In recent years there has been criticism that international investment treaties and investor-State arbitration conducted under those treaties increasingly, and unacceptably, have encroached upon the legitimate uses of States’ regulatory power. These concerns have not only been expressed in scholarship, but have also been at the forefront of State negotiations in recent multilateral and bilateral trade and investment agreements (see, for example, the recent discussion by Anthea Roberts and Richard Braddock here on the China-Australia Free Trade Agreement). The concerns have led to policy proposals from States and international organisations for greater safeguards for States to be able to enact measures in the public interest without attracting liability under investment treaties.
Investor-State arbitration tribunals appear to be alive to these concerns. On 8 July 2016, a tribunal (constituted by Professor Piero Bernardini, Mr Gary Born and Judge James Crawford) convened pursuant to the Switzerland-Uruguay Bilateral Investment Treaty (‘BIT’) delivered an award which, by majority, upheld the legality of two tobacco-control measures enacted by the Uruguayan government for the purpose of protecting public health. The award contains an extensive analysis of the interaction between States’ regulatory powers to enact laws in the public interest and States’ obligations to protect and promote foreign investment within their territory. This post will focus on two aspects of the award that considered this interaction: the claim pursuant to Article 5 of the BIT (expropriation) and the claim pursuant to Article 3(2) (fair and equitable treatment or FET).
The challenged measures
The claim, brought by the Philip Morris group of tobacco companies against Uruguay, challenged two legislative measures. First, the claimants challenged a law that mandated a ‘single presentation requirement’ on cigarette packaging, such that different packaging or variants of cigarettes were prohibited.
Secondly, the claimants challenged a law that mandated an increase in the size of health warnings on cigarette packaging from 50 to 80% of the lower part of each of the main sides of a cigarette package (‘the 80/80 requirement’). As the the amicus brief submitted by the WHO and Framework Convention on Tobacco Control (‘FCTC’) Secretariat noted, large graphic and text health warnings are increasingly common on tobacco packaging globally and a number of States have enacted (or are considering enacting) laws with the aim of preventing misleading tobacco packaging, as is required of States parties to the FCTC (including Uruguay).
Expropriation and ‘police powers’
The claimants argued that the single presentation requirement and the 80/80 requirement constituted an indirect expropriation of the claimants’ brand assets, including intellectual property and good will associated with the brand variants, contrary to Article 5(1) of the BIT. In response, Uruguay contended that the measures could not be considered expropriatory on various grounds. Relevantly, Uruguay contended that the challenged measures were a legitimate exercise of its “police power” to protect public health.
The Tribunal unanimously rejected the claim that the challenged measures were expropriatory. In addition to concluding that the measures did not deprive the claimants of their investment, the Tribunal also considered that the challenged measures were not expropriatory on the basis that the measures were a “valid exercise of the State’s police powers, with the consequence of defeating the claim for expropriation” (at ). By “police powers”, the tribunal was referring to States’ powers to enact bona fide, non-discriminatory measures for the protection of public welfare (including public health). The tribunal considered that the measures were bona fide, for the purpose of protecting the public health, were non-discriminatory and were proportionate to the objective pursued (at ).
Article 5(1) of the BIT does not expressly refer to the police power of States, nor is it referred to elsewhere in the treaty text. However, the Tribunal considered that Article 5(1) must be interpreted in accordance with Article 31(3)(c) of the Vienna Convention on the Law of Treaties (‘VCLT’), such that the provision must be interpreted in light of customary international law as a “relevant rule of international law applicable to the relations between the parties”. The tribunal considered that the police power of States was reflected in customary international law and applied to the expropriation analysis accordingly.
In addition to offering an affirmation of the applicability of the police powers of States to indirect expropriation claims under BITs, the award is notable insofar as it explicitly articulates the basis on which it has invoked the police power using the applicable principles of treaty interpretation under the VCLT. This approach is consistent with another tribunal in Saluka v Czech Republic, which similarly considered that the expropriation article in the applicable BIT imported into the treaty the customary international law notion of “police powers”, also relying on Article 31(3)(c). The citation and reliance on the VCLT is welcome, as while the invocation of the police power at the point of interpreting the expropriation provision in the BIT is a common (although not universal) approach, tribunals have not consistently articulated the basis on which the police power applies.
