a large Canadian company that produced MMT in the U.S., brought action against the U.S. under the investment chapter of the NAFTA for, among other things, expropriation. The Tribunal ruled in favour of the U.S. and explicitly affirmed the right of states to regulate for public health purposes.

Unfortunately, there is also an opposing line of case-law where states have been found to breach their investment treaty commitments even if the measures are taken for public purposes.

In an earlier case against Costa Rica, which had re-zoned a tract of land to make it part of a national park, a foreign investor’s claim for expropriation was upheld.

There is no appellate organ in this system so it is difficult to predict with certainty how any panel will resolve the treaty claim brought against Australia. On balance however, the Australian Government will have strong grounds to successfully defend the case brought against it by Philip Morris.

Is this effective legislation?

If this Bill had covered any other asset or property class, it is unlikely that there would be much sympathy for this move.

What the Australia Government is planning on doing is to formally preserve a cigarette company’s trademark (by maintaining it on the register of trademarks) but at the same time, preventing the company from actually using that trademark.

To my mind, this rather artificial move seems simply devoted at minimizing litigation risk by claiming that there has been no actual “taking” of that asset class (in breach of either section 51(xxxi) of the Commonwealth Constitution and equivalent protections in Australia’s BITs).