On Wednesday 27th June AFTINET held it’s 11th annual Trade Justice Dinner at Sydney's Hellenic Restaurant. We would like to say a big thank you to everyone who attended and supported the event helping make it such a big success!

Auction items were kindly donated by supporters, including an original Rod Tandberg cartoon, donated by the artist, that appeared in The Age in April, resulting in the winning bid of $550 raised in a fiercely contested bidding war. In total the evening raised over $5,000 in aid of AFTINET's important campaign work.

Our guest speaker for the evening was Dr. Kyla Tienhaara, a Research Fellow at the Regulatory Institutions Network at the Australian National University in Canberra, and the author of a book about investment disputes over environmental regulation entitled The Expropriation of Environmental Governance: Protecting Foreign Investors at the Expense of Public Policy.

Her presentation “Tobacco giants use of trade agreements to sue governments: The Philip Morris case” gave our audience insight into the activities of the corporations using Investor-State Dispute processes to sue governments, something AFTINET actively campaigns against.

Tobacco giants use of trade agreements to sue governments: The Philip Morris case

Presented at AFTINET's Trade Justice Dinner 2012, Sydney, Australia.

Good evening. I’d just like to start by thanking everyone at AFTINET and Pat (AFTINET Convener) in particular for inviting me to come to speak to you here tonight. Since I first met Pat at a forum about the Australia-US Free Trade Agreement back in 2009, she has given me some amazing opportunities to escape from the ivory tower and meet with policy makers and to participate in public forums, which I have really appreciated. And tonight is no exception – because as much as I enjoy debating with lawyers and academics that disagree with me, it is nice to - every once and a while - speak to an audience that I am fairly certain shares the fundamental concern that underlies my research – which is that corporate power is on the rise, facilitated greatly by trade and investment agreements, and threatens to overwhelm many hard-fought public policy protections for the environment, health and labour rights.

Generally, my work focuses on the threat of corporate power to the protection of the environment, but tonight I want to speak about the tobacco industry’s fight against the Federal Government’s Plain Packaging legislation. Although I am not an expert on public health, the core message of my talk is about a government’s ‘right to regulate’ and is applicable across all areas of public policy.

Now I imagine that in an educated audience such as this one, I don’t need to go into much detail on the background to this dispute. I will just say a few words to help clarify the three separate areas of legal challenge that can often get mixed up in media reporting.

As I am sure you are all aware, after a lengthy policy process, last December the Tobacco Plain Packaging Act received Royal Assent and became law in Australia. The Act requires that as of December of this year, all cigarette packages are to be the same drab olive-brown colour, with identical small font to identify the brand and large health warnings with disturbing photos of diseased lungs and so forth covering much of the pack.

The big tobacco companies, most notably Philip Morris, British American Tobacco and Imperial Tobacco have argued that the legislation deprives them of their intellectual property because they can no longer effectively use their brand. They have responded to the legislation in a number of ways, including the extensive ‘nanny state’ advertising spree last year.

In terms of the legal disputes, most of you have probably heard about the challenge brought to the High Court. The hearings in this case were held in April and we expect a ruling to come down later this year. Several eminent constitutional law experts have predicted that the government will prevail in the case.

In addition to being challenged as unconstitutional, the plain packaging legislation has also been subjected to scrutiny as potentially breaching international trade rules. Under the auspices of the World Trade Organisation, the Ukraine, Honduras and possibly also the Dominican Republic are considering entering into state-to-state dispute resolution with Australia. According to some government ministers, these countries have received encouragement as well as legal advice from the tobacco industry.

However, it is really the third legal challenge that I would like to focus on tonight because it is the least reported on in the media, but potentially the most dangerous challenge for the legislation and for the future of regulation in this country more broadly. This is the investor-state dispute that has been brought by Philip Morris Asia under the terms of a 1993 bilateral investment treaty signed between Australia and Hong Kong.

