News in Brief

Philip Morris files for arbitration over intellectual property dispute with Australia

The tobacco company Philip Morris filed for arbitration on 21 November 2011, claiming the government of Australia’s regulations on cigarette branding breach the Hong Kong-Australia bilateral investment treaty.

The announcement arrived on the same day that the Australian Parliament passed legislation that bans most branding from tobacco products. Under the new law, packages are stripped of logos and branding images, although the brand name of the tobacco product can remain. The law is due to come into effect in December 2012.

Australia is the first country in the world to implement such strict branding restrictions on tobacco products, although other countries are considering similar laws.

Philip Morris put the Australian government on alert in July 2011 when it filed a notice of claim, setting in motion a three-month period before it could initiate arbitration proceedings. In its notice of claim, recently made public under an access-to-information request, Philip Morris argues that the Australia’s plain packaging legislation amounts to an expropriation of its investment in Australia.

“The intellectual property plays a critical part in distinguishing Philip Morris’ products from competitors’ products … Without branding, PML’s products are not readily distinguishable to the consumer from the products of competitors; consequently, competition will be based primarily on price,” states Philip Morris.

The tobacco company notes that the Hong Kong-Australia BIT “encompasses a broad range of investments,” including “rights with respect to copyright, patents, trade marks, trade names, industrial designs, trade secrets, know how and goodwill …”

Philip Morris also claims that the tobacco packaging restrictions run afoul with the World Trade Organization’s agreement on intellectual property. However, in contrast to the protections provided in the Hong Kong-Australia BIT, which allow Philip Morris to sue the government of Australia directly, international trade law only permits disputes to be settled between governments.

In its claim, Philip Morris seeks a repeal of the legislation, and says monetary damages could amount to billions of dollars.

Notably, the Australian government announced in April 2011 that it will no longer include provisions that permit investors to sue governments through international arbitration in its future international trade agreements, a policy move that may have been prompted in part by tobacco company threats.  

The Australian government argues the lawsuit by Philip Morris, and the grumblings of other tobacco companies, are a sign that the plain-packaging legislation is effective. « Plain packaging means that the glamour is gone from smoking and cigarettes are now exposed for what they are: killer products that destroy thousands of Australian families, » said the Australian Health Minister, Nicola Louise Roxon.

Philip Morris, however, counters that the law will probably be ineffective: “the likely reduction of price and relative desirability of cheap illicit tobacco products mean the measure may be counter-productive,” says the company.

Philip Morris has also initiated an arbitration claim against Uruguay in reaction to that country’s tobacco packaging regulations. In its case against Uruguay, Philip Morris is alleging violation of the Switzerland-Uruguay BIT.

Divisions continue to slow progress in UNCITRAL transparency negotiations

Work continues on efforts to make the arbitration rules developed by the United Nations Commission on International Trade Law (UNCITRAL) more conducive of transparency.

The working group responsible for addressing transparency in the rules convened for the third time in Vienna in October 2011. The group considered various draft rules that reflected proposals made during the previous two sessions, and concentrated on identifying which of those options UNCITRAL member states could not support.

Broadly, discussions of the options covered two different, but related areas: the issue of applicability (when the rules will apply) and the issue of content (what the rules will require).

This work traces back several years. In 2008, the Commission formally “agreed by consensus on the importance of ensuring transparency in investor-State dispute resolution.”[1] It then entrusted a working group with the task of developing a legal standard consistent with the Commission’s decision on transparency.

The working group, which is comprised of country members and other state and non-state observers, officially began work on its mandate in October 2010, and has had three one-week sessions dedicated to the topic. Helping maintain momentum and focus on the working group’s efforts, in June 2011 the Commission “reiterated its commitment” to the importance of ensuring transparency in investor-State arbitration.[2]

Applicability of the rules on transparency

The topic of applicability is especially important for the practical impact the new rules will have (or, perhaps, will not have) on increasing transparency of investor-state arbitrations.

Significantly, a few delegations at this third session expressed their desire to prevent the new UNCITRAL rules from applying to future disputes arising under existing treaties. Given that there are roughly 3000 investment treaties in existence, and that the bulk of them refer to UNCITRAL arbitration rules as an option, such an approach would have the effect of preventing any real change from the old UNCITRAL rules, making the revised rules significantly less relevant.

Several delegations, however, opposed inserting a provision in the rules that would limit their application to only future treaties. Under this approach, the issue of whether the rules would apply to disputes arising under existing treaties would be left to a matter of treaty interpretation.

Ultimately, the working group was not able to resolve this issue of applicability to existing and/or future treaties during the October 2011 session.

Another issue of applicability that delegates continued to debate was whether, for future investment treaties, treaty parties would have to explicitly “opt into” the new rules on transparency in order for them to apply, or whether a general reference to the UNCITRAL arbitration rules would suffice to trigger their application. Like the issue of the rules’ applicability to existing and future treaties, the approach adopted will have significant consequences for the rules’ relevance and their potential to increase transparency of investor-state arbitrations. However, delegations were unable to find consensus on which approach to adopt.

The rules’ content

On the issue of content, there seemed to be less disagreement overall. Many delegations advocated increased openness regarding various aspects of investor-state arbitrations.

