Inadmissible politics

Uruguay has to continue to fight a lawsuit brought by tobacco giant Philip Morris over its cigarette warning labels, according to a decision by a three-person panel released a few weeks ago.

The  so-called jurisdictional decision means that the dispute – Philip Morris Brands Sarl v. Uruguay – will continue to the merits stage at the World Bank’s center for resolving investment differences (ICSID).

The case has attracted a lot of attention from the public health community, given that it could open up developing nations to substantial liability if they try to restrict multinational company’s tobacco operations in certain ways. For instance, Mayor Michael Bloomberg (a major anti-obesity and -tobacco campaigner)has pledged to help Uruguay with its legal expenses at ICSID. For its part, the multinational giant is also suing Australia over its tobacco regulations, that case under the Australia-Hong Kong investment treaty (using a Hong Kong affiliate).

The Uruguay particular case was brought by Philip Morris using a Swiss affiliate. The company is alleging that Uruguay’s requirements to have plain packaging and graphic anti-tobacco labels on 80% of the surface of the tobacco packets violate provisions of the 1988 Switzerland-Uruguay investment treaty. The arbitrators hearing the case include Gary Born (from the US) and James Crawford (from Australia), and are led by Piero Bernardini (from Italy).

Confused yet? The case is complex, so I’ll just comment on one aspect of it.

In this latest phase of the case, Uruguay objected that the text of the Swiss-Uruguay treaty allowed it to exclude public health measures from international lawsuits. The relevant part of the text reads: “The Contracting Parties recognize each other’s right not to allow economic activities for reasons of public security and order, public health or morality, as well as activities which by law are reserved to their own investors”. (paras. 151-155)

But Philip Morris and the tribunal disagreed.

They noted that this provision was included in a section of the treaty dealing with admission of investments in the first instance, not how investments would be regulated once admitted. (paras. 164-175)

This may seem like a dry technical matter. But what does it mean in plain terms to tie lawsuits to when such an investment was admitted?

As recounted in Philip Morris’ 2010 request for arbitration, the company’s local affiliate (Abal Hermanos) first became active in the Uruguayan market in 1887, and took its present form in 1945. The multinational made and increased their investment in Abal 1979, 1999 and 2002. The company even cites to a 2002 tax benefit that Uruguay granted it in 2002 as evidence for the government’s ongoing approval of its operations.

The implications of last month’s ICSID award are that, if Uruguay had wanted to avoid having international lawsuits over its tobacco policies, it should have blocked the investment in 1887, 1945, or 1979 – years before the treaty even went into effect.

As it turns out, when the tribunal discusses the issue of admission, they so in a general way without mentioning any of these dates explicitly. If they had, it would become clearer that countries signing investment treaties will have limited ability to cite articles like the one noted above to change their regulatory regime affecting investments made in the totality of previous national history without risking international lawsuits.

Since we are mentioning dates, let’s add a bit more color to them. In 1887, Uruguay was governed by the conservative  and business-oriented Colorado Party. In 1945, the same. In 1979, by a military dictatorship that killed and tortured many Uruguayans. In 1988 and 2002, again by the Colorado Party. The progressive health regulations only began with the Frente Amplio governments of Tabare Vasquez and Jose Mujica (2005-present). These regs came  in response to the growing awareness of tobacco’s negative impact on health that began to compel major regulation only since the  1990s and 2000s. (For a sense of how significant the Frente Amplio institutional shift was, see here. For a reasonably good chronology of tobacco regulation efforts, see the Obama administration’s statements in a recent WTO case.)

The tribunal accorded no weight to a chronology of how these investments fell within the political, scientific or regulatory developments within or outside of Uruguay. It seems that the practical implication for governing parties wishing to avoid international lawsuits is that they should have been in office earlier (like, 118 years earlier) with the science of today at hand.

Of course, international lawyers cherish the notion of state responsibility, which suggests that the different branches of government and ruling parties over time must be considered as a unified whole – able to sign meaningful contracts and have these enforced.

Fair enough when it comes to war and peace, but are we so sure that the same should apply to the very complicated business of the modern regulatory state? The very existence of “business-intrusive” administrative law raises the stakes to different parties and factions controlling the state. Consistent regulation may be desirable from certain points of view, but it does seem unlikely.

Maybe none of it matters. Maybe states will regulate or not, be sued or not, and pay investment awards or not. Maybe investment law cannot and does not dictate a country’s regulatory path. It does seem, however, that these lawsuits signal power to establish norms in international conduct, and to take up government resources in litigation if not payment. This will raise the costs to regulation, in financial if not normative terms. Will public health crusaders be able to garner enough popular support to face down Big Business and Big Law – both at home and abroad? Time will tell.

Read the full decision here.