The first point to note about this case is how Philip Morris accessed the treaty. The image that springs to mind when we all hear the name Philip Morris is of the famous Marlboro Man – a chain smoking Texan cowboy. I think you will all agree with me that there is nothing particularly Asian about the Marlboro Man nor is there anything Asian about the company. However, thanks to the flexible rules of international law, Philip Morris can be an American company one day and with the shuffling of a few papers, an Asian one the next.

The reason why Philip Morris re-structured its investments in Australia through an Asian subsidiary is quite simple. Although the United States and Australia have a free trade agreement with a chapter on investment protection, that chapter does not provide American investors direct access to dispute settlement with the Australian Government. On the other hand, the 1993 bilateral investment treaty does provide direct access to dispute settlement for investors from Hong Kong. Philip Morris pulled a similar trick when it sued Uruguay through a Swiss bilateral investment treaty.

The next logical question is why the company would go to all this effort to pursue this course of action against the Australian Government when it already had access to the High Court. There are three possible answers to this question. First – two bites at the apple simply gives the company better odds of prevailing. Second, the strategy is part of a global effort to scare other countries that might be considering similar legislation. Tobacco companies are engaged in legal battles with Norway and Uruguay, are threatening the UK government and have already gotten Canada to back down on its efforts in this area. Third – and very importantly, the company has a much broader scope to make its arguments under the provisions of the investment treaty than within the more narrow confines of the Australian constitution – which was not written solely to protect foreign investors.

The provisions in investment treaties are, in fact, very vaguely worded. Two of them are particularly contentious and these happen to be the key ones that Philip Morris is relying on in its claim. The first is the so-called fair and equitable treatment standard. Now that doesn’t really sound so bad – after all we all believe in fairness and in equity. Let me assure you, never have two words that sound so innocuous been twisted to such self-serving ends. In Philip Morris’ view, what is fair and equitable is for regulation to stand still so that they can continue to make enormous profits at the expense of the health of Australians and of the Australian healthcare system. Ironically, they argue that the plain packaging legislation is particularly unfair because it won’t work. If the company is so convinced that the legislation will be ineffective, one can reasonably wonder how they can justify claiming billions of dollars in compensation for their ‘lost future profits’?

The second provision being relied upon by Philip Morris is on expropriation. Now, historically, expropriation has been understood as the direct acquisition or taking of private property by the state. However, in recent years the concept has been expanded to also cover so-called indirect expropriation. This is the idea that even if a government doesn’t directly acquire property, it can effectively deprive an investor of the value of its investment through regulation.

It has always been understood that there is a public policy exception to this provision – that is, that not every regulation that negatively affects an investor will result in a breach of treaty or require compensation. The difficulty is where to draw the line between arbitrary and unfair regulation designed to discriminate against an investor and “legitimate regulation” designed to protect the public good. And what is really disturbing is who is permitted, under the system of investor-state dispute settlement, to draw that line.

Investors-state disputes are presided over by a panel of arbitrators – one chosen by the state, one by the investor and a third mutually agreed upon or chosen by an arbitral institution such as the International Centre for the Settlement of Disputes in Washington, DC or the Permanent Court of Arbitration in The Hague. The parties can choose practically anyone to be an arbitrator but the bottom line is that they are generally private lawyers and amazingly these lawyers are permitted to act as counsel in one case and as an arbitrator in another. These arbitrators interpret the vague provisions in investment treaties, decide what is and isn’t acceptable public policy in countries they have no connection with and award millions or even billions of taxpayer dollars in compensation to companies. They are not accountable in any way – there isn’t even a process of appeal – and they often make their decisions behind closed doors with no public scrutiny. And importantly they also profit enormously from the system, earning on average $3000 US per day. Regardless of which disputing party prevails in a case, one thing is for certain – the lawyers always win, which helps to explain why they defend the system so vociferously.

