ARBITRATION BEFORE THE INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES
PHILIP MORRIS BRANDS SÀRL PHILIP MORRIS PRODUCTS S.A. and ABAL HERMANOS S.A.
Claimants,
v.
ORIENTAL REPUBLIC OF URUGUAY,
Respondent.
ICSID Case No. ARB/10/7
URUGUAY’S REJOINDER ON THE MERITS
20 September 2015
Paul S. Reichler Ronald E.M. Goodman Lawrence H. Martin Clara E. Brillembourg
FOLEY HOAG LLP 1717 K Street, N.W. Washington, DC 20006
Professor Harold Hongju Koh 87 Ogden Street New Haven, CT 06511
Counsel for the Oriental Republic of Uruguay
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Table of Contents
CHAPTER 1. Introduction ...... 1
CHAPTER 2. Uruguay Has the Sovereign Right and Duty To Regulate the Tobacco Industry To Protect Public Health...... 9
I. Uruguay Incurs No International Responsibility When It Exercises Its Sovereign Police Powers To Protect Public Health ...... 11
II. Uruguay’s Decisions About How To Protect Public Health Enjoy a Margin of Appreciation ...... 15
III. Uruguay Not Only Has a Right, But Also a Duty, To Regulate Public Health .....22
CHAPTER 3. The SPR Was a Reasonable Exercise of Uruguay’s Sovereign Police Powers to Protect Public Health ...... 29
I. The SPR Constitutes Sound Policy that Advances Important Public Health Objectives ...... 35
A. The Wisdom of the SPR Is Confirmed by the World’s Leading Authorities on Public Health and Tobacco Control ...... 35
B. Claimants’ Arguments Against the SPR Are Meritless ...... 41
1. There Is an Obvious “Logical Connection” Between the SPR and the Objective of Preventing Consumers from Being Misled ...... 42
2. Claimants’ Argument That There Was No Need for the SPR Because Consumers Are Already Aware That Cigarettes Are Harmful Is Nonsense...... 46
3. The SPR Is Supported by Ample Evidence ...... 48
4. The Hypothetical “Black” Variants Claimants Say They Wanted To Market in Uruguay Would Also Have Been Deceptive ...... 53
5. Claimants Themselves Sought a Special Dispensation from the Law that Requires Tobacco Companies To List the Toxic Ingredients in Cigarettes ...... 59
6. The SPR Does Not “Incentivize Illicit Cigarette Trade” ...... 61
7. Claimants’ Threats Have Stopped Other States from Adopting an SPR ...... 61
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II. The SPR Was Adopted Pursuant to the Same Deliberative Process as Other Tobacco Control Measures ...... 64
CHAPTER 4. The 80% Requirement Was Also a Reasonable Exercise of Uruguay’s Sovereign Police Powers to Protect Public Health ...... 77
I. The 80% Requirement Was Adopted To Make Warning Labels More Effective, Not Punish Mailhos ...... 80
II. Claimants Fail To Undermine the International Consensus That Larger Warning Labels Are More Effective than Smaller Ones ...... 87
A. The Overwhelming Weight of the Evidence Shows That the Largest Warning Labels Are the Most Effective ...... 87
B. Claimants’ Experts’ Fail To Undermine the Global Consensus on Health Warning Labels ...... 92
C. Large Warning Labels Also Serve To Minimize the Advertising Appeal of Cigarette Packs ...... 96
CHAPTER 5. The Measures Claimants Challenge Have Been Effective ...... 103
I. Smoking Prevalence Has Declined ...... 104
II. Other Specific Aims of the Regulations Have Also Been Achieved ...... 107
III. Claimants’ Arguments about Consumption Are Factually Inaccurate ...... 112
CHAPTER 6. Uruguay Did Not Expropriate Claimants’ Investment ...... 121
I. The SPR and 80% Requirement Were Non-Expropriatory Exercises of Uruguay’s Sovereign Police Power ...... 122
II. Claimants Had No Trademark Rights Capable of Being Expropriated ...... 128
III. Claimants’ Investment Has Not Been Expropriated Because It Retains Significant Value ...... 130
CHAPTER 7. Uruguay Did Not Breach Article 3(2) of the BIT with Respect to Fair and Equitable Treatment ...... 143
I. The Standard Applicable to Article 3(2) Is the Customary International Law Minimum Standard of Treatment...... 144
A. The Principle of Contemporaneity Dictates the Conclusion That the Applicable Standard is the Minimum Standard of Treatment ...... 144
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B. Article 3(2) Establishes A High Threshold for Finding An FET Violation ...... 147
II. Even if an Autonomous Standard Were Applied, Uruguay Has Not Breached It ...... 149
A. The SPR and 80% Requirement Are Not Arbitrary...... 150
B. Claimants Did Not Have Any “Legitimate Expectations” Capable of Being Frustrated ...... 161
1. There Can Be No Legitimate Expectations In the Absence of a Specific Commitment or Promise ...... 161
2. Uruguay Made No Specific Commitments to Claimants Capable of Giving Rise to Legitimate Expectations ...... 166
C. Uruguay Did Not Deprive Claimants of Legal Stability ...... 171
CHAPTER 8. The SPR and 80% Requirement Did Not Unreasonably Impair Claimants’ Use and Enjoyment of Their Investment ...... 175
CHAPTER 9. Uruguay Has Not Breached Article 11 of the BIT ...... 179
I. Article 11 Does Not Convert Alleged Violations of Uruguayan Municipal Law Into Violations of the BIT ...... 180
II. Uruguay Did Not Fail To Observe Any Obligations Under Uruguayan Law with Regard to Claimants’ Trademarks ...... 187
A. Claimants Know They Have No Guaranteed Right To Use Their Trademarks ...... 187
B. Uruguayan Trademark Law Is Clear: Registrants Do Not Have a Right To Use, Only a Right To Exclude Others from Using ...... 191
C. Uruguayan Trademark Law Does Not Grant a Right To Use ...... 192
D. None of the International Intellectual Property Conventions on Which Claimants Rely Recognize a Right To Use...... 199
1. The Mercosur Protocol ...... 199
2. The Paris Convention and TRIPS Agreement ...... 203
3. The 1892 Montevideo Treaty...... 204
III. Claimants Did Not Register the Marks That Form the Basis of Their Claim ...... 205
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CHAPTER 10. Claimants Are Not Entitled To The Relief They Request ...... 213
I. Claimants are Not Entitled to Restitution ...... 215
II. Claimants Have Failed to Establish that the Challenged Measures Caused the Harm They Claim to Have Suffered ...... 221
A. Alleged Harms from Increasing the Size of Health Warning Labels ...... 222
B. Alleged Harms from Removal of Brand Variants from the Market ...... 227
C. The Harms Allegedly Suffered by Claimants Are Attributable to Factors Other than the 80% Requirement and the SPR ...... 231
III. Claimants’ Valuation of their Alleged Losses Contains such Significant Errors and Unsupported Assumptions as to Render It Unusable ...... 242
A. Navigant Continues To Overestimate Sales Volumes in the But-for Scenario...... 244
B. Claimants’ Assumption that Excise Taxes Will Not Exceed Inflation Is Contradicted by Economic Data ...... 248
C. Navigant Continues To Inflate the 2009 But-for Price, and Thus Claimants’ Prices in Perpetuity ...... 249
D. Navigant’s Model Continues To Misstate Marketing Expenses...... 251
E. Navigant Continues To Overstate Damages by Failing To Offset Revenues from Benson & Hedges in the Actual Scenario ...... 252
F. Claimants’ Interest Demands Are Inappropriate ...... 254
1. The Interest Rate Claimants Seek Is Excessive ...... 254
2. Compound Interest Is Not Appropriate...... 255
IV. Uruguay is Entitled to Recover Its Fees and Expenses ...... 257
CHAPTER 11. Claimants Were Not Denied Justice By The Uruguayan Courts ...... 259
I. The Threshold for Proving a Denial of Justice Claim under International Law Is a High One ...... 264
A. The TCA Did Not Deny Claimants Justice When It Rejected Their Challenge to the SPR ...... 266
B. The TCA Considered and Dismissed Claimants’ Reserva De La Ley Claim ...... 267
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C. The TCA Considered and Dismissed Claimants’ Other Claims in Regard to the SPR ...... 271
D. The TCA Did Not Rely on Evidence That Claimants Had No Opportunity To Address ...... 274
E. The TCA’s Rejection of Claimants’ Motion for Clarification and Expansion of Its Decision Was Neither Unreasonable Nor a Denial of Justice ...... 275
F. Claimants Failed To Exhaust All Available and Effective Local Remedies Against the TCA’s Decision ...... 277
II. The TCA Did Not Deny Claimants Justice When It Rejected Their Challenge to the 80% Requirement...... 281
A. The TCA Was Not Bound To Adhere to the Reasoning or Interpretation of the SCJ in the Latter’s Ruling on the Constitutionality of Law 18,256 ...... 281
B. Res Judicata Does Not Apply ...... 288
III. Claimants Are Not Entitled to Damages ...... 291
Conclusions and Submissions ...... 297
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CHAPTER 1.
INTRODUCTION
1.1 Claimants’ Reply is a remarkable document, especially for what it does not say.
1.2 The single most conspicuous omission is Claimants’ failure even to mention, let alone address, the submissions made to this Tribunal by the World Health Organization (“WHO”), the
WHO Framework Convention on Tobacco Control Secretariat (“FCTC Secretariat”) and the Pan
American Health Organization (“PAHO”). The words “WHO,” “FCTC Secretariat” and
“PAHO” (or their fully spelled-out equivalents) appear nowhere in the Reply’s 193 pages.1
1.3 This is particularly striking because Claimants argue that the two measures they challenge—the Single Presentation Requirement (“SPR”) and the 80% Requirement—are arbitrary and bear “no logical connection” to promoting public health. The WHO, the FCTC
Secretariat and PAHO—the leading international public health bodies in the world—directly and thoroughly refute this claim. All three express the unqualified view that the SPR and 80%
Requirement are well-designed and well-justified measures that are “effective means for protecting public health.”2 Claimants’ silence in the face of these submissions effectively admits that they have no response.
1.4 Instead of answering the WHO, FCTC Secretariat and PAHO submissions, Claimants invite the Tribunal to accept their own judgment on the reasonableness of the two measures, and
1 The Reply contains two footnote references to the “WHO” Framework Convention on Tobacco Control. Claimants’ Reply on the Merits (17 Apr. 2015) (hereinafter “Reply”), ¶¶ 101 n.138 & 102 n.139. 2 Written Submission (Amicus Curiae Brief) by the World Health Organization and the WHO Framework Convention on Tobacco Control Secretariat (28 Jan. 2015) (hereinafter “WHO & WHO FCTC Secretariat Submission”), ¶ 90. See also Written Submission (Amicus Curiae Brief) by the Pan American Health Organization (6 Mar. 2015) (hereinafter “PAHO Submission”), ¶ 100.
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to reject that of the world’s leading public health experts. Given the U.N. General Assembly’s recognition of the “fundamental conflict of interest between the tobacco industry and public health,”3 Claimants’ self-serving objections cannot stand.
1.5 This is particularly so because it is undisputed that the SPR and 80% Requirement were adopted because Uruguayan public health officials—medical doctors with many years of experience treating tobacco-related illness—believed in good faith that the two measures would promote and protect public health. Claimants’ contention that these officials were wrong and the measures were nevertheless “arbitrary,” is defeated not only by Uruguay’s submissions, but also by the considered and expert judgment of the WHO, FCTC Secretariat and PAHO.
1.6 Claimants’ effort to substitute their self-interested judgment for that of the WHO, FCTC
Secretariat, and PAHO is also defeated by the international jurisprudence on the weight to be accorded such evidence. The International Court of Justice (“ICJ”) has consistently given greater weight to the views of technical experts from international bodies with specialized knowledge and experience in the subject matter than to the opinions of consultants hired by the parties.4
3 United Nations General Assembly (UNGA), Political Declaration of the High-level Meeting of the General Assembly on the Prevention and Control of Non-communicable Diseases, UN Doc. A/RES/66/2, adopted 19 Sept. 2011, distributed 24 Jan. 2012, ¶ 38 (RL-136). 4 See, e.g., Pulp Mills on the River Uruguay (Argentina v. Uruguay, Judgment (20 Apr. 2010), I.C.J. Reports 2010, p. 14, ¶¶ 226, 228, 239, 243, 252 (RL-298) (basing findings on the reports of expert consultants hired by the International Finance Corporation); Armed Activities on the Territory of The Congo (Democratic Republic of The Congo v. Uganda, Judgment (19 Dec. 2005), I.C.J. Reports 2005, p. 168, ¶¶ 206-210 (RL-293) (basing findings on, inter alia, reports of the UN observer mission in the DRC); Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia and Herzegovina v. Serbia and Montenegro), Judgment (26 Feb. 2007), I.C.J. Reports 2007, p. 43, ¶¶ 228-230, 283, 285, 408, 436 (RL-173) (basing findings on, inter alia, a report prepared by the U.N. Secretary-General at the request of the General Assembly). See also WTO Panel Report, United States—Measures Affecting the Production and Sale of Clove Cigarettes, WT/DS406/R (2 Sept. 2011), ¶¶ 2.29-2.32, 7.230 (RL-301) (citing FCTC guidelines as reflecting international scientific consensus on various tobacco-related issues).
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1.7 Another conspicuous omission from the Reply is Claimants’ failure to address the voluminous evidence presented in Uruguay’s Counter-Memorial describing their well- documented history of false and misleading marketing, including their deceptive marketing of
“health reassurance” cigarettes—purportedly less harmful to health than others—even while their own studies showed that all cigarettes are equally harmful. Claimants casually dismiss all of this evidence with a single word: “irrelevant,” as if its only purpose were to cast them in a bad light.
But they cannot sweep such critical—and undisputed—facts under the rug so easily. The evidence shows that these marketing practices contributed to Uruguay’s determination that the
SPR and the 80% Requirement would help protect public health.
1.8 This is because Claimants marketed their “health reassurance” cigarettes in Uruguay (as elsewhere) in packages with explicit descriptors like “light,” “mild,” and “low tar.” These descriptors were intended to signal that they were “healthier” than the original variants of the same name. Studies showed that this deception succeeded; a large percentage of consumers were led to believe (as Claimants intended) that “light” and similarly labelled cigarettes were safer than the original variants. After Uruguay, like many other countries, banned the use of such descriptors, Claimants found a way to comply with the ban but still perpetuate the myth that it was possible to smoke a safer cigarette: they replaced the banned variants with new ones that were marketed as identical to the ones they replaced, in packs with the same colors and other design elements that consumers identified with the banned products. Thus, Claimants deliberately created the false impression that Marlboro Gold was not only the same cigarette as
Marlboro Light, but also had the same health “benefits.” These were not only Uruguay’s findings, but also those of the WHO, the FCTC Secretariat and PAHO. The evidence shows,
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without contradiction, that it was to combat this deception, and its adverse consequences for public health, that Uruguay chose to adopt its two regulations, especially the SPR.
1.9 Still another remarkable omission from the Reply is Claimants’ failure to engage with most of Uruguay’s arguments in the Counter-Memorial. Rather than address those arguments head-on, the Reply largely repeats Claimants’ arguments from their Memorial while making no effort to address Uruguay’s counter-arguments. To cite just one example, Claimants argued in their Memorial that Uruguay adopted the 80% Requirement to “punish” their competitor,
Mailhos, for its use of so-called alibi brands. Uruguay presented contrary evidence in its
Counter-Memorial—to which more was added in the course of document discovery—showing that the 80% Requirement was adopted for the sole reason that larger health warnings are more effective than smaller ones. Claimants’ Reply makes no effort to deal with any of this evidence, instead choosing merely to recycle their original, disproven argument.
1.10 In those few instances where the Reply does address Uruguay’s arguments, it misrepresents them. With respect to the SPR, for example, Claimants spin the narrative that
Uruguay is so unsure of its own position that it “invented” a whole new argument in its Counter-
Memorial that was “never before articulated in this arbitration.”5 Yet, Claimants’ own pleadings show their narrative to be false. In their Counter-Memorial on Jurisdiction, Claimants expressly described Uruguay’s argument about the SPR in exactly the same language they now claim
Uruguay only “invented” in its Counter-Memorial.6
5 Reply, ¶¶ 5, 37. 6 See Claimants’ Counter-Memorial on Jurisdiction (23 Jan. 2012) (hereinafter “Claimants’ Counter-Memorial on Jurisdiction”), ¶¶ 9, 24.
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1.11 Another misrepresentation is Claimants’ attempt to portray the SPR as arbitrary because it prohibits all brand variants, not only those (like Marlboro Gold) that Claimants marketed as identical to those that previously carried banned descriptors (like Marlboro Lights). How is it reasonable, Claimants ask, for the SPR to prohibit a black-packaged Marlboro variant, which is not like previously-marketed variants, and which uses a color that does not suggest a healthier alternative? Claimants’ own Reply reveals how disingenuous this question is.
1.12 Tellingly, the Reply includes only a black and white image of the “black” packages
Claimants say they intended to market in Uruguay. But the actual packages are colored, and contain elements that plainly justify application of the SPR. In particular, the “black” packs are distinguished by a prominent gold chevron (not visible in the Reply) and the word “GOLD” in bold letters. The background may be black; but the message is that these are Marlboro Gold cigarettes (which are identical to Marlboro Light cigarettes). They perpetrate the same deception as Marlboro Gold. This is clear from the color photographs shown in Chapter 3 of this Rejoinder.
Uruguay trusts that Claimants’ “black packs” argument will be less successful in misleading the
Tribunal than the packs themselves are in deceiving smokers outside Uruguay.
1.13 Claimants’ penchant for misrepresenting or ignoring the record allows them to present a comparatively concise Reply that is unencumbered by the need to hew to actual evidence. In contrast, exposing Claimants’ false statements, errors and omissions, and citing to the pertinent evidence, requires more space. This Rejoinder is therefore longer than the Reply, notwithstanding Uruguay’s effort to avoid repetition of what it argued in the Counter-Memorial.
For the avoidance of doubt, however, Uruguay stands by all arguments presented in that pleading, whether reference is made to them in the following Chapters or not.
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*
1.14 The balance of this Rejoinder consists of:
Chapter 2, which rebuts Claimants’ arguments intended to undermine Uruguay’s inherent sovereign right and duty to exercise its police powers to protect public health;
Chapter 3, which refutes Claimants’ challenge to the SPR and shows that measure to be a responsible public health initiative adopted in good faith;
Chapter 4, which disproves Claimants’ contentions about the 80% Requirement and shows it to be a responsible measure adopted in good faith to protect public health;
Chapter 5, which exposes the fallacy of Claimants’ arguments about the efficacy of the two measures they challenge, and shows both to be fulfilling their intended purposes;
Chapter 6, which rebuts Claimants arguments on the issue of expropriation and shows that neither the SPR nor the 80% Requirement constituted an expropriation;
Chapter 7, which refutes Claimants’ FET argument; and shows that the SPR and 80% Requirement were not arbitrary, did not deny Claimants their legitimate expectations, and did not deny them legal stability;
Chapter 8, which shows that Uruguay has not unreasonably impaired Claimants’ investment;
Chapter 9, which disproves Claimants’ argument that Article 11 elevates Uruguay’s (wholly fictitious) violations of its domestic trademark law into BIT matters;
Chapter 10, which shows that Claimants have not proved entitlement to any of the relief they have requested; and
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Chapter 11, which refutes Claimants’ denial of justice claim and shows it to be meritless.
1.15 For all of these reasons, Claimants have failed to show any violation of the BIT and their claims must be denied in their entirety. Moreover, because of the unfounded nature of Claimants’ claims, Uruguay should be awarded its legal fees and costs.
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CHAPTER 2.
URUGUAY HAS THE SOVEREIGN RIGHT AND DUTY TO REGULATE THE TOBACCO INDUSTRY TO PROTECT PUBLIC HEALTH
2.1 Uruguay’s Counter-Memorial showed that tobacco “is the only legal consumer product that kills when used exactly as intended by the manufacturer.”7 It killed an estimated 100 million people during the 20th century8—more than both World Wars combined. Today, more than five million people die every year as a result of tobacco use,9 more than 6,000 of them in Uruguay alone.10 If present trends continue, it is estimated that tobacco use will kill one billion people in the 21st century.11 Claimants do not and cannot contest these facts.
2.2 Because tobacco use is “the leading preventable cause of death in the world,”12 governments have the duty to prevent tobacco from causing death by regulating it strictly.
Claimant Abal notably agrees. It has expressly affirmed to the Government of Uruguay its support for the “strong and effective regulation of the tobacco industry and its products.”13 Abal acknowledges that: “The broad regulation of tobacco, combined with its effective application,
7 World Health Organization, Call for pictorial warnings on tobacco packs (29 May 2009) (R-391). 8 World Health Organization (WHO), Report on the global tobacco epidemic, 2008: The MPOWER package (2008) (hereinafter “WHO 2008 Tobacco Report”), p. 6 (R-28). 9 Ibid., p. 14. 10 Uruguayan Office of the President, “Study of the Ministry of Public Health: Smoking Habit Still Causes Around 6,500 Deaths Per Year in Uruguay” (14 Aug. 2014), available at http://www.presidencia.gub.uy/comunicacion/comunicacionnoticias/estudio-msp-enfermedades-atribuibles-tabaco (last visited 11 Sept. 2014) (R-315). 11 WHO 2008 Tobacco Report, p. 14 (R-28). 12 Ibid., p. 9. 13 Abal Hermanos S.A., Recommendations for a comprehensive regulation of tobacco products (9 July 2004), p. 1 (R-166).
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can achieve important public health objectives. ... Regulation can also help reduce the prevalence of tobacco use, an appropriate public health objective with which Abal [Hermanos] agrees.”14
2.3 Yet ironically, Uruguay enacted the very measures that Claimants now challenge as part of its “broad regulation” of tobacco and its “effective application” to “help reduce the prevalence of tobacco use.” At issue is more than just a general right to regulate, however.15 This case implicates a special category of State power and sovereign duty: the police power.16 Under well- established principles of international law, the police powers doctrine entitles Uruguay to adopt bona fide public health measures without incurring international responsibility.17 Such measures enjoy a wide margin of appreciation,18 and must be assessed in light of Uruguay’s international obligations to protect the lives and health of its people.19
2.4 Uruguay made each of these points in its Counter-Memorial. Claimants’ Reply offers three counter-arguments: (1) the police powers doctrine does not apply to these health regulations;20 (2) Uruguay’s vital regulatory decisions enjoy no “margin of appreciation” in
14 Ibid. 15 Claimants mischaracterize Uruguay’s position, stating that “Respondent claims an exception for all generally applicable regulatory measures.” Reply, ¶ 202. Claimants also attribute to Uruguay absurdly overbroad arguments that it plainly has not made, namely that Uruguay allegedly proposes that “any exercise of the State’s authority, including any exercise of its regulatory authority” should be exempt from international responsibility. Ibid., ¶ 195 (emphasis added). 16 Counter-Memorial, ¶¶ 2.8-2.18. 17 Ibid., ¶¶ 2.5-2.18. 18 Ibid., ¶¶ 2.37-2.53. 19 Ibid., ¶¶ 2.19-2.35. 20 Reply, ¶¶ 195-200, 207-210.
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investment arbitration;21 and (3) Uruguay’s BIT obligations somehow supersede its broader international obligations to protect public health.22
2.5 All three arguments fail for the reasons more fully presented below. In short: (1) Uruguay may undeniably exercise its police powers to prevent the harms implicated here; (2) trade and investment law jurisprudence recognizes that when Uruguay so regulates, its actions are entitled to a margin of appreciation; and (3) Uruguay’s BIT obligations cannot be read in isolation—
Uruguay’s other international obligations form the broader context for assessing its compliance with the BIT.
I. Uruguay Incurs No International Responsibility When It Exercises Its Sovereign Police Powers To Protect Public Health
2.6 Uruguay’s Counter-Memorial showed that a State is not responsible under international law for economic injury resulting from bona fide non-discriminatory measures adopted within the police powers of the State.23 Protecting public health is perhaps the quintessential manifestation of the police power.24
2.7 Claimants do not dispute that international law provides an exception for a State’s exercise of its police power.25 They make three unpersuasive claims instead. First, they argue that the BIT “does not contain any carve-out or special rule” for measures related to the protection of public health.26 Second, they mischaracterize Uruguay’s position as advocating “an
21 Ibid., ¶¶ 172-177. 22 Ibid., ¶¶ 166-167. 23 See Counter-Memorial, ¶¶ 2.10-2.18 with the supporting legal authorities. 24 Ibid., ¶¶ 2.9-2.10, 2.14-2.17. 25 Reply, ¶ 196. 26 Ibid., ¶ 165. See also ibid., ¶ 195. - 11 - CONTAINS CONFIDENTIAL INFORMATION
exceedingly broad scope of police powers that would encompass any exercise of the State’s authority, including any exercise of its regulatory authority.”27 Third, taking literalism to its extreme, they argue that the only “governmental action contemplated by the police powers doctrine is action by law enforcement, not adoption of regulatory measures.”28 In other words, the police powers doctrine applies only to exercises of power by the police! All three contentions are easily refuted.
2.8 Claimants prove nothing when they argue that the BIT does not contain a “carve-out” for public health measures, for the simple reason that no carve-out is necessary. The police powers doctrine applies with full force here by virtue of its status as a governing rule of customary international law.29
27 Ibid., ¶ 195. 28 Ibid., ¶ 198 (emphasis added). See also ibid., ¶ 199 (Claimants conclude “police powers encompass the State’s powers to enforce the law.”). 29 Saluka Investments BV (The Netherlands) v. Czech Republic, UNCITRAL, Partial Award (17 Mar. 2006) (Watts, Fortier, Behrens) (hereinafter “Saluka v. Czech Republic”), ¶ 255 (CLA-227). See also ibid., ¶ 262 (“In the opinion of the Tribunal, the principle that a State does not commit an expropriation and is thus not liable to pay compensation to a dispossessed alien investor when it adopts general regulations that are ‘commonly accepted as within the police power of States’ forms part of customary international law today.”); Spyridon Roussalis v. Romania, ICSID Case No. ARB/06/1, Award (7 Dec. 2011) (Hanotiau, Giardina, Reisman) (hereinafter “Spyridon Roussalis v. Romania”), ¶ 663 (RL-193); Técnicas Medioambientales Tecmed, S.A. v. United Mexican States, ICSID Case No. ARB(AF)/00/2, Award (29 May 2003) (Grigera Naón, Fernandez Rozas, Bernal Verea) (hereinafter “Tecmed v. Mexico”), ¶ 119 (CLA-203) (the tribunal recognized as “undisputable” that “the State’s exercise of its sovereign powers within the framework of its police power may cause economic damage to those subject to its powers as administrator without entitling them to any compensation whatsoever ….”); Methanex Corporation v. United States, UNCITRAL, Final Award (3 Aug. 2005) (Veeder, Rowley, Reisman) (hereinafter “Methanex v. United States”), Part IV, Ch. D, ¶ 7 (RL-164) (“as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.”) (emphasis added); Sedco, Inc., et al. v. National Iranian Oil Co., et al., Award No. ITL 55-129-3 (28 Oct. 1985), reprinted in 9 IRAN-U.S. CL. TRIB. REP. 248 (1985), p. 275 (RL- 149) (“It is also an accepted principle of international law that a State is not liable for economic injury which is a consequence of bona fide “regulation” within the accepted police power of states.”) (emphasis added).
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2.9 Article 31(3)(c) of the Vienna Convention on the Law of Treaties requires that the BIT be interpreted in light of “[a]ny relevant rules of international law applicable in the relations between the parties.”30 This includes, of course, rules of customary international law. The
International Court of Justice specifically held in Nicaragua v. United States that customary international law does not require incorporation into a treaty. To the contrary, there is no need for a specific carve-out for exceptions arising from customary international law because customary international law “continues to exist and to apply, separately from international treaty law.”31 As the Invesmart tribunal held, “the absence of an express regulatory power exception” in a BIT is irrelevant, because “Article 5 [on expropriation] imports into the Treaty the customary international law notion that a deprivation can be justified if it results from the exercise of regulatory actions aimed at the maintenance of public order.”32
2.10 Claimants’ second contention—that Uruguay is advocating for a doctrine of police powers with “an exceedingly broad” scope—is equally mistaken. Uruguay made clear in its
Counter-Memorial that the police powers do not include “any exercise,” however abusive, of a
State’s regulatory authority. But the police powers do involve more than the “general right to
30 Vienna Convention on the Law of Treaties (with annex) (23 May 1969), 1155 U.N.T.S. 331, Art. 31(3)(c) (RL- 19). 31 Military and Paramilitary Activities in and against Nicaragua (Nicaragua v. United States of America), Judgment on the Merits (26 June 1986), I.C.J. Reports 1986, p. 14, ¶ 179 (RL-67). 32 Invesmart, B.V. v. Czech Republic, UNCITRAL, Award (26 June 2009) (Pryles, Thomas, Bernardini) (hereinafter “Invesmart v. Czech Republic”), ¶ 498 (RL-297). See also Saluka v. Czech Republic, ¶ 254 (CLA-227) (“The Tribunal acknowledges that Article 5 of the Treaty in the present case is drafted very broadly and does not contain any exception for the exercise of regulatory power. However, in using the concept of deprivation, Article 5 imports into the Treaty the customary international law notion that a deprivation can be justified if it results from the exercise of regulatory actions aimed at the maintenance of public order. In interpreting a treaty, account has to be taken of ‘any relevant rules of international law applicable in the relations between the parties’—a requirement which the International Court of Justice (‘ICJ’) has held includes relevant rules of general customary international law.”).
