A-List Celebrity No. 8: The Philip Morris case

Raquel Macedo Moreira
Jan 6
4 min read

This article is part of the series A-List: The Celebrities of Arbitration Cases. A series delving into the most renowned cases that have shaped the landscape of international arbitration.

Parties: Philip Morris Asia Limited v. The Commonwealth of Australia

Decided by: Arbitral Tribunal in the PCA Case No. 2012-12 (Professor Karl-Heinz Böckstiegel, Professor Gabrielle Kaufmann-Kohler, Professor Donald M. McRae)

Date: 17 December 2015 (Award on Jurisdiction and Admissibility)

Why is this case famous?

The Philip Morris v. Australia case is a classic "nice try, but no" moment in investor-state arbitration. It’s famous because Philip Morris—yes, the big tobacco giant—tried to sue Australia over its plain packaging laws. But here is the twist: Philip Morris had changed its corporate structure just in time to use protections from a treaty between Hong Kong and Australia. Australia called it out as treaty shopping, and the tribunal agreed. The arbitrators ruled Philip Morris was gaming the system and booted the case for "abuse of rights". It was a big deal. It told corporations, "You can’t just move pieces around on the board to claim legal perks". It also showed that countries can defend their right to pass public health laws without getting strong-armed by global giants. It was a big win for Australia and the fight against tobacco.

Back in time

I first heard about this case in 2017 from my LL.M. professor, Dr Dirk Pulkowski, who acted as PCA registry for the case in the years before. For clarity, the case had already finished, and he only shared publicly available information. I am not trying to compromise anyone here…

I don't know how old you are, but there was a time when cigarette packaging was not covered in vivid imagery. It had appealing branding, and even TV commercials advertised how cool it was to smoke!

In 2011, Australia pioneered the fight against tobacco and enacted the Tobacco Plain Packaging Act, introducing strict regulations for tobacco products’ packaging and branding.

Philip Morris, one of the world’s biggest tobacco companies, did not like it and decided to fight back.

The case

Philip Morris Asia Limited (Hong Kong) started an investment arbitration against Australia under the Hong Kong Australia BIT. The Notice of Arbitration was served on 21 November 2011 under the UNCITRAL Rules.

Philip Morris Asia relied on Philip Morris’ corporate structure to qualify as an investor.

Basically, Philip Morris Asia held 100% of the shares of the Australian holding Philip Morris (Australia) Limited who, in turn, had 100% of Philip Morris Limited – a company incorporated in Australia that engaged in the manufacture, import, marketing and distribution of tobacco in Australia, New Zealand and the Pacific Islands.

Philip Morris argued that Australia's plain packaging laws (which required tobacco products to be sold in plain, standardised packaging with large health warnings) amounted to expropriating its trademarks and intellectual property. They claimed that the law reduced the value of their investment and violated their rights under the Hong Kong-Australia BIT.

Accusation of treaty shopping

In its defence, Australia argued that the plain packaging law was a legitimate public health measure designed to reduce smoking rates, especially among young people, and had the sovereign right to regulate in the public interest.

In addition (and more importantly for the story I am telling today), Australia argued that Philip Morris purposely changed its structure to benefit from the protections granted to investors under the Hong Kong-Australia BIT, which would constitute an abuse of rights.

Australia made the case that:

(…) case law indicates that an abuse of right can be found where a corporate restructuring is motivated wholly or partly by a desire to gain access to treaty protection in order to bring a claim in respect of a specific dispute that, at the time of the restructuring, exists or is foreseeable.

(Parenteshis for some important dates here)

3 September 2010: decision to restructure

23 February 2011: restructuring completed

21 November 2011: Tobacco Plain Packaging Act

21 November 2011 (yes, same date): the Notice of Arbitration was served (!)

Philip Morris, of course, denied the accusations.

The tribunal’s take on it

The tribunal tackled the case by looking at different case law in which an analogous “abuse of right” was alleged. By finding common ground on the cases quoted, the tribunal found that legal tests on abuse of rights revolve around the concept of foreseeability. Foreseeability, in turn, rests between “a very high probability and not merely a possible controversy”.

In other words, changing a corporate structure to gain the protection of an investment treaty at a point in time when a specific dispute is foreseeable constitutes an abuse of rights.

Then, the tribunal looked at whether the dispute was foreseeable at the time of the restructuring.

One of the tribunal's points was that 19 months passed between Australia’s announcement of its intention to legislate and the passage of actual legislation. The tribunal deemed the process transparent and even included consultation with tobacco companies (!).

Based on the legislative and political context involving the measure discussed, the tribunal concluded that at least after 29 April 2010 (when Australia’s Prime Minister announced major tobacco control reforms), it was reasonably foreseeable that legislation like the Tobacco Plain Packaging Act would have been enacted – and thus, a dispute would arise.

What's more, the tribunal was thorough here! They conducted an in-depth analysis of Philip Morris’ corporate structure, the Claimant’s effective “management” of the Australian investor, and the reasons behind the restructuring. In conclusion, they held that Philip Morris did not prove that tax or other business reasons were determinative for the restructuring, which could only lead to one conclusion:

The initiation of this arbitration constitutes an abuse of rights, as the corporate restructuring by which the Claimant acquired the Australian subsidiaries occurred at a time when there was a reasonable prospect that the dispute would materialise and as it was carried out of the principle if not sole, purpose of gaining Treaty protection. Accordingly, the claims raised in this arbitration are inadmissible, and the Tribunal is precluded from exercising jurisdiction over this dispute.

Boom! And that is how Australia won a significant battle against tobacco.