Philip Morris Asia Limited v. The Commonwealth of Australia, PCA Case No. 2012-12

Australia enacted the Tobacco Plain Packaging Act, a tobacco control legislation that removed brands from cigarette packs, on November 21, 2011. On the very same day, Philip Morris Asia Limited (PM Asia) served a Notice of Arbitration against Australia under the Hong Kong–Australia bilateral investment treaty (BIT), claiming that plain tobacco packaging amounted to an expropriation of its intellectual property rights.

A redacted version of the December 2015 decision by the arbitral tribunal established under the auspices of the Permanent Court of Arbitration (PCA) was published in May 2016. The tribunal accepted one of Australia’s objections—the commencement of the arbitration configured abuse of rights because Philip Morris had changed its corporate structure to gain the protection of the BIT when a specific dispute was already foreseeable—and declined to hear the case.

Australia’s tobacco plain packaging rules

Australia first considered plain packaging of cigarette packs in 1995, but the initiative gained momentum ten years later, after the World Health Organization (WHO) Framework Convention on Tobacco Control entered into force for Australia. State parties to this convention are under an obligation to develop and implement tobacco control measures, including comprehensive bans on advertising, promotion and sponsorship.

In 2009, Australia’s National Preventive Health Taskforce recommended plain packaging of tobacco products, and a bill to remove brands, trademarks and logos from tobacco packaging was introduced in the Australian Senate. A heated debate about plain packaging legislation took place in Australia throughout the following months. Philip Morris vigorously opposed the proposal throughout the entire legislative process, expressing “concern about the unconstitutionality” of the measure (para. 110) and willingness to challenge it by litigation if necessary.

In November 2011, the government secured the votes to approve the bill at last. Australia then enacted the Tobacco Plain Packaging Act and implemented ensuing regulations.

Philip Morris’s corporate restructuring

Philip Morris International Inc. (PMI) is one of the world’s largest tobacco manufacturers. To manage its business in different regions around the world, PMI owns dozen of subsidiaries and affiliates, forming the so-called PMI Group.

The claimant, PM Asia, is a company based in Hong Kong that serves as regional headquarters for PMI’s operations. The investment, Philip Morris Australia (PM Australia), is a holding company registered under the laws of Australia that owns all shares of Philip Morris Limited (PML), a trading company that engages in manufacturing, importing, marketing and distributing tobacco products for sale within Australia and for regional export.

A Switzerland-based company of the PMI Group owned PM Australia until February 23, 2011, when the ownership of the Australian subsidiaries was restructured. PM Asia acquired all shares of PM Australia and became the direct owner of the PMI Group’s investment in the country. Moreover, PM Asia alleged it had managed and controlled the Australian subsidiaries since 2001.

According to PM Asia, the restructuring of the Australian subsidiaries was part of a group-wide reorganization to “refine, rationalize and streamline PMI’s corporate structure” (para. 466). Said differently, PM Asia alleged that the restructuring was unrelated to the plain packaging measures that formed the subject matter of the arbitration.

Australia’s objections to the tribunal’s jurisdiction: lack of control of the investment since 2001, irregular admission of the investment, lack of temporal jurisdiction, and abuse of rights

As the PCA tribunal accepted Australia’s plea to bifurcate proceedings, the December 2015 decision deals solely with questions of jurisdiction and admissibility.

First, Australia disputed that PM Asia had exercised control of the Australian subsidiaries since 2001. Interpreting the control test under the BIT, which required “substantial interest in the company” (para. 497), the tribunal pointed out that oversight and management did not seem sufficient to establish control, given this particular aspect of the treaty. However, it did not decide the objection based on it. The tribunal departed from the interpretation task and indicated that PM Asia had not proven it exercised management control of the Australian subsidiaries. Thus, it dismissed PM Asia’s allegations for failure to present evidence of control.

