The two Philip Morris cases involving restrictions on the presentation and sale of cigarettes through plain packaging measures has been used by anti-ISDS groups as the prime example for creating the myth that treaty arbitration causes states not to adopt certain measures for the protection of public goods, i.e., results in so-called “regulatory chill”.
This myth has been blown up to proportions equal only to ancient Greek myths. Indeed, even the TPP negotiators have become believers of this myth – so much that they have excluded tobacco from the scope of the ISDS rules within TTP.
However, as I noted in a previous blogpost, the anti-ISDS groups have been extremely silent when the first Philip Morris case against Australia was kicked out at the jurisdictional phase because, in the view of the arbitral tribunal, the restructuring of the Philip Morris subsidiary into Hong Kong entity occurred only after the dispute arose. Although the tribunal did not deal with the merits of the case, Australia succeeded and will most likely recover its legal costs. In other words, the Australian plain packaging legislation remained unaffected in force. Thus, one would have expected the anti-ISDS groups to loudly celebrate this outcome and hail the ISDS system as working properly to protect public interest. When I asked why there was only deafening silence, I was told that this had to do with fact that there was no discussion on the merits, and since Philip Morris surely would have won on the merits – as the anti-ISDS groups always maintain that the ISDS system is rigged and pro-investor biased – there was no reason for joy.
However, recently, in another ISDS arbitration also involving plain packaging measures, brought by Philip Morris against Uruguay, the arbitral tribunal did render a decision on the merits. In this Philip Morris II award, the majority tribunal again sided with the state, so the challenged legislation remains in place and the state will most likely recover its legal costs. But again there were no bursts of joy and happiness in the anti-ISDS camp.
The silence of anti-ISDS groups regarding the outcome in both Philip Morris disputes is remarkable and in stark contrast with the mythical proportions attributed to these cases as a perfect real life example of “regulatory chill”. This effect is enabled and facilitated by the possibility of foreign investors to bring claims against states, which presumable intend to protect public goods and which are fearful of damages they may have to pay to investors when ordered by rigged, private and secret tribunals.
But as it turned out again, the “regulatory chill” argument simply remains unconvincing and failed yet again. The weakness of the “regulatory chill” argument has also been confirmed by the in-depth analysis of EFILA.
The truth is that both arbitral tribunals did a decent job: they considered and weighted all arguments, allowed amicus curiae briefs and extensively discussed relevant case law. In other words, they did what every arbitral tribunal normally does, namely, they delivered justice. Nevertheless, I believe that the minority views in both cases had more merit. In particular, the Philip Morris II arbitral tribunal gave practically unlimited deference to state measures, which in my view went beyond what is necessary.
But be that as it may, the bottom line is that the whole hysteria surrounding the alleged undermining of policy exemplified by the Philip Morris cases was clearly exaggerated, and ultimately, wrong.
Of course, one can understand that the anti-ISDS critics would not suddenly stand up in defense of the ISDS system, but they should, at the very least, explicitly acknowledge that their “regulatory chill” argument has lost one of its most prominent cases – the other one in their eyes being the Vattenfall case, which still awaits adjudication.
But, more importantly, as Gary Born, one of the most respected arbitrators in the world and regular contributor to this blog, recently rightly argued in an interview with GAR, the international arbitration community must defend the virtues and benefits of international arbitration more vigorously.
He drew a comparison with the Seven Kingdoms in the “Game of Thrones” series, saying that international arbitration has enjoyed “a long golden summer when everything went right” but “winter is coming”. More specifically, Born is quoted as saying that outside the confines of the kingdoms, “an army of the undead” wants to tear down “everything that has so harmoniously been created” in the belief that “the state and state-selected decision makers are the only real way to properly resolve disputes.”
He continued by arguing that the criticisms of investment arbitration are not just wrong but “wildly wrong” and those who attack the system “would do well to take a step back and think about what a world would look like without neutral and independent application of legal rules because that is the direction that their criticisms take us.”
Accordingly, the question arises: what can we do to avoid the victory of “the armies of the undead”? For the answer, Born looked not to the “Game of Thones” but another popular US television series, “House of Cards”, and Frank Underwood’s rule for life: “hunt or be hunted”.
Born is quoted as saying:
“I think we should stop being hunted and always defending international arbitration. “We defend it against not being transparent […] against being pro-investor […] against being inconsistent”.
