Philip Morris Award Shows Timing is Everything in International Arbitration

The decision was made publicly available on May 17, 2016, and serves as a cautionary tale for companies seeking to protect their overseas investments via corporate restructurings. In particular, the ruling confirms the need for investors to carefully plan the structure of their investments at the time the investment is made or, at a minimum, before foreseeable disputes arise.

According to the award, Philip Morris claimed that the Australian plain packaging law barred the use of intellectual property on tobacco products and packaging, transforming the company from a manufacturer of branded products to a manufacturer of commoditized products, substantially diminishing the value of its investments in Australia. But Philip Morris’s substantive claims were never addressed because of Australia’s jurisdictional objections.

Australia’s main jurisdictional objection was that Philip Morris had impermissibly obtained the protection of the investment treaty by restructuring its investment through a new Australian subsidiary after the dispute was foreseeable.

The Tribunal held that from the date of the announcement by Australia’s Prime Minister and Health Minister of the Government’s intention to introduce plain packaging, “there was at least a reasonable prospect that legislation equivalent to the Plain Packaging Measures would eventually be enacted and a dispute would arise.” According to the Tribunal, “adoption of the Plain Packaging Measures was not only foreseeable but actually foreseen by the Claimant when it chose to change its corporate structure.” The Tribunal added that its conclusion was reinforced by the record of the case, which showed “that the principal, if not sole, purpose of the restructuring was to gain protection under the Treaty in respect of the very measures that form the subject matter of the present arbitration.”

The Tribunal concluded that the initiation of the arbitration under these circumstances constituted an “abuse of right” and denied Philip Morris the protection of the investment treaty.