While each case turns on its own facts and is not binding on subsequent tribunals, the award is the latest in a number of decisions that suggest that expropriation provisions in BITs, properly interpreted, accommodate the “police powers” of States even absent explicit treaty language to that effect.
Fair an Equitable Treatment and ‘regulatory power in the public interest’
The claimants further argued that the measures were unfair and inequitable on the basis that the measures were arbitrary (insofar as they failed to serve a public purpose but caused substantial harm), undermined the claimants’ legitimate expectations, and destroyed the stability of the legal framework in which the claimants invested. Uruguay again emphasised that the measures were bona fide measures enacted in a non-discriminatory manner that were logically connected to the objective of protecting public health. The majority of the tribunal noted that whether a particular treatment is fair and equitable will depend on the circumstances of a particular case, and focussed its analysis on the principles of arbitrariness, legitimate expectations, and stability.
In rejecting the argument that the challenged measures were arbitrary, the majority of the tribunal instead concluded the measures were reasonable, not discriminatory or disproportionate and were enacted in good faith. In doing so, the majority of the tribunal considered that the “margin of appreciation” as developed in the jurisprudence of the European Court of Human Rights applied equally in disputes arising under BITs, and that tribunals “should pay great deference to governmental judgments of national needs” (at ). Similarly with respect to legitimate expectations and stability, the tribunal accepted that neither concept affected “the State’s rights to exercise its sovereign authority to legislate and to adapt its legal system to changing circumstances” (at ). In particular, changes to general legislation were not prevented by the FET standard if they did not “exceed the exercise of the host State’s normal regulatory power in pursuance of a public interest” and did not modify the legal framework relied upon by an investor outside of “an acceptable margin of change” (at ). In the absence of any specific undertakings by the host State, the tribunal concluded there could be no legitimate expectation that the regulatory environment would not change; indeed, the expectation “could only have been of progressively more stringent regulation” (at ). Nor could the challenged measures be said to modify the legal framework beyond an acceptable margin of change. The FET standard, in the majority’s view, was not a “guarantee that nothing should be done by the host State for the first time” (at ).
Arbitrator Gary Born dissented, rejecting the applicability of the margin of appreciation in the BIT context and considering that the single presentation requirement breached the FET standard as it was arbitrary, irrational and did “not bear even a minimal relationship to the legislative policy objective cited by Uruguay for the requirement”. He reiterated, however, that his conclusions were “not in any way a comment on the sovereign authority of Uruguay (or any other state) to safeguard its population’s health or safety”, such measures being “within the regulatory sovereignty of Uruguay”. Substantial deference to this regulatory sovereignty was required, but was “not a substitute for reasoned analysis” of whether the measures satisfied a minimum level of rationality and proportionality between the regulatory measure and the public interest objective.
In contrast to the (relatively) more settled jurisprudence on “police powers” in an indirect expropriation context, consideration of the extent to which the FET standard limits States’ regulatory powers to enact laws in pursuit of public interest objectives is less developed and less consistent. This perhaps reflects a broader lack of consensus as to the precise content of the FET standard. In addition to the different conclusions reached by the majority and dissenting arbitrators, the unsettled status of the issue is reflected in the varying language adopted by the tribunal to describe States’ regulatory powers within the FET analysis, using expressions such as “sovereign power”, “sovereign authority to legislate”, “normal regulatory power in the pursuance of a public interest” and “regulatory sovereignty” interchangeably. Notably, the tribunal did not use the language of the “police power” in the FET analysis, notwithstanding that much of the majority’s conclusion that underpinned the police power analysis (that the measures were non-discriminatory, proportionate and in pursuit of a public welfare objective) also underpinned the finding that the measures were “reasonable” for the purposes of the FET analysis.
More broadly, the differing views between the majority and the dissent as to the relevance of the “margin of appreciation” and deference to the regulatory powers of States (and the extent of any such deference) reveals an affirmation of States’ regulatory powers in principle, but a remaining uncertainty as to their relevance and scope in their application to the FET standard. The award therefore highlights that the ongoing debate as to the impact of investment treaties on States’ regulatory powers has shifted in emphasis from expropriation to the FET standard.