Treaty Shopping: How Companies Tilt The Legal Playing Field For Investor-State Arbitration

from the hard-to-keep-up dept

Alongside globe-spanning treaties like ACTA and TPP, there are more subtle efforts to limit the power of national governments, through the use of free trade agreements (FTAs) and bilateral investment treaties (BITs). There are now so many of these that it's hard to keep up, although the dedicated site is a great help here. The confusing multiplicity only adds to their attractiveness for those negotiating them behind close doors, keen as they are to avoid transparency as much as possible.

One key issue for both FTAs and BITs concerns investor-state arbitration procedures that allow companies, typically powerful global corporations, to take entire nations to court over actions that allegedly cause the company harm -- for example, by introducing stricter environmental legislation that requires additional expenditure at manufacturing plants. The trailblazer in taking advantage of these provisions is the tobacco giant Phillip Morris. Here's what it did in Uruguay, back in 2010:

The tobacco giant is suing Uruguay, alleging the country is violating Switzerland’s trade agreement by requiring that anti-smoking warnings cover 80 percent of cigarette packages. If World Bank arbitrators agree, Uruguay could be forced to pay the company millions of dollars.

But Uruguay -- whose Gross Domestic Product is $44 billion -- refuses to back down from Philip Morris, whose market capitalization equals $108 billion. And now the country is getting backing all across the world in its fight against tobacco.

It's also suing Australia for similar reasons:

On 1 December 2011 the Tobacco Plain Packaging Act 2011 received Royal Assent and became law in Australia.

The Act forms part of a comprehensive Australian Government strategy to reduce the rate of smoking in Australia. Smoking is one of the leading causes of preventable death and disease in Australia.

Philip Morris Asia is challenging the plain packaging legislation under the 1993 Agreement between the Government of Australia and the Government of Hong Kong for the Promotion and Protection of Investments. On 21 December 2011, the Australian Government provided its response to Philip Morris Asia's Notice of Arbitration.
A fascinating article on the site from a few weeks ago explains the strategy of the tobacco giant here:
So why didn't this American company go through the [the main US-Australia FTA]? Because that treaty (1) does not guarantee investor-state dispute, and (2) provides for exemptions to expropriation obligations for limitations on intellectual property rights. Phillip-Morris faced a greater likelihood of failure under the US treaty.

The Hong Kong BIT is also a particularly good choice for Phillip-Morris because, unlike other treaties, it does not include prohibition on claims brought by investors owned by citizens or entities of countries not party to applicable treaty. For example, the BIT with the Czech Republic states:
Article 2(2): Where a company of a Contracting Party is owned or controlled by a citizen or a company of any third country, the Contracting Parties may decide jointly in consultation not to extend the rights and benefits of this Agreement to such company.
Had the Hong Kong BIT contained this language, Australia could have stopped Phillip Morris International from going through their Asian subsidiary in bringing this claim.
Phillip Morris is engaging in "treaty shopping" -- choosing to invoke those FTAs or BITs that contain terms most favorable to its legal action, whether or not they are the most logical or relevant to the dispute in question. That's possible because of the multiplication of these treaties, often with slightly different wording that allows the tobacco company to cherry-pick in this way. As well as deploying it against Australia, Phillip Morris is using the same approach in its fight against Uruguay by invoking the bilateral investment treaty between that country and Switzerland, not the US.

This underlines why it is crucially important for nations to get the wording of investor-state arbitration procedures right when negotiating FTAs, BITs and multilateral treaties like TPP. If they don't, they may well find that global corporations will exploit favorable clauses through the kind of treaty shopping practised by Phillip Morris to put countries at a disadvantage when arguing before international tribunals.

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Filed Under: acta, jurisdiction shopping, tpp, trade agreements
Companies: phillip morris

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  1. identicon
    anon, 27 Dec 2012 @ 6:20am


    Simple solution, the court and only the court can use the jury pool to get 10 people to listen to both sides argue and then come to a decision on who is wrong and who is right. If they feel there are lies and inconsistencies from one side or the other they must have the power to ask for information to settle anything that reaches them.
    Or any business that deals with arbitration must not have done any arbitration for either side of a disagreement before.

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