In 2011, the Australian government passed the Tobacco Plain Packaging Act.

The legislation which comes into force in stages in the second half of 2012 prohibits tobacco retail products from using marks, words, colours, designs and other distinctive features on their packaging.  The use of a brand name is allowed, but restricted in size and appearance. The packaging will in large parts display health warnings. 

When companies are faced with regulations that impact, and are meant to impact, their business in a fundamental manner a number of options are available. These include:

  • The use of domestic constitutional law complaining of an unjustified interference in the ‘property’ or similar rights.
  • The use of international treaties, such as a claim under an investor state arbitration under a bilateral investment treaty complaining of the failure to live up to the standards of conduct required of the state hosting an ‘investment’ – those claims might include that there has been a failure to afford just and equitable treatment, or an uncompensated expropriation.
  • The use of international trade law, such as a challenge under World Trade Organisation rules that the regulatory regime amounts to an improper barrier to trade.

The tobacco companies or tobacco-producing countries (Ukraine, Honduras and the Dominican Republic)  are challenging the plain packaging legislation on each of these grounds. One of the interesting questions is what impact each line of argument has on others legal challenges.

The High Court of Australia has recently ruled in favour of the Australian Government in relation to the constitutional challenge, finding that the plain packaging legislation is not contrary to the Constitution: JT International v Commonwealth of Australia, British American Tobacco Australasia Ltd v Commonwealth of Australia, [2012] HCA 43.

As expected, the Australian Government and the tobacco companies have taken different views as to the impact the High Court’s decision will have on the other challenges. At the time the High Court handed down its decision, Phillip Morris stated that the decision would have ‘no bearing’ on its investor state arbitration claim.

This note examines the High Court’s decision and the implications for the investor state arbitration claim.

Expropriation of intellectual property rights – the High Court’s decision

The Australian Constitution confers on the Australian Parliament the power to make laws regarding ‘the acquisition of property on just terms from any State or person for any purpose in respect of which the Parliament has power to make laws’ (s51(xxxi)).

Largely dismissing the relevance of US constitutional ‘takings’ cases to the Australian issue, the High Court held that an ‘acquisition of property’ requires the ‘receipt of something seen from the perspective of the acquirer’ whereas ‘[t]aking involves deprivation of property seen from the perspective of its owner’ (French CJ, para 42). The interest accruing to the acquirer must be proprietary in nature (ibid). The High Court ruled that there was no breach of section 51(xxxi) of the Constitution because there was no ‘acquisition’ by the Commonwealth under the legislation.

The issue turned to some extent on the nature of the right granted by the relevant intellectual property statute – something to which we return below. In issue in this case was a trade mark right.

The majority's finding was based on the premise that a taking could take place without a corresponding acquisition (Kiefel J, para 357). The majority argued that since the sole use or control over the packaging remained with the tobacco company (Hayne and Bell JJ, para 182) and there was no accrual of a benefit by the government, the constitutional protection was not engaged. Specifically, the space created by the limits on what can be displayed on the tobacco packaging did not give the Commonwealth a proprietary interest in filling that space with health warnings but was merely a creation of space through compliance with statutory requirements (Hayne and Bell JJ, paras 182-184, 188).

Thus, the claim failed because the government had not acquired any proprietary interest (see also Gummow J, para 155). 

The international dimension – implications for Phillip Morris' investment treaty claim

What are the implications for Phillip Morris’ investment treaty claim?

Prima facie, there are a number of fundamental differences between the High Court challenge and the treaty claim:

  • first, and obviously, the decision of the Australian High Court does not, of course, have any direct precedential value in relation to the investment treaty claim; and
  • secondly, there are significant differences in the protection afforded by the Hong Kong - Australia BIT and the Australian Constitution. Unlike the Constitution, the BIT does not require the acquisition of a property right for a breach of the treaty to be found, but rather grants a protection which applies in broader circumstances – wherever an investor is ‘deprived’ of their investment: ‘Investors of either Contracting Party shall not be deprived of their investments nor subjected to measures having effect equivalent to such deprivation in the area of the other Contracting Party except under due process of law, for a public purpose related to the internal needs of that Party, on a non-discriminatory basis, and against compensation.’ (Art 6.1) . This would include an indirect expropriation of an investment.

However, a number of aspects of the High Court judgment may have some implications for the investment treaty claim.

First, the High Court held that intellectual property rights can constitute ‘property’ in the sense of the constitutional protection. In coming to that view, a number of the judges held that the trade mark right was a ‘negative right’, ie, a right to restrict the use of an otherwise publicly available symbol by others (French CJ, para 37; Crennan J, para 248, 268; Kiefel, para 348) and that this right was subject to conditions that the regulatory regime imposes. This right may be contrasted to a positive right to use the trademark. If the arbitral tribunal were to adopt a similar approach, even on the broader ‘deprivation’ test under the BIT, there may not be a breach of the expropriation standard because the tobacco companies will not have been deprived of their right to prevent others from using their trade mark. It is relevant to note however that this argument may not have been accepted by some of the High Court judges who held that even though a trade mark right is a negative right, it could still be the subject of an acquisition of property in the constitutional sense – see French CJ, para 38; Crennan J, para 276).

The BIT defines investments broadly to include: "intellectual property rights including rights with respect to copyright, patents, trademarks, trade names, industrial designs, trade secrets, know-how and goodwill " (Art 1(e)(iv)). However, it does not address the nature of those rights.

Secondly, in the High Court, the Commonwealth of Australia advanced the argument that, since the plain packaging legislation was made for a higher purpose, namely the protection of public health, the modification of the trade mark rights did not amount to a constitutionally relevant change in property rights.

That argument was either rejected or not finally considered. Those judges rejecting the argument held that the purpose behind a particular change in law could not have any effect on the constitutional question of whether property had been expropriated (Kiefel J, para 344; Heydon, para 230-234).

In its response to Phillip Morris' treaty claim, Australia has advanced a similar argument ie that ‘plain-packaging measures are non-discriminatory regulatory actions of general application designed and adopted by the Australian Government to achieve the most fundamental public welfare objective - the protection of public health. Such measures do not amount to expropriation, are not equivalent to expropriation, also do not give rise to a duty of compensation’ (Response to Notice of Arbitration dated 21 December 2011, para 46).)  The BIT does not contain any express public health exception for expropriation. In those circumstances, the arbitral tribunal may take a similar approach to the High Court on the issue.

It may be that in future BITs, the Australian Government will seek to expressly carve-out certain areas such as public health from protection.