Part I: Expropriation and Police Powers
Recently
an Award was issued in the Philip Morris v Uruguay[1]
case, which dealt with the public interest and its application in international
investment arbitration. This decision concerned specifically the protection of public
health on one hand, and the protection of the investors’ investment on the
other. It was a long awaited decision, with high importance for the future of international investment arbitration ("IIA"). What exactly did this decision bring to IIA? In the following I will provide a summary of the fundamental arguments regarding expropriation and public purpose with some commentary.
A short background, the claimant in this case, Philip Morris, is a
worldwide tobacco producer, who produced and sold cigarettes under various
brands in Uruguay. These included Marlboro, Fiesta, L&M, Philip Morris,
Casino and Premier.[1]
They generated revenues of more than US $30 million and employed about 100 people
between 2008 and 2011 only in Uruguay.[2]
The respondent, Uruguay, is a country especially concerned about health
risks from smoking since it has one of the highest rate of smokers in Latin
America and more than 5000 Uruguayans die each year from diseases linked to
tobacco consumption.[4]
This unhealthy habit has also an economic impact. Uruguayans spent 20% of the
national minimum wage on cigarettes and the health costs linked to smoking are
estimated to amount to US$150 million per year.[5]
Therefore the current president of Uruguay Tabaré Ramón Vázquez Rosas led a
strong campaign against smoking trying to reduce tobacco consumption in the
country.
In order
to do so, the president issued several decrees in 2005, which included the
inclusion of warning texts to cover 50% of the packaging of tobacco products,
prohibiting sponsorship through advertising and promotion of tobacco-derived
products, restricting the smoking areas and smoking ours in restaurants and
bars, restricting smoking in public offices and in all enclosed premises for
public use. Many of these measures were in 2008 enacted by Parliament in Law
18,256.[6]
None of these measures were challenged by the claimant.
The disputed regulation
In
February 2009, the Ministry of Public Health issued Ordinance 514, which was connected to Law 18,256
and required each brand of tobacco products to have a single presentation of
any cigarette brand ("Single Presentation Rule" = SPR).[7]
Based on this ordinance, tobacco companies could only market one variant for
each family brand.[8]
As a result, the claimant had to eliminate seven of its thirteen product
variants accounting for 20% of its sales. The claimant considered this regulation
to breach the due process and transparency standards of protection and he
claimed that the measure amounted to indirect expropriation.
Secondly,
in June 2009, the presidential Decree 287/009 was enacted, which mandated the
increase in the size of health warning on the cigarette packages from 50 to 80%
of the lower part of each of the main sides.[9] This
left only 20% of the packaging for the branding.
These two
regulations were the cause of the dispute. The claimant considered them to be
arbitrary and alleged that they did not result into the decrease of smoking,
but only turned customers to illicit markets.[10]
Uruguay on the other hand stated that by these regulations it only tried to
fulfil its obligations arising from the FTCT treaty[11]
and to protect the health of its citizens, which is its constitutional
obligation under Article 44 of the Uruguayan Constitution.[12]
Both
parties agree that it is difficult to measure the effectiveness of the
measures. The state provided statistical data, which showed a decline of
smokers among every group of citizens in the past 10 years, however, it is hard
to prove that this decline was a result of the regulation.
Claims
The
Claimant asserts the violation of Articles 3(1) – Arbitrariness and
discrimination; Art. 3(2) – Fair and equitable treatment; Art. 5 – Indirect
expropriation and Art. 11 – Umbrella clause, of the Switzerland-Uruguay BIT
entered into in 1988.
As for the protection of public health, it was not disputed by the claimant, “that smoking cigarettes and other tobacco products represent a serious health risk.”[3] Similarly, the claimant did not question the respondents power to protect public healh. The issue at dispute was the appropriateness of the way of doing so.
As for the protection of public health, it was not disputed by the claimant, “that smoking cigarettes and other tobacco products represent a serious health risk.”[3] Similarly, the claimant did not question the respondents power to protect public healh. The issue at dispute was the appropriateness of the way of doing so.
Expropriation and police powers
The
tribunal first issued the expropriation claim. The claimant asserted the
expropriation occurred as a result of the Single Product Rule. By banning seven
cigarette variants the State also expropriated the intellectual property
connected to these variants and this ban lead to diminishing the value of the
remaining ones.[13]
Sole variant expropriation argument
The
claimant did not dispute, that they remained a profitable business. However,
they considered each brand asset – each
variant of cigarettes – to be an individual investment.[14]
Therefore the discontinuance of 7 variants constituted expropriation.
