Australia Beats Philip Morris

In the most high-profile investment dispute in recent history, Australia has emerged victorious. The challenge was brought by tobacco company Philip Morris against public health regulations.

According to Investment Arbitration Reporter, the three arbitrators appointed to hear the case dismissed the case for lack of jurisdiction. Australia asked the tribunal to block the dispute from going forward, as the US company appeared to be opportunistically gaming the system by claiming a Hong Kong nationality.

A few takeaways.

The case may be a fleeting first attempt to crack down on the creeping multilateralist nature of the investor-state dispute settlement (ISDS) system – where companies can claim to be from anywhere and benefit from any treaty in the 3,200-strong investment treaty network. In other words, arbitrators may demand that a company be from where it says it is from.

It also shows that arbitrators are not political masochists. John Oliver dedicated a show to ridiculing the claim and stoking public outrage. This effort (and others) was so successful that tobacco got carved out of the Trans-Pacific Partnership deal.

Were three arbitrators really going to risk further roll back of the system (and future paydays)? This is a case of the system watching out for itself. To hand Big Tobacco a victory – after the Australian Supreme Court had already ruled against the industry – would have invited substantial overhaul of ISDS.

Ironically, critics’ success makes their work harder. Every time anti-ISDS activists have made a poster child out of a threatening case before it was decided (Loewen, Pac Rim), arbitrators ended up ruling against the investor.* These state victories make the system appear less objectionable. The case may help the TPP, at least at the margin.

At the same time, the Australia ruling has downsides for ISDS advocates. If businesses perceive that arbitrators have a weak spine in the face of political pressure, then they will be less likely to go to the considerable expense of launching ISDS claims. It will also make it harder for them to credibly make threats to sue other states over tobacco policy.

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*Pac Rim launched a case under CAFTA and a Salvadoran law. The CAFTA part of the claim was dismissed, and I would be surprised if the other part were not also.

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