Second, Australia maintained that the investment was not admitted under Australian law and investment policies, as required by the BIT, because PM Asia had not disclosed its intention to bring a claim under the BIT, nor described how the restructuring could have an impact on national interest, making the application incomplete and thus misleading. However, considering that PM Asia had a prima facie evidence of admission—a No-objection Letter issued by government authorities—the tribunal shifted the burden of proof and went on to assess whether Australia had proven that the investment was not lawfully admitted.

The tribunal was not convinced that disclosure of intentions and description of impact on national interest were mandatory. Furthermore, the tribunal highlighted that, although PM Asia had not disclosed it was seeking BIT protection, Australia’s Treasurer was aware of Philip Morris’s intention to challenge the plain packaging measures. In the tribunal’s view, Australia’s assertion that it did not know PMI’s intention “seem[ed] to be rather an admission of defect in its own internal procedures, where a matter of potentially important public policy was missed” (para. 518).  Therefore, the tribunal dismissed the objection.

Third, Australia alleged that the tribunal lacked temporal jurisdiction because the dispute between Philip Morris and Australia over plain packaging regulation arose before PM Asia acquired the shares of PM Australia. For Australia, “the existence of a dispute is a question of substance” (para. 525) and a dispute pertaining the plain packaging measures existed in substance prior to the PMI Group’s corporate restructuring.

The tribunal disagreed. Relying on Gremcitel v. Peru, it pointed out that “whenever the cause of action is based on a treaty breach, the test for a ratione temporis objection is whether a claimant made a protected investment before the moment when the alleged breach occurred” (para. 529). In the present case, the temporal jurisdiction requirement was met because the investment (namely, the acquisition of shares) was made before the alleged breach (namely, the Tobacco Plain Packaging Act of November 2011).

Australia’s final—and, as it turned out, decisive—objection was that PM Asia’s claim configured an abuse of right. Australia argued that, even if the tribunal had temporal jurisdiction, it would be precluded from exercising it because the acquisition of jurisdiction was abusive. Philip Morris, according to Australia, had modified its corporate structure to obtain BIT protection for an existing or foreseeable dispute. Thus, in Australia’s view, the claim constituted abuse of rights and was inadmissible.

Based on a review of investment arbitration case law on abuse of rights, the tribunal recalled that “restructuring an investment to obtain BIT benefits is not per se illegitimate” (para. 540) and that what distinguishes a legitimate restructuring from an illegitimate one is the existence of a foreseeable dispute. The tribunal’s assessment of whether the acquisition of the jurisdiction was abusive then depended on a key question: was a dispute about plain packaging reasonably foreseeable before the restructuring that resulted in PM Asia’s acquisition of PM Australia?

In the tribunal’s view, it was. Relying on Tidewater v. Venezuela, the tribunal defined foreseeability as “a reasonable prospect […] that a measure which may give rise to a treaty claim will materialise” (para. 554). In applying this lower threshold to define abusive restructuring, it departed from the definition in Pac Rim v. El Salvador, which required “a very high probability” of dispute.

Applying the test to the case, the tribunal understood that, by the time PM Asia acquired PM Australia, there was no uncertainty about Australia’s intention to introduce plain packaging. Therefore, a dispute was foreseeable. In addition, given the evidence submitted, the tribunal ruled out Philip Morris’s allegations that taxes and other business reasons were determinative factors in the restructuring.

In sum, the tribunal concluded that Philip Morris committed abuse of rights because it changed its corporate structure to gain BIT protection when a specific dispute against Australia over tobacco plain packaging was reasonably foreseeable. Therefore, it deemed all claims inadmissible and declined to exercise jurisdiction over the dispute, reserving the issue of costs for a final award.

Notes: The arbitral tribunal was composed of Karl-Heinz Böckstiegel (President appointed by the PCA Secretary-General, German national), Gabrielle Kaufmann-Kohler (Claimant’s appointee, Swiss national), and Donald M. McRae (Respondent’s appointee, Canadian national). The award is available at http://www.italaw.com/sites/default/files/case-documents/italaw7303_0.pdf.

Inaê Siqueira de Oliveira is a Law student at the Federal University of Rio Grande do Sul, Brazil.