On the other hand, states appear to gain very little from investor-state dispute settlement. The original idea of investment treaties that was sold to states, in particular to developing countries, was that by signing an agreement that guaranteed protection to investors, a government would be able to attract more inward flows of investment. Unfortunately, this argument was never backed up by any solid evidence and has now been largely debunked.

Furthermore, compensation in these cases is only ever awarded to investors. Philip Morris can sue the Australian government for ‘destroying its intellectual property’ but the Australian government can’t counter-sue for the phenomenal cost that smoking has had on the healthcare system. This reflects a disturbing lack of balance in international law more generally. Efforts aimed at enshrining corporate accountability in a binding international treaty, such as that proposed by the United Nations Centre on Transnational Corporations in the late 1980s, have been abandoned in favour of weak voluntary mechanisms like the Global Compact. At the same time, highly enforceable bilateral investment treaties have flourished. There are now more than 3000 that have been signed by nearly every country in the world. And given the chameleon nature of multinational corporations – as illustrated in the Philip Morris case – it is impossible for an individual country to limit its exposure to lawsuits unless it terminates all of its investment treaties.

When you start to think of all the different types of investors that come to a country like Australia and all the different types of regulation that can negatively impact their profit margins – from local zoning laws to the introduction of new taxes like the carbon tax or the mining super profits tax – the potential threats (or if you are an investment lawyer the opportunities) seem endless. And when there is a large price tag that comes with losing a case, anywhere from a few million to a few hundred billion dollars, it becomes clear why so many NGOs and a few academics are concerned about the potential of ‘regulatory chill’ – that is, the idea that governments will rollback or change regulations in order to avoid an investor-state dispute.

Now all of this is quite depressing, I realize, and I don’t want to set a negative tone for what should be a very enjoyable evening. So I am going to try to end on a high note, with what I see as being some very positive news. And that is that the Labor Government is actually quite progressive on this issue, perhaps more progressive than any other government in a developed country (trust me if you want to hear about what the opposite of progressive is on this subject, ask me about the Canadian government some time).

So how exactly is Labor progressive? Well in April of last year they released a trade policy statement that indicated that they would no longer sign treaties with investor-state dispute settlement clauses. To date, they appear to have kept their word on this. A recently signed trade deal with Malaysia has no mention of investor-state dispute settlement and the investment chapter of the Trans Pacific Partnership Agreement or TPP – which was leaked only a few weeks ago – excludes Australia from the coverage of the investor-state dispute settlement provisions.

Of course I am not going to give the government all of the credit for these positive steps. Without the tireless efforts of many people sitting in this room tonight who have been working to oppose investor-state dispute settlement for many years, I cannot imagine that this progressive position would have been adopted.

While the government could of course do more – namely by terminating its existing investment treaties and working harder to convince other countries to change their position on this issue - I think that everyone who has worked in this area, whether they hail from NGOs, unions or academia, should take a moment to enjoy this victory and to congratulate themselves.

Unfortunately, I don’t think that we can now sit back and put our feet up. This is no time for complacency. In the leaked TPP chapter the text providing the Australian exclusion from investor-state dispute settlement is bracketed – meaning that it has not been agreed upon by all parties. Furthermore, officials in the New Zealand government have stated that they do not support such a carve-out for Australia. The pressure on Australian negotiators to abandon their position is likely to be quite high.

In addition, Julie Bishop has suggested that there is no bipartisan agreement on this issue, which means that following the next election we could be back to square one. That is, of course, unless the Australian public makes it loud and clear to the Liberal National Coalition that backtracking on the April 2011 statement on trade policy is unacceptable. And I think that the best chance we have of keeping this issue, as well as many other important trade issues that I haven’t discussed tonight, in people’s minds and on the agenda of politicians is for us to continue to support the excellent work done by AFTINET.

So thank you Pat for the invitation and also for all of your hard work, and thank you everyone in the audience for your support of AFTINET and for your attention tonight.