Instead, Gary Born called upon the arbitration community to speak more robustly about the historic role of international arbitration in safeguarding the rule of international law and the protection of fundamental civil rights. And, in doing so, it may need to describe forthrightly the historical roots of current critics of international law and international arbitration.
He finished by wishing us all “Happy hunting”.
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Nikos, may I suggest you / Kluwer correct the typo in the title and opening sentence. It is not “Philipp Morris” and such an error does not inspire confidence in readers.
On your substantive arguments, however, I agree it is odd that there has been so little public response to this second loss by the Philip Morris group in its multi-pronged attack on tobacco regulation. I asked my RA to check a few weeks ago how much media coverage there had been on the award in favour of Uruguay – and her Factiva database search could find NONE in Australian newspapers. (This contrasts with the extensive newspaper coverage of the Philip Morris v Australia investment treaty arbitration over 2011-2015: see my paper at http://ssrn.com/abstract=2802450.) One would have expected something, given that the case dealt with very important legal issues that have been increasingly subject to media and parliamentary debate in Australia over recent years, such as limits to expropriation claims for “police powers” involving non-discriminatory and proportionate public health measures, or limits on FET claims for good faith and proportionate measures (or if no specific undertakings to ground a claim based on substantive legitimate expectations). All the more surprising, given that this tribunal included Australia’s most famous living international lawyer (Prof James Crawford, now on the ICJ).
On the other hand, I’m not sure we can draw from this any strong conclusions about “regulatory chill” (although I have elsewhere express skepticism about its pervasiveness, at least in countries like Australia that take seriously the disciplinary effect of the WTO as well as domestic law restrictions on public authorities). Already some countries seem to be reviving or proceeding with tobacco regulation after Philip Morris lost (on jurisdiction) against Australia last year. Perhaps more will now follow after the Uruguay award dealing with the merits. This would in fact support prima facie the regulatory chill thesis. But a complication is that inter-state WTO claims against Australia, indirectly supported by Philip Morris, remain pending. So countries may still hold off, this suggesting some ongoing regulatory chill – BUT then not (just) from ISDS!
thanks for your comment. I asked to correct it.
I am glad to hear that your findings support my impression about the silence on the outcome of this case.
My point is simply that the regulatory chill-argument, if it were true, cannot be supported by case-law.
I think that is an important point.
Regarding the WTO cases, of course, the situation is slighly different in that they are state-state procedures and the legal framework (TRIPS, Art. XX GATT chapeau) is clearly different compared to the BITs. We know that the AB gives states a relatively broad margin when it comes to the suitability of a measure and its proportionality. The US gambling case is a good example. So, I am a bit hesistant to put them all in one basket, although of course for the general public and the NGOs it may seem all the same.
(a) If we find some countries implementing (Australia-style) tobacco regulation after Philip Morris lost at the jurisdictional stage, then this would provide some evidence in support of the regulatory chill hypothesis thesis – but not much, since the award didn’t delve into the merits of the message.
(b) If some implement (Uruguay-style) regulation now that Philip Morris lost on the merits, that provides better evidence that hitherto there had been regulatory chill, but we have to wait and see if states do this. If they don’t enact such regulation, this doesn’t really disprove the chill thesis re ISDS, because there is the WTO case pending – that may be exercising separate “chill”.
(c) If the WTO panel/AB rule in favour of Australia AND states then introduce similar reg, then this doesn’t really prove a reg chill from ISDS, only chill from WTO. And even that is debatable – it could be that even without the WTO, states would have held off introducing the more extreme Australian measures until they saw evidence that it was working to reduce smoking especially among higher-risk groups like young people (even without the WTO process, research on this point is starting to come out unilaterally by Australian studies).
In sum, although I remain myself skeptical about the reg chill hypothesis, I think it is premature for you to argue that this case shows that it has failed.
obviously, the two PM decisions are not enough to completely negate the chill-argument, but they are enough to show that there is not as yet any factual evidence supporting that argument, which makes the argument simply unconvincing. And therefore policy should be based on such unconvincing arguments.
States may decide to implement or not certain legislation for a vast array of reasons, which may include ISDS considerations but certainly includes other considerations as well (jobs, tax incomes, protection of domestic industry etc).
So, I think it is fair to say after the PM cases, that the argument – at least for now – has failed and continues to fail until proven otherwise.