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regulate for public purposes.”33 Rather, the term refers to the plenary power of a State to make laws necessary to protect the public order, security, health and justice.34 Other categories of State action, even when taken for a public purpose, are not covered. There is thus no genuine concern that the Tribunal is being asked to create a new exception of unduly broad application.
2.11 With respect to Claimants’ assertion that police powers only covers law enforcement actions, this too is plainly wrong. One need look no further than Black’s Law Dictionary, which defines “police power” as “the inherent and plenary power of a sovereign to make all laws necessary and proper to preserve the public security, order, health, morality and justice.”35
2.12 Unsurprisingly, the jurisprudence makes equally clear that the police power extends to more than just law enforcement measures. In Chemtura v. Canada, for example, a U.S. manufacturer claimed that Canada breached the North American Free Trade Agreement
(“NAFTA”) by adopting a regulation that banned sales of the chemical lindane, an agricultural pesticide widely recognized as harmful to human health and the environment. The tribunal rejected the claim on several grounds, including that Canada’s actions constituted a valid exercise of its police powers “motivated by the increasing awareness of the dangers presented by lindane for human health and the environment.”36
2.13 To be clear, Uruguay does not claim that a State’s police power is absolute. The police power doctrine cannot, for example, insulate governmental action that is discriminatory or taken
33 Counter-Memorial, ¶ 2.8. 34 Ibid. 35 Black’s Law Dictionary (7th ed. 1999), p. 1178: “police power” (RL-230) (emphasis added). 36 Chemtura Corporation v. Government of Canada, UNCITRAL, Award (2 Aug. 2010) (Kaufmann-Kohler, Brower, Crawford) (hereinafter “Chemtura v. Canada”), ¶ 266 (RL-53). See also Methanex v. United States, Part IV, Ch.D, ¶ 7 (RL-164).
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in bad faith, whatever the purpose.37 No such issues arise in the current case, however. As
Uruguay demonstrates in the next two chapters of this Rejoinder, its adoption of the SPR and the
80% Requirement were clearly bona fide, non-discriminatory exercises of its sovereign police powers.38
II. Uruguay’s Decisions About How To Protect Public Health Enjoy a Margin of Appreciation
2.14 Uruguay demonstrated in its Counter-Memorial that international courts and tribunals accord States a margin of appreciation, or degree of discretion, when it comes to determining their own public policy. This is particularly true in matters involving public health. States’ decisions in this respect may not be second-guessed unless they are manifestly arbitrary or made in bad faith.39
2.15 Before refuting such counter-arguments as Claimants offer in their Reply, Uruguay notes that it does not need the Tribunal to accord it a margin of appreciation. As Uruguay showed in its
Counter-Memorial, and shows again in Chapters 3 and 4 of this Rejoinder, the measures
Claimants challenge in this case are so obviously reasonable that the Tribunal should have no difficulty rejecting Claimants’ claims out of hand.
2.16 Nevertheless, as a matter of principle and precedent, Uruguay submits that the Tribunal should conduct its review mindful of the fact that it may not substitute its own views for that of
37 See, e.g., T. Weiler, Philip Morris vs. Uruguay: An Analysis of Tobacco Control Measures in the Context of International Investment Law (28 July 2010), p. 22 (R-228) (observing that “the FET standard was never meant to prevent the good faith and non-discriminatory exercise of regulatory (aka ‘police’) powers by the Host State unless the adoption, implementation or effects of a measure are manifestly arbitrary, grossly inequitable or patently unfair.”). 38 See infra Chapters 3 & 4. 39 Counter-Memorial, ¶¶ 2.40-2.49.
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Uruguay’s public health experts and policymakers. This is true in any case involving a State’s public policy decisions. It is especially true, here, in a case where the policies in debate relate to public health, and the underlying issues involve an addictive product which is universally recognized—including by Claimants themselves—as being extremely harmful to health. There is substantial authority for this approach, as shown in the Counter Memorial and reiterated below.
2.17 Claimants mistakenly argue that the concept of a “margin of appreciation” does not apply in the investment arbitration context.40 Unlike the First Protocol to the European Convention on
Human Rights (“ECHR”), they say, the BIT does not explicitly adopt this concept.41 Claimants are wrong.
2.18 Neither the ECHR nor its Protocols expressly endorse the application of a margin of appreciation. Rather, the margin of appreciation is a judge-made standard of review that the
European Court of Human Rights (like other courts and tribunals) has developed to balance public and private interests based on the commonsense logic that national authorities—by virtue of their direct knowledge of the subject matter, their society and its needs—are better placed than international judges to appreciate what serves their own particular countries’ public interest.42 A
40 Reply, ¶ 172. 41 Ibid., ¶¶ 174, 175. 42 See Counter-Memorial, ¶¶ 2.41, 2.43, 2.47. Importantly, in the context of assessing state measures regarding interference with private property, the ECtHR tends to afford states a “wide” (more deferential) margin. See, e.g. Broniowski v. Poland, Eur. Ct. H.R., Application No. 31443/96, Judgment (22 June 2004), ¶ 149 (RL-160) (the ECtHR held that since “the margin of appreciation available to the legislature in implementing social and economic policies should be a wide one, [the Court] will respect the legislature’s judgment as to what is ‘in the public interest’ unless that judgment is manifestly without reasonable foundation.”).
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“margin of appreciation” thus inheres in the international adjudicatory function; no express permission is necessary to invoke it.43
2.19 Relying on two isolated investment arbitration awards, Claimants sweepingly assert that tribunals “consistently have refused to apply a ‘margin of appreciation’” beyond the context of the ECHR.44 Claimants’ broad assertion is, however, belied by the jurisprudence.45
2.20 Investment arbitration tribunals not only have applied a margin of appreciation, in some cases they have actually done so sua sponte.46 In Frontier Petroleum v. Czech Republic, for example, the tribunal decided for itself to employ the concept to determine whether the respondent State had breached its obligation to accord fair and equitable treatment by refusing to recognize and enforce a foreign arbitral award on the grounds that it would have been contrary to
Czech public policy to do so.
43 See, e.g., Electrabel S.A. v. Republic of Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability (30 Nov. 2012) (Veeder, Kaufmann-Kohler, Stern), ¶ 8.35 (RL-200) (stating that a State “enjoy[s] a reasonable margin of appreciation in taking [regulatory] measures before being held to account under the [Energy Charter Treaty],” even though the ECT, like BITs, does not expressly refer to a margin of appreciation.) 44 Reply, ¶¶ 174-175 (citing Siemens A.G. v. Argentine Republic, ICSID Case No. ARB/02/8, Award (6 Feb. 2007) (Rigo Sureda, Brower, Bello Janeiro) (hereinafter “Siemens v. Argentina”), ¶ 354 (CLA-144) and Quasar de Valores SICA V S.A., et al. v. Russian Federation, SCC Case No. 24/2007, Award (20 July 2012) (Brower, Landau, Paulsson), ¶ 22 (RLA-198)) (emphasis added). 45 See, e.g., United States-United Kingdom Arbitration concerning Heathrow Airport User Charges (United States- United Kingdom), Award on the First Question (30 Nov. 1992, rev. 18 June 1993), reprinted in 24 U.N.R.I.A.A. 1 (2006), Ch 5, ¶ 2.2.6 (RL-285) (holding that the United Kingdom was entitled to a margin of appreciation in setting airport charges disputed by the United States.); Conditions of Admission of a State to Membership in the United Nations (Article 4 of the Charter), Advisory Opinion (28 May 1948), I.C.J. Reports 1948, p. 5 (RL-281) (holding that “Article 4 does not forbid the taking into account of any factor which it is possible reasonably and in good faith to connect with the conditions laid down in that article.”); Case concerning rights of nationals of the United States of America in Morocco (France v. United States of America), Judgment (27 Aug. 1952), I.C.J. Reports 1952, p. 212 (RL-108) (holding that “[t]he power of making the valuation rests with the Customs authorities, but it is a power which must be exercised reasonably and in good faith.”). 46 See, e.g., Frontier Petroleum Services Ltd. v. Czech Republic, UNCITRAL, Final Award (12 Nov. 2010) (Williams, Alvarez, Schreuer), ¶¶ 527, 483-500 (CLA-105); Electrabel S.A. v. Republic of Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability (30 Nov. 2012), ¶¶ 6.92, 8.35 (Veeder, Kaufmann-Kohler, Stern) (RL-200). - 17 - CONTAINS CONFIDENTIAL INFORMATION
2.21 The tribunal held that it was “not necessary for [it] to determine whether the findings of the Czech courts meet the applicable standard of international public policy, or to determine the precise contents of that standard” because “States enjoy a certain margin of appreciation in determining what their own conception of international public policy is.”47 On that basis, the tribunal determined that “it is sufficient to examine whether the conclusion reached by the Czech courts ... was ... reasonably tenable and made in good faith.”48 The tribunal found no reason to doubt the Czech court’s good faith, and was satisfied with the reasonableness of its interpretation of public policy.
2.22 Uruguay cited the Frontier Petroleum case in its Counter-Memorial.49 Claimants conspicuously make no effort to address it. Instead, they repeat their sweeping—but demonstrably false—assertion about investment tribunals “consistently” refusing to apply a margin of appreciation.
2.23 Saluka v. Czech Republic presents another helpful example. There, the claimant complained that the respondent had expropriated its investment in a Czech bank by placing the ailing institution under State administration. The tribunal held that the Czech State “had the responsibility to take a decision,” and that it “enjoyed a margin of discretion in the exercise of that responsibility.”50 Given that margin, the tribunal reviewed only for “clear and compelling evidence that the [Czech banking regulator] erred or acted otherwise improperly in reaching its
47 Frontier Petroleum Services Ltd. v. The Czech Republic, UNCITRAL, Final Award (12 Nov. 2010) (Williams, Alvarez, Schreuer), ¶ 527 (CLA-105). 48 Ibid. (emphasis added). 49 Counter-Memorial, ¶ 2.48. 50 Saluka v. Czech Republic, ¶ 272 (CLA-227) (emphasis added).
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decision” to put the bank under forced administration.51 In the absence of any such evidence, the tribunal found no reason not to accept the justification given by the Czech authorities.52
2.24 Likewise, in Electrabel v. Hungary, the tribunal adopted the same interpretive approach in determining whether claimant’s legitimate expectations were breached by the respondent’s imposition of regulatory pricing on electricity companies. In assessing the regulatory measures at issue, the tribunal stressed that its task was “not to sit retrospectively in judgment upon
Hungary’s discretionary exercise of a sovereign power, not made irrationally and not exercised in bad faith” because that “difficult discretionary exercise involve[d] many complex factors” best assessed by the respondent State.53 Accordingly, it held: “Regulatory pricing (by operation of law) was and remains an important measure available to State regulators,”54 and that the State should “enjoy a reasonable margin of appreciation in taking such measures before being held to account under the [Energy Charter Treaty]’s standards of protection.”55
2.25 Claimants respond that the Electrabel case:
means only that, where a State has a choice among several alternatives, a tribunal should not second-guess the State’s discretion to choose any given legitimate alternative. The Electrabel tribunal did not say that it should defer, nor did it defer, to the State’s own judgment as to whether the chosen action satisfied the standard of treatment under the applicable treaty.56
51 Ibid., ¶ 273 (emphasis added). 52 Ibid. 53 Electrabel S.A. v. Republic of Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability (30 Nov. 2012) (Veeder, Kaufmann-Kohler, Stern), ¶ 8.35 (RL-200). 54 Ibid. 55 Ibid. (emphasis added). 56 Reply, ¶ 176 (emphasis in original).
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2.26 Uruguay agrees. That is exactly the point. A tribunal “should not second-guess the State’s discretion to choose any legitimate alternative,” including a State’s decision to determine and achieve its legitimate policy goals in critical areas such as public health. As the tribunal in
Invesmart v. Czech Republic stated (citing, inter alia, Waste Management II): “[I]nternational law extends a high level of deference to the right of domestic authorities to regulate matters within their own borders,” and “[e]ven though [a BIT] obviously leaves room for judgment and appreciation by the Tribunal, it does not set out totally subjective standards which would allow the Tribunal to substitute ... its judgment on the choice of solutions for the [State].”57
2.27 That does not mean, and Uruguay does not argue, that the State’s discretion is entirely unfettered. It does mean, however, that a State’s exercise of its discretion should only be subject to challenge when there is compelling evidence that it has been exercised in a manner that is manifestly arbitrary or made in bad faith. Such an approach is consistent both with the jurisprudence and the sound administration of justice.
2.28 In this case, Claimants do not dispute that Uruguay exercised its police powers with the intention of protecting public health. As shown in the next two Chapters of this Rejoinder,
Uruguay acted with the considered, good faith conviction that the SPR and 80% Requirement would help protect the health of its people against the harms caused by the consumption of
57 Invesmart v. Czech Republic, ¶ 501 (RL-297). In Lemire v. Ukraine, the tribunal similarly emphasized “the high measure of deference that international law generally extends to the right of domestic authorities to regulate matters within their own borders.” Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Decision on Jurisdiction and Liability (14 Jan. 2010) (Paulsson, Voss, Fernández-Armesto), ¶ 505 (RLA-114) (citing to S.D. Myers, Inc. v. Government of Canada, UNCITRAL, Partial Award (13 Nov. 2000) (Hunter, Schwartz, Chiasson), ¶ 263 (RL-155) (emphasis in original)). Claimants contend this award is not applicable here, because it dealt with the protection of cultural and linguistic rights, whereas the SPR and the 80% Requirement deal with the protection of public health. Reply, ¶ 177. But this factual distinction has no merit. If a State enjoys a margin of appreciation in protecting its culture and language, a fortiori Uruguay’s decisions on how best to protect its public from the adverse health impacts of tobacco consumption are entitled to no less deference.
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tobacco products. Even under Claimants’ analysis, the sole question is whether Uruguay chose legitimate regulatory alternatives in so doing. Uruguay’s sovereign decisions regarding both measures should not be second-guessed merely because there were other possible measures which Claimants might have preferred.
2.29 Both the SPR and the 80% Requirement have been expressly endorsed on a global scale by the World Health Organization, the Secretariat of the Framework Convention on Tobacco
Control and the Pan American Health Organization as sound and effective exercises in public health policymaking.
2.30 In their joint Written Submission to the Tribunal supporting the two measures at issue in this case, the WHO and FCTC Secretariat wrote:
The action taken by Uruguay [the 80% Requirement] was taken in light of a substantial body of evidence that large graphic health warnings are an effective means of informing consumers of the risks associated with tobacco consumption and of discouraging tobacco consumption. There is also a substantial body of evidence that prohibiting brand variants is an effective means of preventing misleading branding of tobacco products. These bodies of evidence, which are consistent with State practice, support the conclusion that the Uruguayan measures in question are an effective means of protecting public health.58
2.31 PAHO, for its part, stated:
PAHO and its Member States publicly recognize and fully support Uruguay’s efforts to protect its citizens from the harmful effects of tobacco consumption, including through its implementation of the 80% Rule and the Single Presentation Rule measures and have expressed their deep concern “about misinformation campaigns and legal actions instituted by the tobacco industry against tobacco control.”
58 WHO & WHO FCTC Secretariat Submission, ¶ 90.
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PAHO supports Uruguay’s defense of the 80% Rule and the SPR, which are aimed at savings lives, and recognizes it as a role model for the Region and the world.
Uruguay’s tobacco control measures are a reasonable and responsible response to the deceptive advertising, marketing and promotion strategies employed by the tobacco industry, they are evidence based, and they have proven effective in reducing tobacco consumption. For this simple reason, the tobacco industry is compelled to challenge them.59
2.32 Uruguay was plainly entitled to choose a domestic regulatory alternative endorsed by the world’s leading public health authorities as a “legitimate alternative” to protect public health.
There can be no genuine debate that the measures Claimants challenge in this case were anything other than rational, non-discriminatory and good faith measures intended to protect the public health.
III. Uruguay Not Only Has a Right, But Also a Duty, To Regulate Public Health
2.33 Claimants state that the “Switzerland-Uruguay BIT comprises binding international law obligations of Uruguay.”60 Uruguay, of course, agrees. That said, the BIT does not constitute the sum total of Uruguay’s “binding international law obligations.” Rather, as it made clear in the
Counter-Memorial, Uruguay has other binding international law obligations that are also relevant, including the compelling obligation to protect the lives and health of its people.
2.34 Claimants respond that Uruguay cannot avoid its BIT obligations by invoking its other international obligations.61 That, however, has never been Uruguay’s position.62 Uruguay’s position is simply that these other obligations form a critical part of the broader context within
59 PAHO Submission, ¶¶ 98-100. 60 Reply, ¶ 166. 61 Ibid., ¶¶ 166-167. 62 See Counter-Memorial, ¶¶ 2.19-2.35.
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which the bona fide character of Uruguay’s actions must be evaluated.63 In analogous circumstances, the Chemtura tribunal took notice of Canada’s international treaty obligations to ban lindane for purposes of protecting public health,64 holding that the “broader factual context is relevant in assessing” the reasonableness of Canada’s exercise of its police powers.65
2.35 In a case involving tobacco, the single leading cause of preventable death in the world,
Claimants’ claims under the BIT must be assessed in light of Uruguay’s international law obligations to protect the rights of its people to life and health from the dangers of tobacco use.66
2.36 The obligation is not a passive or meaningless one. According to the United Nations
Economic and Social Council (“ECOSOC”), it requires, among other things, the adoption of
“legislative, administrative, budgetary, judicial, promotional and other measures” that “prevent third parties from interfering with ... the right to health.”67 In this regard, ECOSOC has explained that “violations of the obligation to protect” may arise from “the failure of a State to
63 See ibid., ¶¶ 2.35, 2.25-2.34. Uruguay also made clear in its Counter-Memorial that its Constitution and national laws do not trump its international obligations, including those arising from bilateral investment treaties. Ibid., ¶ 2.24. But they do confirm that Uruguay exercised its police powers to fulfill its legal duty to protect public health. Those legal duties both explain why Uruguay enacted the challenged regulatory measures and underscore Uruguay’s good faith in doing so. 64 Chemtura v. Canada, ¶¶ 135, 137 (RL-53) (“The Tribunal cannot ignore the fact that lindane has raised increasingly serious concerns both in other countries and at the international level since the 1970s. The Respondent has amply established the existence of such concerns, by referring inter alia to the following examples [a list of international conventions]. … This broader factual context is relevant in assessing the first point raised by the Claimant, namely whether the PMRA undertook the Special Review as a result of a trade irritant and not as a part of its mandate as a regulatory agency or as part of an international commitment undertaken by Canada under the Aarhus Protocol to the LRTAP Convention. Although the Claimant has avoided formulating this allegation in such terms, the underlying idea is that the PMRA acted in bad faith and launched a review process for reasons unrelated to its mandate and to the international obligations of Canada. The burden of proving these facts rests on the Claimant, in accordance with well established principles on the allocation of the burden of proof, and the standard of proof for allegations of bad faith or disingenuous behaviour is a demanding one.”) (emphasis added). 65 Ibid., ¶ 137. 66 See U.N. Committee on Economic, Social and Cultural Rights (CESCR), The right to the highest attainable standard of health: General Comment No. 14, U.N. Doc. E.C.12/200/4 (11 Aug. 2000), ¶ 33 (RL-129) (explaining that “the right to health, like all human rights, imposes … the obligations to respect, protect and fulfill.”). 67 Ibid. (emphasis added).
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take all necessary measures to safeguard persons within their jurisdiction from infringements of the right to health by third parties.”68 This category of omission specifically includes “the failure to discourage production, marketing and consumption of tobacco.”69
2.37 The preamble to the FCTC, to which 180 nations are Party70specifically states that the
States Parties thereto are “[d]etermined to give priority to their right to protect public health.”71
The Convention then imposes a comprehensive set of obligations to implement and manage tobacco control measures, which encompass protection from exposure to tobacco smoke; regulation of the contents of tobacco products and tobacco product disclosures; preventing false or misleading packaging tobacco products; and restricting tobacco advertising, promotion and sponsorship.72
2.38 Failure to take appropriate measures is not an alternative; such a default would place
Uruguay in breach of its international obligations. In taking appropriate measures, Uruguay is not choosing between competing international obligations. To the contrary, it is fulfilling its domestic and international legal duties to protect public health, with all of its obligations being read consistently and together to form a coherent whole.
68 Ibid., ¶ 51. 69 Ibid. (emphasis added). 70 Although Claimants’ home state, Switzerland has not yet ratified the FCTC, it is obligated under Article 18 of the VCLT “to refrain from acts which would defeat the object and purpose” of the Convention, see Vienna Convention on the Law of Treaties (23 May 1969), 1155 U.N.T.S. 331, Art. 18 (RL-19), which are “to protect present and future generations from the devastating health, social, environmental and economic consequences of tobacco consumption and exposure to tobacco smoke by providing a framework for tobacco control measures to be implemented by the Parties at the national, regional and international levels in order to reduce continually and substantially the prevalence of tobacco use and exposure to tobacco smoke.” World Health Organization (“WHO”), Framework Convention on Tobacco Control (“FCTC”), opened for signature May 2003 through 29 June 2004, EIF 27 Feb. 2005 (hereinafter “WHO, FCTC”), Article 3 (RL-20). 71 Ibid., ¶ 1 of the preamble (emphasis added). 72 The normative content of these obligations is discussed in Chapter 3 of the Counter-Memorial.
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2.39 Uruguay’s other international legal obligations thus form a critical piece of the present dispute’s context that this Tribunal cannot ignore. Claimants might want the BIT obligations to be evaluated in isolation, without reference to the harmful nature of their product or the international consensus that has emerged in favor of controlling its marketing and use, but they cannot be. Regard must be had to the full legal context.
2.40 The mere possibility that BIT obligations might be interpreted acontextually and applied to undermine States’ sovereign right and duty to regulate matters of public health has already had perverse consequences: BITs have become a bludgeon the tobacco industry uses to prevent or delay tobacco control measures, as the Tribunal well knows.73
2.41 PAHO provides examples in its March 2015 Written Submission. PAHO states that it
“has become aware that the threat of litigation is having a chilling effect on the promulgation of tobacco control measures, including those like Uruguay’s, even though the measures are considered important for public health.”74 PAHO cites the example of Ecuador, which was
“actively considering” adopting an SPR, “but was dissuaded from doing so because of the pending litigation against Uruguay by the tobacco industry.”75
2.42 Another recently reported example is New Zealand, which was contemplating adopting a law requiring plain packaging. When the tobacco industry threatened it with investment claims
73 S. Tavernise, “Tobacco Firms’ Strategy Limits Poorer Nations’ Smoking Laws”, New York Times (13 Dec. 2013) (R-421); M. Levin, “Tobacco industry uses trade pacts to try to snuff out anti-smoking laws”, NBC News (29 Nov. 2012) (R-419). 74 PAHO Submission, ¶ 40. 75 Ibid., ¶ 85.
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like those it has brought against Australia, however, New Zealand announced it would await the outcome of those proceedings before moving forward.76
2.43 In fact, Claimants’ primary goal in this case seems to be to deter other countries from following Uruguay’s lead through the threat of arbitration. Why else would Philip Morris invest what is undoubtedly tens of millions of dollars pursuing a claim which, by its own calculations, is worth no more than (an overstated) US$ 22 million against a country of just 3.5 million people with a tiny tobacco market?
2.44 Claimants’ internal documents turned over during the course of document production prove the point. In Claimants own words, their “top priority is to reverse single presentation and
80% HW [health warning], if that costs $4.0 mio OCI [other comprehensive income] so be it. It is an example for the world.”77 Philip Morris’ aim, revealed in a memorandum laying out the motivation for this case, is
2.45 This approach is consistent with the industry’s long-standing practice. As PAHO explains in its Submission:
76 J. Surowiecki, “Trade-Agreement Troubles”, The New Yorker (22 June 2015), p. 2 (R-439); “NZ waits on Australia on tobacco packaging”, The Australian (11 Feb. 2014) (R-423); New Zealand Ministry of Health, Regulatory Impact Statement: Plain Packaging of Tobacco Products (28 Mar. 2012), p. 12 (R-416). 77 Email from Chris Dilley, Philip Morris International, to Malcolm Healey, Philip Morris International (25 Aug. 2009), Bates No. PMIUY-00029487 (R-354). 78
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Litigation is a tool often used by the tobacco industry to hinder legitimate public health regulations. Litigation imposes a significant financial burden on small countries such as Uruguay and acts as an impediment to implementation of effective tobacco control regulations. This strategy is particularly successful against low- and middle-income countries that attempt to legitimately regulate tobacco use as a means of protecting the health and wellbeing of their citizens.79
2.46 Such misuse of the investment arbitration system has broad systemic consequences. An increasing number of States—including both capital-importing and capital-exporting State alike—are publicly reconsidering their participation in trade and investment protection agreements in order to reclaim their diminishing regulatory space. In its recommendations to the
European Commission on negotiation of the Transatlantic Trade and Investment Partnership with the United States, for example, the European Parliament emphasized that “investment flows are not an end in themselves and well-being of ordinary citizens ... and consumers ... are the benchmarks” for an agreement.80 In approving the recommendations, the rapporteur “insist[ed] that the right of lawmakers ... to legislate must not be undermined by private arbitration courts,”81 given that “private interests cannot undermine public policy objectives.”82
*
79 PAHO Submission, ¶ 42. 80 European Parliament, Resolution of 8 July 2015 containing the European Parliament's recommendations to the European Commission on the negotiations for the Transatlantic Trade and Investment Partnership (TTIP) (2014/2228(INI)), No. P8_TA-PROV(2015)0252 (8 July 2015), ¶ L (R-440) 81 European Parliament, “TTIP: ease access to US market, protect EU standards, reform dispute settlement” (7 Aug. 2015), available at http://www.europarl.europa.eu/pdfs/news/expert/infopress/20150702IPR73645/20150702IPR73645_en.pdf (R-446). 82 European Parliament, Resolution of 8 July 2015 containing the European Parliament's recommendations to the European Commission on the negotiations for the Transatlantic Trade and Investment Partnership (TTIP) (2014/2228(INI)), No. P8_TA-PROV(2015)0252 (8 July 2015), ¶ 2(d)(xv) (R-440). Enhancing and protecting the right to regulate in response to the current arbitration system were also guiding objectives in the negotiations of the Comprehensive Trade and Economic Agreement between the EU and Canada. See European Commission, “Concept Paper: Investment in TTIP and beyond - the path for reform” (3 May 2015) (R-436).
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2.47 In sum, the police powers doctrine entitles sovereign States to adopt bona fide public health measures without incurring international responsibility, unless such measures are manifestly arbitrary, discriminatory, or made in bad faith. Measures arising from a valid exercise of police powers also enjoy a wide margin of appreciation, and must be assessed in light of
States’ international obligations to protect the lives and health of their people.
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CHAPTER 3.
THE SPR WAS A REASONABLE EXERCISE OF URUGUAY’S SOVEREIGN POLICE POWERS TO PROTECT PUBLIC HEALTH
3.1 In its Counter-Memorial, Uruguay demonstrated that it adopted the SPR to address a serious public health problem: the enduring misperception that some cigarettes are less harmful than others. This false belief, which Claimants actively cultivated over many years, dissuades smokers from quitting and reduces the barriers to other people starting. Uruguay also explained that it adopted the SPR based on the recommendation of an independent advisory board comprised of tobacco control experts, and informed by studies in the public health literature.
3.2 Claimants’ Reply nevertheless continues to argue that the SPR violates the BIT because, they claim, it is arbitrary and was not adopted pursuant to a deliberative process. It offers no less than eight separate arguments to support its claim.
3.3 Yet, Claimants do not deny any of the critical historical facts that led to Uruguay’s adoption of the SPR, which were detailed in Uruguay’s Counter-Memorial. They include:
Tobacco kills up to half its users when consumed as intended.83
Smoking causes a multitude of fatal and otherwise grave illnesses ranging from lung cancer to heart disease, and from emphysema to impotence, among many others.84
83 See Counter-Memorial, ¶ 1.7; WHO 2008 Tobacco Report, p. 14 (R-28). 84 See Counter-Memorial, ¶¶ 3.1, 3.19, 3.22-3.33; Philip Morris International, “Health Effects of Smoking,” available at http://www.pmi.com/eng/our_products/health_effects_of_smoking/pages/health_effects_of_smoking.aspx (last visited 17 Sept. 2014), p. 1 (R-346).
