Philip Morris vs. Uruguay: Intellectual Property Debate in International Investment Arbitration

In 2010, three subsidiaries of US-based Altria Group (formerly named Philip Morris Companies Inc.), Switzerland based FTR Holding S.A., Switzerland based Philip Morris Products S.A. and Uruguay based Abal Hermanos S.A., (hereinafter collectively referred to as “PMI”) started international arbitration proceedings against Uruguay.

PMI claimed that Uruguay violated several provisions of the Uruguay­Switzerland Bilateral Investment Treaty  (the “BIT”) by introducing illegitimate measures to reduce tobacco use. The BIT provides protections for investments made by Swiss companies in Uruguay, which extend to intellectual property rights. PMI claims that Uruguay’s anti-tobacco legislation caused a substantial decrease in sales, and a deprivation of PMI’s intellectual property rights. As a result, PMI claims that it is entitled to compensation under the BIT and international law. In July 2013, the Tribunal constituted to hear the case at the International Center for Settlement of Investment Disputes (“ICSID”) issued a decision that it had jurisdiction over the case. After PMI filed a memorial on the merits in March 2014, on October 13, 2014, Uruguay filed a counter-memorial. The decision of the Tribunal is expected in 2015.

International lawyers, policy makers as well as the tobacco industry closely watch the case. International lawyers are interested in the case as there are few disputes in international investment arbitration discussing intellectual property protections set forth in the BITs. This case is also crucial for policy makers in public health all around the world as there is a trend in many countries to enact legislation restricting tobacco consumption in public places and encouraging use of mandatory pictograms on cigarette packages to illustrate the adverse effects of smoking. The tobacco industry is concerned that Uruguay’s practice of both imposing health warnings that cover 80% of the package and allegedly infringe trademark will spread to other countries. There is already  controversy over Australia’s enforcement of logo-free plain cigarette packaging, which some countries like UK and France are considering adopting.

Furthermore, by filing an arbitration case against a country before ICSID, PMI is likely trying to establish a reference case that might guide practices in other countries. Switzerland has signed over 120 BITs. After Germany (135) and China (125), Switzerland has the world’s third largest network of such agreements, most of which contain provisions similar to the Uruguay-Switzerland BIT. Even if international arbitration is not governed by rules of precedent, previously issued awards are considered relevant. If PMI were to be successful in its claim against Uruguay, more claims against other developing countries may likely follow.

The Challenged Measures taken by the Uruguayan  Government

The first measure mandates all cigarette packages to include pictures illustrating the effects of smoking on human health, in addition to textual warnings. Some of the contested images include, “i) An image of a sleeping baby surrounded with tobacco smoke [. . .] linked with a caption to the effect that second-hand smoke increases the risks of Sudden Infant Death Syndrome, ii) A hand giving a thumbs-down covers the naked torso of a man and the caption indicates that smoking leads to inferior sexual performance, iii) A picture of a mouth with teeth stained yellow and rotting gums is linked with a caption to the effect that smoking causes gum disease.” PMI claims that these pictures are designed to invoke emotions of repulsion and disgust undermining the good will associated with legally protected trademarks. Uruguay claims that the pictures are designed to warn of the health effects of smoking. Those measures are compatible with its duties as a sovereign state to legislate all matters regarding public health enshrined in its constitution. Also, Uruguay is bound by the World Health Organization Framework Convention on Tobacco Control (“WHO Convention”) that prescribes similar measures.

The second measure is to require the portion of prescribed health messages to take up 80% of cigarette packaging, an increase from 50%. According to PMI, the 80% health warning coverage requirement infringes PMI’s right to use its legally protected trademarks and prevents PMI from displaying their trademarks in their proper form. Uruguay claims that the second measure is to promote legitimate health policies that are compatible with its domestic and international obligations. Indeed, the measure was enacted six months after the adoption of the WHO Convention establishing that health warnings and messages should cover “as much of the principal display area as possible.”

The third measure requires each cigarette brand to have a “single presentation” and prohibits different packaging or presentations for cigarettes sold under a given brand. Until the legislation was enacted, PMI sold multiple product varieties under each of its brands, (e.g., “Marlboro Red”, “Marlboro Gold”, “Marlboro Blue”). Afterwards, PMI was forced to sell only one product variety under each brand that it owns, which resulted in a significant decrease in sales and substantial loss of profits. In the historic case, USA v. Philip Morris USA, the court upheld a decision that “light” descriptors on the brand name were deceptive and the risk of cancer and other serious illnesses were just as high for smokers of “light” and “low tar” cigarettes than for smokers of “regulars”. Thus, US tobacco companies are legally prohibited from using descriptors like “light,” “low tar,” “mild,” or other similar descriptors in accordance with FDA rules. However, even if those deceptive descriptors are banned, PMI has replaced the “light” with “gold” or “menthol” with “green,” marketing the same cigarette with different packaging. Uruguay has implemented a regulation reiterating the prohibition on deceptive terms and other descriptive elements, such as colors, numbers, or letters that create a false impression that one tobacco product is less harmful than another. Thus, PMI has to cease selling such product varieties.