Support coalesced in particular around automatic disclosure of the existence of the dispute (i.e., the fact that an arbitration had been commenced, the identities of the parties, the economic sector involved, and the treaty on which the claims were based); publication of a number of documents submitted to arbitral tribunals; awards and decisions issued by the tribunals; and participation of amici curiae.

One main issue of content that remains to be resolved relates to the exceptions to the rules. Delegations generally supported the principle that the rules on transparency should not require disclosure of “confidential” and “sensitive” information. Delegations, however, have not yet agreed on how to define those terms, nor have they agreed on whether disclosure of information can be restricted for additional reasons. A few delegations, for instance, would like to allow tribunals to restrict public access in order to protect the “integrity of the proceedings.”

Yet, several delegates in the working group expressed their concern that this “integrity of the process” carve-out and other exceptions may inappropriately weaken or swallow the underlying rules on transparency.

The scope of the exceptions will likely join issues of applicability as key items of discussion during the next working group meeting, which is scheduled to be held in February 2012.

Korean protests erupt over investor-state arbitration provisions in US-South Korea FTA

The South Korean-United States free trade agreement (KORUS FTA), which Korean lawmakers ratified on 22 November 2011, has sparked protests in South Korea over the deal’s investor-state arbitration provision.

First negotiated in 2007, the agreement has long been controversial in South Korea, drawing vehement opposition from farmers who fear cheap agricultural imports from the United States.

More recently, however, critics have focused on a provision that allows US investors to bring the government of South Korea to international arbitration for alleged breaches of the FTA’s investment standards (or, vice versa, claim by Korean investors against the United States).

These investor-state clauses are common in bilateral investment agreements, including those negotiated previously by South Korea. Yet the provision has come under sharp criticism by opposition lawmakers and civil society groups who fear it will give US investors a strong hand to challenge South Korea’s social and environmental policies.

Dozens of Korean judges have also spoken out against the investor-state dispute resolution provisions. “After reviewing discussions about the FTA, I concluded that the deal is likely to have many clauses disadvantageous to Korea and infringe on the nation’s judicial sovereignty,” said Judge Kim Ha-neul at Incheon District Court, as reported in the Korean Times.

President Lee Myung-bak’s offered to renegotiate the investor-state dispute resolution provision within three months of the KORUS FTA coming into effect. But that failed to calm protesters, who continued to demonstrate in the days following the agreement’s ratification. 

The agreement was ratified following a surprise vote by the ruling Grand National party.

The KORUS FTA was ratified by the United States in October. This is the largest trade and investment deal for the US since the North American Free Trade Agreement, and second largest for South Korea after the a 2009 FTA with the European Union.

Vattenfall reportedly considers arbitration over German phase-out of nuclear

The Swedish energy firm Vattenfall is considering a claim against Germany under the Energy Charter Treaty (ECT) in response to Germany’s decision to abandon nuclear energy, according to reports in the German press.

Germany announced in May 2011 that it will phase-out its nuclear power plants by 2022. Six plants shutdown in 2011 and the remaining nine will be closed over the next 10 years.

The decision came in the wake of Japan’s Fukushima Daiichi nuclear disaster, although nuclear energy has been long been a topic of political debate in Germany.

Vattenfall says it stands to lose €700 million from investments made in nuclear power plants, which it says were based on the understanding that the life-spans of the plants would be extended.

While German nuclear power companies are challenging the decision through legal forums in Germany, Vattenfall could try to access international arbitration through the ECT – a multilateral agreement that governs investment in the energy sector. The ECT provides rights and guarantees to investors which are similar to those found in bilateral investment treaties.

The company has already made use of the ECT to challenge the German government. In April 2009 Vattenfall brought a claim against German to challenge environmental restrictions imposed by the City of Hamburg on a coal-fired power plant. Vattenfall had sought approximately €1.4 billion in damages. This dispute was settled by agreement on March 11, 2011, in which Vattenfall appears to have obtained, among other things, a modified water use permit and a release from previously imposed requirements to build and operate a discharge cooler at the Moorburg power plant.

Foreign investors sue government of Spain over hikes to solar energy tariffs

A group of 14 foreign investors have served the Spanish government with a notice of arbitration in reaction to cuts in solar tariffs. 

The notice, served on November 17, was delivered days before Spain’s Socialist Party, which enacted the tariff cuts, was toppled in elections. The conservative opposition People’s party, led by Mariano Rajoy, took the majority.

The claimants complain that they counted on feed-in-tariff laws, which guaranteed above-market rates for renewable energy fed to the grid, when they made their investments. However, tariffs were cut in 2010, on the grounds that they were too expensive.  Under the new legislation, producers of solar-generated electricity can sell a certain amount of electricity at higher rates, after which it must be sold at market rates.

“Spain induced our clients to invest billions of euros in the PV sector and, once it received the benefit of that investment, simply reneged on its end of the deal,” said a lawyer for the investors.

The claim comes under the Energy Charter Treaty (ECT). This only the second publicly disclosed ECT claim against a western European government. As mentioned above, in 2009, the German European utility Vattenfall filed a claim against the government of Germany, after the construction of a power plant was blocked over environmental concerns. The governments of the former Soviet Union and Eastern Europe have received the bulk of investor claims under the ECT.

[1]Report of the United Nations Commission on International Trade Law, Forty-first session, 16 June -3 July 2008, para. 314.

[2] Report of the United Nations Commission on International Trade Law, Forty-fourth session, 27 June -8 July 2011, para. 200.