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The tobacco industry, including Claimants, understood the causal link between their product and these diseases long before their customers or public health authorities did.85
When the public started to become aware of the harmful health effects of smoking, the tobacco industry, including Claimants, denied those effects for many years, and deliberately created the false impression of scientific uncertainty in order to discourage smokers from quitting.86
When the link between smoking and premature death became undeniable, the tobacco industry, including Claimants, responded by introducing “health reassurance” brands. These brands were marketed to convey the false impression that they could be smoked with less health risk, thus giving smokers an alternative to quitting and encouraging health-conscious nonsmokers to start.87
The tobacco industry, including Claimants, offered many of these “health reassurance” cigarettes as variants of existing brands so as to capitalize on the market appeal of those brands.88 Thus, Claimants introduced “Marlboro Lights,” in a gold
85 See Counter-Memorial, ¶¶ 3.5, 3.48-3.63. See also, e.g., U.S. Surgeon General, The Health Consequences of Smoking: 50 Years of Progress (2014), p. 7 (R-285). 86 See Counter-Memorial, ¶¶ 3.47-3.77; Dr. Jonathan M. Samet, The Adverse Health Effects of Smoking and the Tobacco Industry’s Efforts to Limit Tobacco Control (10 Oct. 2014), pp. 26-28 (REX-001); Philip Morris Internal Document, Memorandum from H. Wakeham to J.F. Cullman III (8 Dec. 1970), Bates No. 1005082153, p. 1 (JS- 101). 87 See Counter-Memorial, ¶¶ 4.9-4.59. See also, e.g., Philip Morris Internal Document, Operations Department Presentation to Philip Morris Board of Directors: Research and Development (28 Oct. 1964), Bates No. 3003572197-3003572202, p. 3003572197 (R-91); Philip Morris Internal Document, M. Johnston, Market Potential of a Health Cigarette (June 1966), Bates No. 1000338644-1000338671, pp. 1000338648-51 (R-92); Philip Morris Internal Document, 1987-1992 R&D Strategic Plan (20 Nov. 1987), Bates No. 2021337620-2021337807, p. 2021337642 (R-120); Philip Morris Internal Document, Review of Low Tar Category (22 May 1979), Bates No. 3990445629-3990445651, p. 3990445649 (R-109); Philip Morris Internal Document, Goldstein Krall Market Resources, A Qualitative Exploration of Smoker Potential for a New Entry in the Ultra Low Tar Market Category (Two Focused Group Interviews) (Jan. 1979), Bates No. 2040066740-2040066766, pp. 2040066752-54 (R-106). 88 See Counter-Memorial, ¶¶ 4.3, 4.16, 4.25-4.33. See also, e.g., Philip Morris Internal Document, M. Johnston, Market Potential of a Health Cigarette (June 1966), Bates No. 1000338644-1000338671, pp. 1000338648-51 (R- 92); Philip Morris Internal Document, 1987-1992 R&D Strategic Plan (20 Nov. 1987), Bates No. 2021337620- 2021337807, p. 2021337642 (R-120).
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pack, as a “health reassurance” alternative to the original Marlboro distinctively packaged in red.89
“Health reassurance” variants like Claimants’ included misleading descriptors such as “light,” “low,” “mild” and others to distinguish them from the original variants. They were typically sold in packaging along a spectrum of colors, with lighter coloring and other signifiers used to suggest progressively lesser health effects.90
“Health reassurance” variants offer no health benefits vis-à-vis their parent brands. The tobacco industry, including Claimants, knew this long before anyone else but publicly denied it for many years, even in the face of their own scientific evidence showing that all cigarettes are equally harmful.91
Despite the evidence, Claimants marketed their “health reassurance” variants in Uruguay, as elsewhere, as a responsible alternative to quitting.92 Indeed, Claimants identified health conscious consumers in Uruguay as offering “better development opportunities.”93
As a result of these marketing efforts, a significant percentages of consumers came to believe—and still believe—that by smoking what they have been led to identify as a “health reassurance” variant they are less likely to suffer harmful effects.94 This false perception is widely shared in Uruguay, as elsewhere.95
89 See Counter-Memorial, ¶ 4.26. 90 See ibid., ¶¶ 3.6, 4.5, 4.25-4.33, 4.71-4.76. 91 See ibid., ¶¶ 4.35-4.47. See also, e.g., Philip Morris Internal Document, Some Unexpected Observations on Tar and Nicotine and Smoker Behavior (1 Mar. 1974), Bates No. 0000260363-0000260380, p. 0000260379 (Chart 16) (R-1); Philip Morris Internal Document, Smoke intake patterns among filter smokers (1970), Bates No. 1003287490- 1003287557, p. 1003287494 (R-93); Philip Morris Internal Document, Depth Research Laboratories, Inc., Reactions to a Proposed New 88MM Benson & Hedges Among Current Benson & Hedges Smokers in Dallas (28 Aug. 1978), Bates No. 1004888470-1004888484, pp. 1004888480-1004888481 (R-105). 92 See Counter-Memorial, ¶¶ 3.54-3.55, 4.15-4.24, 4.30-4.32, 4.42, 4.49-4.59. 93 Philip Morris Internal Document, Summary of Main Findings (Dec. 1989), Bates No. 2040125501-2040125527, p. 2040125516 (R-123). 94 Counter-Memorial, ¶¶ 4.49-4.50. See also, e.g., WHO Scientific Advisory Committee on Tobacco Product Regulation (SACTob), Conclusions on Health Claims Derived from ISO/FTC Method to Measures Cigarette Yield - 31 - CONTAINS CONFIDENTIAL INFORMATION
The false message generated by Claimants and other tobacco companies thus continues to cause health-conscious smokers to keep smoking based on the marketing-induced misperception that smoking a “health reassurance” variant is a responsible intermediate step, or even an alternative, to quitting.96
When public health authorities around the world discovered that “health reassurance” variants are just as harmful as other cigarettes, and that the contrary representations of the tobacco industry were false, the international community responded in unison. The FCTC specifically called on States to prohibit the use of misleading descriptors like “light” and “low tar.” It also called on States to prohibit the use of “any term, descriptor, trademark, figurative or any other sign that directly or indirectly creates the false impression that a particular tobacco product is less harmful than other tobacco products.”97
After Uruguay banned misleading descriptors in 2005, the tobacco industry, including Claimants, continued to market the same “health reassurance” variants in nearly identical packages as before, minus only the banned descriptor.98
Uruguayan consumers had no difficulty identifying the “health reassurance” variants despite the descriptor ban. Those who continued to ask for Marlboro “Lights” after
(2002), p. 2 (R-13) (“many smokers currently believe that lower yield or light cigarettes deliver less tar, produce lower rates of disease and are therefore ‘safer’….”). 95 See Counter-Memorial, ¶ 4.94. See also, e.g., International Tobacco Control (ITC) Policy Evaluation Project, ITC Uruguay National Report: Findings from the Wave 1 to 3 Surveys (2006-2011) (Aug. 2012), pp. 41-42 (C-133). 96 See Counter-Memorial, ¶¶ 3.54, 4.10-4.24, 4.96. See also, e.g., Euromonitor International, Tobacco - Uruguay: Cigarettes (23 Sept. 2008), pp. 1, 5 (R-200) (noting that “[l]ow tar and ultra low tar cigarettes ... had important volume growth as, in lieu of quitting, many smokers shifted to these products, which are perceived as less harmful” and that “smokers who are not willing to quit are expected to shift to” those products.). 97 WHO, FCTC, Art. 11.1(a) (RL-20). 98 Counter-Memorial, ¶¶ 4.77-4.87. See also, e.g.,
J. Peace, et al., “Colouring of cigarette packs in New Zealand, does it mislead consumers?”, University of Otago Health Promotion and Policy Research Unit Papers (12 Nov. 2007) (R-382).
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the descriptor ban would be given Marlboro “Gold,” which were sold in the same gold packs as “Lights.”99
Like others around the world, a significant percentage of Uruguayan consumers continued to erroneously believe—and still even now believe—that these cigarettes are less harmful than others.100
3.4 Claimants do not dispute any of these facts. Nor could they seriously do so. As reflected in the footnotes to the points listed above, the facts are amply demonstrated by Claimants’ own documents, among other sources.
3.5 Rather than deny the undeniable, Claimants choose a different tack: they call all of it
“irrelevant.” They state:
In its Counter-Memorial, Respondent spends hundreds of pages recounting the adverse health effects of smoking, which no one denies, and various historical marketing practices of ‘the tobacco industry,’ which are irrelevant.101
3.6 History cannot so easily be ignored, however. Context is critical. All regulations are adopted against a historical and scientific backdrop. A measure’s reasonableness cannot be fully appreciated without regard to that context. This is particularly true in the case of the SPR. When the particular history of tobacco marketing is accepted, as it must be, there can be no doubt that
Uruguay adopted the SPR as an appropriate and balanced response—fully within its police powers—to a lingering threat to public health that Claimants themselves helped create.
99 See Counter-Memorial, ¶¶ 4.78-4.80, 4.94-4.96. See also ibid., ¶¶ 4.88-4.93, 4.1; Gabriel Sierra del Cioppo, Notarial Records (19 Jan. 2009) (R-206). 100 See Counter-Memorial, ¶ 4.94. See also International Tobacco Control (ITC) Policy Evaluation Project, ITC Uruguay National Report: Findings from the Wave 1 to 4 Surveys (2006-2012) (Aug. 2014), pp. 73-74 (R-313). 101 Reply, ¶ 30.
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3.7 Rather than confront this critical context, Claimants choose to argue by epithet. They call the SPR “inexplicable,”102 “unsupported,”103 “baseless”104 and “absurd[].”105 They also falsely accuse Uruguay of “invent[ing]” a whole new “rationale for the SPR in its Counter-Memorial on the Merits.”106 Claimants’ hyperbole, together with their penchant for misrepresenting the record, only underscores the fact that they have no serious basis for challenging the SPR.
3.8 Section I of this Chapter demonstrates that the SPR is distinctly not arbitrary, as
Claimants contend. In fact, the prohibition on brand variants is a considered, well-designed measure supported by abundant evidence. Precisely for that reason, the world’s leading public health experts, including the WHO, the FCTC Secretariat and PAHO have all taken the unprecedented step of presenting written submissions to this Tribunal in which they express their unqualified endorsement of Uruguay’s tobacco control measures, including specifically the SPR, which they conclude is both reasonable and scientifically-based.
3.9 Claimants notably do not challenge anything in either of these submissions. In this, the
Reply is quite striking. Nowhere is there a single reference to the submissions of the WHO, the
FCTC Secretariat or PAHO. In fact, the Reply nowhere even mentions the words “WHO,”
“FCTC Secretariat” or “PAHO.” Claimants thus seek to divert the Tribunal not only from the historical and scientific context in which the SPR was adopted but also the expert analyses and considered judgments of the world’s leading public health authorities.
102 Reply, ¶ 28. 103 Ibid., ¶ 29. 104 Ibid., ¶ 31. 105 Ibid., ¶ 102. 106 Ibid., ¶ 5.
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3.10 Section II answers Claimants’ assertions that the process by which the SPR was adopted was somehow deficient. Uruguay will show that Claimants’ argument depends on a gross distortion of the facts. In fact, the SPR went through the normal procedures for considering and evaluating any smoking-related regulation in Uruguay. The idea of the SPR was developed by the National Advisory Commission for Tobacco Control (“Advisory Commission”), an independent advisory body responsible for advising Uruguay’s Ministry of Public Health
(“MPH”) on matters relating to tobacco control. The Advisory Commission then presented its recommendation to the MPH, which independently considered the proposal and endorsed it only after it had been reviewed by several responsible officials within the Ministry. The proposal was later reduced to a draft text, and subjected to additional review, comment and amendment before being approved and signed into law.
3.11 In short, the SPR was sound government policy adopted through sound governmental processes. Claimants give no grounds for this Tribunal to cast it aside as arbitrary.
I. The SPR Constitutes Sound Policy that Advances Important Public Health Objectives
A. The Wisdom of the SPR Is Confirmed by the World’s Leading Authorities on Public Health and Tobacco Control
3.12 The WHO and the FCTC Secretariat directly refute Claimants’ argument that the SPR is
“baseless” and “absurd.” The Tribunal has already recognized the former as “the world authority on public health matters,”107 and the latter as “the designated global authority concerning the
FCTC and its Implementation Guidelines.”108 Given their unquestioned expertise on the issues
107 Procedural Order No. 3 (17 Feb. 2015), ¶ 25(c). 108 Ibid., ¶ 25(c).
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Claimants raise in this case and their status as multinational organizations devoted to this very subject matter, their views are entitled to substantial weight.
3.13 In their January 2015 joint Written Submission to the Tribunal (the “WHO/FCTC
Submission”), the WHO and FCTC Secretariat express complete support for the SPR. Their
Written Submission confirms the SPR’s wisdom in two key ways: (1) it confirms the existence of the very real problem the SPR is designed to address; and (2) it concludes that the measure is an effective means to address that problem.
3.14 The WHO/FCTC Submission states that “it is well established that descriptors such as
‘low tar’, ‘light’, ‘ultra light’ and ‘mild’ are misleading when used in association with tobacco products.”109 This is because they “suggest that products with which they are associated are less harmful to health than the regular variant of a brand when, in fact, the evidence contradicts this conclusion.”110 The Submission explains further that the effect of this deception is to “discourage existing smokers from quitting and to encourage non-smokers to take up the habit, a fact recognized by tobacco companies.”111
3.15 The WHO/FCTC Submission further confirms that the effects of this deception continued even after descriptor bans were implemented in many countries. In particular, the Submission explains that the tobacco industry took advantage of the fact that “colours and other design elements on packaging can affect consumer perceptions of the harmfulness of tobacco
109 WHO & WHO FCTC Secretariat Submission, ¶ 64. 110 Ibid. 111 Ibid.
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products.”112 It used these devices to “perpetuate[] the misleading character of some tobacco brands after the prohibition of misleading descriptors.”113 The tobacco industry was able to do this “because consumers continue[d] to associate design elements including package colours with banned deceptive descriptors.”114
3.16 The WHO/FCTC Submission supports these points with evidence “that consumers are adept at recognizing which colour packages are associated with prohibited descriptors.”115 It describes, for example, how
colours and other design elements have been used to preserve misleading brand extensions. Evidence of this comes from a number of sources, including the United States where an Altria brochure, concerning Philip Morris USA products, was distributed to retailers. That brochure showed the new pack identifiers associated with misleading brand variants and enabled retailers to assist consumers in identifying those variants after misleading descriptors were removed from packaging. For example, Marlboro Lights became Marlboro Gold and Marlboro Ultra Lights became Marlboro Silver. The brochure also indicated that ‘some cigarette and smokeless packaging is changing, but the product stays the same.’ In this context, a nationally representative survey of US smokers conducted one year after the ban on misleading descriptors came into effect found that 92% of smokers reported that they could easily identify their usual brands and 68% correctly named the package colour associated with their usual brand.116
3.17 Of particular note, the WHO and FCTC Secretariat explain that “brand extensions can in themselves be misleading to consumers, particularly when presented in the course of trade alongside one another and regular or full flavored brands.”117 There are several reasons why. One
112 Ibid., ¶ 65. 113 Ibid. 114 Ibid. 115 Ibid. 116 Ibid., ¶ 78. 117 Ibid., ¶ 79.
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is that “people try to find attributes among brand variants”118 and that healthiness is the attribute which consumers tend to assume is being indicated. Another is “that packaging, and particularly colour, affect consumers’ perceptions of risk.”119
3.18 The WHO/FCTC Submission further explains that the fact that “pack design affects consumer perceptions of risk” is “consistent with subsequent peer-reviewed studies that document the association between packaging and risk perception in countries other than
Uruguay.”120 The Submission concludes: “Taken together, the internal industry documents and peer-reviewed studies suggest that even in the absence of prior misleading descriptors, brand extensions can create misleading perceptions concerning the relative risks of brand variants.”121
3.19 Having demonstrated that the problem Uruguay identified is a real one, the WHO/FCTC
Submission endorses the SPR as an appropriate solution. It states that “prohibiting brand variants” is supported by a “substantial body of evidence,” and that the SPR is “an effective means of preventing misleading branding of tobacco products.” On this basis, the WHO and
FCTC Secretariat conclude that the SPR is an “effective means of protecting public health.”122
118 Ibid. 119 Ibid. 120 Ibid., ¶ 81. 121 Ibid. 122 Ibid., ¶ 90. The WHO and the States Parties to the FCTC have long supported the SPR as a regulatory measure that advances Uruguay’s public health objectives. For instance, in 2010, the tobacco industry’s efforts to challenge the SPR and other regulations adopted by Uruguay prompted the States Parties to adopt the Punta del Este Declaration on the Implementation of the WHO FCTC, which recognized “that measures to protect public health, including measures implementing the WHO FCTC and its guidelines fall within the power of sovereign States to regulate in the public interest.” Ibid., ¶ 20. The following year, the Director-General of the WHO urged Uruguay not to “cave in” to the tobacco industry’s “scare tactics.” Counter-Memorial, ¶ 4.115. See also Opening Remarks by Dr. Margaret Chan, Director-General of the World Health Organization, 51st Directing Council of the Pan American Health Organization, CD51/DIV/5 (26 Sept. 2011), p. 3 (R-248). Reflective of the FCTC Secretariat’s endorsement of Uruguay’s tobacco control regulations, in 2014, it entered into a Memorandum of Understanding with Uruguay’s Ministry of Public Health to create a Center for International Cooperation on Tobacco for Uruguay, which assigns - 38 - CONTAINS CONFIDENTIAL INFORMATION
3.20 PAHO, the oldest international public health organization in the world and WHO’s regional office of the Americas, also disproves Claimants’ assertions about the purported arbitrariness of the SPR. In its March 2015 written submission to the Tribunal (the “PAHO
Submission”), PAHO likewise agrees with Uruguay that the lingering perception that some brand variants are less harmful than others was a serious public health problem that demanded attention. PAHO also agrees with the solution Uruguay adopted.
3.21 Echoing the views of the WHO and FCTC Secretariat, PAHO observes that “prohibiting the terms ‘light,’ ‘mild,’ and ‘low tar,’ standing alone, can be insufficient to significantly reduce false beliefs about the health risks of different cigarette brands.”123 PAHO points out that “[e]ven after the removal of the terms ‘light’ and ‘mild’ from tobacco packages, a Canadian study found that 33% of smokers still reported that they used light brand variants.”124 “Similar findings were reported in a U.S. study.”125
3.22 The situation in Uruguay was no different. The PAHO Submission states: “With the ban on misleading descriptors in place in Uruguay, cigarette manufacturers continued to find ways to misrepresent the health risks of their products.”126 The industry achieved this largely through the use of brand variants. According to PAHO: “Some tobacco companies launched new variations of their brands, using design elements across brand families, like colors or numbers instead of
Uruguay the responsibility for helping to guide other Latin American States in drafting tobacco policies. Counter- Memorial, ¶ 4.114. See also Memorandum of Understanding between the Secretariat of the WHO Framework Convention for Tobacco Control and the Uruguayan Ministry of Public Health (21 May 2014), Preamble (R- 301(bis)) (recognizing “Uruguay’s strong and important support for the application of the Convention.”). 123 PAHO Submission, ¶ 83. 124 Ibid. 125 Ibid. 126 Ibid., ¶ 82.
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words, to convey the false message that certain variants of their brands were less harmful than others.”127 Doing so proved successful because “[e]ven without such descriptors, many brands had been on the market for so long that consumers simply recognized the color scheme and logos on the cigarette pack and continued to associate those colors and logos with the earlier misleading descriptors.”128
3.23 On the basis of these findings, PAHO concludes that “Uruguay’s tobacco control measures,” including the SPR: (1) are “evidence based”; (2) “are a reasonable and responsible response to the deceptive advertising, marketing and promotion strategies employed by the tobacco industry”; and (3) have “proven effective in reducing tobacco consumption.”129
3.24 How do Claimants respond to the WHO/FCTC and PAHO Submissions? As stated, they don’t. Their failure to do so is as telling as it is conspicuous. Taken individually and together, the submissions conclusively refute Claimants’ arguments about the alleged “baselessness” and
“absurdity” of the SPR. Not only do the WHO, the FCTC Secretariat and PAHO agree that the
127 Ibid. 128 Ibid. 129 Ibid., ¶ 100. This has long been PAHO’s position. In 2010, shortly after Uruguay enacted the SPR, the Directing Council of the PAHO adopted a Resolution in support of “all the national measures” Uruguay has adopted, including “especially those on the packaging of tobacco products to inform the public about the risks of tobacco and prevent manufacturers from directly or indirectly suggesting that some products are less harmful to health.” Counter-Memorial, ¶ 4.112. See also PAHO & WHO, Strengthening the Capacity of Member States to Implement the Provisions and Guidelines of the WHO Framework Convention on Tobacco Control, CD50.R6, adopted on 29 Sept. 2010, Art. 1 (R-230). In 2014, the Director of the PAHO stated that “Uruguay has become a regional model on the issue of tobacco control.” Counter-Memorial, ¶ 4.116. See also Pan American Health Organization (“PAHO”), “Director Carissa Etienne’s Presentation on Tobacco Control: ‘PAHO commits itself to continue supporting the leadership path that the country has taken’” (2 May 2014), available at http://www.paho.org/uru/index.php?option=com_content&view=article&id=837:la-directora-carissaetienne-en- presentacion-sobre-control-de-tabaco-ops-se-compromete-a-seguir-acompanandolos-en-la-ruta-deliderazgo-que-ha- ejercido-el-pais-&Itemid=238 (last visited 22 July 2014) (R-300). In May 2015, Uruguay received PAHO’s 2015 World No Tobacco Day Award in recognition of its “comprehensive and effective tobacco control policies.” Pan American Health Organization (PAHO), “PAHO/WHO honors Nicaragua, Uruguay and four tobacco control advocates with the 2015 World No Tobacco Day awards” (22 May 2015), available at http://www.paho.org/hq/index.php?option=com_content&view=article&id=11003%3A2015-world-no-tobacco-day- awards-&Itemid=1926&lang=en (last visited 9 June 2015) (R-437).
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public health problem Uruguay identified is a serious one, they also agree that the solution it adopted is sound. If Claimants had any counter-arguments—any at all—they would have made them. The fact that they did not constitutes a clear admission that they have no basis to challenge these authoritative scientific health assessments. The Tribunal can reject Claimants’ complaint about the SPR on this basis alone.
B. Claimants’ Arguments Against the SPR Are Meritless
3.25 Rather than try to rebut the considered views of the world’s leading public health authorities, Claimants invite the Tribunal to ignore them in favor of Claimants’ wholly self- interested arguments. Given the U.N. General Assembly’s express recognition that there is a
“fundamental conflict of interest between the tobacco industry and public health,”130 Claimants’ attacks on Uruguay’s public health regulations must be treated with great caution.
3.26 Having waved off their (undisputed) history of deceptive marketing as “irrelevant,” and having ignored the WHO/FCTC and PAHO Submissions in their entirety, Claimants offer the
Tribunal no less than seven arguments why it should nevertheless find the SPR arbitrary. None withstands scrutiny.
130 United Nations General Assembly (UNGA), Political Declaration of the High-level Meeting of the General Assembly on the Prevention and Control of Non-communicable Diseases, UN Doc. A/RES/66/2, adopted 19 Sept. 2011, distributed 24 Jan. 2012, ¶ 38 (RL-136). See also Conference of the Parties to the Framework Convention on Tobacco Control (COP-FCTC), Guidelines for Implementation of Article 5.3 of the WHO Framework Convention on Tobacco Control (Packaging and labeling of tobacco products), FCTC/COP3(7) (Nov. 2008), p. 2 (RL-134) (stating: “There is a fundamental and irreconcilable conflict between the tobacco industry’s interests and public health policy interests.”).
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1. There Is an Obvious “Logical Connection” Between the SPR and the Objective of Preventing Consumers from Being Misled
3.27 Claimants’ Reply persists in arguing “that there is no logical connection between the SPR and Respondent’s stated objective of ensuring consumers are not misled into believing that one variant within a brand family presents fewer health risks than another.”131 To continue making this argument at this stage of the proceedings, Claimants are reduced to wildly misrepresenting the record.
3.28 A central element of Claimants’ narrative in the Reply, for example, is that Uruguay’s argument has supposedly “evolved radically over the course of this arbitration, as Respondent has cast about for some defensible justification for [the SPR].”132 According to Claimants,
Uruguay “invented” a brand new “rationale for the SPR in its Counter-Memorial on the
Merits”133 that differed materially from the one presented in its jurisdictional pleadings. This new theory, they say, had “never before [been] articulated in this arbitration.”134 Claimants describe this new theory as being “that variants are per se misleading.”135
3.29 Claimants would do well to read their own pleadings. The truth is that this has been
Uruguay’s position from the beginning and Claimants know it. Uruguay first described the SPR and the rationale behind it in its September 2011 Memorial on Jurisdiction.136 In their January
131 Reply, ¶ 2. 132 Ibid., ¶ 33. 133 Ibid., ¶ 5. 134 Ibid., ¶ 37. 135 Ibid., ¶ 5. See also Ibid., ¶ 37 (stating that “Respondent shifted to a second argument for the SPR: that the existence of more than one variant is per se misleading….”). 136 See Memorial on Jurisdiction, ¶ 28 (identifying SPR’s rationale as preventing the “proliferation of different- colored subbrands associated in consumer consciousness with false health” because consumers believe that any given “version of the same brand of cigarettes is less harmful than another.”).
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2012 Counter-Memorial on Jurisdiction, Claimants described Uruguay’s rationale for the SPR as follows: “Uruguay claims Ordinance 514 is justified because it believes that the use of a brand family is per se misleading.”137 Exactly the same point is repeated just as clearly elsewhere:
“[U]nder Ordinance 514, [Uruguay] simply assumed that the mere existence of multiple brand varieties ... is per se misleading.”138
3.30 Claimants’ assertion that Uruguay’s argument was only “invented” for purposes of its
Counter-Memorial on the Merits is thus a flat lie. Claimants’ own words show that Uruguay has been articulating the argument that Claimants now say came “out of the blue”139 since the beginning of the case.
3.31 Another stratagem Claimants employ is to set up transparent straw men that have no bearing on the issues actually in dispute. Referring again to Uruguay’s allegedly “new” argument about the rationale for the SPR, for example, they state: “Respondent’s current asserted justification for the SPR—that consumers necessarily perceive one variant of a cigarette brand as less harmful than another variant of the same brand, and will begin or continue smoking due to that misperception—is baseless.”140 This is not Uruguay’s position. Claimants are intentionally, if inartfully, attempting to suggest that Uruguay has set a high hurdle for itself, which they then hope to show it cannot clear.
3.32 The differences between Claimants’ description of Uruguay’s position and its actual views are significant. They can most easily be demonstrated by correcting Claimants’ words in
137 Counter-Memorial on Jurisdiction, ¶ 9 (emphasis added). 138 Ibid., ¶ 24 (emphasis added). 139 Reply, ¶ 37. 140 Ibid., ¶ 31 (emphasis added).
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track-changes. A more faithful description of Uruguay’s position would read: “A significant percentage of consumers necessarily perceives that one variant of a cigarette brand as is less harmful than another variant of the same brand, and will may be encouraged to begin or continue to smoking smoke due to that misperception.”
3.33 Uruguay notes further that it does not bear the burden of proving that this view is reasonable. To the contrary, it is Claimants who bear the burden of proving that it is not. And they cannot hope to meet that burden for the reasons that Uruguay presented in its Counter-
Memorial, and have now been affirmed by the WHO, the FCTC Secretariat and PAHO.
3.34 To be absolutely clear: it is, and has always been, Uruguay’s position that the existence of multiple variants of a single brand per se creates a risk of deception in the minds of some consumers. A brief summary of the uncontested record presented in the introductory section of this Chapter confirms the reasonableness of this position.
3.35 Claimants themselves introduced “health reassurance” variants precisely to foster the misperception that some cigarettes are less harmful than others. They actively cultivated this misperception over decades, even when they knew it was false. Consumers have therefore been conditioned to view the difference between brand variants as a difference in their comparative health effects. Studies (including those relied on by the WHO and PAHO) show that this remains true even after the descriptor ban.
3.36 This follows even from Claimants’ own argument. In their Memorial, Claimants cited the expert report of Professor Villanueva for the proposition that by using a “trademark on a package, the manufacturer creates an association between the sign and the product itself. Over
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time, the sign takes on meaning and becomes a symbol for the product’s attributes (e.g., origin, quality, value, heritage, status, taste) and a brand association is thereby created.”141
3.37 The same reasoning applies mutatis mutandis to brand variants. The mere elimination of a single element from the package (i.e., the descriptor), while retaining all other elements, is unlikely to change the association built up “over time” between “the sign and the product itself.”
Indeed, Claimants themselves inadvertently admit the point when they assert in their Reply that
Marlboro Gold “maintain[s] the distinctive character” of Marlboro Lights.142
3.38 Viewed against the backdrop of Claimants’ own history, their contention that “there is no reason to assume that consumers would spontaneously categorize variants based on perceived healthiness”143 could scarcely be more disingenuous. The truth is that there is considerable reason to believe that consumers would continue to categorize variants based on perceived healthiness. As the respected Canadian NGO, Physicians for a Smoke Free Canada, wrote in a
2005 report:
If smokers are faced with multiple types of cigarettes under one brand name they can be expected to look for and find differences in those brands, and to ascribe a meaning to those differences. Because these cigarettes were marketed to convey a hierarchy of ‘strength’/harmfulness, this will be the meaning that smokers ascribe to any within-brand distinctions.144
3.39 In other words, distinction implies a difference. And the perceived difference among variants in the same brand family that the tobacco industry, including Claimants, has assiduously
141 Memorial, ¶ 89 (citing Expert Report of Julian Villanueva (27 Feb. 2014), § 3.2.3 (CWS-010)). 142 Reply, ¶ 113. See also ibid., ¶¶ 114-119. 143 Ibid., ¶ 59. 144 Physicians for a Smoke-Free Canada, A comprehensive plan to end the ‘light’ and ‘mild’ deception (Jan. 2005), p. 5 (R-170).
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cultivated for decades is the belief that one variant is less harmful than another. A significant percentage of consumers continued to hold this false belief even after descriptors were banned.
There was therefore an obvious logical connection between the SPR and the goal of diminishing the industry’s ability to continue perpetuating this fiction.
2. Claimants’ Argument That There Was No Need for the SPR Because Consumers Are Already Aware That Cigarettes Are Harmful Is Nonsense
3.40 In addition to arguing that there is no logical connection between the SPR and the goal of preventing consumers from being misled, Claimants also argue that there was no need for the
SPR. This is true, they say, because “(i) consumers are aware that all cigarettes are harmful; (ii) all cigarettes carry the same health warnings; and (iii) before Respondent adopted the SPR, 98 percent of Uruguayans already believed that smoking caused cancer and 97 percent believed that smoking caused coronary heart disease.”145
3.41 Claimants do not bother to articulate how these facts rendered the SPR unnecessary.
Presumably, they mean that since almost everyone knows that cigarettes are harmful and cigarettes all carry the same warnings, there is no reason to suppose that consumers might think some are less harmful than others. If that indeed is what Claimants are saying, it is nonsense.