PMI claims that above-mentioned measures constitute breaches of Uruguay’s obligations under Articles 3(1), 3(2), 5 and 11 of the BIT, entitling PMI to compensation under the BIT and international law.

Legal Analysis of PMI’s Potential Claims Regarding Intellectual Property

Article 3(1) of the BIT states that “each Contracting Party shall protect within its territory investments made in accordance with its laws and regulations by investors of the other Contracting Party and shall not impair by unreasonable or discriminatory measures the management, maintenance, use, enjoyment, extension, sale and, should it so, happen, liquidation of such investments.” This is regarded as a standard BIT clause that appears in most trade agreements. This clause prohibits Uruguay from imposing unreasonable or discriminatory measures that impair the enjoyment and liquidation of PMI’s investments. ICSID has jurisdiction over legal disputes arising directly out of an investment between a Contracting State and a national (persons or companies) of another Contracting State. Hence, the concept of investment is central to the Center’s jurisdiction and the Tribunal’s competence. The ICSID Convention does not define “investment” to leave flexibility in drafting the definition of investments in BITs. According to Article 1(2) of the Switzerland–Uruguay BIT, an investment encompasses all classes of assets, which include industrial property rights such as manufacturer’s or commercial marks or trade names. Hence, the Tribunal held that Philip Morris trademarks constitute investments and did not find Uruguay’s arguments legitimate.

The merits of the case have yet to be discussed. What is known is the scope of PMI’s claims under the BIT some of which were discussed at the Tribunal’s jurisdiction hearing. Below are potential arguments that legal commentators speculate may be presented.

There is the issue of whether Uruguay has taken unreasonable or discriminatory measures to impair use and enjoyment of Philip Morris trademarks. The most valuable investment made by a tobacco company is its brands.  PMI might argue that the measure to limit use of its trademarks to 20% of the package space and prohibiting different brand names for product varieties of the same company is unreasonable, as Uruguay might not prove that such measures will decrease the tobacco consumption in the country. In its counterclaim Uruguay might refer to research conducted by WHO and other institutions that show such restrictions indeed result in significant decrease in tobacco consumption.

Article 3(2) of the BIT states, “each Contracting Party shall ensure fair and equitable treatment within its territory of the investments of the investors of the other Contracting Party.” Known as the fair and equitable standard (“FET”) in international arbitration, it requires Uruguay to respect and protect PMI’s legitimate expectations arising from the Uruguayan government’s specific representations or investment inducing measures. The FET standard ensures regulatory stability in a country. The FET standard should also be balanced with the legitimate right of sovereign states to exercise authority in the public interest. PMI might argue that under Article 3(2) it is entitled to hold a legitimate expectation that it would be making full use of its trademarks. Also, as Uruguay is a party to World Trade Organization Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), PMI might contend that it has the legitimate expectation that Uruguay would act in conformity with its obligations regarding protection of trademarks enshrined in the TRIPS Agreement.

Article 5(1) of the BIT imposes an obligation on Uruguay to refrain from acts of expropriation except for a public purpose and upon payment of ?compensation. Under private international law there might be indirect expropriation when several measures result in deprivation of investor’s right of use and enjoyment of the investment. PMI might claim that all of the three measures explained above substantially deprive it of using its trademarks without compensation by Uruguay; thus resulting in indirect expropriation.

Article 11 of the BIT constitutes an umbrella clause. Under international investment law, umbrella clause is regarded as a catch-all provision to pursue claims when a host state’s actions do not otherwise breach the BIT. Uruguay is a party to two international treaties, TRIPS and the Paris Convention for the Protection of Industrial Property (“Paris Convention”), both of which include trademark provisions. According to Article 11 of the BIT, Uruguay should comply with its commitments with respect to investment and the commitments made under TRIPS and the Paris Convention. Indeed both treaties constitute standards that states should implement to protect the intellectual property rights of its nationals and nationals of other states. Uruguay has an intellectual property law in force that is similar to most other countries. If PMI does not prove that it has either discriminated against Uruguayan nationals with regards to enjoyment of its trademarks or Uruguay’s IP legislation does not meet the standards of TRIPS, then the Article 11 claim seems weak. On the other hand, a BIT Tribunal does not have jurisdiction to make a decision on TRIPS non-compliance. Only states might bring action against other states before the WTO claims that there is a breach of TRIPS. Finally, even if the Tribunal accepts arguments of PMI regarding Uruguay’s non-compliance with the TRIPS Agreement, Article 17 of the TRIPS provide WTO Members with considerable discretion to impose “… limited exceptions to the rights conferred by a trademark, such as fair use of descriptive terms, provided that such exceptions take account of the legitimate interests of the owner of the trademark and of third parties.”