The
tribunal dealt firstly with the question, whether the variants constitute one
investment as a whole, or separate investments. The case law in IIA is not unanimous on this issue, thus this was the first important decision to make.[15] The
tribunal concluded that in this case the claimants business is to be considered
as a whole, “since the measures affected
its activities in their entirety”.[16] As
a supportive argument, the tribunal stated that the claimant resorted to
countermeasures involving its business as a whole and not separately for each
brand.[17]
Trademark expropriation argument
Furthermore,
the Claimant considered the reduction to only one variety of cigarettes per
family brand to amount to expropriation
of his rights related to trademark law. The claimant stated that trademarks
are assets because they create values by distinguishing goods in commerce.
However, they can only do so if they can be used.
The
respondent in turn alleged that there is no positive right of the claimant to
use the trademarks under Uruguayan nor international trademark law. To the contrary trademarks offer only a negative right,
according to which the State have to protect the intellectual property rights
of the owners from abuse by third parties, so that only the trademark holder
has the possibility to use its trademark in commerce.
The
tribunal, after analysing the Uruguayan trademark law and international
conventions regarding intellectual property rights concluded that these does not
prohibit the State from limiting the use of intellectual property by exercising
its regulatory power. On the other hand, the tribunal did not agree with the
states position, that trademarks only enjoy a negative right of protection from
third parties. To the contrary, the tribunal considers trademark to be a
property, the use of which is protected. It is presumed that they are
registered in order to be used.[18]
The tribunal concluded that the trademarks are capable of being expropriated. Thus States does also have a positive obligation to protect trademarks.
Therefore the tribunal further had to examine, whether the States measures in this case amounted to expropriation.
Therefore the tribunal further had to examine, whether the States measures in this case amounted to expropriation.
Indirect expropriation
The
tribunal pointed out that in the present case, the dispute concerned indirect expropriation. In the tribunals view, indirect expropriation is
defined in the Switzerland-Uruguay BIT stricter than in other BITs, since it
refers to measures, “that have the same
nature or the same effect” as expropriation or nationalization.[19]
In other BITs the required threshold for indirect expropriation is measures
with “tantamount” or “equivalent” effect to nationalization or expropriation, which offers a broader space for interpretation.
The
tribunal further concluded based on analysis of case law that indirect expropriation can arrive from measures
which have a major adverse impact on the claimants’ investment. These should
amount to a “substantial deprivation” of the value of the investment, use or
enjoyment.[20]
The effect can be measured by the intensity and duration of the economic
deprivation suffered by the investor. [21]
As for
the measures increasing the size of warning, the tribunals concluded that the
reduction of the space on packaging for trademarking could not itself have a
substantial effect on the Claimants business since it only imposes a limitation
on the modality of the trademark. Therefore without any further elaboration it
dismissed the expropriatory effect of this measure.[22]
As for
the SRP, the tribunal stated that the effects of it were “far from depriving the Claimant of the value of its business or causing
a substantial deprivation”.[23]
The tribunal pointed out the claimants argument that his business would have
been significantly more profitable, had the regulations not been introduced.
Nevertheless, the claimant still profited at all times after the implementation
of the regulations. According to the tribunal, “as long as a sufficient value remains after the Challenged Measures are
implemented, there is no expropriation”.[24]
Therefore the tribunal did not consider the measures to amount to indirect expropriation.
The
tribunal supported its argumentation by case law, in which it was confirmed
that “a partial loss of the profits does
not confer an expropriatory character on the measure.”[25]
However, the tribunal provided only a one sentence analysis with one example,
that of the LG&E v Argentina, which is indeed a very specific case.[26]
This short analysis and lack of case law is less than sufficient in a so important dispute.
Police powers and public interest
In the
analysis the tribunal had to issue the sovereign power of the State to regulate
(the so called “Police powers” doctrine) and the limits of legitimate
regulation in public interest. This was the respondent’s main counterargument, however, the tribunal issued it only in obiter dictum after dismissing the indirect expropriation claim entirely.