3.42 This argument requires ignoring two interrelated phenomena: (1) the tobacco industry’s history of deception; and (2) the workings of the human psyche. Indeed, the success of the former depended very much on the latter. Tobacco industry internal documents, including those from Claimants, show that the industry devised “health reassurance” variants precisely to provide concerned consumers with an alternative to quitting. The documents show that they
145 Reply, ¶ 31.
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anticipated that, faced with the dilemma resulting from their addiction to nicotine, on the one hand, and their concern for their health, on the other, consumers would try to reconcile these competing imperatives by smoking a less bad cigarette.146
3.43 The fact that most Uruguayans were “aware that all cigarettes are harmful”147 and causes cancer and coronary heart disease148 therefore does not undermine the need for the SPR; it reinforces it. Cognizant of the risks to their health they are running, smokers are only too eager to resort to brand variants that they have been led to believe offer a “healthier” option.149
3.44 For the same reason, the assertion that “all cigarettes carry the same health warnings”150 is of no help to Claimants. Warnings may inform consumers that smoking is dangerous but they do not address whether some cigarettes are more dangerous than others.151 Moreover, faced with the conspicuous reminder of the consequences of smoking that graphic health warnings provide, smokers once again are only too ready to believe that some cigarettes are less harmful than others.
3.45 Euromonitor’s 2008 report on smoking in Uruguay confirms these points. According to
Euromonitor, the Uruguayan low tar market was experiencing “important volume growth”
146 Counter-Memorial, ¶¶ 4.12-4.42. See also, e.g., Philip Morris Internal Document, M. Johnston, Market Potential of a Health Cigarette (June 1966), Bates No. 1000338644-1000338671 (R-92). 147 Reply, ¶ 31. 148 See ibid., ¶ 31. 149 See Prof. Joel Cohen, Prof. Timothy Dewhirst & Prof. David Hammond, The Single Presentation Requirement: Overcoming The Illusion Of A Less Hazardous Cigarette (19 Sept. 2014), ¶¶ 82-105 (REX-002). See also Prof. Joel Cohen, Prof. Timothy Dewhirst & Prof. David Hammond, Rebuttal Expert Report of Professors Joel Cohen, Timothy Dewhirst & David Hammond (18 Sept. 2015) (hereinafter “Cohen Second Report”), ¶¶ 11-25, 31-45 (REX- 013). 150 Reply, ¶ 31.
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notwithstanding the descriptor ban and Uruguay’s increasingly strict tobacco-control policies.
The report states:
The largest cigarettes categories, high tar and mid tar, kept posting negative volume growth rates during 2007 as they were the most affected by the anti- tobacco government campaign, enforced through the [Ministry of Public Health]. Low tar and ultra low tar cigarettes, on the other hand, had important volume growth as, in lieu of quitting, many smokers shifted to these products, which are perceived as less harmful.152
3.46 The report also predicted that the market for low tar cigarettes would continue to grow:
Many smokers who are not willing to quit are expected to shift to products with lower tar content, thus favouring the future growth of low tar and ultra low tar cigarettes, which are the smallest categories.153
3.47 The SPR was thus a reasonable response to disrupt this shift and counteract the false impression that the brand variants to which smokers were switching were “less harmful.”
3. The SPR Is Supported by Ample Evidence
3.48 The Reply also tries to buttress Claimants’ contentions about the SPR by asserting that there is no “empirical evidence that might support the SPR.”154 Claimants offer the opinions of two business school professors: Professors Chernev and Jacoby.155
3.49 On the other side of the scale are the WHO, FCTC Secretariat and PAHO. In their joint written submission, the WHO and FCTC Secretariat specifically conclude:
152 Euromonitor International, Tobacco - Uruguay: Cigarettes (23 Sept. 2008), p.13 (C-120). 153 Ibid., p. 17. 154 Reply, ¶ 55. 155 See Alexander Chernev, Ph.D., Second Expert Report on the Relevance, Validity, and Sufficiency of the Empirical Evidence cited by the Uruguayan Government in Support of the Single Presentation Requirement and the 80% Graphic Health Warning Regulation (17 Apr. 2015) (hereinafter “Chernev Second Report”), ¶ 21 (CWS-020); Jacob Jacoby, Ph.D., Problems with the Empirical Evidence Cited and Relied Upon by the Oriental Republic of Uruguay in Support of the Single Presentation Regulation and the 80% Graphic Health Warning Regulation (17 Apr. 2015) (hereinafter “Jacoby Report”), ¶ 4 (CWS-021).
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There is also a substantial body of evidence that prohibiting brand variants is an effective means of preventing misleading branding of tobacco products. These bodies of evidence, which are consistent with State practice, support the conclusion that the Uruguayan measures in question are effective means of protecting public health.156
3.50 PAHO, for its part, concludes:
Uruguay’s tobacco control measures [i.e., the SPR and 80% Requirement] are a reasonable and responsible response to the deceptive advertising, marketing and promotion strategies employed by the tobacco industry, they are evidence based and they have proven effective in reducing tobacco consumption.157
3.51 Inasmuch as neither Professor Chernev nor Professor Jacoby has any direct experience with tobacco control policy or, indeed, public health regulation of any kind, their reports cannot stand against the clear weight of the actual experts: the WHO, the FCTC Secretariat and PAHO.
3.52 In any event, Professor Chernev’s and Professor Jacoby’s putative criticisms of the many studies Uruguay cited that support the SPR—such as they “fail[] to test actual behavior”;158
“test[] hypothetical rather than consequential responses”;159 “rely[] upon unreliable verbal reports”;160 or “ask respondents how they think others would react”161—betray a transparent attempt to impose impossibly rigid standards that have no basis in the study of public health.
Professor Cohen explains that accepting their proposed standards “would have the effect of making it all-but impossible for scientific research to provide the basis for public health
156 WHO & WHO FCTC Secretariat Submission, ¶ 90 (emphasis added). 157 PAHO Submission, ¶ 100 (emphasis added). 158 Jacoby Report, § D(1) (CWS-021) (capitalization from original quote has been changed into lowercase). 159 Ibid., § D(2) (capitalization from original quote has been changed into lowercase). 160 Ibid., § D(3) (capitalization from original quote has been changed into lowercase). 161 Ibid., ¶ 10.
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regulation.”162 “If Professor Chernev’s criteria for causal inferences were required,” for example,
“the landmark studies that are responsible for establishing that smoking causes lung cancer would be deemed unreliable.”163
3.53 Notably, many of the studies that Claimants criticize employ the same methodologies as does the tobacco industry when it researches consumer preferences. Professor Cohen explains:
“[T]he tobacco industry itself relies on studies that use the same or very similar methodologies to those employed in the peer-reviewed literature that Uruguay cites. Industry documents highlight the importance of consumer perceptions in three areas that are the evidentiary basis for the SPR:
1) measures of consumer demand, including ‘intentions’ to purchase or try products; 2) measures of brand appeal and smoker image; and 3) consumer perceptions of taste and harshness, which are used by many consumers as cues for reduced harm.”164
3.54 Professor Jacoby’s opinions should be approached with particular caution. Federal trial courts in the United States have repeatedly expressed reservations about the reliability of his opinions. One court cited no fewer than 10 prior cases in observing that Professor Jacoby’s work has been frequently “rejected by ... court[s].”165 Another ruled that “the Jacoby study ... must be significantly discounted” because of its “serious flaws.”166 Still another court criticized Professor
Jacoby’s study, noting: “This is not the first time Jacoby’s survey findings have been
162 Cohen Second Report, ¶ 49 (REX-013). 163 Ibid., ¶ 58. 164 Ibid., ¶ 66 (footnotes omitted). 165 National Football League Properties, Inc. v. Prostyle, Inc., 16 F. Supp. 2d 1012 (E.D. Wisc. 1998), p. 1018 (R- 373). 166 ConAgra, Inc. v. Geo. A. Hormel & Co., 784 F. Supp. 700 (D. Neb. 1992), pp. 725, 728 (R-367).
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criticized.”167 And a fourth referred to a “number of flaws in the design of [Professor Jacoby’s] survey” that “lead [the Court] to accord very little weight to its results.”168 The list goes on.
3.55 Other courts have variously held that “Dr. Jacoby’s failure to consider data gleaned from actual consumers limits [his opinion’s] value”;169 that, because of their flaws, “the Court assigns significantly reduced weight to the Jacoby Survey’s results”;170 that “Dr. Jacoby’s study” was of
“questionable value because his questions were leading”;171 and that Professor Jacoby had employed the “tricks of the survey researcher’s black arts.”172
3.56 Not that it is necessary in light of the above, but additional evidence in support of the
SPR as an appropriate response to the tobacco industry’s history of deception comes from the
FCTC and its Implementation Guidelines, which are “evidence-based.”173
3.57 The Tribunal will recall that Article 11 of the FCTC states that the States Parties “shall” adopt “effective measures to ensure” that
tobacco product packaging and labelling do not promote a tobacco product by any means that are false, misleading, deceptive or likely to create an erroneous impression about its characteristics, health effects, hazards or emissions, including any term, descriptor, trademark, figurative or any other sign that directly or indirectly creates the false impression that a
167 Weight Watchers Int’l., Inc. v. Stouffer Corp., 744 F. Supp. 1259 (S.D.N.Y. 1987), p. 1274 n.8 (R-362). 168 Am. Home Prods. Corp. v. Barr Laboratories, Inc., 656 F. Supp. 1058 (D.N.J. 1987), p. 1070 (R-363). 169 Smith v. Ames Dep’t. Stores, Inc., 988 F. Supp. 827 (D.N.J. 1997), p. 834 (R-372). 170 Simon & Schuster, Inc. v. Dove Audio, Inc., 970 F. Supp. 279 (S.D.N.Y. 1997), p. 291 (R-371). 171 Jim Beam Brands Co., v. Beamish & Crawford, Ltd., 852 F. Supp. 196 (S.D.N.Y. 1994), p. 199 (R-369). 172 Indianapolis Colts, Inc. v. Metro. Baltimore Football Club Ltd. Partnership, 34 F.3d 410 (7th Cir. 1994), p. 416 (R-370). See also Quality Inns Int’l, Inc. v. McDonald's Corp., 695 F.Supp. 198 (D. Md. 1988), p. 219 (R-364) (rejecting results of Jacoby survey as irrelevant); Worthington Foods, Inc. v. Kellogg Co., 732 F. Supp. 1417 (S.D. Ohio 1990), p. 1445 n.83 (R-365) (noting flaws in Jacoby study and holding that “the Court does not place great weight on Dr. Jacoby’s study”). 173 WHO, FCTC, p. v (RL-20).
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particular tobacco product is less harmful than other tobacco products. These may include terms such as “low tar”, “light”, “ultra-light”, or “mild” ...174
The Convention thus specifically takes note of the tobacco industry’s history of deception and recognizes that terms, descriptors, trademarks, figuratives and other signs can be used to convey the erroneous impression that some cigarettes are less harmful than others.
3.58 The Article 11 Guidelines, unanimously adopted by the then 160 States Parties to the
Convention, go even further. They recommend that, to implement Article 11’s requirement to eliminate false and misleading packaging:
Parties should consider adopting measures to restrict or prohibit the use of logos, colours, brand images or promotional information on packaging other than brand names and product names displayed in a standard colour and font style (plain packaging). This may increase the noticeability and effectiveness of health warnings and messages, prevent the package from detracting attention from them, and address industry package design techniques that may suggest that some products are less harmful than others.175
3.59 The States Parties to the FCTC thus expressly acknowledge that the industry has used
“package design techniques” to misleadingly “suggest that some products are less harmful than others,” and that the prohibition of logos, colors and brand images is an appropriate response to combat this phenomenon. Indeed, the Guidelines encourage State to go further than Uruguay did, and to adopt plain packaging (which prohibits the use of any logos, colors or brand images).176
174 Ibid., ¶ 11.1(a) (emphasis added). 175 Guidelines for implementation of Article 11 of the WHO Framework Convention on Tobacco Control (Packaging and labelling of tobacco products), adopted at the third Conference of the Parties (Nov. 2008) (hereinafter “COP- FCTC, Article 11 Guidelines”), ¶ 46 (RL-13) (emphasis added). 176 Ibid.
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3.60 As discussed further below, Uruguay considered adopting plain packaging during the deliberations that led to the SPR. It decided, however, that it was not yet ready to take that step.177 It opted instead for a more incremental measure. Uruguay continued to permit tobacco companies to use some logos, colors and brand images, provided only that each brand be limited to a single presentation.
4. The Hypothetical “Black” Variants Claimants Say They Wanted To Market in Uruguay Would Also Have Been Deceptive
3.61 Claimants also attack the SPR by invoking their nominal plan
178 As support for this alleged plan, Claimants include the image below of two black variants they are currently selling in
Argentina:
3.62 Claimants argue:
The SPR made the rollout of multiple black variants in Uruguay impossible. As Respondent would have it, Uruguay needed to ban black variants because consumers automatically would have assumed that multiple black packages like the ones shown above conveyed differences in health effects.
177 See infra, ¶ 3.96. 178 Reply, ¶ 38.
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That is absurd. They are both black. There is no resemblance between the appearance of these variants and the appearance of variants sold in Uruguay with “light” or “mild” descriptors before 2005. There is not even an alleged association between the color black and health, and there would be no basis for consumers to perceive that one black variant carried fewer adverse health effects than the other.179
3.63 This aspect of Claimants’ argument calls for multiple responses. In the first place, it is wholly hypothetical. Claimants were not marketing any variants in black boxes at the time the
SPR went into effect. The variants then on the market were Marlboro Red, Marlboro Gold,
Marlboro Blue and Marlboro Fresh Mint. This “brand family” is shown in the image below, a reproduction of Figure 4.7 from Uruguay’s Counter-Memorial:
3.64 These are the particular variants at which the SPR was targeted and which, in Uruguay’s view, are plainly designed to evoke a perception of relative harmfulness.180
Marlboro Gold corresponded to what was
179 Ibid., ¶ 40. 180 Claimants’ denial that such color-coding is misleading, see, e.g., Memorial, ¶¶ 32, 35-36; Reply, ¶¶ 33-37; Chernev Second Report, ¶¶ 51-82 (CWS-020), is just as disingenuous as their sister company’s 1993 “assur[ance]… that,” in attempting to register the trademark “Marley” for tobacco sales in France, Philip Morris Products Inc. “did not adopt and register the mark ‘Marley’ with a Bob Marley in mind, or with any other Marley. ... Consumers just would not associate a ‘Marley’ tobacco product with Bob Marley.” M. Zwerin, “What's in a Name? Marley Heirs Fuming”, New York Times (12 Nov. 1993) (R-368). 181
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previously Marlboro Lights;
and, by using the colors green and silver,
Marlboro Fresh Mint was positioned as the least harmful of all, a suggestion reinforced by the inclusion of the word “Fresh” in its name (a conclusion shared by the WHO and FCTC
Secretariat183).184
3.65 Notably, Claimants’ Reply effectively admits that if the SPR were properly targeted at the problem with which Uruguay was concerned, it would have been reasonable. Claimants state:
“The SPR cannot achieve Respondent’s stated objective of preventing misperceptions about the linkage between variants and light cigarettes. The SPR does not regulate the sale of products that were previously marketed as ‘light’ ....”185 They thus implicitly acknowledge that the SPR as applied to their existing variants was logically related to a perceived public health problem.
3.66 It is exactly because they need to convert such an obviously reasonable measure into an apparently unreasonable one that Claimants invoke their black boxes. Yet, even there, their argument is as misleading as the variants they cite. Indeed, Claimants’ new black packages provide still further evidence of how adept the tobacco industry is at devising ways to convey false impressions about relative healthfulness. The image Claimants include in the Reply of the black-packaged variants that they sell in Argentina has been not-so-subtly manipulated to
182 According to a March 2010 internal presentation produced by Claimants in document discovery,
183 See WHO & WHO FCTC Secretariat Submission, ¶¶ 76, 89. 184 The WHO and FCTC Secretariat reports also that “20.3% of Uruguayan adults who identified smoking as harmful were unaware that mentholated cigarettes are as harmful as regular cigarettes.” Ibid., ¶ 76. 185 Reply, ¶ 4.
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minimize the color contrast between the two. When the two variants are shown in their full, authentic color, this is what they look like:186
(Uruguay asked Claimants to provide high-resolution imagery of the packages included in the
Reply. In response, they provided the image of the Marlboro Touch box above. They claimed, however, to “not have a higher resolution photo” of the box with the blue chevron.187 Uruguay was nevertheless able to find the image above on the internet.188)
3.67 The contrast is immediately obvious. These two “black” variants are actually just new variants of Marlboro with blue and gold coloring, respectively. Claimants’ statement that there
“is no resemblance between the appearance of these variants and the appearance of variants sold
186 High resolution images of Marlboro “Black” variants provided by Claimants (11 Sept. 2015), p. 1 (R-449). Uruguay submits herewith a collection of Marlboro cigarette packages it obtained in Argentina and Brazil in September 2015. See Collection of Marlboro Cigarette Packages from Argentina and Brazil (purchased Sept. 2015) (R-448). 187 High resolution images of Marlboro “Black” variants provided by Claimants (11 Sept. 2015), p. 1 (R-449). 188 “Marlboro Ice Lote X 7 Advertencias Graficas Argentina Vacias,” Mercado Libre Argentina, Advertisement No. 569511790, available at http://articulo.mercadolibre.com.ar/MLA-569511790-marlboro-ice-lote-x-7-advertencias- graficas-argentina-vacias-_JM (last visited 12 Sept. 2015) (R-361).
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in Uruguay with ‘light’ or ‘mild’ descriptors before 2005”189 is therefore false. In the Marlboro universe—and the perceptions of significant numbers of Claimants’ consumers—gold equates with “light”190 and blue with To focus on the fact that these same colors have been carried over to a black box is to obscure the point. These are not Marlboro “Black” any more than Claimants’ traditional white boxes are Marlboro “White.” The appearance of misleading colors is just as misleading whether they are presented against a black background or against a white background. In either case, the deception is the same.
3.68 And so is the deception Claimants say they were preparing to perpetrate in Uruguay. The
Reply depicts three black-packaged variants that Claimants registered in July 2008.192 Notably, the Reply shows them only in black and white, so that the gold color on each is hidden. Shown below are the “black” variants as presented in the Reply, and as they appear in full color in other countries where they are presently marketed.
189 Reply, ¶ 40. 190 Counter-Memorial, ¶¶ 4.70-4.73. See also Cohen Second Report, ¶¶ 16-17, 26-34 (REX-013). 191
192 Reply, ¶ 38 (citing DNPI, Mark Details for various “Marlboro Gold” variants, available at http://www.dnpi.gub.uy (last visited 5 Aug. 2014), pp. 1-6 (R-338)).
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In the Reply (black and white)193:
As actually marketed (in color)194:
3.69 The deceptiveness of the “black” packs Claimants hoped to market in Uruguay is obvious even without exposing the color masked by the Reply. It is obvious from the wording on the packs. Each of them bears the word “GOLD.” The direct identification of these variants with
Marlboro Gold, which consumers identified with Marlboro Lights and considered a safer and less unhealthy alternative to traditional Marlboro Red, could not be clearer. Nor could the intention to communicate this false perception to consumers.
193 Reply, ¶ 38. 194 High resolution images of Marlboro “Black” variants provided by Claimants (11 Sept. 2015), pp. 2-3 (R-449) (the image of Marlboro Gold Edge is from Russia and the image of Marlboro Gold Touch is from Brazil).
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3.70 Uruguay is therefore grateful to Claimants for introducing their argument about so-called
“black” variants.195 It confirms Uruguay’s point, which the WHO and PAHO emphasized in their
Submissions, about the use of colors on cigarette packs to convey false impressions to consumers about the relative healthfulness of different brand variants, especially lighter colors such as gold, blue, green and silver. Even the packs Claimants describe, and misleadingly depict, as “black” use those lighter colors to convey the false message.
5. Claimants Themselves Sought a Special Dispensation from the Law that Requires Tobacco Companies To List the Toxic Ingredients in Cigarettes
3.71 Claimants also argue that Uruguay “undermines the asserted premise of its arguments
[for the SPR] by requiring tobacco manufacturers to publish tar and nicotine levels for each of their brands.”196 This is a misstatement of Uruguayan law and, here once again, Claimants know it. The original, now derogated, requirement to which Claimants refer was first enacted in 1982 at a time when Uruguay, like other States, labored under the erroneous belief—which Claimants even then knew was false197—that information about tar and nicotine levels indicated the relative harmfulness of a cigarette.
3.72 That requirement was, however, superseded in 2008 when, in accordance with Article 10 of the FCTC, Uruguay enacted Law No. 18,256, Article 6, which requires tobacco companies to publish “in the major media” the “toxic components of tobacco products and the emissions they
195 Their Request for Arbitration and Counter-Memorial on Jurisdiction made no mention of these variants; it focused only on the colors that Claimants marketed at the time the SPR took effect. 196 Reply, ¶ 42. 197 Counter-Memorial, ¶¶ 4.34-4.42. See also, e.g., Philip Morris Internal Document, S. Schachter, Pharmacological and Psychological Determinants of Smoking (2 Mar. 1977), Bates No. 1000046626-1000046661, pp. 1000046655, 1000046660 (R-101) (concluding that it is “clear” that “the major body of data that has been used to justify the campaign for low nicotine [and tar] cigarettes does nothing of the sort”).
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may produce.”198 Uruguay has not yet defined with precision what these toxic components and emissions are; it has been waiting until such time as the States Parties to the FCTC complete the
Implementation Guidelines to Article 10.199
3.73 Soon after the enactment of Law 18,256, Claimant Abal contacted the MPH to request a formal notification that pending the issuance of the relevant regulations, it could interpret the law to apply to nicotine and tar.200 The MPH gave the notification requested but it did not say that the levels should be published.201 It is on the basis of this exchange, distinctly not because of any legal requirement, that Claimants have continued to publish not just the fact that their cigarettes contain tar and nicotine but also the levels of each. They have thus taken advantage of a temporary gap in Uruguayan law to keep disseminating information they know to be misleading to the Uruguayan public.
198 See Uruguayan Law 18,256 (10 Mar. 2008), Arts. 6 & 25 (C-033). In a transcript of a hearing before the Uruguayan legislature’s Committee on Public Health and Welfare in May of 2008, cited by Claimants, Dr. Jorge Basso makes clear that the requirement to publish toxic comments under Law 18, 256 must be regulated: “[W]e discussed with some of you that it was important for the regulation to deal with this issue, because we are speaking of about five hundred toxic substances in tobacco, and it is impossible, from the practical point of view, to list all of them in the pack and provide information on each of them. Therefore, the regulation will define the main toxic substances that the Ministry of Public Health is interested in controlling […].” Transcript of Testimony Before the Public Health and Welfare Committee of the Uruguayan House of Representatives (7 May 2008), p. 3 (C-173) (emphasis added). He says nothing about continuing to publish tar and nicotine levels. 199 See Witness Statement of Dr. Ana Lorenzo (18 Sept. 2015) (hereinafter “Lorenzo Witness Statement”), ¶ 20 (RWS-006). 200 See Email from Javier Ortiz to Chris Dilley (19 Aug. 2008), Philip Morris Brands, et al. Internal Document, Bates No. PMIUY-00020548, (R-387) (“leveraging on the lack of definition of ‘toxic substances to be determined by the MoH [Ministry of Health]’ (as stated in Decree 284) we managed to obtain a formal notification from the MoH saying that Art. 6 from Decree 284 refer to Nicotine & Tar up to [the time a] new regulation is issued by that Ministry”); Email from Federico Gey to Javier Ortiz (15 Aug. 2008), Philip Morris Brands, et al. Internal Document, Bates No. PMIUY-00049397 (R-386) (alluding to obtaining a “formal notification from the MoH saying that Art. 6 from Law 18256 ... refer[s] to Nicotine & Tar up [until a] new regulation is issued by that Ministry.”). 201 Letter from Ministry of Health to Abal Hermanos SA (12 Aug. 2008), Philip Morris Brands, et al. Internal Document, Bates No. PMIUY-00020549 (R-385).
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6. The SPR Does Not “Incentivize Illicit Cigarette Trade”
3.74 In the Executive Summary to their Reply, Claimants also include what can only be described as a “throw-away” argument that “the SPR actually undermines Respondent’s tobacco control policies by incentivizing illicit cigarette trade.”202 This argument rematerializes in the section of Claimants’ Reply in which they argue that the SPR and 80% Requirement have not been effective.203
3.75 Uruguay addresses that argument in full in Chapter 5 of this Rejoinder. It need not also do so here. It is enough now to note simply that there is no reliable evidence to support
Claimants’ assertion that “the volume of illicit cigarette products sold in Uruguay is higher” now than when the SPR took effect.204 Nor is there any reliable evidence that any such increase, even if there were one (quod non), is attributable to the SPR (or the 80% Requirement).205
7. Claimants’ Threats Have Stopped Other States from Adopting an SPR
3.76 Claimants cannot save their case by arguing, as they do, that “no other FCTC party has adopted legislation similar to the SPR.”206 The truth is that other States have considered adopting similar regulations but have been deterred by the threat of litigation.207
3.77 PAHO explains that it “routinely advises public health authorities in the Americas in relation to the drafting of public health regulations, including with respect to tobacco control,”
202 Reply, ¶ 7. 203 See ibid., ¶¶ 82-96. 204 See infra, ¶¶ 5.30-5.39. 205 See infra, ¶¶ 5.40-5.44. 206 Reply, ¶ 102. 207 Uruguay’s Comments on the Written Submission of the Pan American Health Organization (18 May 2015), ¶ 15. See also PAHO Submission (6 Mar. 2015), ¶¶ 40, 85.
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and that, “[i]n the course of providing such advice, and in its discussions with public health regulators more generally, PAHO has become aware that the threat of litigation is having a chilling effect on the promulgation of tobacco control measures, including those like Uruguay’s, even though the measures are considered important for public health.”208 PAHO cites Ecuador as an example of a State that was “actively considering following Uruguay’s lead in adopting ... an
SPR but was dissuaded from doing so because of the pending litigation against Uruguay by the tobacco industry.”209
3.78 In fact, Claimants’ internal records make clear that deterring States from adopting regulations like the SPR is a key strategic objective of this arbitration.210 An email reporting on a meeting
states that “the top priority is to reverse single presentation and 80% HW [health warning],” and that “if that costs $4.0 mio OCI [other comprehensive income] so be it. It is an example for the world.”211
3.79 Similarly,
208 PAHO Submission, ¶ 40. 209 Ibid., ¶ 85. 210 Uruguay’s Comments on the Written Submission of the Pan American Health Organization (18 May 2015), ¶ 16. 211 Email from Chris Dilley, Philip Morris International, to Malcolm Healey, Philip Morris International (25 Aug. 2009), Bates No. PMIUY-00029487 (R-354) (emphasis added).
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3.80 In any event, and despite the efforts of Claimants and other tobacco companies, some
States have enacted, or are considering enacting, regulations that are similar to, but even stronger than, the SPR. These regulations include requiring the plain packaging of all cigarette packs and prohibiting the use of any brand imagery or designs.215 Unlike the SPR, which permits tobacco companies to use graphic designs of their choosing, plain packaging eliminates the ability of tobacco companies to use any brand imagery, allowing them only the use of the name of the product in uniform font and size.
3.81 In regard to plain packaging regulations, the WHO and FCTC Secretariat report:
Uruguay’s concern with respect to misleading packaging is shared by other states that are also implementing regulatory approaches, including those in the WHO FCTC and its Guidelines. For example, Australia has passed laws requiring ‘plain packaging’ of tobacco products, which requires retail
213 214
215 Unlike the SPR, which permits tobacco companies to use their chosen graphic design for the one permitted variant per brand, plain packaging completely removes the ability of tobacco companies to use any of their brand imagery, and causes them to rely solely on names of their products. Ironically, the result of plain packaging has been an exponential increase in the number of brand variants introduced into the market. See, e.g., J. Hoek, et al., Effects of brand variants on smokers’ choice behaviours and risk perceptions, TOBACCO CONTROL: ONLINE FIRST (25 Mar. 2015), p. 1 (R-434); M. Scollo, Tobacco product developments coinciding with the implementation of plain packaging in Australia, TOBACCO CONTROL: ONLINE FIRST (30 Apr. 2014), p. 2 (R-424).
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packaging that permits only brand and variant names in a standardized font, style and size, against a standardized background.216
In that connection, the WHO/FCTC Submission observes:
One of the express objects of the legislation is to ‘reduce the ability of the retail packaging of tobacco products to mislead consumers about the harmful effects of smoking or using tobacco products.’ Although Australia has prohibited the use of colours and other brand elements, whereas Uruguay has prohibited use of brand variants, Australia’s approach shows a similar concern regarding on-going consumer deception associated with branding.217
3.82 Australia is not alone in considering plain packaging. The WHO and FCTC Secretariat note: “A number of other World Health Organization Member States are actively considering the introduction of plain packaging.”218 These include Brazil, Chile, Finland, France, Hungary,
Ireland, Mauritius, New Zealand, Norway, Panama, Singapore, South Africa, Sweden, Turkey, and the United Kingdom. The international community is thus increasingly going further than
Uruguay and prohibiting the use of any brand imagery of any kind.
