Gloves are Off in Next Round of the Dispute over Australia''s Plain Packaging Laws

Source from:  Tobacco Asia  03/07/2014

Make no mistake, this is huge. The Sydney Morning Herald said it "is shaping up to become the biggest trade dispute Australia has ever faced as a defendant ... it has the potential to overturn the anti-smoking law".

They were talking about various legal action taken against the Australian government over its plain packaging law. One such dispute is at the World Trade Organisation (WTO), brought by five countries – Ukraine, Honduras, The Dominican Republic, Cuba and Indonesia. Another is the international arbitration initiated by Philip Morris Asia (PMA) under the Hong Kong-Australia Bilateral Investment Treaty (BIT), which, as we went to print, was due for its latest hearing in Singapore on February 20.

The Australian government views these actions so seriously it has taken the unprecedented step of setting up a special branch-level taskforce to handle them.

PMA, a Hong Kong corporation that owns and controls Philip Morris Limited (PMI) in Australia, had already previously notified the Australian government it would take legal steps if tobacco plain packaging rules were enacted. This it did on the same day that legislation was passed in November 2011.

The legislation states that all tobacco products sold in Australia must have removed logos, colors, designs and other differentiating elements of branding, as well as trademarks, other than the product name.

The government mandated that products sold by every tobacco company must use the same color and typeface, and comply with many other homogenizing rules that essentially eliminate packaging design. Cigarette packaging must also carry larger graphic health warnings on the pack, occupying 90% of the front and 75% of the back.

PMA alleges that these new rules breach the Hong Kong-Australia BIT signed in 1993 to "create favorable conditions for greater investment" and to "promote economic cooperation" by protecting cross-border investments between the two countries.

The BIT treaties are designed specifically to protect brands, intellectual property, branding, ongoing business enterprises and other forms of investment.

PMA claims that Australia's rules breach these terms and cause it substantial financial injury. Specifically, the action says the Australian government violated the BIT in three key areas: it deprives PMA of the real value of its investments in Australia (that is, its brands, branding, and intellectual property); denies PMA "fair and equitable treatment"; and unreasonably impairs PMA's investments.

The company is asking the arbitration panel to suspend the law and award substantial compensation. A country's domestic law must be consistent with the provisions of an investment treaty, and any damages awarded under a BIT would be enforceable in Australian domestic courts.

Under the provisions of the BIT, and the Arbitration Rules of the United Nations Commission on International Trade Law 2010, a tribunal of three arbitrators will hear and decide the dispute. One each was chosen by PMA and the Australian government and the other by the Permanent Court of Arbitration at The Hague, which provides certain administrative assistance. The arbitration will consist of several hearings and is expected to be completed at the earliest by 2015.

Following preliminary hearings in 2012, which focused on procedural matters, the tribunal issued an order on confidentiality. The hearings and transcripts of the arbitration will be confidential, but any final awards and other orders will be public and each party can publish its own submissions. Last year, PMA filed its Statement of Claim, to which Australia responded in October with its Statement of Defense.

At the hearing in February, the parties will present arguments on whether the tribunal should split the case into two phases, one to address jurisdictional arguments, and the other to the cover the merits of the dispute.

In a previous and separate domestic case challenging the new regulations, Australia's High Court already agreed that plain packaging deprives tobacco companies of valuable intellectual property rights. It however, ruled in favor of Australia because the country's constitution uniquely requires the government to receive a proprietary benefit.

Apart from the issues of treaty violation, PMA argues that commoditizing tobacco products through plain packaging will harm public health and furthermore does not meet the Australian government's own test of 'evidence-based policy'. The question is: does anybody actually know whether plain packaging will cut smoking rates?

Shortly before the legislation was passed in 2011, Nicola Roxon, Australia's then Federal Minister for Health, admitted in Radio 3AW Mornings interview with Neil Mitchell that there was "some level of experiment" in the new legislation. She later told the The Herald Sun, "The sort of proof they're looking for doesn't exist".

And even after the legislation came into force in December 2012, there was no change in tone. In a July 2013 interview with The Australian, in which then Federal Health Minister, and now deputy leader of the Labour Party, Tanya Plibersek criticized the UK government for dropping plans to introduce plain packaging, the newspaper said she commented that "data was unavailable on whether the introduction of plain packaging in Australia had hit cigarette sales".

However, evidence is now beginning to emerge that, on the contrary, it has not hit sales. London Economics, commissioned by PMI, published the first comprehensive study measuring smoking rates in Australia since plain packaging was introduced.

The study began with the statement, "As the overarching objective of plain packaging is to improve public health by reducing tobacco consumption, the core question in this analysis is whether there has been any change in smoking prevalence amongst the resident Australian population."

Having interviewed over 5,000 smokers and non smokers before and after the legislation came into force, the report concluded that, "Over the timeframe of the analysis, the data does not demonstrate that there has been a change in smoking prevalence following the introduction of plain packaging and larger health warnings despite an increase in the noticeability of the new health warnings."

Other reports confirm that, since the new legislation, the illicit trade in cigarettes has climbed. A report by KPMG on illegal tobacco in Australia, commissioned by the industry and released in October, has significant findings.

It says the level of illegal tobacco consumption has reached record levels, growing from 11.8% to 13.3% from June 2012 to June 2013. In the main, this is down to consumption of illegal branded cigarettes, such as Manchester, which now has a 1.2% market share in Australia, up from 0.3%. This is greater, for instance, than Kent or Camel. Consumption of counterfeit cigarettes has also increased.

The jump in black market branded cigarettes stands at 154%, a rise that has surfaced at the same time volumes of illicit unbranded tobacco, known as 'chop chop' in Australia, have declined by 40%.

The report states that if these black market purchases had been made in the legal market, the government would have collected AUD$1 billion in additional excise tax revenue.

And then there's the impact on retailers to consider. In August, a study conducted by international research company Roy Morgan, commissioned by PM Australia, revealed that "since plain packaging was introduced, 43% of small retailers surveyed in Australia perceive an impact on their business from illegal tobacco, up from 36% in December 2012". 

All these factors in the PMA dispute will play some role, too, in the WTO action brought by Ukraine, Honduras, The Dominican Republic, Cuba and Indonesia. If the WTO panel rules that Australia's law breaches international trade rules and damages these countries' economies, the implications will have a ripple effect. The UK and New Zealand have already rejected or shelved plans for similar plain packaging laws, and 12 territories, including the EU, have joined the WTO consultations, some as neutral observers. All will be watching closely.

Notes of caution are wise, but there is room for optimism. As The Australian newspaper noted, "The WTO was set up to spread free trade, and defendants rarely win cases before its disputes panels." Enditem