The respondent considered the protection of public health to be an essential element of the States police powers. Furthermore, they alleged that “a bona fide, non-discriminatory exercise of a State’s sovereign police power to protect health or welfare does not constitute an expropriation as a matter of law. Nor is the State liable to pay compensation for any damages arising from its exercise of such a power”.
The respondent considered the protection of public health to be an essential element of the States police powers. Furthermore, they alleged that “a bona fide, non-discriminatory exercise of a State’s sovereign police power to protect health or welfare does not constitute an expropriation as a matter of law. Nor is the State liable to pay compensation for any damages arising from its exercise of such a power”.
The argumentation of the claimant included the assertion to interpret the provisions of the BIT, which in fact does include a provision allowing regulation in public interest, however, only if “adequate compensation” is provided:
“Neither of the parties should take measures
of expropriation, nationalization or any other measure having the same nature
or same effect ... unless the
measures are taken for the public benefit as established by law, on a
non-discriminatory basis, and under due process of law, and provided that provisions be made for effective and adequate
compensation”.[27]
On the other hand,,
the respondent relied on the police powers of the State arising from international customary lawstating that in this
specific case no compensation is due. The claimant opposed that there was no
room for carving out an exemption based on police powers of the state. The
tribunal ruled in favour of the State, so that no compensation was due.
The
tribunal augued with the use of Article 31(3)(c) of VCLT when interpreting
Article 5(1) of the BIT (provision agains expropriation). This article requires treaty provisions to be
interpreted in the light of “any relevant rules of international law applicable
to the relations between the parties”. It is considered to be a reference to
the rules of customary international law.
The
tribunals analysis led to the finding that since the beginning of the 21th century
arbitral practice recognises the principle, which preserves the sovereignty of the state. Its' content is the following, “the State’s reasonable bona fide exercise of police powers in such
matters as the maintenance of public order, health or morality, excludes
compensation even when it causes economic damage to an investor and that the
measures taken for that purpose should not be considered as expropriatory.”[28]
This
implies that the measures maintaining public order, protecting health and
morality are those areas of public interest, which are important enough for the
measures not to amount to expropriation even if the formal aspects of
expropriation are fulfilled. This will be true even if they are not expressly
mentioned in the BIT. On the other hand, the police powers are not absolute.
The tribunal further argued that the decision, whether the measure is expropriatory or it is a legitimate regulation, will depend on the nature and the purpose of the States action.[29] The tribunal thus suggested that it is a rule of customary international law that if the measure is a legitimate regulation, no compensation needs to be paid.
The tribunal further argued that the decision, whether the measure is expropriatory or it is a legitimate regulation, will depend on the nature and the purpose of the States action.[29] The tribunal thus suggested that it is a rule of customary international law that if the measure is a legitimate regulation, no compensation needs to be paid.
One of
the examples used by the tribunal is also the case of Methanex, when the tribunal stated that:”
[A]s
a matter of general international law, a non-discriminatory regulation for a
public purpose, which is enacted in accordance with due process and, which
affects, inter alios, a foreign investor or investment is not deemed
expropriatory….”
The question that emerges, is whether the tribunal correctly used the police powers doctrine rooted in international customary law instead of the exception from liability for expropriation stated in the treaty? The problem arises upon comparing the text of Art. 5(1)
with the tribunals finding. The extent of non-compensable
measures under “police powers” described by the tribunal in the Methanex case, is exactly the same as the content of the measures mentioned in Art. 5(1) of
the treaty. However, the treaty in addition expressly requires an adequate compensation for
such measures.
Therefore, the parties to this dispute have an express
provision in their BIT, which states the exact opposite as the customary
international law suggests. When it comes to the clash of the exact wording of
the treaty between two countries and an international customary rule, the
customary international rule can hardly prevail. This is because, the will of
States is what forms international customary law (their opinio juris about the
existing rules). Upon entering into international agreements, such as BITs,
countries express their will, or opinio iuris about the certain legal matter.
In case there is no mention of a certain issue in an international treaty then
it is reasonable to apply international customary law for interpretation. But
if the will of two countries is directly opposite within their contractual
relation as the prevailing “legal opinion”, they can hardly be bound with customary
international law, since they would be bound by the “opinio juris” of other
countries.