II. The SPR Was Adopted Pursuant to the Same Deliberative Process as Other Tobacco Control Measures
3.83 Unable to show that the SPR is not logically related to Uruguay’s legitimate public health objectives, Claimants attempt to re-write history by making the absurd claim that Uruguay enacted an important public health measure, the SPR, based on nothing more than a single public
216 WHO & WHO FCTC Secretariat Submission, ¶ 88. 217 Ibid. 218 Ibid.
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health official’s “visit to a store.”219 Claimants assert: “There is no reason to believe that the SPR was the product of deliberation and thorough study by the government.”220
3.84 Claimants’ narrative bears no relation to reality. As recounted in the Counter-
Memorial,221 and as all-but ignored in the Reply,222 Uruguay engaged in an extensive deliberative process that involved input from both external advisors and government regulators, to consider how it should address the ongoing problem of consumers being misled into believing that some cigarettes are less dangerous than others. These discussions, which occurred over a period of months, drew upon the existing scientific and public health literature, and considered a variety of regulatory options. They ultimately yielded the recommendation that the MPH adopt the SPR. The Ministry subjected this recommendation to its own internal evaluation process and decided it was meritorious. Only after these processes had been completed was a draft Ordinance prepared, which was itself subjected to additional internal review within the MPH, before being officially adopted and signed into law by the Minister of Public Health.
3.85 The witness statements Uruguay presented with the Counter-Memorial describe this process in detail, and include testimony by several of the leading participants, including: Dr.
Maria Julia Muñoz, the Minister of Public Health; Dr. Winston Abascal, the Director of the
National Tobacco Control Program (“PNCT” per its Spanish acronym); and Dr. Eduardo Bianco, the Director of the Uruguayan Tobacco Research Center (“CIET” per its Spanish acronym) and a
219 Reply, § I.A.2.a, at p. 20 (capitalization from original quote has been changed into lowercase). 220 Ibid., ¶ 43. 221 See Counter-Memorial, ¶¶ 4.98-4.107. 222 See Reply, ¶¶ 43-54. See also ibid., ¶ 50 (dismissing Respondent’s narrative by noting that the “testimony of its witnesses” is “post hoc”).
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member of the Advisory Commission, who received the International Achievement Award from the American Cancer Society for his tobacco-related work.223
3.86 The deliberative process that led to the SPR is described with specificity in their statements. Dr. Abascal testified: “The PNCT, in consultation with the Advisory Commission, considered several options to combat the tactics used by the tobacco companies,”224 and that
“[o]nce the Advisory Commission and the PNCT approved the recommendation to prohibit multiple presentations of the same brand, the proposal was presented to the Ministry of
Health.”225 Dr. Abascal further stated that he “discussed this recommendation with the Minister of Health, who after conferring with the Ministry’s authorities, agreed with the measure.”226
3.87 Despite the testimony of the central participants in the process, Claimants argue in the
Reply that the SPR was unilaterally adopted by a single government official (Dr. Abascal) without any meaningful deliberation.227 Uruguay therefore supplements the testimony provided in the Counter-Memorial with that of additional participants in the regulatory process. They include Dr. Jorge Basso Garrido, Uruguay’s current Minister of Public Health, who served as the
Ministry’s Director-General of Health at the time the SPR was adopted; Dr. Ana Lorenzo, an
223 “International Affairs Honors Outstanding Global Cancer and Tobacco Control Advocates,” American Cancer Society Cancer Blogs (14 July 2006) (R-379). More recently, Dr. Bianco received the 2015 Luther L. Terry Award for Exemplary Leadership in Tobacco Control. World Conference on Tobacco or Health, “2015 Luther L. Terry Awards Presented” (Mar. 2015), available at http://www.wctoh.org/updates/acs-announces-2015-luther-l-terry- award-winners (R-432). 224 Witness Statement of Dr. Winston Abascal (9 Oct. 2014) (hereinafter “Abascal Witness Statement”), ¶ 10 (RWS- 001). 225 Ibid., ¶ 12. 226 Ibid. 227 See Reply, ¶¶ 43-46.
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official with the MPH and a member of the PNCT and Advisory Commission; and Ms. Amanda
Sica, a member of the Advisory Commission.228
3.88 The testimony of these witnesses corroborates the testimony presented previously and confirms that the SPR was adopted pursuant to a deliberative regulatory process. Uruguay also presents a supplemental witness statement by Dr. Abascal that responds to the erroneous assertions in the Reply concerning his involvement in the deliberations and drafting of the SPR.
3.89 Uruguay explained in the Counter-Memorial that it created the Advisory Commission in
2004 in order to assist the Government in evaluating the effectiveness of its tobacco regulation policies, and to develop and propose additional regulatory measures.229 The body is comprised of public health experts who are well-informed about tobacco-regulation issues and are active members of the international public health community.230 Its mandate includes advising the
MPH on the development of Uruguay’s tobacco control strategy.231
228 Witness Statement of Dr. Jorge Basso Garrido (11 Sept. 2015) (hereinafter “Basso Witness Statement”) (RWS- 004); Lorenzo Witness Statement (RWS-006); Witness Statement of Ms. Amanda Sica (14 Sept. 2015) (hereinafter “Sica Witness Statement”) (RWS-005). 229 See Counter-Memorial, ¶¶ 3.111, 4.100. See also Uruguayan Ordinance 507/004 (30 Sept. 2004), Art. 2 (RL- 210). 230 Among the members of the Advisory Commission are Dr. Eduardo Bianco, the President of the Uruguayan Tobacco Epidemic Research Center (CIET), Witness Statement of Dr. Eduardo Bianco (15 Sept. 2014) (hereinafter “Bianco Witness Statement”), ¶ 3 (RWS-002); Dr. Ana Lorenzo, a doctor who has represented Uruguay in various international tobacco control conferences and has spent nearly her entire medical career working on issues related to tobacco use, Lorenzo Witness Statement, ¶¶ 2-6 (RWS-006); and Ms. Amanda Sica, who is a social psychologist that has worked in the area of tobacco control since 1993, Sica Witness Statement, ¶ 1 (RWS-005). 231 Uruguayan Ordinance 507/004 (30 Sept. 2004), Article 1 (RL-210). See also A. Sica, et al., Tobacco Control Policies in Uruguay in PREVENTION OF HEALTH RISK FACTORS IN LATIN AMERICA AND THE CARIBBEAN: GOVERNANCE OF FIVE MULTISECTORIAL EFFORTS (M. Bonilla-Chacín, ed., 2014), p. 152 (R-282); Abascal Witness Statement, ¶ 6 (RWS-001); Bianco Witness Statement, ¶ 2 (RWS-002); Witness Statement of Dr. María Julia Muñoz (8 Oct. 2014) (hereinafter “Muñoz Witness Statement”), ¶¶ 13-14 (RWS-003); Basso Witness Statement, ¶ 8 (RWS-004); Sica Witness Statement, ¶¶ 4-5 (RWS-005).
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3.90 Among the Advisory Commission’s responsibilities was to evaluate the effectiveness of the regulation, enacted in 2005, that prohibited misleading product descriptions, such as “light” and “mild,” which led consumers to believe that cigarettes bearing these descriptors were safer than other cigarettes.232
3.91 The Advisory Commission determined that the 2005 measure was only partially effective because the same misperceptions persisted despite the prohibition on descriptors. Based on their own observations and the public health literature, they concluded that consumers continued to associate the supposed health effects of the now-banned products with new variants that the tobacco industry promoted as their successors. As Dr. Lorenzo testifies:
One of the topics most frequently discussed and commented on with the experts in the various fora was, and continues to be, issues related to the conduct that the tobacco industry has displayed over the years in response to successive governmental regulations on the matter of tobacco control. This analysis showed that throughout its history, whenever the government implemented a measure designed to fight against tobacco addiction, the tobacco industry frequently responded by devising a way of complying with the regulation, while often taking measures that implied non-compliance with the spirit of these regulations.
A clear example of this behavior could be observed after the use of deceptive terms such as “light” or “mild” were prohibited in Uruguay in 2005. It was observed that in spite of the fact that the industries removed those descriptors from cigarette packaging, the design of the packages remained practically unchanged, retaining the same colors, and adding the variants of the brands, whereby the consumer could clearly continue to buy the same “light” cigarette within one brand, being able to identify the product by the design, colors and the variant of the brand variant packaging, despite the fact that the word “light” had been deleted. For example, Marlboro Light became Marlboro Gold. This behavior hindered compliance with the spirit of the law that prohibited deceptive terms, which was precisely to avoid having the consumer purchase a “light,” “mild,” or “ultra-
232 Sica Witness Statement, ¶ 9 (RWS-005); Lorenzo Witness Statement, ¶ 11 (RWS-006).
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mild” cigarette based on the erroneous understanding that this cigarette was less harmful than a cigarette that is not “light.”233
3.92 Dr. Lorenzo further testifies:
I had the opportunity to speak about this situation with a number of colleagues with whom I frequently had discussions about tobacco control, including Eduardo Bianco, (who represented the Medical Union of Uruguay on the Advisory Commission), Miguel Asqueta (President of the Health Committee of the House of Representatives of Parliament and member of the main opposition party), Beatriz Goja (representative of the School of Medicine at the Advisory Commission) and Winston Abascal (Director of the PNCT of the MSP) in addition to several other colleagues on the Advisory Commission, and we all agreed that given this deception with regard to a cigarette of a brand variant being mistakenly considered less harmful than another of the same brand, some measure ought to be taken. This was a matter that caused much concern, and for this reason, there were a number of people discussing possible measures.234
3.93 The Advisory Commission reached the conclusion that the ban on deceptive descriptors was not fully achieving its objective and that widespread misconceptions persisted.235 On this basis, it determined that further regulatory measures were needed.236
3.94 To identify the most appropriate regulatory measure, the Advisory Commission, working in conjunction with officials from the MPH, spent several months discussing what additional measures should be considered.237 Dr. Basso testifies:
233 Lorenzo Witness Statement, ¶¶ 9-10 (RWS-006). 234 Lorenzo Witness Statement, ¶ 12 (RWS-006). 235 Counter-Memorial, ¶ 4.101. See also Abascal Witness Statement, ¶ 8 (RWS-001); Bianco Witness Statement, ¶¶ 8-11 (RWS-002); Sica Witness Statement, ¶¶ 6-8 (RWS-005); Lorenzo Witness Statement, ¶¶ 9-11 (RWS-006); Second Witness Statement of Dr. Winston Abascal (18 Sept. 2015) (hereinafter “Abascal Second Witness Statement”), ¶ 5 (RWS-007). 236 Counter-Memorial, ¶ 4.101. See also Abascal Witness Statement, ¶¶ 9-11 (RWS-001); Bianco Witness Statement, ¶¶ 9-10 (RWS-002); Sica Witness Statement, ¶¶ 8-9 (RWS-005); Lorenzo Witness Statement, ¶¶ 13-15; Abascal Second Witness Statement, ¶¶ 5-7 (RWS-007). 237 Counter-Memorial, ¶ 4.102. See also Abascal Witness Statement, ¶¶ 9-10 (RWS-001); Bianco Witness Statement, ¶ 10 (RWS-002); Basso Witness Statement, ¶¶ 8-10 (RWS-004); Sica Witness Statement, ¶¶ 8-9 (RWS- 005); Lorenzo Witness Statement, ¶¶ 11-15 (RWS-006); Abascal Second Witness Statement, ¶ 5 (RWS-007). - 69 - CONTAINS CONFIDENTIAL INFORMATION
Inasmuch as the issue of the single presentation is concerned, we had long analyzed with the Advisory Commission the scenario that presented itself in the country after misleading terms such as “light” and “ultralight” were prohibited in 2005. This situation gave rise to the incorporation, by the tobacco industry, of brand variants, using colors and other elements, as another way of maintaining the perception that one brand variant could be a less harmful option than another.238
3.95 Likewise, Dr. Lorenzo testifies:
[T]he Advisory Commission and the PNCT discussed the possibility of requiring a single presentation per brand, in order to avoid the deception that by having several variants under a single brand, the consumer would be induced to think that some were less harmful than others. I participated in various meetings of the Advisory Commission in which the single presentation per brand was discussed. We all agreed that by doing away with multiple presentations within the same brand, this would reduce the possibility that the consumer would consider one variant as being less harmful than another, or that the industry could simply replace deceptive terms that had been prohibited with a variant within the same brand.... Given the industry’s long practice of using brand variants to perpetuate the myth of a healthier option, we considered it essential to regulate this aspect. Distinctions obviously create a difference, and what was evident is that the most important difference between the variants the industry had cultivated for several decades is that some varieties of cigarette “X” could be less harmful than others.239
3.96 The Advisory Commission and the PNCT considered a variety of possible regulatory options. Among them was the plain packaging requirement that has been adopted by Australia.
The Commission, however, decided against making this recommendation because it determined that a less restrictive alternative should be tried first. It thus recommended the prohibition on brand variants, which they considered to impose less of a burden on the tobacco industry.240
238 Basso Witness Statement, ¶ 9 (RWS-004). 239 Lorenzo Witness Statement, ¶ 13 (RWS-006). 240 Abascal Second Witness Statement, ¶ 8 (RWS-004); Lorenzo Witness Statement, ¶ 13 (RWS-006).
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3.97 The Advisory Commission communicated its recommendation to Dr. Abascal, who, as the Director of the PNCT, served as the official liaison between the Advisory Commission and the MPH.241
3.98 Despite the evidence, Claimants continue to paint the false picture that Dr. Abascal was a one-man show. They do this by completely ignoring the extensive deliberation and recommendation of the Advisory Committee, and by disregarding everything he and his colleagues at the MPH did afterwards to review and analyze the Committee’s recommendation, and eventually to discuss, draft, modify and adopt the measure that became the SPR. In particular, Claimants ignore the testimony that, in addition to the deliberation within the
Advisory Committee, Dr. Abascal discussed the proposed SPR at length with his superiors in the
MPH—including the Director General, Dr. Basso, among others242—which, of course, he would have had to do before the Ministry could adopt such a regulation. The direct involvement of senior officials of the MPH was in keeping with the priority given to tobacco-regulation by the
Uruguayan Government. Dr. Basso testifies:
Throughout this period, I met on multiple occasions with the Interinstitutional Advisory Commission for Tobacco Control, which operated, and continues to operate, within the scope of the General Directorate of Health, and whose members report to the Ministry and exchange opinions on the status of tobacco control and future regulations to be implemented in compliance with the FCTC. I frequently met with the Director of the Tobacco Control Program, Dr. Winston Abascal, in my office on the second floor of the Ministry, in order for him to provide me with information and, consequently, analyze the progress of the tobacco
241 Counter-Memorial, ¶¶ 4.105-4.106. See also Abascal Witness Statement, ¶¶ 8-12 (RWS-001); Bianco Witness Statement, ¶¶ 9-10 (RWS-002); Muñoz Witness Statement, ¶¶ 15-19 (RWS-003); Basso Witness Statement, ¶ 8 (RWS-004). 242 Basso Witness Statement, ¶¶ 8-10 (RWS-004); Abascal Second Witness Statement, ¶¶ 4-5 (RWS-007). See also Counter-Memorial, ¶ 4.106; Abascal Witness Statement, ¶ 12 (RWS-001); Muñoz Witness Statement, ¶ 19 (RWS- 003).
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control measures. Without prejudice to the formal supervision for which I was responsible, the tobacco control policy was of great importance to both the President of the Republic and the Minister of Public Health, whom I personally informed of the decisions adopted, and with whom I analyzed the need for adopting new measures. Furthermore, as Director-General of Health, I considered the Tobacco Control Program to be a priority for this Ministry of State, due to its impact on non-communicable diseases, Uruguay’s main burden of disease.243
3.99 The process leading to the SPR was no exception. Dr. Basso explains: “Following deliberations in the Ministry and the Advisory Commission we decided to proceed with the policy in July 2008.”244
3.100 The Ministry’s decision to proceed with the adoption of the SPR triggered the process for turning the proposal into a draft ordinance. The responsibility for doing so fell to Dr. Abascal.
Contrary to Claimants’ portrayal of Dr. Abascal as having drafted the regulation on his own initiative, he in fact acted under instructions from Dr. Basso, who explains in his witness statement that “I asked Dr. Abascal to submit a draft proposal in the next regulation on tobacco product packaging, in order to regulate this matter and put an end to the violation of the spirit of the norms....”245
3.101 Dr. Abascal testifies that he then “sent a draft of the measure to the lawyers for the
General Directorate of Health, who gave it proper legal form.”246 His testimony is confirmed by contemporaneous records, which show that the draft regulation was reviewed by: (1) Dr. Rodolfo
Becerra Barreiro, a lawyer for the General Directorate; (2) Alberto della Gatta, the MPH’s
243 Basso Witness Statement, ¶¶ 8 (RWS-004). 244 Ibid., ¶¶ 9-10. 245 Ibid., ¶ 10 (RWS-004). 246 Abascal Witness Statement, ¶ 12 (RWS-001).
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Director of Coordination of Programs; and (3) Dr. Basso.247 Only after these additional levels of review had been completed was the text submitted to the Minister for her review and approval.248
3.102 Unable to refute the testimony of the participants in Uruguay’s deliberations, Claimants resort to asserting that Uruguay has not presented documents proving that “the MPH and the
Advisory Commission extensively considered and debated the SPR before the government adopted the measure.”249 They are mistaken. Putting aside the fact that Claimants have presented no evidence contradicting the testimony recounted above, contemporaneous records demonstrate that the Advisory Commission did, in fact, convene on numerous occasions during the relevant period to discuss matters of tobacco control policy.250
3.103 Further, the MPH’s administrative file regarding Ordinance 514, which records the history of the draft regulation from its initial draft through its signature, refutes Claimants’ implausible argument that Dr. Abascal acted alone. The file shows that, on 28 July 2008, the
PNCT included the initial text for the SPR251 in a draft resolution on tobacco packaging that it
247 Ministry of Health Administrative File regarding Ordinance 514, pp. UGY0001818, 1822, 1825 (C-334). 248 Ibid., pp. UGY0001836-1838 (C-334). Claimants assert that “Dr. Abascal boasted of having personally drafting the SPR on his own initiative, without input from others.” Reply, ¶ 53. The only support offered for this claim is a self-serving statement by Claimant Abal’s own Uruguayan counsel, Nicolás Herrera. But his claims are contradicted by the testimony of the former and current Ministers of Public Health and multiple members of the Advisory Commission, all of whom testify that they were involved in the development of the SPR, as well as by Dr. Abascal himself. See Abascal Witness Statement, ¶¶ 7-12 (RWS-001); Bianco Witness Statement, ¶¶ 7-11 (RWS-002); Muñoz Witness Statement, ¶¶ 18-19 (RWS-003); Basso Witness Statement, ¶¶ 8-9 (RWS-004); Sica Witness Statement, ¶¶ 6-10 (RWS-005); Lorenzo Witness Statement, ¶ 13 (RWS-006); Abascal Second Witness Statement, ¶¶ 5, 8 (RWS-007). 249 Reply, ¶ 47. 250 Email from Ministry of Public Health Commissions to Dr. Abascal et al. (1 July 2008) (C-328); Email from Ministry of Public Health Commissions to Dr. Abascal et al. (2 June 2008) (C-329); Email from Ministry of Public Health Commissions to Dr. Abascal et al. (18 June 2008) (C-330); Email from Ministry of Public Health Commissions to Dr. Abascal et al., (27 May 2008) (C-331); Email from Eduardo Bianco to Ministry of Public Health Commissions (27 May 2008) (C-332); Personal Agenda of Eduardo Bianco (2008) (C-333). 251 Ministry of Health Administrative File regarding Ordinance 514, pp. UGY0001810-1812 (C-334).
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had received on 25 July.252 The Ministry’s legal counsel reviewed the draft on 31 July, which was then transmitted to Dr. Basso.253 Dr. Basso considered the draft provision and amended it to include the clause “such as colors or combinations of colors, numbers or letters.”254
3.104 Dr. Basso explains the process in his witness statement:
A few weeks before the approval of Ordinance 514/009, the Tobacco Control Program sent a draft of the same to the General Directorate of Health (DIGESA), which was first evaluated by its legal advisers. Changes were made and a new draft was forwarded.
After this new draft was reviewed by the legal advisers of the General Directorate of Health (DIGESA), I analyzed it and made handwritten modifications to Article 3, as noted on page 15 of the administrative file, with number 001/2587/2008/0/0. In my opinion, it was important to complete the text with the wording of Article 11 of the FCTC and Article 12 of Decree 284/008, which refers to misleading terms. And I added the text: “...such as colors or color combinations, numbers or letters ...,” because I wanted to prevent the use of variants containing the described elements as a means for evading compliance with the regulation prohibiting misleading terms. The reference to colors, color combinations and the use of numbers or letters was aimed to facilitate compliance stricto sensu with the meaning of the regulation provided in the aforementioned decree. ....255
3.105 The draft was then sent to the Minister, who reviewed the text, including the proposed modifications, before approving and signing it 18 August 2008.256
3.106 As the preceding paragraphs make clear, there is no truth to Claimants’ assertion that Dr.
Abascal alone conceived and drafted the SPR based solely on a single visit to a kiosk, and then
252 Ibid., pp. UGY0001807-1809. 253 Ibid., pp. UGY0001819-1822. 254 Ibid., p. UGY0001824. See also Uruguayan Ordinance No. 514/08 (18 Aug. 2008), Art. 3 (RL-7). 255 Basso Witness Statement, ¶¶ 11-12 (RWS-004). 256 See Ministry of Health Administrative File regarding Ordinance 514, UGY0001836-1838 (C-334). Claimants’ contention that July 2008 was the “first time that PMI representatives heard of the possibility of this type of regulation” is contradicted by contemporaneous records, which show that they were aware of proposed regulations that would impose “colors restriction” in June 2008. Second Witness Statement of Mr. Chris Dilley (14 Apr. 2015), ¶ 4 (CWS-022); Philip Morris International, PMLA&C Strategy Review: Uruguay (June 2008), p. 24 (C-362).
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circumvented the standard regulatory process by convincing the Minister to enact it without any consultative process. This improbable claim is supported only by a witness statement of one of the Claimants’ own attorneys, Dr. Nicolas Herrera.257 Dr. Abascal responds with astonishment to this attempt to make the SPR appear to be the product of his own imagination:
I find it surprising that an attorney like Dr. Herrera, who is acquainted with the workings of government agencies in Uruguay, could think that an ordinary official in the Ministry of Health, at the 6th hierarchical level of the Ministry, could have the authority, without the intervention or input of any other official of a higher administrative rank to prepare and secure approval for a measure such as that in Ordinance 514/008.258
3.107 Apart from its sheer implausibility, Claimants’ argument that Dr. Abascal alone is responsible for the SPR is contradicted by the evidence, including contemporaneous official documentation and testimony of those who were directly involved in the adoption of the regulation and the extensive deliberations that preceded it, as cited and quoted above.259 The
Reply harps repeatedly on the absence of minutes of the meetings of the Advisory Committee or the PNCT.260 But it was not then the practice to keep minutes of those meetings. Their absence does not suggest a failure of due deliberation. To the contrary, the SPR was extensively discussed by numerous officials and advisers before it was adopted.
3.108 In sum, there is no truth to Claimants’ contention that the SPR was conceived and devised by a single government official acting outside the regular regulatory process. To the contrary, Uruguay, following its normal procedures, adopted the SPR after an extensive
257 Witness Statement of Mr. Nicolás Herrera (28 Feb. 2014), ¶ 4 (CWS-006); Second Witness Statement of Mr. Nicolás Herrera (26 Mar. 2015), ¶¶ 4-6 (CWS-019). 258 Abascal Second Witness Statement, ¶ 17 (RWS-007). 259 See supra, ¶¶ 3.88-3.105. 260 Reply, ¶¶ 47-51.
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deliberative process that involved input from both external public health experts and responsible officials within the Ministry of Public Health.
*
3.109 The record is therefore clear that the SPR was a well-justified, well-considered measure designed to protect public health by impeding the tobacco industry’s ability to perpetuate the misperception that some cigarettes are less harmful than others. Claimants’ arguments to the contrary are directly refuted by the world’s leading public health authorities, including the WHO, the FCTC Secretariat and PAHO.
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CHAPTER 4.
THE 80% REQUIREMENT WAS ALSO A REASONABLE EXERCISE OF URUGUAY’S SOVEREIGN POLICE POWERS TO PROTECT PUBLIC HEALTH
4.1 Uruguay’s Counter-Memorial showed that the 80% Requirement was adopted based on the overwhelming scientific evidence that larger warning labels are more effective than smaller ones. This includes warning labels that cover 80% as compared to 50% of the front and back of cigarette packs. Uruguay also described the process leading to the adoption of the 80%
Requirement, and disproved Claimants’ contention that the measure was not adopted to increase warning label effectiveness, but rather to “punish” Mailhos for its use of so-called “alibi brands.”
4.2 Claimants’ Rejoinder invests most of its energy arguing the second point. They attempt to rehabilitate their argument that the 80% Requirement was actually a regulatory counter-measure taken in response to alibi brands. The Rejoinder is no more effective in this respect than was the
Memorial, however. The record—including documents produced by both Parties in document discovery—is clear: the decision to adopt the 80% Requirement had nothing to do with alibi brands. To the contrary, it was aimed exclusively at increasing the efficacy of warning labels.
4.3 In contrast to their treatment of the process by which the 80% Requirement was adopted,
Claimants spend notably less time trying to rebut Uruguay’s showing concerning the wealth of empirical support for its decision to increase warning label size to 80%. Indeed, they devote just a single paragraph of their 193-page Reply to a half-hearted argument that the studies cited by
Uruguay are “an unsound basis for policymaking.”261 The scant attention Claimants give to the issue reflects their evident awareness that they are making a hopeless argument. The simple truth
261 Reply, ¶ 77.
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is that there is a clear consensus among the 180 States Parties to the FCTC that the studies regarding the relationship between warning label size and effectiveness constitute not just a sound basis, but a compelling one, for policymaking. The WHO and FCTC Secretariat confirmed exactly this point in their Written Submission to the Tribunal.
4.4 Before turning to these issues in the sections that follow, it bears noting that there are three critical points of agreement between the Parties. First, the Parties agree that consumers must be informed of the grave health risks that smoking poses. Claimant Abal has specifically stated to the Government of Uruguay: “Smokers should always be informed of the health risks associated with smoking.”262
4.5 Second, the Parties agree that warning labels are an effective way to inform consumers of those health risks. Philip Morris International’s website states:
Warning smokers and nonsmokers about the serious adverse health effects of smoking is a fundamental objective of tobacco regulation and has been a core component of government tobacco policy for decades in many countries. We support this policy. In fact, we are such strong supporters of health warnings that we place them on our packs voluntarily in countries, including several in Africa, where they are not required by law.263
262 Abal Hermanos S.A., Comments on the “Tobacco Control Law” (Mar. 2008), p. 1 (R-197). 263 Philip Morris International, “Health Warning Labels,” available at: http://www.pmi.com/eng/tobacco_regulation/regulating_tobacco/pages/health_warning_labels.aspx (last visited 21 Aug. 2015), p. 1 (R-358). See also Philip Morris International, 2009 Annual Report, p. 29 (C-142) (“We support health warning requirements and, with certain exceptions, defer to the governments on the content of the warnings. In countries where health warnings are not required, we place them on packaging voluntarily […].”); Abal Hermanos S.A., Comments on the “Tobacco Control Law” (Mar. 2008), p. 13 (R-197) (“[C]onsumers should be warned about these risks, and one way of doing this is by placing health warnings on the packaging of the tobacco products that are sold to the public.”).
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Claimants’ Reply is less forthcoming on this point than their website, although they do acknowledge that it is not their position that “health warnings in general serve no purpose.”264
4.6 Third, and most importantly, the Parties agree that when it comes to delivering a message, bigger is better. Uruguay, for its part, requires large warning labels because they are better at informing smokers of the health risks of smoking—a policy goal with which Claimants say they agree.265 Claimants, for their part, seek to maximize the space available for them “to display their branding” precisely because they know that larger design elements are more effective in reaching, attracting and maintaining consumers.266 In either case, the principle is the same: bigger messages are more effective at reaching consumers than smaller ones.
4.7 That, however, is where the agreements between the Parties end. As Uruguay will demonstrate in the sections that follow, Claimants persist in distorting the factual and scientific record in pressing their complaint about the 80% Requirement. Section I will correct the factual record and show that Claimants’ theory of how the 80% Requirement came into being is belied by the facts, including Claimants’ own documents.267 Section II exposes the misguided efforts of
Claimants and the experts they have hired to dismiss the mass of scientific and international support for larger health warnings, including warnings larger than 50%.
264 Reply, ¶ 79. 265 Philip Morris International, “Health Warning Labels,” available at: http://www.pmi.com/eng/tobacco_regulation/regulating_tobacco/pages/health_warning_labels.aspx (last visited 21 Aug. 2015), p. 1 (R-358) 266 Memorial, ¶ 47; Reply, ¶ 62; Expert Report of Prof. Julian Villanueva (27 Feb. 2014), p. 20 (CWS-010). According to Villanueva, packaging is “useful for brand development” and to “attract[] attention, communicate[] differentiation and tie[] variants to existing brand familiarity and associations.” Ibid. 267 On 5 June 2009, Claimant Abal sent a letter to the Minister of Public Health lodging its complaints with regard to 80% warning labels and threatening arbitration. They did not once mention alibi brands in this document. See Uruguayan Ministry of Public Health, Administrative File No. 001-2392/2009/0/0 (8 June 2006), Bates No. UGY0003890 (R-392). Even in the Request for Arbitration, dated 19 February 2010, Claimants did not invoke their alibi brands theory. See Claimant’s Request for Arbitration (19 Feb. 2010).
