Tobacco Regulations as an International Economic Dispute

A box of imported tobacco used to be an icon of sophistication or adulthood in Japan. The Trilogy of the Rat, the early works of Haruki Murakami and my favorite when I was a high school student, has many scenes of smoking. Essays by photographer Shimpei Asai, which I encountered around the same time, are full of longing for American pop culture, reflecting the prevailing sentiment of his generation. There again, a Western cigarette is a must item for scene descriptions. Many people of my generation must remember that unique atmosphere depicted in the advertisements of Marlboro, Lucky Strike, or Salem in bygone days. (If this doesn't ring a bell, you can find them on YouTube.) Elaborately designed cigarette packages in those days had a strong appeal even to non-smokers as a piece of graphic art.

However, times have changed, and the tobacco packages we see today are quite tasteless. In Japan, once-lauded logos are compressed and the bottom one-third of packets is dedicated to the display of health warnings. In the European Union and Thailand, tobacco packets include pictorial warnings such as a picture of tar-blackened lungs and a photo of a cancer patient. These changes are in line with Article 11, paragraph 3 of the FCTC, which mandates signatory countries to require the display of appropriate health warnings that are clear, visible, and legible, covering no less than 30% of the principal display areas of each unit packet and package of tobacco products.

Australia's Tobacco Plain Packaging Bill (Note 1) is set to go far beyond that. If passed into law, tobacco companies would be prohibited from using logos and required to display graphic health warnings, such as a photo suggestive of tobacco-caused health damage, on olive-colored packages, the color deliberately chosen because it has been found to be the least attractive color for smokers (Note 2). Seeing is believing. Take a look at sample tobacco packages (Note 3) provided by the Australian Department of Health and Ageing to see their depressing effects on purchasing appetite.

Differentiation of a product by creating a specific brand image leads to competitive advantage in the market and can affect people's purchasing behavior. The Tobacco Plain Packaging Bill of Australia, which is to deny all such effects for tobacco, would have a negative impact on the trade flows of tobacco products and related investment asset values. It is thus posing various legal questions from the perspective of international economic law.

Trade-restrictive technical regulations: At the meeting of the WTO Committee on Technical Barriers to Trade in June, concerns were raised about the trade restrictive nature of the proposed tobacco regulations of Australia. Committee members argued that the imposition of uniform design formats and standards could constitute a violation of the WTO Agreement on Technical Barriers to Trade (hereinafter referred to as "TBT Agreement"), which covers technical regulations concerning labeling and packaging.

Article 2.2 of the TBT Agreement provides that "technical regulations shall not be more trade-restrictive than necessary to fulfill a legitimate objective." Obviously, Australia's tobacco regulations is considered to have a "legitimate objective" as defined under Article 2.2 of the TBT Agreement or, to be aimed at the "protection of human health." However, the question is whether or not mandating the use of plain packaging is "more trade-restrictive than necessary to fulfill" that objective. The application of the necessity test under Article XX (b) of the General Agreement on Tariffs and Trade (GATT), an analogous normative framework, would find the plain packaging regulations in conformity with Article 2.2 of the TBT Agreement, because there exists "no reasonably available, less trade-restrictive alternative that would make an equal contribution to the public health objective of the measure" of Australia (Voon & Mitchell, 2009).

Meanwhile, Article 2.5 of the TBT Agreement provides that a technical regulation which is "in accordance with relevant international standards shall be rebuttably presumed not to create an unnecessary obstacle to international trade." In this regard, Article 11, paragraph 1 (a) of the FCTC prohibits the use of trademarks on tobacco packages only when such trademarks are likely to create an erroneous impression about the health effects, hazards, or other negative impacts of tobacco. Indeed, even though paragraph 46 of the Guidelines for Implementation of Article 11 of the WHO FCTC promotes the use of plain packaging, Australia's plain packaging regulations, which would mandate the use of such packaging, obviously constitutes an additional restriction, which cannot be seen as being in conformity with the relevant FCTC provisions.

Violation of international protection of trademark rights: One characteristic of the plain packaging regulations is the imposition of strict restrictions on the use of trademarks. Thus, at the meeting of the WTO Council for Trade-Related Aspects of Intellectual Property Rights (TRIPS) in June 2011, some members pointed out that the proposed Australian legislation could violate trademark rights under Article 20 of the TRIPS Agreement.