In the next argument, the tribunal supports its findings by the obligations of the State towards its citizens, in this case stemming from Art. 42 of the Constitution of Uruguay[31] and from the multilateral international treaties in which it entered into (e.g. FCTC). In all of these cases the State is bound to protect the health of its citizens. Even though I agree with this argment I find the claimants counter-argument also valid. The claimant aruged that none of these legal documents prescribe the measures that were conducted by the respondent as suitable means of achieving this goal. The fact that the constitutions calls for the protection of the public health does not mean that the State can enact any arbitrary law.
Furthermore, the tribunal argued that the application of the “police powers doctrine” is also corroborated by newer Model BITs, which expressly states public welfare objectives, which will not constitute expropriation. To such exaples belong the Canada Model BIT of 2004 and the 2012 USA Model BIT.[30] The provisions of these BITs according to the tribunal reflect the position under general international law. Even though we agree that the content of BITs can form the customary international rules, we also believe, that two BITs out of the more than 3000 existing are hardly enough to indicate a trend of customary law.
Furthermore, the tribunal argued that the application of the “police powers doctrine” is also corroborated by newer Model BITs, which expressly states public welfare objectives, which will not constitute expropriation. To such exaples belong the Canada Model BIT of 2004 and the 2012 USA Model BIT.[30] The provisions of these BITs according to the tribunal reflect the position under general international law. Even though we agree that the content of BITs can form the customary international rules, we also believe, that two BITs out of the more than 3000 existing are hardly enough to indicate a trend of customary law.
Proportionality
The
tribunal summarised its findings concerning the police powers relying on earlier
investment treaty decisions by stating the conditions of a measure necessary to
be fulfilled in order not to constitute an indirect expropriation. These are
that “the action must be taken bona fide
for the purpose of protecting the public welfare, must be non-discriminatory and
proportionate”.[32]
This is particularly striking, since it is the first time in the whole decision
that the tribunal used the word “proportionate”.
Therefore any link to case law or other arguments for the use of
proportionality are missing. The only decision the tribunal referred to in
connection with the requirements for regulatory taking was the Tecmed case. I assert
that the tribunal did not explain why it decided to use proportionality as
one of the requirements of liberation from indirect expropriation.
In its analysis, the tribunal ruled that both regulations did fulfil all the criteria of legitimate
regulation under the police powers of State and thus did not amount to
expropriation. However, this conclusion lacks a throughout analysis since the
tribunal only summed up in paragraph 306 that the measures were “adopted in good faith, and
non-discriminatory … proportionate to the objective they meant to achieve,
quite apart from their limited adverse impact on the investors business… were
not arbitrary and unnecessary”.[33] No
argumentation supporting these statements was provided. As to the proportionality, there is not even a mention on which steps of the proportionality test did the
tribunal use. Even though the tribunal mentioned the proportionality also later
when deciding the FET claim, there was no direct link to this analysis and the
analysis was also incomplete, since it in most parts relied on the decisions
of third party bodies (WTO report).
Therefore I believe that had the tribunal not dismissed the indirect expropriation claim before analysing the police powers argument, the argumentation in favour of the police powers of State in this case could not have been upheld. Furthermore, as stated above, the dismissal of the indirect expropriation claim lacks a more substantial analysis and the reasons were not sufficiently elaborated.
On the other hand, I consider these chosen criteria to be reasonable. As I argued above, the conditions of public interest, non-discrimination and bona-fide would not provide any differentiation from measures that would require compensation. With the inclusion of the proportionality criterion, the tribunal came one step closer to the solution of the question, which measures are legitimate. I believe that the use of proportionality test in the future by other tribunals would be beneficial to more transparent and more reasoned decisions in IIA.
Therefore I believe that had the tribunal not dismissed the indirect expropriation claim before analysing the police powers argument, the argumentation in favour of the police powers of State in this case could not have been upheld. Furthermore, as stated above, the dismissal of the indirect expropriation claim lacks a more substantial analysis and the reasons were not sufficiently elaborated.
On the other hand, I consider these chosen criteria to be reasonable. As I argued above, the conditions of public interest, non-discrimination and bona-fide would not provide any differentiation from measures that would require compensation. With the inclusion of the proportionality criterion, the tribunal came one step closer to the solution of the question, which measures are legitimate. I believe that the use of proportionality test in the future by other tribunals would be beneficial to more transparent and more reasoned decisions in IIA.
Summary
To
summarize, the tribunal dealt with the indirect expropriation rather shortly.