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I. The 80% Requirement Was Adopted To Make Warning Labels More Effective, Not Punish Mailhos
4.8 Uruguay’s Counter-Memorial described the process by which the 80% Requirement was adopted. In February 2008, the WHO released its Report on the Global Tobacco Epidemic: The
MPOWER package (2008), which outlined a plan to guide countries in implementing legislation that would comply with their obligations under the FCTC.268 Among other things, this report recommended that warning labels cover “at least half of the pack’s main display areas ....”269
Article 9 of Uruguay’s Law 18,256, which was then in the final stages of approval, followed this recommendation and mandated that Uruguay’s warnings cover “at least 50%” of the principal surfaces of the pack.270
4.9 Then, in November 2008, the States Parties to the FCTC unanimously adopted the
Implementation Guidelines for Article 11 of the Convention, which expressly call on States to enlarge health warnings above 50% to the maximum size possible.271
4.10 In the wake of these developments, Dr. Eduardo Bianco, President of CIET and member of the MPH’s Advisory Commission, met with and then presented a memorandum to President
Vazquez recommending additional tobacco control measures.272 One of the measures
268 WHO 2008 Tobacco Report (R-28). 269 Ibid., pp. 34-35 (emphasis added). See also Counter-Memorial, ¶¶ 5.60-5.62. 270 Uruguayan Law No. 18,256 (6 Mar. 2008), Art. 9 (RL-6) (emphasis added). See also Counter-Memorial, ¶¶ 5.60- 5.62. 271 COP-FCTC, Article 11 Guidelines, ¶ 12 (RL-13). 272 Bianco Witness Statement, ¶¶ 16-20 (RWS-002); Letter from E. Bianco, Uruguayan Tobacco Epidemic Research Center (CIET), to President Tabaré Vásquez (16 Apr. 2009), and email sending same (R-208).
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recommended was to enlarge the size of warning labels to increase public awareness of the harms caused by tobacco smoking, and thus cause them to quit or not take up the habit.273
4.11 The President approved the proposal, leaving it for the MPH to determine the precise size requirement.274 Following consultations among officials of the PNCT and members of the
Advisory Commission, the decision was made to set the requirement at 80%.275 A proposal to increase the size even further to 90% was rejected so as to leave space for tobacco companies to display their brand logos.276
4.12 As they did first in their Memorial, Claimants continue to try to revise history. The Reply asserts: “Respondent adopted the 80/80 regulation in response to efforts by the dominant cigarette manufacturer in Uruguay, Mailhos, to circumvent the SPR by introducing so-called
273 Bianco Witness Statement, ¶¶ 16-20 (RWS-002). Even as early as 2007, Dr. Bianco was recommending larger warning labels. See Email from Eduardo Bianco to Minister Maria Julia Muñoz & Director-General Jorge Basso, Ministry of Public Health (2 Dec. 2007), Bates No. UGY0000325 (R-383) (“The larger the warnings, the more effectively they inform the target group: smokers”); E. Bianco, The Implementation of the Framework Convention: The Role of Civil Society, VII Congress on the Prevention and Treatment of Tobacco Consumption (19 Feb. 2009), Bates No. UGY0002092 (R-389) (presentation from a speech on MPOWER given by Dr. Bianco in February of 2009, in which he stated that large warning labels are one of the most effective strategies to confront the tobacco epidemic). 274 See Counter-Memorial, ¶¶ 5.60-5.65; Abascal Witness Statement, ¶¶ 16-18 (RWS-001); Bianco Witness Statement, ¶¶ 15-20 (RWS-002); Muñoz Witness Statement, ¶¶ 20-22 (RWS-003); Abascal Second Witness Statement, ¶ 19 (RWS-007); Lorenzo Witness Statement, ¶ 24 (RWS-006). 275 Muñoz Witness Statement, ¶ 22 (RWS-003); Abascal Witness Statement, ¶ 17 (RWS-001); Sica Witness Statement, ¶ 12 (RWS-005); Lorenzo Witness Statement, ¶ 24 (RWS-006); Abascal Second Witness Statement, ¶ 19 (RWS-007). 276 Abascal Witness Statement, ¶ 17 (RWS-001); Muñoz Witness Statement, ¶ 22 (RWS-003).
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‘alibi’ brands.”277 Claimants’ argument is only made possible by ignoring large swaths of the record and stitching other pieces of it together in a manner that is unfaithful to the truth.
4.13 Uruguay’s Counter-Memorial included sworn statements from three different witnesses attesting to the facts set out above: the former Minister of Public Health, Dr. María Julia Muñoz;
Dr. Winston Abascal of the PNCT; and Dr. Eduardo Bianco, one of Uruguay’s leading public health authorities and a Member of the Advisory Commission.
4.14 Claimants’ Rejoinder proceeds in the first instance by entirely ignoring the statements of both Minister Muñoz and Dr. Bianco. Indeed, the Rejoinder never even mentions their names in its discussion of the 80% Requirement—an especially significant omission in Dr. Bianco’s case, since he is the one who first met with President Vazquez on this issue and proposed enlarging the health warnings.278
4.15 Claimants choose instead to focus exclusively on Dr. Abascal and certain statements he made to the effect that increasing the size of the warning labels was one of the possible actions
Uruguay was considering taking in response to Mailhos’ creation of alibi brands.279 Dr. Abascal did, in fact, express this thought to others. He indicated that increasing warning label size was one of a number of possible counter-measures that was under consideration. (Other options
277 Reply, ¶ 63. 278 Bianco Witness Statement, ¶¶ 16-20 (RWS-002); Letter from E. Bianco, Uruguayan Tobacco Epidemic Research Center (CIET), to President Tabaré Vásquez (16 Apr. 2009), and email sending same (R-208). 279 See Email from Chris Dilley to Miroslaw Zielinski (16 Mar. 2009) (C-337) ; Letter from Dr. Abascal to the Director General of the Ministry of Public Health (3 Apr. 2009) (C-338); “Accusations against Tobacco Company,” Radio El Espectador (9 April 2009) (C-277); Email from Federico Gey to Javier Ortiz (13 July 2009) (C-340); Second Witness Statement of Mr. Chris Dilley (14 Apr. 2015), ¶ 10 (CWS-022) (“PMI representatives regularly met with MPH officials, including Dr. Abascal.”).
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considered included a request that “Monte Paz [] take off the market these three brands,”280 legal action,281 ) That was not, however, what ultimately led to the adoption of the 80% Requirement. Rather, it was the Presidential initiative discussed above and described in the Counter Memorial. Contemporaneous documents from both Parties make this abundantly clear.
4.16 Claimants cite a 3 April 2009 memorandum from Dr. Abascal to the Director General of the Ministry of Public Health, produced in discovery, in which Dr. Abascal wrote that in response to the alibi brands “consideration should be given to expanding the pictograms and legends to 90% of both main faces[.]”283 Claimants appear to consider the memorandum a smoking gun; it forms the lynchpin of their argument in the Reply. It does not support the weight
Claimants place on it, as its further history, all of it plainly reflected in the same record produced in discovery, demonstrates. In point of fact, Dr. Abascal’s suggestion was overtaken by the
Presidential decision to increase warning label size as recommended in the WHO’s MPOWER initiative and the Implementation Guidelines to Article 11 of the FCTC.
280 “Accusations against Tobacco Company,” Radio El Espectador (9 April 2009) (C-277). In this press article, Dr. Abascal states that he thought “in the next days or weeks the ministry will take some action with respect to” Mailhos’ use of alibi brands. In the same statement, Dr. Abascal described the action he had in mind in regard to alibi brands. He said that he expected the Ministry would request “Monte Paz to take off the market these three brands,” not enlarge warning labels. Ibid. 281 Email from Oscar Bottinelli to Frederico Gey (21 Apr. 2009) (C-336) (PMI representative states that “[i]t seems that the Ministry found the legal foundations to argue that, in this case, there is a clear violation of the regulations, since it is an attempt to deceptively elude the regulations, through maintaining the totality of the elements, except for the name.”). 282
283 Letter from Dr. Abascal to the Director General of the Ministry of Public Health (3 Apr. 2009) (updated version of C-338), p. 3 (R-377) .
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4.17 The record shows that Dr. Abascal’s 3 April letter was forwarded to the legal office of the MPH’s Dirección General, which subsequently issued a memorandum of its own on 16
April.284 After setting out the problem created by Mailhos’ use of alibi brands, the legal office states that “the program [i.e., the PNCT] proposes to expand the pictograms to 90% of the packaging.”285 Notably, the legal office then also states that an alternative solution to the same problem would be the adoption of plain packaging.286
4.18 Dr. Abascal’s proposal went no further than that, however. The expediente, or file, associated with his memo contains only one further entry. On the last page of the memo, there is a hand-written note dated 30 June 2009 (i.e., 15 days after the decree imposing the 80%
Requirement had been issued) written by Dr. Jorge Basso Garrido, then Director General (and now Minister) of Health, which states: “Given that a new Decree enlarging the health warnings has been signed, archive these proceedings without prejudice.”287 In other words, Dr. Abascal’s suggestion had been superseded and rendered moot by the President’s decision to increase the size of warning labels for different reasons.
4.19 In his witness statement, Dr. Basso explains “[a]s the decision to increase the health warnings had already been made, I decided to archive the proceedings concerning the letter sent by the Tobacco Control Program.”288
284 Ibid., p. 6. 285 Ibid., p. 7. 286 Ibid., p. 7. 287 Ibid., p. 3. 288 Basso Witness Statement, ¶ 16 (RWS-004). See also Abascal Second Witness Statement, ¶¶ 21-23 (RWS-007).
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4.20 The contemporaneous record thus demonstrates unequivocally that punishing Mailhos was not the motivation for Uruguay’s increase in the size of warning labels. The same truth emerges equally clearly from both the public announcements accompanying the decision to increase warning label size and the text of Decree 287 itself.
4.21 When Minster Muñoz announced the increase in the size of warning labels on 1 June
2009, she emphasized the importance of making the public more conscious of “the harmful effects that tobacco causes in human beings ....”289 She continued:
That is why it is to them that we are going to direct a more intense campaign. Through cigarette packs, the President has just signed a Decree increasing the warning of the harmful effects [smoking] produces to 80% of the size of the pack, as well as through publicity campaigns devoted to these issues.290
4.22 The Decree’s preamble is also instructive. It states in part:
CONSIDERING: that according to Article 44 of the Constitution, it is the duty of the State to legislate in all matters related to public health and hygiene, to achieve the physical, moral and social betterment of all the inhabitants of the country;
MINDFUL: of the foregoing and of what is established in Article 44 of the Constitution of the Republic, the Framework Convention for Tobacco Control, Article 11 of Organic Law of Public Health No. 9.202 of 12 January 1934, Article 9 of Law No. 18,256 of 6 March 2008 [which provides that warning labels shall cover “at least” 50% of the pack] Article 12 of Decree No. 284/008 of 9 June 2008, and other amending and related provisions ....291
289 Uruguayan Ministry of Public Health (MSP), Commitment to the Health of the Population: Strengthening the Anti-Tobacco Campaign (1 June 2009) (R-37). See also Muñoz Witness Statement, ¶¶ 20-22 (RWS-003); Bianco Witness Statement, ¶¶ 15-20 (RWS-002); Abascal Witness Statement, ¶¶ 15-19 (RWS-001). 290 Uruguayan Ministry of Public Health (MSP), Commitment to the Health of the Population: Strengthening the Anti-Tobacco Campaign (1 June 2009) (R-37). 291 Uruguayan Decree No. 287/009 (15 June 2009), Preamble (RL-4) (emphasis added).
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The references to the FCTC and Article 9 of Law No. 18,256 are telling and entirely consistent with the origins of the decree as described above. Equally telling is the absence of any reference to Mailhos, alibi brands or even the SPR (Ordinance 514). The reason for their absence is obvious: they played no role in the decision to adopt the 80% Requirement.
4.23 Notably, Claimants’ internal documents provide further corroboration of the same point.
An internal, contemporaneous email (only portions of which Claimants cite in their Reply) makes clear that
It also makes clear that
Following the public announcement of the change,
4.24
292 Email from Federico Gey to Javier Ortiz (3 June 2009) (C-339). 293 Ibid. See also Abascal Second Witness Statement, ¶¶ 24-25 (RWS-007). 294 Email from Federico Gey to Javier Ortiz (3 June 2009) (C-339) (emphasis added).
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4.25 The true origins of the 80% Requirement are thus exactly those stated in Uruguay’s
Counter-Memorial. It was a measure designed with the WHO’s MPOWER initiative and the
Implementation Guidelines to Article 11 of the FCTC in mind, to make the public more conscious of “the harmful effects that tobacco causes in human beings ....”295 As discussed in the next section, there was vast empirical support for this decision.
II. Claimants Fail To Undermine the International Consensus That Larger Warning Labels Are More Effective than Smaller Ones
A. The Overwhelming Weight of the Evidence Shows That the Largest Warning Labels Are the Most Effective
4.26 Uruguay’s Counter-Memorial reviewed the abundant scientific support for the conclusion that larger warning labels, including warning labels larger than 50%, are more effective in reaching consumers than smaller ones.296 Uruguay’s submission was supplemented by the expert report of Professor James F. Thrasher.297 To summarize those submissions: both experimental and observational studies demonstrate that larger health warning labels and, specifically, health warning labels larger than 50%, are more effective in achieving a number of public health goals than smaller ones. These goals include increasing public awareness of the specific risks of
295 Uruguayan Ministry of Public Health (MSP), Commitment to the Health of the Population: Strengthening the Anti-Tobacco Campaign (1 June 2009) (R-37). Indeed, Uruguay has recently been recognized by Bloomberg Philanthropies for its commitment to implementing the MPOWER framework. See Bloomberg Philanthropies, “2015 Bloomberg Philanthropies Awards for Global Tobacco Control: Meet the Winning Organizations” (18 Mar. 2015), available at http://www.bloomberg.org/blog/2015-bloomberg-philanthropies-awards-global-tobacco-control- meet-winning-organizations/, p. 5 (R-433) (“Uruguay has been a regional and global leader in tobacco control for nearly a decade. … The Ministry of Health has implemented tobacco cessation in a strategic, sustainable, accessible, and affordable way by prioritizing other MPOWER measures including monitoring, protecting, warnings, and raising [taxes]. Uruguay’s approach represents a successful model for how the MPOWER method can tackle tobacco use in low-income countries.”). 296 Counter-Memorial, ¶¶ 5.25-5.44. 297 See generally Prof. James F. Thrasher, Review of the Size of Health Warning Labels on Tobacco Packaging (15 Sept. 2014) (hereinafter “Thrasher Report”) (REX-003).
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smoking and the magnitude of those risks, as well as discouraging tobacco use.298 Professor
Thrasher concluded in his first report:
The evidence, both before and after Uruguay adopted its 80% HWL regulation, indicates that increasing HWL size enhances HWL effectiveness and that, as a consequence, the largest HWLs are the most effective.
...
In addition to this review, all prior literature reviews of the evidence available regarding the effect of increasing HWL size, except those funded by the tobacco industry, have come to the same conclusion reached here: the evidence shows that the largest HWLs are the most effective.299
4.27 As stated, Claimants spend very little of their Reply attempting to mount a counter- argument. They confine themselves to two short assertions. First, they contend that the “record contradicts Respondent’s argument that the 80/80 regulation was necessary to increase awareness of smoking risks. Knowledge that smoking presents health risks was near universal in
Uruguay well before the 80/80 regulation.”300 Second, they refer in one paragraph to the reports of Professors Chernev and Jacoby who claim the studies cited by Uruguay are “an unsound basis for policymaking.”301 Both contentions are easily dismissed.
4.28 With respect to the first, Claimants badly misstate both Uruguay’s argument and the test for determining whether or not the 80% Requirement is consistent with the BIT. The question is not whether Uruguay has shown that the requirement was “necessary” to increase awareness of smoking risks. To the contrary, the issue is whether Claimants can carry their burden of proof to
298 See Counter-Memorial, ¶¶ 5.53-5.56; Thrasher Report, pp. 21-37 (REX-003). 299 Thrasher Report, pp. 51-53 (REX-003). 300 Reply, ¶ 75 (emphasis added). 301 Ibid., ¶ 77.
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show that Uruguay acted in an obviously arbitrary manner in issuing Decree 287. As the
Counter-Memorial and Professor Thrasher demonstrated, it plainly did not.
4.29 Moreover, Claimants’ suggestion that the change in warning label size was pointless because of the pre-existing knowledge in Uruguay “that smoking presents health risks was near universal” willfully misunderstands the way warning labels work (a point Uruguay made in its
Counter-Memorial302). The function of warning labels goes beyond simply informing consumers
“that smoking presents health risks” in the abstract. Rather, warnings make those risks real by repeated exposure to the specific illnesses caused by smoking every time a smoker (or non- smoker) sees a package.303 In conjunction with other tobacco control policies, such as rotating warning label content, warning labels also serve to fill in specific knowledge gaps of the types of harms caused.304 They can also illustrate the magnitude of risks.305 Finally, warning labels can help overcome psychological coping mechanisms that smokers (especially youth smokers)
302 Counter-Memorial, ¶¶ 5.13-5.24; Thrasher Report, pp. 15-20 (REX-003). 303 Counter-Memorial, ¶¶ 5.13-5.14; Thrasher Report, pp. 15-16 (REX-003); Prof. James F. Thrasher, Uruguay’s Decision to Implement Health Warning Labels that Cover 80% of Tobacco Packaging (10 Sept. 2015) (hereinafter “Thrasher Second Report”), pp. 28-30 (REX-011). 304 Counter-Memorial, ¶¶ 5.15-5.16; Thrasher Report, pp. 10-11 (REX-003); Thrasher Second Report, p. 27 (REX- 011). Cf. Reply, ¶ 76 (arguing that increasing the size will not ensure how warnings will make consumers aware of specific smoking-related diseases). For example, the 2010-2011 ITC Uruguay Survey found that only 54% of the population was aware that smoking causes stroke. This increased to 71% in the next wave of the study, following the introduction of new warning labels (at 80%) that warned specifically of stroke risk. See International Tobacco Control (ITC) Policy Evaluation Project, ITC Uruguay National Report: Findings from the Wave 1 to 3 Surveys (2006-2011) (Aug. 2012), p. 51 (C-133); International Tobacco Control (ITC) Policy Evaluation Project, ITC Uruguay National Report: Findings from the Wave 1 to 4 Surveys (2006-2012) (Aug. 2014), p. 80 (R-313). 305 Counter-Memorial, ¶ 5.17; Thrasher Report, p. 12 (REX-003); Thrasher Second Report, p. 28 (REX-011). See also Gragg, Ross & Dawson Ltd., Health Warnings on Cigarette and Tobacco Packs: Report on Research to Inform European Standardization (Dec. 1990), Bates No. UGY0002061, p. 8 (R-366) (as early as 1990, experts found that there is a “tendency to equate the size of the warning with the magnitude of the risk.”).
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develop to distance themselves from risk.306 All of this was well documented in published scientific studies at the time Uruguay adopted the 80% Requirement.
4.30 Professors Chernev’s and Jacoby’s assertions about the soundness of the studies as a basis for policymaking are just as easily refuted. In fact, the 180 States Parties to the FCTC, together with the WHO and FCTC Secretariat, have already done exactly that. The
Implementation Guidelines for Article 11 of the Convention (unanimously adopted by the States
Parties in 2008) expressly state that the Guidelines and the studies on which they are based constitute a sound basis on which to make policy.
4.31 Paragraph 12 of the Article 11 Implementation Guidelines states: “Parties should consider using health warnings and messages that cover more than 50% of the principal display areas and aim to cover as much of the principal display areas as possible.”307 Notably, the
Guidelines further state that this policy recommendation is based on “the evidence that the effectiveness of health warnings and messages increases with their size.”308 To these points, the
WHO and FCTC Secretariat have expressly added: “The Guidelines play a particularly important role in settings where resource constraints may otherwise impede domestic policy development.”309 In other words, in the view of the world’s leading health authorities, the
Guidelines by themselves constitute a reliable basis for policymaking.
306 Counter-Memorial, ¶¶ 5.20-5.23; Thrasher Report, pp. 16-18 (REX-003); Thrasher Second Report, pp. 28-30 (REX-011). 307 COP-FCTC, Article 11 Guidelines, ¶ 12 (RL-13) (emphasis added). 308 Ibid., ¶ 12. 309 WHO and WHO FCTC Secretariat Amicus Brief, ¶ 19.
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4.32 The WHO and FCTC Secretariat provided further confirmation of the mass of evidentiary support underlying Uruguay’s action in their Written Submission to this Tribunal (to which, as previously noted, Claimants’ Reply never once refers). It writes:
[T]he available evidence supports the conclusion that the effectiveness of health warnings increases with their prominence. ... [T]his general conclusion is based on a substantial number of studies using a number of methodologies that produce consistent results across time and place. When read together, these studies comprise a body of evidence that permits generally applicable conclusions to be drawn.310
The WHO/FCTC Submission reiterates the same point in its conclusion: “The action taken by
Uruguay [i.e., the 80% Requirement] was taken in light of a substantial body of evidence that large graphic health warnings are an effective means of informing consumers of the risks associated with tobacco consumption and of discouraging tobacco consumption.”311 (As previously indicated,312 Claimants agree that this is an appropriate public health objective and aim of tobacco control policy.)
310 Ibid., ¶ 24. 311 Ibid., ¶ 90. Global health authorities also expressed support for the measures Claimants challenge in this case, including the 80% Requirement, soon after they were enacted. For example, in 2010, the 50th Directing Council of PAHO and the WHO passed Resolution CD50.R6, which expressed their “support to the Eastern Republic of Uruguay for all the national measures it has adopted … especially those on the packaging of tobacco products to inform the public about the risks of tobacco and prevent manufacturers from directly or indirectly suggesting that some products are less harmful to health.” Pan American Health Organization (PAHO) & World Health Organization (WHO), Strengthening the Capacity of Member States to Implement the Provisions and Guidelines of the WHO Framework Convention on Tobacco Control, CD50.R6, adopted on 29 Sept. 2010, ¶ 1 (R-230). In 2012, Uruguay won a Bloomberg Award for Global Tobacco Control for its progressive action in implementing larger cigarette pack warnings. “Bloomberg Philanthropies Honors Uruguay’s Efforts To Fight Big Tobacco,” PR Newswire (22 Mar. 2012), Bates No. UGY0003430 (R-415). See also Counter-Memorial, ¶¶ 4.112-4.117 (discussing international support received by Uruguay for its tobacco control regime). Individual members of Uruguay’s public health community have also been recognized: Dr. Eduardo Bianco won the prestigious Luther L. Terry Award in 2015 for his “Outstanding Individual Leadership” in tobacco control. World Conference on Tobacco or Health, “2015 Luther L. Terry Awards Presented” (Mar. 2015), available at http://www.wctoh.org/updates/acs- announces-2015-luther-l-terry-award-winners (R-432). 312 See supra, ¶ 4.4.
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4.33 The international public health community has thus spoken loudly and clearly. The scientific consensus is in: bigger warning labels are more effective than smaller ones, and the bigger the warning, the better. Claimants’ efforts to substitute the judgment of their paid experts for that of the international community should not be countenanced.
4.34 In any event, the opinions of Claimants’ experts, Professor Chernev and Jacoby, afford no basis on which to second-guess either the collective judgment of the States Parties to the
FCTC or Uruguay’s wisdom in adopting the 80% Requirement for the reasons described below.
B. Claimants’ Experts’ Fail To Undermine the Global Consensus on Health Warning Labels
4.35 Claimants offer a second report from Professor Chernev as would-be support for the proposition that the materials Uruguay provided concerning the 80% Requirement “are subject to serious limitations with respect to their relevance, validity, and sufficiency.”313 Professor
Chernev is only able to make this assertion by adopting an absurdly restrictive view of what would constitute a valid study and adopting by analogy principles that have no application in the field of public health. Because Claimants themselves devote so little attention to these issues,
Uruguay will not burden the Tribunal by unnecessarily belaboring these points. Two examples will suffice to illustrate the errors that Professor Chernev commits.
4.36 First, with respect to his overly restrictive criteria for determining relevance, Professor
Chernev claims that “to lend support to the 80/80 regulation, studies must show that increasing the size of warning labels from 50% to 80% can actually increase public awareness of the risks
313 Reply, ¶ 77.
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of smoking and ultimately contribute to a reduction in smoking rates.”314 In other words, in his view, only studies that examine the effects of the specific change Uruguay mandated (i.e., from
50% to 80%) can be relevant to supporting the measure. In Uruguay’s view, the narrowness of such a concept of relevance speaks for itself. It leads Professor Chernev to dismiss as irrelevant the entire body of literature that shows that, regardless of the exact sizes involved, larger warning labels are always more effective than smaller ones, and the biggest are the best.
4.37 In his own second report, Professor Thrasher explains that this “overly restrictive criterion for relevance excludes the vast majority of empirical studies that examine the effects of differing HWL [health warning label] sizes. By refusing to examine the pattern of results across studies with varying HWL sizes, Professor Chernev cannot determine their consistency.”315
Professor Thrasher further explains that “the totality of empirical evidence” is “overwhelmingly consistent with the principle that larger HWLs are more effective than smaller HWLs.”316 “In fact,” he writes, “the evidence shows that each incremental increase in HWL size corresponds with an increase in consumer attention to HWLs and efficacy of risk communication.”317 This evidence includes studies that found that health warning labels covering 75% or 100% of the package are more effective than those covering just 50%.318
314 Chernev Second Report, ¶ 140 (CWS-020). 315 Thrasher Second Report, pp. 6-7 (REX-011). 316 Ibid., p. 7. 317 Ibid., pp. 11. 318 Ibid., pp. 4-6, 8, 11. See also Thrasher Report, pp. 23-37 (REX-003); Counter-Memorial, ¶¶ 5.39-5.42 and accompanying footnotes, for a discussion of studies conducted before Uruguay passed its 80% Requirement, and ¶¶ 5.43-5.44, and accompanying footnotes, for a discussion of studies conducted after the passage that reaffirmed the principle.
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4.38 Second, Professor Chernev attempts to prove his point by reference to a principle known as “diminishing sensitivity, whereby we become less sensitive to changes along a particular dimension as the magnitude of that dimension increases.”319 According to Professor Chernev:
Applied to the domain of health warning labels, the diminishing sensitivity principle implies that increasing the size of health warning labels is likely to be most effective when health warning labels are small and is likely to become progressively less effective as the size of the labels increases.320
4.39 Professor Thrasher explains, however, that the ostensible principle of diminishing sensitivity is of marginal, if any, relevance in the field of public health. Professor Thrasher first notes that
after repeatedly focusing on the fundamental importance of empirical evidence to support a claimed principle, [Professor Chernev] does not provide any evidence that the diminishing sensitivity principle applies to the case of HWLs. Professor Chernev’s own criteria for relevance to the 80/80 case would require empirical data from experimental studies that assessed this principle in the context of changing cigarette package HWLs from 50% to 80%. Again, he does not provide this evidence. In fact, as described in my prior report, the evidence consistently shows that every increment in HWL size is associated with greater effectiveness.321
4.40 He then observes that
even if the “diminishing sensitivity” principle were to apply to HWLs, it does not mean that increasing the size of the HWLs from 50% to 80% will be ineffective. ... Diminishing sensitivity does not mean that there is a specific threshold for maximum HWL effectiveness or that increasing the size of HWLs from 50% to 80% will be ineffective, which is what Professor Chernev implies. Even if HWLs were to have progressively weaker effects as they increase in size (which the evidence does not show), larger HWLs would still be more effective than smaller HWLs.322
319 Chernev Second Report, ¶ 137 (CWS-020). 320 Ibid., ¶ 139. 321 Thrasher Second Report, p. 15 (REX-011) (emphasis in original). 322 Ibid., p. 16.
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4.41 Moreover, in the field of public health,
even interventions with small effects can nevertheless have substantial impacts on the health of a population, as long as a broad swath of the population is exposed to the intervention. Large HWLs on cigarette packs reach many thousands of smokers, potential smokers and non-smokers; hence, their effects, even if they were to be relatively small, can lead to meaningful public health impacts. Indeed, this is a basic principle of public health in general.[] This principle (“public health impact” = “effect size” times “population reach”) justifies increasing HWL size, even if a particular HWL size increase were to produce relatively small effects (which the data does not show in any case).323
4.42 Claimants’ reliance on the report of Professor Jacoby is even less justified. According to
Claimants’ Reply, “Professor Jacoby identified several additional ‘serious problems [that] pervade most or all of the studies relied on by Uruguay’ ....”324 The reference to problems
“pervading” the studies Uruguay relied on is especially curious inasmuch as Professor Jacoby does not bother to evaluate the overwhelming majority of those studies. As Professor Thrasher observes: “Of the 42 original studies included in my review, Professor Jacoby evaluates only six
(C-224, C225, C-230, C-231, C-232, JT-051), as well as one study published after I conducted my review (C-453) and two studies not included in my review (C-241, C-235).”325
4.43 Moreover, Professor Jacoby adopts the wholly inappropriate view that to be considered valid, a study must show changes in behavioral outcomes.326 Yet, as Uruguay made clear in its
Counter-Memorial, and as Professor Thrasher reiterates, this “reflects his lack of understanding
323 Ibid., p. 17 (internal citations omitted). 324 Reply, ¶ 77. 325 Thrasher Second Report, p. 18 (REX-011) (emphasis added). Professor Jacoby cites Exhibit C-388 in his report but presumably he means Exhibit C-453 when discussing the 2014 Gravely et al study. 326 Jacoby Report, ¶ 7 (CWS-021).
