Last night the reasons for the decision in Philip Morris’ billion dollar challenge to Australia’s plain packaging legislation were released. The reasons confirm that companies should structure their investments to take advantage of these treaty protections at the time they make their investment, and may not be protected if they restructure their investment only when a dispute is looming.

Background

Philip Morris’ billion dollar challenge to Australia’s plain packaging legislation failed, with an international investment treaty arbitration Tribunal dismissing the claim. The full text of the almost 200-page decision award can be accessed here.

Philip Morris’ complaint was against Australian laws which banned the sale of branded tobacco products. These laws had the effect of requiring all vendors of tobacco in Australia, including Philip Morris, to sell their products, such as cigarettes, without any of their trademarks. Instead, all tobacco products are required to be sold in plain packages, marked with confronting health warnings. Philip Morris’ case was that these laws extinguished its intellectual property rights, and therefore impaired the value of its investment in Australia.

The cornerstone of Philip Morris’ case, whether Australia’s regulatory acts done in the interests of public health were nonetheless acts which require the Australian government to compensate it, is a question of great interest to business and governments globally. Sovereigns want to encourage foreign investment through offering investment protection, but want to safeguard their right to regulate in the public interest (for example in relation to health, the environment etc) without those regulatory measures resulting in the state having to compensate foreign investors in a way that it would not have to compensate domestic players.

Why was Philip Morris the only tobacco company to bring an investment treaty claim against Australia?

Philip Morris’ claim was made pursuant to the bilateral investment treaty between Hong Kong and Australia, which gives Hong Kong incorporated investors the right to initiate claims directly against the Australian government for breaches of the investment protections in the treaty. Other tobacco companies invested in Australia had not structured their investments in such a way as to obtain this type of protection, and so had no recourse against the government other than through the Australian courts.

Why did Philip Morris’ claim fail?

The Tribunal agreed that it could be legitimate for an investor to structure its investment in a country through a particular jurisdiction in order to take advantage of an investment treaty between that country and the place in which the investment is located. But it found that an investor changing its corporate structure to gain the protection of an investment treaty at a point in time when a specific dispute was foreseeable was an abuse of rights and not permissible.

Philip Morris re-structured its investment in Australia so that that investment was owned by a Hong Kong incorporated entity, after the Australian government announced its intention to introduce plain packaging measures, but before the plain-packaging legislation came into effect. The Tribunal found that the principal, if not sole, purpose of the corporate restructuring was to gain protection under Australia’s bilateral investment treaty with Hong Kong, and that this was not permitted.

Lessons Learned

This claim can be seen as a vindication of states’ rights to regulate in the public interest, as Australia will not be required to compensate Philip Morris, despite it no longer being permitted to use its intellectual property on tobacco products in Australia. While it is true Australia will not be required to compensate Philip Morris, the issue of whether Australia’s public health regulations breached the investment protections in the treaty was not actually tested.

Rather, this case demonstrates that businesses should be considering structuring an investment to obtain potential benefits of bilateral investment treaties at the time of investment. Failure to consider whether an investment has these protections until political changes are announced may be too late to enable the company to take advantage of potential protections available to them.