Investor-state dispute settlement (ISDS) allows investors to sue states directly for violations of international investment agreements.1 Over the past few decades, there has been a large increase in the number of such investment agreements2 and ISDS provisions within them.3 ISDS has been criticized as allowing corporate actors the power to chill government regulations via the threat of costly and prolonged litigation.4 Recently, in Philip Morris Brands Sàrl v. Oriental Republic of Uruguay5 (Philip Morris v. Uruguay), a tribunal of the International Centre for Settlement of Investment Disputes6 (ICSID) found that two tobacco control measures adopted by Uruguay did not amount to an indirect expropriation of a tobacco company’s investment nor to a denial of the company’s right to fair and equal treatment under the Swiss-Uruguay Bilateral Investment Treaty7 (BIT). Rather, it upheld Uruguay’s sovereign power to regulate public health over Philip Morris’s investment claims. The tribunal’s decision to take a limited, pro-state approach to the claims asserted will prove to be a signal for potential future arbitration cases.
With “one of Latin America’s highest rate of smokers,”8 Uruguay must understandably be proactive in its tobacco-control regime. In 2008 and 2009, it enacted two public health measures restricting marketing of tobacco products.9 The “Single Presentation Requirement”10 (SPR) requires that cigarette brands sell only under a single package or variant.11 The “80/80 Regulation”12 mandates that the health warnings on cigarette packages increase from fifty to eighty percent of the surface of the packages.13 Between 2010 and 2011, claims brought by subsidiaries of Philip Morris International regarding the SPR and 80/80 Regulation failed in several domestic challenges.14 Subsequently, Philip Morris challenged these regulations as breaching Uruguay’s obligations under several articles of the BIT.15 In 2011, a three-person arbitration tribunal was convened under ICSID,16 and two years later, the tribunal affirmed that it had jurisdiction over the challenge.17
The ICSID tribunal ruled against all of Philip Morris’s claims. First, it examined the contention that the regulations expropriated Philip Morris’s investment in its trademarks under Article 5(1) of the BIT, which prohibits states from taking measures that expropriate a corporation’s investment, excepting certain circumstances for the public benefit with compensation for the investor.18 Because the regulations did not interfere with Philip Morris’s legal title to its investment, there was a potential case for only indirect, rather than direct, expropriation.19 The standard for a finding of indirect expropriation used by the tribunal was a “substantial deprivation” of the value, use, or enjoyment of one’s investment.20 The tribunal stated that the 80/80 Regulation did not indirectly expropriate Philip Morris’s investment because “distinctive elements” of the brand were still recognizable in the smaller allocated space on the packaging.21 Neither did indirect expropriation result from the SPR, which did not cause a “substantial deprivation” of the value of Philip Morris’s investments.22
In addition, though not necessary to the decision, the ICSID panel decided that Philip Morris’s expropriation claims failed because the regulations were a valid exercise of Uruguay’s police power, a principle embedded in customary international law.23 The panel then provided a comprehensive history of the police power doctrine, from its beginnings in international law through its applications in previous arbitrations.24 It drew upon this jurisprudence to find that the SPR and 80/80 Regulation, as actions “taken bona fide for the purpose of protecting the public welfare” that were “non-discriminatory and proportionate,” satisfied the conditions for a state’s exercise of regulatory powers not to constitute indirect expropriation.25 The tribunal stated that protecting public health was “an essential manifestation” of the police power;26 in doing so, it affirmed the power of a state’s public health regulations over investors’ claims.
The panel then addressed Philip Morris’s claim that it was denied fair and equal treatment (FET) in violation of Article 3(2) of the BIT, which mandates “fair and equitable treatment” for investors.27 The FET claim failed under the standard used by the tribunal. In finding the SPR not arbitrary, it focused on the fact that the measure was a good faith, reasonable “attempt to address a real public health concern.”28 Similarly, it stated that the 80/80 measure, also a “reasonable measure adopted in good faith,” was not arbitrary;29 additionally, “[s]ubstantial deference [was] due” to the national authorities’ policy decision.30 Furthermore, the regulations did not violate the investor’s legitimate expectations because they neither exceeded a state’s inherent power to regulate for the public interest nor modified the relied-upon regulatory framework “outside of the acceptable margin of change.”31
The tribunal summarily disposed of the rest of Philip Morris’s claims. Philip Morris’s claim that Uruguay impaired the use and enjoyment of its investments was dismissed on similar grounds as the FET claim.32 The company’s claim that Uruguay breached commitments as to the use of trademarks failed after the tribunal concluded that trademarks were not “commitments” within the scope of the BIT.33 Finally, the tribunal dismissed Philip Morris’s denial of justice claims regarding allegedly contradictory domestic proceedings pertaining to the 80/80 Regulation because the procedural improprieties did not reach a high-enough threshold.34
Gary Born, Philip Morris’s chosen arbitrator, wrote a concurring and dissenting opinion.35 Though he agreed with most of the decision, he disagreed with two parts of its ruling on the FET claims.36 First, he found that there had been a denial of justice in the domestic legal proceedings of Philip Morris’s claims because of the contradictory treatment of certain aspects of the claims by Uruguay’s Supreme Court and its administrative law court; this disparity was a breach of the FET guarantee of Article 3(2).37 Second, he considered the SPR to be “arbitrary and unreasonable.”38 In his view, the SPR — an “internationally unique” requirement, with both “over-inclusive and under-inclusive” effects — did “not bear even a minimal relationship” with its cited objective.39 However, he emphasized that he did not question Uruguay’s authority to regulate public health and safety.40