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of the primary objective of the 80/80 regulation: to enhance consumer understanding of smoking-related risks.”327
4.44 For these reasons and more, which are explained more fully in Professor Thrasher’s second report,328 Claimants’ reliance on their experts’ reports to overcome the clear weight of the international consensus on the effectiveness of larger warning labels is misplaced.
C. Large Warning Labels Also Serve To Minimize the Advertising Appeal of Cigarette Packs
4.45 In addition to increasing consumers’ awareness of the risks of smoking and discouraging tobacco consumption, larger warning labels serve still another important function: they reduce the amount of space available on the package for tobacco companies to advertise their
(admittedly deadly) product.
4.46 Article 13, paragraphs 1 and 2, of the FCTC state:
1. Parties recognize that a comprehensive ban on advertising, promotion and sponsorship would reduce the consumption of tobacco products.
2. Each Party shall, in accordance with its constitution or constitutional principles, undertake a comprehensive ban of all tobacco advertising, promotion and sponsorship.329
4.47 Paragraph 4 then provides:
4. As a minimum, and in accordance with its constitution or constitutional principles, each Party shall:
(a) prohibit all forms of tobacco advertising, promotion and sponsorship that promote a tobacco product by any means
327 Thrasher Second Report, p. 19 (REX-011). 328 See generally ibid. 329 WHO, FCTC, Art. 13 (RL-20).
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that are false, misleading or deceptive or likely to create an erroneous impression about its characteristics, health effects, hazards or emissions; [and]
(b) require that health or other appropriate warnings or messages accompany all tobacco advertising and, as appropriate, promotion and sponsorship[.]330
4.48 The Guidelines to Article 13 expressly treat packaging as “an important element of advertising and promotion.”331 They observe that packaging is used “in various ways to attract consumers, to promote products and to cultivate and promote brand identity, for example by using logos, colours, fonts, pictures, shapes and materials on or in packs or on individual cigarettes or other tobacco products.”332
4.49 The importance of the package as advertisement has increased in recent years as other forms of advertising have been increasingly banned, including in Uruguay (measures Claimants have not challenged). A Philip Morris executive put the point clearly:
Our final communication vehicle with our smokers is the pack itself. In the absence of any other Marketing messages, our packaging ... is the sole communicator of our brand essence. Put another way—when you don’t have anything else—our packaging is our Marketing.333
4.50 Recognizing this fact, the Article 13 Guidelines recommend plain packaging to prevent advertising and promotion of cigarette consumption through packaging.334 In the alternative: “If plain packaging is not yet mandated, the restriction should cover as many as possible of the
330 Ibid., Art. 13. 331 Conference of the Parties to the Framework Convention on Tobacco Control (COP-FCTC), Guidelines for Implementation of Article 13 of the WHO Framework Convention on Tobacco Control (Tobacco advertising, promotion and sponsorship), FCTC/COP3(12) (Nov. 2008) (hereinafter “COP-FCTC, Guidelines for Implementation of Article 13 of the WHO FCTC”), ¶ 15 (RL-133). 332 Ibid., ¶ 15. 333 Philip Morris Internal Document, M. Hulit, Presentation at Corporate Affairs Conference: Marketing Issues (27 May 1994), Bates No. 2504015017-2504015042, p. 21 (R-133). 334 COP-FCTC, Guidelines for Implementation of Article 13 of the WHO FCTC, ¶ 16 (RL-133).
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design features that make tobacco products more attractive to consumers ....”335 The Guidelines provide further:
Any form of tobacco advertising, promotion or sponsorship that is not prohibited is obliged to meet the requirements of Article 13.4 of the Convention. Notably, these requirements include to “prohibit all forms of tobacco advertising, promotion and sponsorship that promote a tobacco product by any means that are false, misleading or deceptive or likely to create an erroneous impression about its characteristics, health effects, hazards or emissions” (13.4(a)); [and] to “require that health or other appropriate warnings or messages accompany all tobacco advertising and, as appropriate, promotion and sponsorship” (13.4(b)) ....
Parties should prohibit the use of any term, descriptor, trademark, emblem, marketing image, logo, colour and figurative or any other sign that promotes a tobacco product or tobacco use, whether directly or indirectly, by any means that are false, misleading or deceptive or likely to create an erroneous impression about the characteristics, health effects, hazards or emissions of any tobacco product or tobacco products, or about the health effects or hazards of tobacco use.336
4.51 Enlarging the size of warning labels is therefore another way to counteract advertising and promotion on packaging. It shifts the focus from the package’s attractive (and sometimes misleading) marketing elements to the health risks associated with the products contained inside.
4.52 In this way, larger health warning labels can address tobacco companies’ deceptive use of packaging, including efforts to wrongly reassure consumers about the reduced harmfulness of brand variants on the false basis that some cigarettes are safer than others. Thus, even if the motivation for the 80% Requirement was what Claimants’ allege (namely, a counter-measure to the use of alibi brands to circumvent the SPR), which it was not, that would have been an entirely rational policy response fully in line with the FCTC.
335 Ibid., ¶ 17 (emphasis added). 336 Ibid., ¶¶ 38-39.
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4.53 Uruguay presented an analysis of the tobacco industry’s use of advertising, including on its packaging, to attract and keep consumers, especially young people, in its Counter-
Memorial.337 It also discussed how increasing warning label size would have been an entirely appropriate response to this phenomenon.338
4.54 In their Reply, Claimants pretend not to have understood the point. They state that
Uruguay “dedicate[d] eight pages of its Counter-Memorial to discussing and mischaracterizing advertising campaigns that have nothing at all to do with health warnings.”339 But the fact is that health warnings do relate directly to advertising campaigns and the industry’s continuing efforts to enlist new generations of smokers. Exactly as the Article 13 Guidelines state, large warning labels that replace as many of the design elements of the package as possible have the effect of reducing the marketing appeal, and misleading effects, of cigarette packs. This constitutes yet another reason that Uruguay’s decision to increase warning label size was entirely reasonable.
4.55 Further evidence of the measure’s reasonableness comes from the fact that governments around the world are increasingly requiring warning labels to cover more than 50% and, in a growing number of cases, more than 80% of cigarette packs. The Canadian Cancer Society recently observed: “The worldwide trend for larger, picture health warnings is growing and unstoppable, with many more countries in the process of developing such requirements.”340
337 Counter-Memorial, ¶¶ 5.76-5.94. 338 Ibid., ¶¶ 5.92-5.94. 339 Reply, ¶ 80. 340 Canadian Cancer Society, Cigarette Package Health Warnings: International Status Report (4th ed., Sept. 2014), p. 2 (R-426).
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4.56 When Uruguay submitted its Counter-Memorial in October 2014, at least 18 States had requirements that warning labels be larger than 50% of the front and back of cigarette packs.341
In addition, the European Union had mandated that all of its 28 members States require warning labels covering at least 65% of the front and back of the package by May 2016.342
4.57 In the 11 months since, the tide has continued to swell. Nepal has recently vaulted into the lead, upping its warning label requirement from 75% of the front and back to 90%.343 And two other States—Pakistan and India—have joined Thailand in requiring warning labels that cover 85% of the front and back of cigarette packs.344 Moreover, several more States have joined the 18 States and the European Union that had previously enacted requirements that warning labels cover more than 50% of primary pack surfaces. A sampling of these include: Sri Lanka
(80%);345 Chad (70%);346 Uganda (65%);347 Burkina Faso (60%);348 Moldova (65%);349 and
341 Counter-Memorial, ¶ 5.98. 342 Ibid. 343 Action on Smoking & Health, “Success: 90% graphic health warnings now required on tobacco packs in Nepal” (3 Dec. 2014), available at http://ash.org/success-90-graphic-health-warnings-now-required-on-tobacco-packs-in- nepal/ (last visited 2 Sept. 2015) (R-428); Tobacco Labelling Resource Centre, “Nepal: Health Warnings”, available at http://www.tobaccolabels.ca/countries/nepal/ (last visited 2 Sept. 2015) (R-359). 344 Canadian Cancer Society, Cigarette Package Health Warnings: International Status Report (4th ed., Sept. 2014), p. 2 (R-426) (discussing Thailand’s regulation of warning labels on cigarette packages at 85% of the front and back); Government of Pakistan, Ministry of National Health Services, Regulations and Coordination, “Pictorial Warning”, available at http://www.tcc.gov.pk/ (last visited 2 Sept. 2015) (R-430) (announcing Pakistan’s increase to 85%); Campaign for Tobacco-Free Kids, “India Takes Historic Step to Protect Health and Save Lives by Requiring Large, Graphic Tobacco Warnings: Statement of Matthew L. Myers” (15 Oct. 2014), available a http://www.tobaccofreekids.org/press_releases/post/2014_10_15_india (last visited 2 Sept. 2015) (R-427) (announcing India’s increase to 85%). 345 Campaign for Tobacco-Free Kids, “Country Details for Sri Lanka: Summary” (last updated 3 Aug. 2015), available at http://www.tobaccocontrollaws.org/legislation/country/sri-lanka/summary (last visited 2 Sept. 2015) (R- 444). 346 World Health Organization, Regional Office for Africa, “Chad: 70% Health Warnings in pictures on cigarettes packs”, available at http://www.afro.who.int/en/clusters-a-programmes/hpr/health-risk- factors/tobacco/highlights/4604-chad-70-health-warnings-in-pictures-on-cigarettes-packs.html (last visited 2 Sept. 2015) (R-360).
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Namibia (55%).350 Indeed, by the time the EU mandate comes into effect in the first half of next year, at least 58 States, and probably more, will have warning label requirements in excess of
Claimants’ would-be maximum of 50%.351
4.58 There is therefore no good faith basis for challenging the 80% Requirement as anything other than a sound exercise in public health policy making. Overwhelming evidence demonstrates that warning labels over 50%, up to, including and above 80% of a cigarette package, are more effective than smaller warnings. The world’s preeminent public health authorities and tobacco control experts agree. Taking into account the evidence and global consensus on the benefits of increasingly larger warning labels, Uruguay decided to adopt the
80% Requirement to better inform its public of the grave risks they faced, and to dissuade them from taking those risks. Claimants have failed to demonstrate that Uruguay acted arbitrarily, discriminatorily or in bad faith. Their challenge to the 80% Requirement must fail.
347 Campaign for Tobacco-Free Kids, “Uganda Sets Powerful Example with Comprehensive Tobacco Control Law” (30 July 2015), available at http://www.tobaccofreekids.org/tobacco_unfiltered/post/2015_07_30_uganda (last visited 2 Sept. 2015) (R-443). 348 Campaign for Tobacco-Free Kids, “Country Details for Burkina Faso: Summary” (last updated 16 July 2015), available at http://www.tobaccocontrollaws.org/legislation/country/burkina-faso/summary (last visited 2 Sept. 2015) (R-442). 349 Campaign for Tobacco-Free Kids, “Moldova Enacts Historic Law to Fight Tobacco Use, Resisting Pressure from U.S. Chamber of Commerce” (14 July 2015), available at http://www.tobaccofreekids.org/tobacco_ unfiltered/post/2015_07_14_moldova (last visited 2 Sept. 2015) (R-441). 350 Campaign for Tobacco-Free Kids, “Country Details for Namibia: Summary” (last updated 7 Aug. 2015), available at http://www.tobaccocontrollaws.org/legislation/country/namibia/summary (last visited 2 Sept. 2015) (R- 445). 351 See generally Campaign for Tobacco-Free Kids, Tobacco Control Laws (updated version of C-379), available at http://www.tobaccocontrollaws.org/legislation (last accessed 17 Sept. 2015) (R-450).
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CHAPTER 5.
THE MEASURES CLAIMANTS CHALLENGE HAVE BEEN EFFECTIVE
5.1 In this Chapter, Uruguay responds to Claimants’ continued but unfounded insistence that the SPR and 80% Requirement have not been effective.352
5.2 As explained in the previous two chapters, and at length in the Counter-Memorial,353
Uruguay not only had a rational basis for adopting both measures, it had compelling reasons for doing so. Uruguay therefore need not show that they have been effective to show that they were not arbitrary when enacted.354 Claimants have not disputed this point, although they nevertheless persist in claiming that the two measures have been ineffective.
5.3 The argument that the SPR and 80% Requirement have been ineffective is disproven by the facts. This Chapter shows that: (1) smoking prevalence (i.e., the percentage of people who smoke) in Uruguay has declined sharply since the measures’ enactment; (2) the specific aims of the two measures have been achieved; and (3) Claimants’ arguments on total consumption (i.e., the total number of cigarettes sold) are factually inaccurate.
5.4 While Uruguay need not demonstrate that the challenged measures have been effective, it is nonetheless illuminating that they have been. This only further confirms their reasonableness.
352 Reply, ¶¶ 81-99. 353 Counter-Memorial, ¶¶ 3.1-5.100. 354 There is no legal requirement that a regulation must actually prove to be effective once it is implemented; “[i]t is entirely possible that a well-founded measure adopted in good faith might prove either ineffectual or even counter- productive,” but “even in such a case, there could be no legitimate BIT-based attack on the measure if there was a rational basis for it at the time it was adopted.” Ibid., ¶ 6.6.
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I. Smoking Prevalence Has Declined
5.5 In the Counter-Memorial, Uruguay noted that “prevalence” is a more meaningful measure of smoking rates than “consumption.”355 Article 3 of the FCTC is telling. It states that the objective of the Convention is “to reduce continually and substantially the prevalence of tobacco use and exposure to tobacco smoke.”356
5.6 Uruguay also explained that “smoking prevalence in Uruguay has fallen considerably in the years since the SPR and 80% Requirement were adopted. ... [M]any fewer people are smoking now than before.”357 This is true of the Uruguayan population in general358 and young people in particular.359 The 2014 Euromonitor report states that Uruguay’s tobacco control legislation has led to “important declines in prevalence rates and the total number of smokers.”360
5.7 Claimants do not dispute the significant decline in smoking prevalence. Rather, they attempt to dismiss it on the nominal basis that “smoking prevalence has been declining in
Uruguay steadily since 2003,” and “[t]hat trend would likely have continued regardless of whether the SPR and 80/80 regulation were put in place.”361 The Reply cites only a single source for these assertions: Euromonitor’s 2013 report.362
355 Counter-Memorial, ¶ 6.15. 356 WHO, FCTC, Art. 3 (RL-20) (emphasis added). 357 Counter-Memorial, ¶ 6.16. See also ibid., ¶¶ 6.44-47. 358 Ibid., ¶ 6.45. See also Expert Report of Dardo Curti (19 Sep. 2015) (hereinafter “Curti Report”) ¶¶ 39-46 (REX- 018). 359 Counter-Memorial, ¶¶ 6.46-47. See also Curti Report, ¶¶ 47-48 (REX-018). 360 Euromonitor International, Tobacco in Uruguay, (Oct. 2014), p. 26 (C-373). 361 Reply, ¶ 99. 362 Ibid. (citing Euromonitor International, Tobacco in Uruguay (Oct. 2013), p. 3 (C-121)).
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5.8 That report does confirm that smoking prevalence has been “in constant decline since
2003.”363 But, more significantly, it emphasizes that the decline has been especially sharp since
2009—the year the challenged measures entered into force. Under the heading “Smoking
Prevalence Declining Sharply Since 2009,”364 the report states: “Restrictive measures that put increasing pressure on the industry and smokers since the first ones were put in force in 2005 have resulted in a significant reduction in the total number of smokers, especially since 2009.”365
5.9 Claimants also included as an exhibit Euromonitor’s companion report for the same period, Cigarettes in Uruguay. That report similarly explains that the 2012 data indicated “a sharp decline in smoking prevalence between 2009 and 2012,” which it characterizes as “a rather surprising fall of more than 23% since 2009.”366
5.10 These numbers from Claimants’ own sources contradict their argument that the decline in prevalence is merely a continuation of a “steady” trend that started before the SPR and 80%
Requirement were introduced, and continued along the same path in the period afterwards. In fact, the decline since 2009 has been so “sharp” as to have generated “a rather surprising fall.”
5.11 The Reply’s attempts to recharacterize the facts are also inconsistent with what
Euromonitor had been predicting for prevalence rates in Uruguay before the challenged regulations entered into force. In the September 2008 report that forms the basis for Claimants’ arguments about pre-regulation consumption projections, Euromonitor reported: “Smoking
363 Euromonitor International, Tobacco in Uruguay (Oct. 2013), p. 3 (C-121). 364 Ibid., p. 1. 365 Ibid., p. 1 (emphasis added). See also Euromonitor International, Tobacco in Uruguay, (Oct. 2014), pp. 1, 23-24 (C-373). 366 Euromonitor International, Cigarettes in Uruguay (Oct. 2013), p. 1 (C-166).
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prevalence, which was already declining, is expected to keep doing so in the future but probably at a slower rate, as smokers who have not already quit the habit should be the hardest to convince to do so in years to come.”367 The fact that Euromonitor instead later reported “sharp” and “surprising” declines confirms that something happened in 2009 to change the landscape and accelerate the declines. That “something,” of course, was the SPR and 80% Requirement.
5.12 Claimants argue that Uruguay has not shown “a causal link” between the drop in prevalence and the adoption of the challenged measures.368 Yet, Euromonitor has repeatedly linked the decline in prevalence to Uruguay’s tobacco control measures, especially since 2009.369
5.13 To the extent Claimants are arguing that the decline in smoking prevalence “might more readily be attributed to ... the multitude of other tobacco control measures that Uruguay has implemented, rather than to the [SPR or] 80/80 regulation[s],”370 Uruguay offers two observations. First, it is true that Uruguay has deployed broad, multi-faceted programs for tobacco control,371 consistent with international consensus that just such an “evolving collection of policies and programs that work in concert”372 is the most effective approach for combatting
367 Euromonitor International, Tobacco - Uruguay (Sep. 2008), p. 2 (C-120) (emphasis added). 368 Reply, ¶ 99. See also Chernev Second Report, ¶¶ 18, 156 (CWS-020). 369 See, e.g., Euromonitor International, Tobacco in Uruguay (Aug. 2010), p. 21 (R-229(bis)) (“The impact of the anti-tobacco legislation in Uruguay has been quite strong, with sharp declines in prevalence rates”); Euromonitor International, Tobacco in Uruguay (Oct. 2012), p. 26 (R-417) (“The strongest impact of anti-tobacco legislation has already been felt, with important declines in prevalence rates.”). 370 Chernev Second Report, ¶¶ 18, 126, 156 (CWS-020). 371 Counter-Memorial, ¶ 6.12. 372 Thrasher Report, ¶ 85 (REX-003).
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what the WHO has labelled the “tobacco epidemic,” and the constantly evolving efforts by tobacco companies to adapt to existing regulations in order to maintain their sales.373
5.14 Second, Claimants have made no effort to demonstrate, and indeed cannot demonstrate, that the two measures they challenge have not contributed to the clear decline in smoking prevalence. Although correlation is not causation, it cannot be denied that the decline has been especially sharp since the two measures entered into force in 2009. Moreover, the burden rests squarely on Claimants to prove their case, including their allegations about the ineffectiveness of the SPR and 80% Requirement. This is something they have not come close to doing.
II. Other Specific Aims of the Regulations Have Also Been Achieved
5.15 Claimants’ Reply complains that Uruguay “asserts, but does not prove, that the challenged measures have been effective in reducing tobacco consumption.”374 In so doing, it both confuses who has the burden of proof, and misrepresents the purpose of the challenged measures and Uruguay’s arguments about their effectiveness.375
5.16 As Uruguay previously explained, the SPR and 80% Requirement were each aimed at specific near-term goals. To the extent reducing prevalence (not, as Claimants state, consumption) was a goal, it was intended as a longer-term goal. In particular, “the immediate purpose of the SPR was to address the false belief among consumers that some cigarettes are less
373 Counter-Memorial, ¶¶ 3.104-3.124, 6.9-6.13. 374 Reply, ¶ 97. 375 Claimants also ignore their own preferred source, Euromonitor, which has repeatedly indicated that the 80% Requirement has been effective in reducing tobacco consumption. See Euromonitor International, Tobacco in Uruguay, (Oct. 2014), p. 5 (C-373) (“The increase in the size of the warnings and the use of images have contributed to the decline in sales of all tobacco products, but especially sales of cigarettes, the largest category by far.”) (emphasis added); Euromonitor International, Tobacco - Uruguay (Aug. 2010), p. 4 (R-229(bis)) (same).
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harmful than others.”376 The immediate purpose of the 80% Requirement was “to better inform the public about the health risks of smoking, and the severity and magnitude of those risks.”377
5.17 Whether smoking prevalence has decreased because of the regulations is therefore not the only relevant question for determining their effectiveness. And, as Uruguay previously showed, there is significant evidence that both the SPR and 80% Requirement are having their intended effects.378 That body of evidence has only grown since the filing of the Counter-Memorial, and
Claimants’ half-hearted attempt to dismiss it in their Reply379 is unavailing.
5.18 As detailed in the Counter-Memorial, the International Tobacco Control Policy
Evaluation Project (“ITC Project”)380 has confirmed (1) the success of the SPR in helping to reduce misperceptions about “light” cigarettes and their replacements,381 and (2) the increased impact of health warnings on smokers’ awareness of risks and related behaviors since the implementation of the 80% Requirement.382
376 Counter-Memorial, ¶ 6.13. 377 Ibid., ¶ 6.13. 378 Ibid., ¶¶ 6.31-6.43. 379 Reply, ¶¶ 97-98. 380 “The ITC Project is the first-ever international cohort study of adult smokers to assess tobacco control policy. It has collected data related to tobacco control in 19 countries, including Uruguay, every two years since 2006, in order to evaluate the effects of existing tobacco control measures.” Counter-Memorial, ¶ 4.94. 381 Counter-Memorial, ¶¶ 6.33-6.35 (citing ITC, ITC Uruguay National Report (Aug. 2012), p. 42 (C-133)); ITC, ITC Uruguay National Report (Aug. 2014), pp. 75-76, 102 (R-313)). 382 Counter-Memorial, ¶¶ 6.40-6.42 (citing ITC, ITC Uruguay National Report (Aug. 2012), p. 29 (C-133)); ITC, ITC Uruguay National Report (Aug. 2014), pp. 66, 102 (R-313)). See also Thrasher Report, ¶ 53 (REX-003) (“Smokers’ awareness of less well-known risks (e.g., blindness, impotence) … increased after larger warnings were introduced in [Uruguay]. This was found even though these outcomes had been included on prior, pictorial HWLs, suggesting that the larger HWL size accounted for this enhanced awareness.”); ibid., ¶¶ 54, 60-61 (reporting that the larger warning labels were “accompanied by greater thinking about smoking-related harms” in Uruguay, as well as more smokers reporting thoughts about quitting and smoking-cessation behaviors).
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5.19 In the 11 months since the filing of the Counter-Memorial, an additional paper has been published, drawing on the data collected during the ITC Uruguay Survey. It concludes: “The
2009/2010 introduction of larger and more graphic [health warning labels] in Uruguay from 50% to 80% were associated with significant increases in all of the key indicators of [health warning label] effectiveness.”383 These include noticing and reading the warnings, thinking about the risks of smoking, thinking about quitting, avoiding looking at the warnings, and foregoing cigarettes as a result of the warnings384—all of which are “indicators that have been shown to predict future quit attempts.”385 These results indicate that “[c]ountries that increase the [health warning label] size above 50% would increase the effectiveness of their [health warning labels] across a broad range of key outcomes.”386
5.20 The Reply makes two arguments in its attempt to dismiss the ITC Project’s findings.
First, Claimants and their experts argue that, because the SPR and the 80% Requirement were implemented concurrent with changes to the content of Uruguay’s warning labels, it is
“impossible to segregate and measure their individual impact.”387 The argument appears to be that, if a study does not isolate and assess the impacts of the SPR or the 80% Requirement on an individual basis, its findings are irrelevant.
383 S. Gravely, et al., The impact of the 2009/2010 enhancement of cigarette health warning labels in Uruguay: longitudinal findings from the International Tobacco Control (ITC) Uruguay Survey, TOBACCO CONTROL ONLINE FIRST (15 Dec. 2014) (hereinafter “Gravely, et al.”), p. 4 (C-453). 384 Ibid., pp. 1-4 & Table 3. 385 Ibid., p. 6. See also ibid., p. 1 (“a wide range of [empirical] studies across different countries … have demonstrated the predictive validity of these key indicators.”). 386 Ibid., p. 6. See also ibid., pp. 1, 5; Thrasher Second Report, p. 22 (REX-011). 387 Chernev Second Report, ¶ 181 (CWS-020). See also Reply, ¶¶ 97-98.
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5.21 Professor Thrasher, a globally-recognized expert on tobacco warning labels, disagrees.
He writes: “There is no perfect study design for determining causality, particularly for understanding the effects of national policy decisions.”388 With regard to the size of the warning labels in particular, he notes: “Countries inevitably issue regulations that change both the size and content of HWLs because these two measures are complimentary and mutually reinforcing.”389 The fact that observational studies “do not—indeed, they cannot—involve experimental control over HWL size independent of other HWL characteristics”390 does not make them irrelevant.
5.22 Second, Claimants argue that the ITC Project “did not study actual consumer behavior, but instead focused on what smokers thought about or what they were more likely to think about.”391 In Claimants’ view, the study could only be relevant if it showed “whether consumers actually quit smoking.”392 This aspect of Claimants’ argument is flawed at multiple levels.
5.23 In the first place, it is not true that the study did not examine “actual consumer behavior.”
As indicated above, smokers were surveyed not only about their thoughts and perceptions, but also about behaviors such as reading the warnings, avoiding the warnings, and foregoing cigarettes as a result of the warnings.393
388 Thrasher Report, ¶ 73 (REX-003); Thrasher Second Report, pp. 11-15 (REX-011). 389 Thrasher Report, ¶ 71 (REX-003); Thrasher Second Report, p. 14, 27 (REX-011) (“Applying best practices recommended by the FCTC, Uruguay increased HWL size and refreshes HWL content every year.”). 390 Thrasher Report, ¶ 71 (REX-003); Thrasher Second Report, pp. 11-15 (REX-011) (“Evidence from both types of studies [experimental and observational], not just one type, will strengthen conclusions regarding the impact of a public health intervention that reaches an array of people living under different conditions.”). 391 Reply, ¶ 98 (emphasis in original). 392 Ibid. 393 Gravely, et al., pp. 2-3 & Table 3 (C-453).
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5.24 Moreover, even when a study does not show “whether consumers actually quit smoking,” it may still be significant. Consumer perception studies are “a mainstay of research used by public health experts and by the tobacco companies themselves.”394 Their relevance is all the more obvious here, as the challenged regulations were specifically aimed at consumer perceptions and awareness about the relative harmfulness of cigarettes and the health risks associated with tobacco use. As Professor Thrasher put it in his first report: “Consumer perceptions are ... critical endpoints in and of themselves (e.g., knowledge of the magnitude and/or range of tobacco-related health effects).”395 Research shows that changes in consumer perceptions are critical precursor steps to later decisions to quit.396
5.25 That said, there is evidence that consumers have quit smoking as a result of Uruguay’s measures, including the SPR and the 80% Requirement. The Counter-Memorial discussed a 2014 study by MIT econometrician and physician Dr. Jeffrey Harris, in which both of the challenged regulations were found to be associated with a significant increase in the rate at which pregnant women in Uruguay quit smoking, with resulting positive impacts on birth weights.397
394 Thrasher Report, ¶ 78 (REX-003). 395 Ibid., ¶ 77. See also ibid., ¶ 68(“the Uruguayan regulations primarily aim to influence consumer perceptions, and not necessarily behavior.”); Thrasher Second Report, pp. 25-30 (REX-011) (“For the Uruguayan government, the key objective of increasing the size of HWLs was to enhance consumer understanding of smoking-related risks.”). Moreover, “many behavioral outcomes are impractical or impossible to measure in the context of an experimental design. Elicitation of smoking cessation behavior through short-term exposure to different packaging and labelling alternatives is likely to be one of those cases. A unique feature of cigarette packaging concerns its ability to repeatedly expose consumers to HWL messages at diverse moments of product purchase and consumption, and at different moments of vulnerability to their messages. Experimental studies that rely on brief exposures to HWLs in order to elicit cessation behavior would be analogous to clinical trials assessing drug effectiveness after administering only 1% of the standard dose.” Thrasher Report, ¶ 77 (REX-003). 396 Cohen Second Report, ¶ 64 (REX-013) (“attitudes and beliefs play central roles [in established models of health behavior], and have been shown to predict future smoking behavior, both with respect to smoking cessation among established smokers and smoking uptake among youth and young adults.”). 397 J. Harris, et al., Tobacco Control Campaign in Uruguay: Impact on Smoking Cessation During Pregnancy and Birth Weight (29 Jan. 2014), National Bureau of Economic Research (NBER) Working Paper No. 19878 (R-287) - 111 - CONTAINS CONFIDENTIAL INFORMATION
5.26 Since Uruguay submitted its Counter-Memorial, Dr. Harris has published an updated version of his study in the Journal of Health Economics.398 It concludes that there was “a striking increase in the proportion of pregnant smokers who had quit by the third trimester, from 15.4% in 2007 to 42.7% in 2013,”399 and that five “non-price, national level policies” including the SPR and 80% Requirement accounted for 71% of this change.400 “All five ... had significant effects” and “combined increased the probability of quitting by an estimated 26.9 percentage points.”401
5.27 There is thus growing evidence that the SPR and 80% Requirement have not only decreased consumers’ misunderstandings regarding the relative harmfulness of different types of cigarettes, and increased awareness of the health risks posed by smoking, but also increased cessation among a key population group, with important implications for public health. These important achievements are in addition to the “sharp” decline since 2009 in the number of people in Uruguay who smoke, discussed above.
