After becoming president of Uruguay in March 2005, the oncologist Tabaré Vàzquez [1] launched several legislation initiatives to improve the population’s protection from the dangers of tobacco consumption. Against two of the regulations Philip Morris took legal action[2]: against the ban to market several varieties of one brand (e.g. Marlboro Red, Gold, Blue, Green) and against the regulation, that graphic health warnings must cover 80% of the cigarette package’s surface. Philip Morris considers this as a violation of the bilateral investment treaty contracted between Uruguay and Switzerland in 1991.[3]

The action for damages amounting to 25 million US Dollar has been negotiated at the arbitration body of the World Bank. In Juli 2016 the arbitration dismissed this action and required PMI to cover part of the court costs.[4] The health minister of Uruguay is convinced, that the tobacco company hasn’t been fighting for cigarettes sales in her country, but tried to keep other countries from following Uruguay’s example.[5]

Tobacco Control in Uruguay

Uruguay introduced quite early very successful tobacco control measures, especially from 2005 on. 2006 former president Vázquez talked about his vision of a “smokefree Uruguay”. In 1979, when PMI made its investment in Uruguay by purchasing Abal Hermanos, producer and importer of tobacco products, tobacco control  was already well under way. In 2004 Uruguay signed the FCTC. Uruguay continued introducing new regulations. And in 2009, PMI was fed up. Uruguay had made some new decisions:

  1. an increase in the size of health warnings on cigarette packets from 50% of the total pack size to 80%. Warnings are supposed to be pictures that illustrate the adverse health effects of tobacco consumption.
  2. a selection of six messages that will fill the 80% space.
  3. a regulation, that forces companies to sell only one variation of cigarettes per brand. Some manufactureres had taken to colour-labelling cigarette packs to get around a previous prohibition on labelling cigarettes as ‘light’ or ‘ultralight’.

Enough is Enough

It is the “one variation regulation” that appears to be pivotal for PMI. In an analysis written by legal expert Todd Weiler on behalf of Physicians for a Smoke-Free Canada he explains:

“In the tobacco industry, the most valuable assets are not plant, inventory of equipment. The most valuable investments maintained by any tobacco enterprise are its brands.”

Due to this regulations the tobacco industry fears for its options to connect its products and brand with a certain image, which is crucial for the company’s market position. Philip Morris asks for a compensation amounting to US$25 million

“for actual damages caused by the regulations[…]. Those damages are the direct result of Uruguay’s decision to disregard its commitments to investors, which include respecting and protecting investments such as intellectual property rights. The heart of this case focuses on such fundamental principles as the rule of law and whether or not Uruguay must keep the promises it makes.

The Arbitration Tribunal

In March 2010, PMI appealed to the International Center for Settlement of Investment Disputes (ICSID) requesting arbitration. The tribunal was appointed in September 2010. Claimants and respondents each chose an arbitrator, the secretary general of the ICSID nominated the president. Usually the two arbitrators determine their president, but in this case an agreement could not be reached. Thus, the secretary general had to decide. PMI chose the US-American lawyer and academic Gary Born, Uruguay chose the Australian professor James Crawford, the tribunal’s president is prof. Piero Bernardini

A positive decision on jurisdiction of the ICSID was taken in July 2013 after a hearing in February 2013 in the presence of lawyers, experts and representatives of companies’ and states.  By then, already three years had passed since the first claim.

An investment treaty dating back to the year 1988 between Switzerland and Uruguay offers the legal base for the action against Uruguay – the Switzerland-Uruguay Bilateral Investment Treaty (BIT). Such an agreement is supposed to protect a company’s (or legal person’s) investment or property in a foreign country. In contrast to other international legal procedures within this framework PMI is able to act directly against the host country and is not obligated to have the support of a government.

Setting an Example

This case is important. Not just for Uruguay that could be committed to pay a high sum to Philip Morris and has growing costs due to the process itself, but for all countries that are trying to strengthen their tobacco control policy. Uruguay experiences generous financial support to pay the costs, for example offered by the mayor of New York, Bloomberg, which certainly can be considered a political signal.

There are more than 2000 agreements globally that resemble the bilateral investment treaty between Switzerland and Uruguay. Every country that has a similar contract with Switzerland or the US could face similar claims. This could discourage especially financially weak states, like many countries of the south, to expand their tobacco control.

“In my opinion the claim is nothing more than the cynical attempt by a wealthy multinational corporation to make an example of a small country with limited resources to defend against a well-funded international legal action, but with a well-deserved reputation as a worldwide leader in tobacco control.” (T. Weiler)

Legal expert Todd Weiler takes the position, that PMI is intentionally making a statement of political nature with the case, not just representing its immediate commercial interests. PMI’s market share in Uruguay is not insignificant, but the financial damage in this small country with just 3.4 million inhabitants might not be that great for a company with a net return of about US$ 80 billion (2013). Regarded as strategic behaviour of PMI this case could imply:

  1. Discouraging other countries from strengthening their tobacco control policy in general,
  2. discouraging countries to introduce plain packaging and
  3. discouraging countries to get involved in a tribunal with the company, since procedures take a long time and are very costly.

Well then?

Uruguay refuted PMI’s demand for compensation and presented its arguments at the ICSID on 13th of October. A hearing will take place before the end of the year 2015 and a decision is expected in the end of 2015 or in the first half of 2016.

Cases of tribunals like this, where an investor takes a state to an international arbitration court, could increase in the near future due to the free trade agreements like TTIP, between the US and the EU, and CETA, between the EU and Canada.

There are several critical points: Lawyers are not appointed in a democratic, public way and national courts are bypassed. From an investor perspective this is a legitimate protection against potentially biased justice, from the opponents’ (of TTIP and CETA) perspective it is a new profitable field for specialized lawyers and a way for companies to pressure states in order to secure profits – against any national interests, such as health or environment related policy.

Further information:

Andrew Russell et al.: Chilling Example? Uruguay, Philip Morris International, and WHO’s Framework Convention on Tobacco Control (2014)