The tribunal in Philip Morris v. Uruguay took a pro-state approach to the claims brought forward by the tobacco company, sending a signal for future antiregulatory litigation under investment treaties. Though the facts of the case highlighted certain systemic issues of ISDS, particularly the potential for corporate challenges to chill regulation, the tribunal limited the scope of the FET claims in a favorable manner for the state in two important ways. First, the tribunal recognized that Uruguay’s status as a developing nation meant that Uruguay deserved particular deference to its policy decisions made with reference to international standards. Second, it reasoned that Philip Morris’s legitimate expectations should have included increasingly stringent tobacco regulations. In doing so, the tribunal further empowered states to regulate dangerous consumer products such as tobacco. Though international arbitration opinions are not binding precedent, adjudicators do look to the core principles of past decisions for guidance.41 Thus, the tribunal’s approach in this case may disincentivize ISDS challenges, at least by tobacco companies in developing nations.42
This case illustrates some of the background controversies surrounding the ISDS system’s potential to chill regulation. Some commentators believe that the nature of the investor-state dispute settlement system skews in favor of corporate actors because only corporations bring cases, whereas states are always defendants.43 Philip Morris v. Uruguay, the first instance of a tobacco company directly suing a country in an international forum,44 was the latest of a series of “industry-sponsored trade and investment challenges.”45 Even though the challenge failed and Philip Morris had to pay Uruguay $7 million and cover the fees for the tribunal,46 Uruguay still had to expend significant resources, including financial costs of $2.6 million.47 Thus, some commentators argue that states — especially developing nations — hesitate to enact regulations that may provoke a corporate challenge because of such financial burdens.48 In fact, Uruguay itself was nearly pressured into relaxing the two measures underlying this litigation in 2010 after receiving initial notice of Philip Morris’s claims.49 Though the chilling effect is particularly potent for less developed nations,50 threats of litigation from big tobacco have also chilled regulation in Canada, the European Union, and New Zealand.51 However, despite these challenges for state actors, regulatory chill might subside in an arbitration climate that favors states over multinational corporations. Therefore, the pro-state manner in which this tribunal adjudicated the claims for both sides is a step toward ameliorating such regulatory chill in the future.
On the defendant side, the tribunal took into account Uruguay’s “limited technical and economic resources,”52 granting broad deference to the state’s policy in response to Philip Morris’s claim of arbitrariness.53 It found, as the plaintiffs alleged, that the SPR had not been subject to detailed research prior to its enactment.54 However, it was enough that Uruguay had adopted such measures in conformity with the World Health Organization’s guidelines;55 there was no need for additional evidence to support its regulations.56 Indeed, the tribunal ruled that what mattered was not whether the regulations actually had the intended effects, or if the impacts of the regulations could even be measured,57 but whether they were “reasonable” when adopted.58 And it was reasonable for Uruguay, a developing nation, to rely upon international guidelines in creating policies.59 The deference shown by the tribunal, insofar as it influences future panels, may thus reassure developing countries. Though they may not have the resources to thoroughly test and measure each regulation, they may still be able to go ahead and regulate as long as they follow authoritative international frameworks.
Second, on the plaintiff side, the tribunal narrowly defined the scope of Philip Morris’s legitimate expectations within the FET claim.60 Tribunals have been willing to protect investors’ expectations of a stable regulatory framework;61 however, the requirement of legitimate expectations does not limit a state’s right to regulate.62 Legitimate expectations, rather, hinge upon “specific undertakings” made by the state,63 and states retain flexibility to adapt regulations to changing circumstances.64 Past cases developed this idea by requiring investors to take a holistic account of the state’s regulatory environment.65 Philip Morris v. Uruguay extended this line of thought by curbing an investor’s expectations based on a specific harmful product, tobacco, and its unique local and global regulatory environment.66 In particular, it decided that cigarette manufacturers cannot expect to avoid “onerous” regulations;67 in fact, they should only expect “progressively more stringent regulation.”68 Given the “widely accepted articulations of international concern for . . . tobacco [use],” even the novelty of the regulations at hand did not violate Philip Morris’s legitimate expectations.69 In essence, the decision placed the onus on Philip Morris to anticipate and adapt to regulatory measures.
In granting substantial deference to policy decisions in light of Uruguay’s economic circumstances and in narrowly defining the legitimate expectations of tobacco companies, Philip Morris v. Uruguay established solid guidance for future challenges by tobacco companies to public health regulations under international investment treaties. The decision has particular impact given the current ISDS system in which investor challenges are most commonly levied against developing countries. Professor Harold Koh takes the more confident view that this case is “an unequivocal landmark rebuke” of big tobacco’s trade arguments.70 Thus, this decision may strengthen states’ confidence in enacting tough and innovative tobacco control measures. Other states may take even bigger steps. India, for instance, has proposed to entirely ban foreign investment from big tobacco.71 Here, a similar battle is gearing up — Philip Morris has raised issues of India’s compliance under various trade treaties.72 Though it is doubtful that we have seen the last of tobacco plaintiffs in ISDS, the decision in Philip Morris v. Uruguay should certainly give big tobacco plaintiffs pause.