They explained why the measures were not arbitrary and dedicated a deeper
analysis to the public interest. In this regard, the decision can serve as a
useful tool also for future tribunals to determine whether certain measures
were conducted in public interest and are within the police powers of the
state, or not. Even more importantly, the tribunal considered
proportionality of the measures to be one of the key requirements for the measure
to be a legitimate regulatory taking not requesting compensation. On the other hand,
the decision making process, which resulted to the conclusion that the measures
are proportional is not well described.
All in all, the decision is an
important cornerstone for the question of balance between the public interest
and foreign investors’ rights. It provides tribunals in future cases
with an insight, how the balance can be achieved - the action must be taken
bona fide for the purpose of protecting the public welfare, must be
non-discriminatory and proportionate. The question though remains, whether other
tribunals will be inspired to apply this method.
[1] Award, Philip Morris v Uruguay, above, p. 14
[2] Ibid.
[3] Award, Philip Morris v Uruguay, above, p. 16
[4] Ibid.
[5] Award, Philip Morris v Uruguay, above, p 17
[6] Award, Philip Morris v Uruguay, above, p. 25-26
[7] Award p. 28 :“ 3. Each
brand of tobacco products shall have a single presentation, such that it is
forbidden to use terms, descriptive features, trademarks, figurative signs or
signs of any other kind such as colors or combinations of colors, numbers or
letters, which may have the direct or indirect effect of creating a false
impression that a certain tobacco product is less harmful than another, varying
only the pictograms and the warning according to article 1 of the present
Ordinance“
[8] E.G. for Marlboro family
brand, Philip Morris chose Marlboro red, and had to také of Marlboro Light,
Blue and Fresh Mint off the market.
[9] Award, Philip Morris v Uruguay, above, p. 31
[10] Award, Philip Morris v Uruguay, above, p. 35
[11] Uruguay is a signatory party of the WHO FCTC treaty (Framework
Convention on Tobacco Control) since 2004
[12] Article 44 of the Uruguayan Constitution provides that it is the
Government’s duty to legislate public health and hygiene issues, with the
purpose of attaining the physical, moral and social improvement of Uruguay’s
citizens.
[13] Award, Philip Morris v Uruguay, above, p. 48
[14] Award, Philip Morris v Uruguay, above, p. 53
[15] Claimant : Republic , Respondent : ….
[16] Award, Philip Morris v Uruguay, above, para 283
[17] Ibid.
[18] Award, Philip Morris v Uruguay, above, p. 77
[19] BIT Switzerland-Uruguay Art. 5
[20] Award, Philip Morris v Uruguay, above, p. 52
[21] Telenor Mobile Communications AS v. Republic of Hungary, Award, 13
Sep. 2006, (RLA-078), ¶¶ 65, 70. See
also Metalclad (CLA-039) ¶ 103; CME
(CLA-202), ¶ 688; Pope & Talbot (CLA-216), ¶¶ 96, 102.
[22] In my opinion, the tribunals did not state sufficient reasons why
the claim fails in this case. The whole reasoning is concluded in one sentence.
See para 276.
[23] Award, Philip Morris v Uruguay, above, para
284
[24] Award, Philip Morris v Uruguay, above, para. 286
[25] Award, Philip Morris v Uruguay, above, para 286
[26] In addition the tribunal added, that the respondent relied also on
the cases of Archer Daniels, CMS, and Encana. However, I still believe, that
the dismissal of the expropriation claim was not sufficiently reasoned.
[27] Art. 5(1) BIT
[28] Award, Philip Morris v Uruguay, above, para 295
[29] Ibid. para 295. The tribunal mentioned the following decisions:
Tecmed (CLA-203), ¶ 122; Methanex (RLA-164), Part IV, Ch. D, ¶ 7; Chemtura
(RLA-53), ¶ 247; Glamis (RLA-183), ¶ 356; Saluka (CLA-227), ¶¶ 255-264.
[30] They contain provision which state, ”Except in rare circumstances,
non-discriminatory regulatory actions by a Party that are designed and applied
to protect legitimate public welfare objectives, such as public health, safety,
and the environment, do not constitute indirect expropriation.”
[31] The State shall legislate in all matters appertaining to public
health and hygiene, to secure the physical, moral and well-being of all the
inhabitants of the country.
[32] Award, Philip Morris v Uruguay, above, para 305
[33] Ibid. para 306
