News has just emerged that the Permanent Court of Arbitration (“PCA”) declined jurisdiction in a unanimous decision to hear the merits of Philip Morris’ expropriation claim against the Commonwealth of Australia.

Philip Morris brought its claim under Australia’s 1993 Investment Promotion and Protection Agreement (IPPA) with Hong Kong, challenging Australia's plain packaging laws that were passed in 2011.  The legislation required cigarette companies to sell their cigarettes in a logo-free, drab dark brown packaging.

As a result, Philip Morris International announced it would use the provisions in the IPPA to demand compensation for Australia's plain packaging anti-smoking legislation.

Philip Morris argued that it effectively lost its intellectual property investment in Australia by being denied the right to use its trademark on its products.

Following the news of Philip Morris’ claim, the Australian government made a policy announcement in April 2011 that it would no longer include investor-state dispute settlement clauses in its future investment treaties.  At the time, the Australian Government stated that it:

“does not support provisions that would confer greater legal rights on foreign businesses than those available to domestic businesses.  Nor will the Government support provisions that would constrain the ability of Australian governments to make laws on social, environmental and economic matters in circumstances where those laws do not discriminate between domestic and foreign businesses.  The Government has not and will not accept provisions that limit its capacity to put health warnings or plain packaging requirements on tobacco products or its ability to continue the Pharmaceutical Benefits Scheme...”

Clearly, the Australian Government was concerned about the potential far-reaching consequences if it lost this case, and its ability to determine its own public policy and laws that regulate the same.

Challenging the jurisdiction of the tribunal, Australia argued that Philip Morris, in anticipation of the plain packaging legislation in 2011, restructured itself so that its Australian subsidiary became wholly owned by the Hong Kong-based Philip Morris Asia.  This restructuring allowed Philip Morris to sue Australia under the investor-state dispute settlement provisions of the 1993 bilateral agreement with Hong Kong that allowed compensation for “expropriation” of investments.

The PCA said it will publish the decision on its website once issues regarding confidentiality have been resolved.  We will provide an update on the reasons for declining jurisdiction once it is available.