Article 20 of the TRIPS Agreement prohibits the imposition of special requirements-- such as use in a special form--that unjustifiably encumber the use of a trademark in the course of trade. Provisions that prohibit the use of any trademark and the use of any trade name other than in a standardized form, as imposed under the plain packaging regulations, would constitute "use in a special form" and therefore undermine the basic function of a trademark, which is to identify and distinguish one's products from those of others. In addition, those requirements would put significant constraints on the use of foreign-owned trademarks registered in Australia. This would go against the purport of the "tel-quel" (as-is) clause (Article 6 quinquies) of the Paris Convention for the Protection of Industrial Property the compliance of which is mandatory under Article 2 of TRIPS Agreement.

However, there are those who conclude that Australia's proposed new regulations are justifiable after balancing the value of promoting public health as an objective of such regulations and the value of protecting trademark rights (Voon & Mitchell [2009]). This interpretation is supported, in particular, by the presence of the WHO FCTC. Meanwhile, there are also those who interpret Article 20 of the TRIPS Agreement as prohibiting measures governing how trademarks may be used, but not those restricting when and where they can be used (Alemanno & Bonadio [2011]).

Infringement of investors' rights to investments: On June 27, Philip Morris, the world's biggest tobacco company, announced its intention to pursue legal action over Australia's planned introduction of mandatory plain packaging, commencing a process prior to arbitration pursuant to the United Nations Commission on International Trade Law (UNCITRAL) in accordance with the bilateral investment agreement between Hong Kong and Australia (Note 4). Article 1 (e) (iv) of the treaty explicitly includes intellectual property rights as "investments," whereby an infringement of such rights would provide a legal ground for the right owner to seek damages.

Back in 1994, when the Canadian government proposed similar tobacco packaging regulations, Philip Morris sought investment arbitration under the North American Free Trade Agreement (NAFTA). Though this did not reach the stage of arbitration, the case made by Philip Morris was that the proposed regulations would amount to an expropriation of an investment (Liberti [2009]). It was not a case of traditional expropriation which involves physical taking of the property and typically takes the form of nationalization, but a case of indirect expropriation in which the value of the investment is effectively extinguished due to stringent regulatory restrictions.

Article 6 of the Hong Kong-Australia BIT provides for expropriation. Thus, in the ongoing case against the Australian government, Philip Morris will likely invoke this provision to make a similar argument to that in the NAFTA case. The company may also argue that the introduction of plain packaging constitutes a breach of the principles of fair and equitable treatment under Article 2, paragraph 2, provided that the situation can be defined as a case in which an investor's legitimate expectations are frustrated by post-investment regulatory changes made by the host country.

Needless to say, these principles do not rule out the right of host countries to introduce regulations that have legitimate purposes such as the protection of public health. According to precedents, general practice has been that the interest of an investor is weighed and balanced against the host country's right to regulate by taking into consideration the legitimacy of the objective of the regulations as well as the proportionality between the means employed and the objective pursued. Meanwhile, in interpreting these general principles, the TRIPS Agreement will be taken into account, whereby the validity of new regulatory measures not in conformity with the TRIPS Agreement will be questioned (Liberti [2009], Mendenhall [2009]).

More and more countries around the world are adopting stringent tobacco regulations. Even in the U.S., which has not ratified the FCTC, the Food and Drug Administration (FDA) is considering mandating the inclusion of provocative graphic health warnings on all cigarette packages effective 2012. In a similar move, the U.S. introduced a ban on the use of certain flavors in cigarettes in 2009, which prompted Indonesia to file a complaint with the WTO. The case is currently being reviewed by a WTO panel. As a more extreme case, deliberations are now under way in Iceland on a bill that would prohibit the sale of cigarettes in shops.

To date, a series of disputes over tobacco regulations have been brought before the GATT/WTO. With the international rise of anti-smoking sentiment, the tobacco issue has come to be discussed in the context of conflict between states' right to regulate for the purpose of protecting public health, which is of a higher order than ever before, and requirements imposed by the globalization of the world economy. The issue of food safety has been discussed in the context of the division of authority (or in the context of the theory of constitutionalization) between the WTO and other authorities such as the governments of member countries and the Codex Alimentarius Commission (Ito [2007]). The issue of tobacco will likely be discussed in the same manner between the WTO and the WHO.

The U.S. government has so far remained silent on the dispute over Australia's plain packaging regulations because it is prohibited by law from urging foreign governments to remove tobacco regulations (Note 5). Will the U.S. government take any action and, if it does, what stance will it take? And how will the tobacco dispute be resolved? Close attention should be paid to how things turn out because it will significantly affect the positioning of the tobacco issue in the development of international economic relations going forward.