III. Claimants’ Arguments about Consumption Are Factually Inaccurate
5.28 Claimants all but ignore prevalence and the actual goals of the challenged regulations in pressing their argument that they are ineffective. They focus instead on consumption, claiming
(cited in Counter-Memorial, ¶¶ 6.36-38). The study found “a striking increase in the proportion of pregnant smokers who had quit by their third trimester, from 15% in 2007 to 42% in 2012” as a result of Uruguay’s non-price tobacco control measures, including the SPR and the 80% Requirement. Ibid., p. 24. It reported that “[t]he [SPR], in particular, appeared to have had the largest quantitative impact on quit rates,” ibid., and that “there are reasons to believe that the [SPR] was by itself a critically important measure,” ibid., p. 25. 398 J. Harris, et al., Tobacco Control Campaign in Uruguay: Impact on Smoking Cessation During Pregnancy and Birth Weight, JOURNAL OF HEALTH ECONOMICS, Vol. 42 (20 Apr. 2015), pp. 186-196 (R-435). This renders moot Professor Chernev’s implied criticism that the prior source is “an unpublished working paper,” Chernev Second Report, ¶ 180 (CWS-020). 399 J. Harris, et al., Tobacco Control Campaign in Uruguay: Impact on Smoking Cessation During Pregnancy and Birth Weight, JOURNAL OF HEALTH ECONOMICS, Vol. 42 (20 Apr. 2015), p. 194 (R-435). 400 Ibid., pp. 187, 190. The other three “non-price, national-level policies” were the ban on nearly all advertising and the fifth and sixth rounds of warning labels launched in January 2012 and April 2013, respectively. 401 Ibid., p. 191.
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that “when consumption of all types of cigarettes is taken into account, consumption in Uruguay has increased since the imposition of the regulations.”402 Claimants’ attempt to distract the
Tribunal from the real issues is plagued with errors and outright distortions that render their argument meaningless, even taken on its own terms.
5.29 Claimants acknowledge that consumption of legal cigarettes decreased perceptibly after the adoption of the challenged measures.403 They also acknowledge that the decrease is even greater than Euromonitor projected in September 2008.404 In light of this undeniable decrease in legal consumption, together with the even more dramatic decrease in prevalence, Claimants are left with what is has become one of the most shop-worn arguments in the industry toolbox: that the regulations have caused an increase in the illicit/irregular market.
5.30 Uruguay observes first that Claimants’ internal documents contradict their own argument.
According to documents they produced in discovery,
Claimants’ own analysis revealed that the data on illicit trade “has not clearly indicated that [Uruguay’s] regulatory
402 Reply, ¶ 82 (citing, inter alia, Memorial, Table 4). 403 Counter-Memorial, ¶ 6.19. 404 Ibid. 405
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initiatives have been counterproductive. In other words there is no certainty that illicit trade is getting worse.”406
5.31 The contrary arguments Claimants and their experts now offer are based, in part, on
Euromonitor data on the illicit market.407 Claimants insist that this data is reliable.408 Uruguay disagrees.
5.32 As explained in the report of Mr. Dardo Curti, a researcher in tobacco control economics since 2003, illicit market data is necessarily less reliable than legal market data because only the latter is based on official records. Data on the illicit market are only estimates, and the various methods used to derive them have a significant margins of error.409
5.33 Moreover, Euromonitor’s data on the illegal market is especially unreliable for at least three reasons: (1) Euromonitor does not describe its method for estimating the size of the illicit market; (2) the estimates change significantly over time, even for years long past, and no
406 Email from Morgan Rees to Juan Batiz, et. al (24 Nov. 2009), Philip Morris Brands, et al. Internal Document, Bates No. PMIUY-00050741(R-397). 407 See Reply, ¶ 83; Second Expert Report of Brent C. Kaczmarek and Kiran P. Sequeira (17 Apr. 2015) (hereinafter “Second Navigant Report”), ¶¶ 35, 74 (CWS-017). 408 See Reply, ¶ 92. This insistence is interesting in light of internal PMI communications from 2010, in which Euromonitor’s process for estimating illicit trade was described as follows:
409 Curti Report, ¶¶ 12, 18, 22 (REX-018). See also Witness Statement of Diego Cibils (28 Feb. 2014), ¶ 48 (CWS- 004) (“There are no publicly available official statistics in Uruguay on the overall level of illicit trade in Uruguay.”).
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explanation is provided for these changes; and (3) Euromonitor provides no margins of error or confidence intervals for its ever-changing estimates, as would be expected of a reliable source.410
5.34 Moreover, the way in which Euromonitor—and therefore Claimants and their experts,
Navigant—present and analyze the questionable data is improper. They purport to measure trends in consumption by tracking the total number of cigarettes sold year over year. But this distorts the analysis because Uruguay’s population is growing. To meaningfully compare consumption year-to-year, it is necessary to calculate the total consumption of tobacco products per capita.411 When analyzed in this way, even Euromonitor’s unreliable estimates of the size of the illicit market show no statistically significant differences between 2004 and 2012.412
5.35 Navigant and Claimants also ignore Roll-Your-Own (“RYO”) tobacco,413 which sells for a lower price than contraband cigarettes and is a significant participant in the Uruguayan tobacco market, occupying approximately 30%.414 RYO must be considered in any discussion of the
“total” tobacco market in Uruguay,415 and by ignoring it and artificially depressing the total size of the market, Navigant overstates the relative percentage of the market that is allegedly occupied by illicit cigarettes.416
410 Curti Report, ¶¶ 14-18 (REX-018). 411 Ibid., ¶¶ 6-7. 412 Ibid., ¶ 33 & Graphic 2. 413 See Reply, ¶ 82 n.93. 414 Curti Report, ¶¶ 8-11 & Table 2 (REX-018). 415
416 Curti Report, ¶ 9 (REX-018). Notably, this is the measure upon which Claimants focus. See Reply, ¶ 86.
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5.36 When RYO tobacco is properly accounted for, the data reveals that illicit cigarettes occupy a percentage of the total tobacco market in Uruguay that is lower than estimated for Latin
America as a whole, and much lower than estimated for various countries in the region, including neighboring Brazil.417 Moreover, when RYO tobacco is included in the analysis, per capita consumption of tobacco in Uruguay turns out to have been lower every year from 2009 to
2014 than it was in 2008.418 Claimants are therefore incorrect when they claim that consumption in Uruguay has increased since the imposition of the SPR and 80% Requirement.
5.37 Even setting aside all the foregoing and assuming that Claimants’ data on the illicit/irregular market were reliable (which they are is not), their arguments would still be unfounded.
5.38 With regard to the combined legal and illegal markets, Claimants argue that “tobacco consumption did not fall as predicted” by Euromonitor in 2008, before the SPR and 80%
Requirement were adopted.419 They claim that this is clear from the following table, reproduced from the Second Navigant Report:420
417 Curti Report, ¶ 29 (REX-018). 418 Ibid., ¶¶ 34, 36. 419 Reply, ¶ 83. 420 Second Navigant Report, Figure 11 (CWS-017).
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5.39 What this table actually shows is that, even according to Claimants’ own questionable data, combined legal and illegal consumption was lower than Euromonitor’s 2008 projections every year from 2009 through 2012, the last year for which Euromonitor made projections.
Claimants acknowledge that Euromonitor’s projections extended only “through 2012,” and that the dashed orange lines in the above table are Navigant’s extrapolations, not actual projections.421 There is therefore no basis for Navigant’s argument that “[b]y 2014, actual consumption was higher than what it was projected to be in Euromonitor’s 2008 projection”422 for the simple reason that Euromonitor made no such projection (presumably because any attempt to project consumption more than six years out would have been hopelessly speculative).
5.40 Just as they did in the Memorial when faced with unhelpful data, Claimants take a second, even more speculative leap, adding ostensible duty free sales to the equation in an attempt to make it look like total consumption has remained stable or increased since the implementation of the challenged measures.423 They argue: “When duty-free and partially taxed
421 Ibid. 422 Second Navigant Report, ¶ 74 (CWS-017). 423 See Counter-Memorial, ¶ 6.25.
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cigarettes are taken into account ... overall tobacco consumption shows even larger increases in
2012, 2013, and 2014.”424 Claimants again reproduce a table from the Second Navigant Report:
5.41 This table is particularly misleading because, while the blue bars have been altered by adding Claimants’ proprietary “Empty Pack Survey” estimates of duty-free and partially taxed consumption,425 the orange line is still Euromonitor’s 2008 projection, which “exclud[es] duty- free and partially taxed cigarettes.”426 In other words, the blue bars are an amalgam of data on three types of consumption (legal + illicit + duty free) but the orange line is only a projection for two (legal + illicit). Even if the Empty Pack Surveys provided reliable data (quod non),427 there is no argument that the foregoing table shows anything meaningful. Here again, Euromonitor’s projection went no further than 2012. Navigant’s argument that consumption has “remain[ed]
424 Reply, ¶ 85. 425 Ibid., ¶ 85, n. 98. 426 Ibid., ¶ 83 (emphasis added). 427 See Counter-Memorial, ¶¶ 6.27-6.29; Curti Report, ¶¶ 23-26 (REX-018).
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above projected levels for 2012 through 2014”428 is thus demonstrably false. Euromonitor made no projections for 2013 or 2014.
5.42 To the extent any of Claimants’ jury-rigged data on the amount of total cigarette consumption indicates any trend whatsoever, which Uruguay does not concede, Uruguay notes for the sake of completeness that increased consumption is not inconsistent with decreased prevalence. According to Euromonitor’s 2012 report, although fewer people are smoking in
Uruguay, there was a “change of habits among heavy smokers.”429 “[T]hose still smoking are doing it more intensively, or at least purchase more cigarettes.”430
5.43 This has been possible in the last few years because of “good economic conditions” and
“growing purchasing power.”431 Cigarettes have become more affordable, in part because there were no increases in taxes from March 2010 until December 2014.432 This allowed smokers to buy more and “trad[e] up” from RYO tobacco.433 Euromonitor also reports that increased sales to heavy smokers may also be an “unintended side effect of [other] regulatory measures, as
428 Second Navigant Report, ¶ 75 (CWS-017). 429 Euromonitor International, Tobacco in Uruguay (Oct. 2012), p. 26 (R-417). 430 Euromonitor International, Tobacco in Uruguay, (Oct. 2014), p. 1 (C-373). See also ibid., p. 23 (“those who smoke are purchasing more cigarettes as a whole.”). 431 Euromonitor International, Tobacco in Uruguay (Oct. 2012), pp. 26, 23 (R-417). See also Euromonitor International, Tobacco in Uruguay, (Oct. 2014), p. 9 (C-373) (“In 2011 … the good economic conditions prevailing in the country allowed smokers to increase the volume of their purchases”); ibid., pp. 23, 26, 27, 30, 48. 432 For lack of tax increases in 2011-2013, see Euromonitor International, Tobacco in Uruguay (Oct. 2012), p. 26 (R-417) (“In 2011, taxes remained unchanged and companies adjusted prices according to their own strategies.”); Euromonitor International, Cigarettes in Uruguay (Oct. 2013), p. 1 (C-166); Euromonitor International, Tobacco in Uruguay, (Oct. 2014), p. 23 (C-373) (“Again in 2013 there were no changes in tobacco product taxes”). 433 Euromonitor International, Tobacco in Uruguay, (Oct. 2014), p. 1 (C-373).
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smokers, who must step outside their working places to smoke a cigarette, often do not smoke the full stick and need more cigarettes to fulfill their nicotine craving.”434
5.44 In short, even if consumption has increased as prevalence has fallen, that increase, if any, is attributable to other factors, not to the SPR and 80% Requirement. But, in any event, as shown above, the evidence does not support a conclusion that consumption has increased.
*
5.45 In sum, there is no credible evidence to support Claimants’ allegation that the SPR and
80% Requirement have not been effective. To the contrary, the measures have been effective at
(1) reducing smoking prevalence (for both adults and youth); (2) decreasing misperceptions about the relative harmfulness of different brands of cigarettes; (3) increasing consciousness of the health risks of smoking; and (4) encouraging smoking cessation. Claimants’ focus on consumption is misplaced and their related arguments are both improperly formulated and incorrect. When properly analyzed, total consumption has only fallen since the challenged measures were enacted. The effectiveness of Uruguay’s measures, while not a necessary condition for them to have been reasonable and well-founded when adopted, further confirms that they were.
434 Euromonitor International, Tobacco in Uruguay (Oct. 2012), p. 23 (R-417).
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CHAPTER 6.
URUGUAY DID NOT EXPROPRIATE CLAIMANTS’ INVESTMENT
6.1 Uruguay’s Counter-Memorial showed that Claimants’ expropriation arguments are ill- conceived. Neither in law nor fact did the SPR or 80% Requirement expropriate Claimants’ investment in violation of Article 5 of the BIT. Claimants’ attempts to resuscitate their case in the Reply, largely by repeating exactly the same arguments they made in their Memorial (which
Uruguay refuted in the Counter-Memorial), are unavailing.
6.2 Section I of this Chapter responds to Claimants’ argument that, because Article 5 does not state an exception for the exercise of a State’s police powers, the measures they challenge constituted (indirect) expropriations. Uruguay already disproved this argument in its Counter-
Memorial and will do so again below. Claimants are wrong for a simple, incontestable reason: measures adopted pursuant to a State’s police powers do not, by definition, constitute an
“expropriation” as a matter of law. They therefore do not trigger the application of Article 5.
6.3 Section II shows that Claimants’ expropriation claim also fails because they did not have the rights they claim were expropriated. This is true for two reasons: (1) Uruguayan law does not create the right Claimants assert—namely, the putative “right to use” their trademarks; and (2) even assuming arguendo that it does, Claimants did not have registered trademarks for the brand variants they have been prevented from using.
6.4 Finally, Section III shows that Claimants’ expropriation claim is meritless for yet another reason: the measures they challenge did not substantially deprive their investment as a whole of its value.
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I. The SPR and 80% Requirement Were Non-Expropriatory Exercises of Uruguay’s Sovereign Police Power
6.5 In its Counter-Memorial (and again in Chapter 2 of this Rejoinder), Uruguay demonstrated that the valid exercise of a State’s police powers does not constitute an expropriation as a matter of law. Since the SPR and 80% Requirement were adopted pursuant to
Uruguay’s sovereign police power to protect public health, they therefore do not engage
Uruguay’s responsibility to pay compensation under Article 5.435
6.6 Aside from their meritless argument that protecting public health does not fall with a
State’s police powers (which Uruguay refuted in Chapter 2), Claimants offer no other response to this basic point. They merely recycle arguments from their Memorial. They assert: “The principle that a State must pay compensation for a deprivation of property for a public purpose applies to all government measures,”436 and “the fact that a regulation is taken for a public purpose (such as protecting public health) does not mean that it falls outside the scope of Article
5.”437 To these erroneous statements of the law they add another: “‘Public benefit’ is not an exception from expropriation but instead one of several prerequisites for an expropriation to be consistent with the BIT.”438
6.7 Uruguay exposed the falseness of these “propositions” in its Counter-Memorial,439 and will not burden the Tribunal by repeating itself at length. The key point is easily stated: Article 5 is only triggered by an act of “expropriation,” or a measure having the same effect. The
435 Counter-Memorial, ¶¶ 7.6-7.28. 436 Reply, ¶ 201. 437 Ibid., ¶ 192. 438 Ibid. (emphasis added). 439 See Counter-Memorial, ¶¶ 7.6-7.25.
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conditions Article 5 states (including the “public benefit” requirement) are those necessary to render an expropriation lawful. They have no bearing, however, on the prior question of whether an “expropriation” has occurred in the first place.440
6.8 That question must be answered by reference to the nature of the State’s action. And, as stated, a bona fide, nondiscriminatory exercise of the police power to protect public health does not, by definition, constitute an expropriation.441 To quote the OECD (of which Switzerland is a
440 Counter-Memorial, ¶¶ 7.8-7.16. See Fireman’s Fund Insurance Co. v. United Mexican States, ICSID Case No. ARB(AF)/02/01, Award (17 July 2006) (van den Berg, Lowenfeld, Saavedra Olavarrieta) (hereinafter “Fireman’s Fund v. Mexico”), ¶ 174 (RL-169) (There, the tribunal stated that it “cannot start an inquiry into whether expropriation has occurred by examining whether ... [the four conditions] for avoiding liability in the event of expropriation have been fulfilled,” because those conditions “do not bear on the question as [to] whether an expropriation has occurred.”) (emphasis added); Corn Products International, Inc. v. Mexico, ICSID Case No. ARB(AF)/04/01, Decision on Responsibility (15 Jan. 2008) (Greenwood, Lowenfeld, Serrano de la Vega) (hereinafter “Corn Products v. Mexico”), ¶ 89 (CLA-272) (The tribunal held: “[I]t is important not to confuse the question whether there has been an expropriation with that of whether the four criteria in paragraphs (a) to (d) of Article 1110 have been satisfied. Those paragraphs come into play only if it has been decided that there has been an expropriation, or a measure tantamount to an expropriation, but the absence of one or more of them is not in itself indicative of expropriation.”) (emphasis added); UNCTAD, EXPROPRIATION: A SEQUEL (2012), pp. 80, 85-86 (RL- 254) (UNCTAD cited “extensive State practice as well as arbitral awards and academic literature” confirming that “the support for the police powers doctrine appears to be overwhelming” and concluded that “[e]xpropriation provisions in [investment protection treaties] may not be read as preventing States from bona fide regulation in the public interest.”) (emphasis added). 441 See Levy de Levi v. Republic of Peru, ICSID Case No. ARB/10/17, Award (26 Feb. 2014) (Oreamuno, Hanotiau, Morales Godoy), ¶ 475 (RL-207) (in a case where counsel for Claimants represented the respondent, the tribunal reaffirmed the proposition expressed in Suez, Sociedad General de Aguas de Barcelona S.A. and Vivendi Universal S.A. v. Argentine Republic, holding that it is “important to recognize a State’s legitimate right to … exercise its police power in the interests of public welfare and not to confuse measures of that nature with expropriation.” (citing Suez, Sociedaad General de Aguas de Barcelona S.A. and Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/03/19, Decision on Liability (30 July 2010) (Salacuse, Kaufmann-Kohler, Nikken), ¶ 139 (RL-189) (emphasis added)); Saluka v. Czech Republic, ¶ 262 (CLA-227) (“In the opinion of the Tribunal, the principle that a State does not commit an expropriation and is thus not liable to pay compensation to a dispossessed alien investor when it adopts general regulations that are ‘commonly accepted as within the police power of States’ forms part of customary international law today.”) (emphasis added); Ibid., ¶ 255 (“It is now established in international law that States are not liable to pay compensation to a foreign investor when, in the normal exercise of their regulatory powers, they adopt in a non-discriminatory manner bona fide regulations that are aimed at the general welfare.”); Chemtura v. Canada, ¶ 266 (RL-53) (holding that “a valid exercise of the State’s police powers … does not constitute an expropriation.”); Methanex v. United States, Part IV, Ch. D, ¶ 7 (RL-164) (holding that “as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable.”) (emphasis added); Tecmed v. Mexico, ¶ 119 (CLA-203) (the tribunal recognized as “undisputable” that “the State’s exercise of its sovereign powers within the framework of its police power may cause economic damage to those subject to its powers as administrator without entitling them to any compensation whatsoever ….”); Spyridon Roussalis v. Romania, ¶ 663 (RL-193) (“[I]t is a principle of customary international law that compensation is not required where economic injury results from a bona fide, non-discriminatory regulation -123- CONTAINS CONFIDENTIAL INFORMATION
member): “It is an accepted principle of customary international law that where economic injury results from a bona fide non-discriminatory regulation within the police powers of the State, compensation is not required.”442
6.9 Claimants’ studied silence on this point, combined with their rote recapitulation of arguments they have already made, should be taken for what it is: an admission to which they have no answer.
6.10 Just as Claimants mechanically repeat the same arguments they made in their Memorial, they also attempt to lean on many of the same cases Uruguay showed to be inapposite in its
Counter-Memorial. None of the cases Claimants invoke addresses the applicability of the police powers doctrine in a case like this.443 They once again cite, for example, Norwegian Shipowners’
that falls within the police power of the State”); Sedco, Inc., et al. v. National Iranian Oil Co., et al., Award No. ITL 55-129-3 (28 Oct. 1985), reprinted in 9 IRAN-U.S. CL. TRIB. REP. 248 (1985), p. 275 (RL-149) (“It is also an accepted principle of international law that a State is not liable for economic injury which is a consequence of bona fide “regulation” within the accepted police power of states.”) (emphasis added); Too v. Greater Modesto Insurance Associates, Award No. 460-880-2 (29 Dec. 1989), reprinted in 23 IRAN-U.S. CL. TRIB. REP. 378 (1991), ¶ 26 (RL- 153). 442 OECD, “Indirect Expropriation” and the “Right to Regulate” in International Investment Law, OECD Working Papers on International Investment Law, No. 2004/04 (Sept. 2004), p. 5 n.10 (RL-238) (citing R. Dolzer and M. Stevens, BILATERAL INVESTMENT TREATIES (1995), p. 98 (CLA-055)) (emphasis added). 443 Claimants again cite to Santa Elena v. Costa Rica, see Reply, ¶ 193, in which the tribunal stated: “Expropriatory environmental measures—no matter how laudable and beneficial to society as a whole—are, in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies: where property is expropriated, even for environmental purposes, whether domestic or international, the state’s obligation to pay compensation remains.” Compañía del Desarrollo de Santa Elena, S. A. v. Costa Rica, ICSID Case No. ARB/96/1, Final Award (17 Feb. 2000) (Fortier, Lauterpacht, Weil) (hereinafter “Santa Elena v. Costa Rica”), ¶ 72 (CLA-214). See also Memorial, ¶ 206. But as Uruguay demonstrated in its Counter-Memorial, this portion of the tribunal’s award was mere obiter dictum and did not form part of its ratio decidendi. Moreover, the Santa Elena tribunal was not called upon to decide whether an expropriation had occurred. Costa Rica did not dispute that it had taken claimant’s property and consented to arbitration tasked with “the sole issue” of “the amount of compensation.” The tribunal’s passing comments thus provide no meaningful support for Claimants’ case. See Santa Elena v. Costa Rica, ¶ 56 (CLA-214) (“[T]he sole issue in the present arbitration could not be more simply stated: What is the amount of compensation now owed to CDSE for the expropriation of the Property by Costa Rica?”). Claimants attempt to reenlist SPP v. Egypt to their aid, see Reply, ¶ 193, in which the tribunal found Egypt to be under “an obligation to indemnify” the claimant in spite of the fact that the measure in question concerned the protection of antiquities, see Southern Pacific Properties (Middle East) Ltd. v. Egypt, Award (20 May 1992) (Jiménez de Aréchaga, el Mahdi, Pietrowski) (hereinafter “SPP v. Egypt”), ¶ 159 (CLA-215). This case is equally unhelpful for -124- CONTAINS CONFIDENTIAL INFORMATION
Claim. Claimants assert that the award required compensation for the wartime expropriation of certain contractual rights, notwithstanding the fact that “the United States had a valid public purpose.”444 Claimants continue to mischaracterize the award and, not coincidentally, make no effort to rebut Uruguay’s prior showing that the case actually defeats their argument.445
6.11 In that case, Norway and the United States consented to arbitration to determine the amount of compensation due after the latter’s requisitioning of the property of Norwegian nationals “by the exercise of the power of eminent domain within the meaning of American municipal law.”446 By its terms, eminent domain under American law requires just compensation. In fact, the United States never disputed its obligation “to make just compensation for the property taken.”447 The tribunal therefore had no occasion to determine whether an expropriation had occurred as a matter of international law.
Claimants, as Uruguay demonstrated in its Counter-Memorial. See Counter-Memorial, ¶ 7.20 n.769. Protecting antiquities, as laudable and necessary an objective as it may be, is not part of a State’s police powers under international law, whereas the protection of public health plainly is. Perhaps for this reason, Egypt itself recognized its obligation to compensate. Following the cancellation of the investment project, “the Prime Minister stated that the Claimant would be compensated for their losses.” SPP v. Egypt, ¶ 162 (CLA-215). Even the Egyptian Constitution and laws, applicable in that case, imposed upon Egypt “[t]he obligation to pay fair compensation in the event of expropriation [] where antiquities are involved,” a factor dispositive for the tribunal’s decision on compensation. Ibid., ¶ 159. That case is therefore distinguishable from this one on both the law and the facts. Claimants’ reliance on Phelps Dodge, Vivendi II and ADC, see Reply, ¶ 193 n. 317, is equally inapposite, because those cases had nothing to do with the exercise of police powers. Moreover, both Vivendi II and ADC are paradigm examples of unlawful expropriation. As the Vivendi II tribunal stressed, the “record ... [was] clear” that the measures at issue “were not legitimate regulatory responses … but were sovereign acts designed illegitimately to end” the investment. Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/97/3, Award (20 Aug. 2007) (Rowley, Kaufmann-Kohler, Bernal Verea) (hereinafter “Vivendi II”), ¶ 7.5.22 (CLA-210) (emphasis added). Similarly, in ADC v. Hungary, the tribunal pointed out that the respondent “acted throughout with callous disregard of the Claimants’ contractual and financial rights” and even failed to show that the challenged actions were taken for “public interest.” ADC Affiliate Ltd. v. Republic of Hungary, ICSID Case No. ARB/03/16, Award (2 Oct. 2006) (Kaplan, Brower, van den Berg), ¶¶ 536, 433 (CLA-238) (emphasis added). 444 Reply, ¶ 193 n. 317; Memorial, ¶ 207. 445 Counter-Memorial, ¶¶ 7.18-7.19. 446 Norwegian Shipowners’ Claims (Norway v. USA), Arbitral Award (13 Oct. 1922), 1 U.N.R.I.A.A. 307, p. 325 (CLA-212). 447 Ibid., p. 313.
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6.12 The tribunal did nevertheless highlight what it called the “essential difference” between that case and the “requisition of neutral property” under the laws of war, which is “often excused” from compensation “on account of extreme emergency.”448 It thus accepted that there are situations where even a State’s “requisition” of private property cannot be treated as a compensable expropriation as a matter of law. Here, of course, none of Claimants’ property was
“requisitioned” or otherwise taken from them by the State. To the contrary, Uruguay’s two measures (which applied to all tobacco companies, domestic as well as foreign) did no more than regulate their commercial activities to protect and promote public health. They were classic and bona fide exercises of the police power. As a matter of law, there was no expropriation of
Claimants’ investment.
6.13 Where Claimants do not simply repeat arguments from their Memorial, they resort to outright mischaracterization of the legal authorities. They quote the Harvard Draft Convention on International Responsibility of States for Injuries to Aliens—which Uruguay cited in the
Counter-Memorial449—as support for the ostensible proposition that “the principle that a State must pay compensation for a deprivation of property ... applies to all types of governmental measures” without any exception.450 Yet, the Harvard Draft Convention says no such thing. As
Uruguay previously showed, the Draft Convention’s Article 10 (captioned “Taking and
Deprivation of Use or Enjoyment of Property”) explicitly states in paragraph 5: “An uncompensated taking of property of an alien or a deprivation of the use or enjoyment of property of an alien which results from ... the action of the competent authorities of the State in
448 Ibid., p. 337. 449 See Counter-Memorial, ¶ 2.9 n.27 and ¶ 7.3 (citing Article 10(5) of 1961 Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens, reprinted in 55 AM. J. INT’L L. 548 (1961) (RL-255)). 450 Reply, ¶ 201 (emphasis added).
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the maintenance of public order, health, or morality ... shall not be considered wrongful.”451
Claimants’ Reply does not even bother to mention this point, let alone argue that it is inapplicable here.452
6.14 Claimants also fail in their attempt to distinguish the tribunals’ decisions in Methanex and
Chemtura, which rejected expropriation claims, inter alia, on the ground that the States involved
(the United States and Canada, respectively) had engaged in bona fide exercises of their police powers in order to protect public health. Claimants conspicuously do not challenge the rulings in these cases on the law. Instead, they limit themselves to alleged factual distinctions. According to Claimants, those cases are different than this one because here “(i) Respondent gave no due consideration to the measures before adopting them; (ii) the measures lack an empirical foundation; (iii) the measures have been ineffective in practice; and (iv) the measures are not proportional to the public interest Respondent alleges they serve given the severe harm that they inflict.”453 All of these alleged “facts” are thoroughly disproved by the evidence, as shown in prior Chapters of this Rejoinder as well as in the Counter-Memorial.454 Claimants are therefore unable to show why the legal principles that underlay the Methanex and Chemtura awards do not apply to this case.
451 1961 Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens, reprinted in 55 AM. J. INT’L L. 548, Art. 10(5) (1961) (RL-255) (emphasis added) (quoted in Counter-Memorial, ¶ 2.9 n.27). 452 Claimants also mischaracterize the Harvard Draft Convention by misleadingly citing to its Article 9(2) and suggesting that the police power exception applies only to “destruction of and damage to property, not to an uncompensated taking of property and is not applicable to regulatory takings.” Reply, ¶ 201, n. 328. This misconceived contention is directly refuted by Article 10(5) of the Harvard Draft Convention to which Uruguay cites. See supra ¶ 6.13 n. 451; Counter-Memorial, ¶¶ 2.9 n.27, 7.3. 453 Reply, ¶ 204. 454 See supra Chapters 3 & 4. See also Counter-Memorial, ¶¶ 4.98-4.117 (describing the process leading to the adoption of the SPR), 5.60-5.75 (describing the process leading to the adoption of the 80% Requirement), 4.9-4.97 & 4.118-4.143 (describing the foundations of the SPR), 5.7-5.59 & 5.75-5.100 (describing the foundations of the 80% Requirement), 6.8-6.48 (describing the effectiveness of the measures). -127- CONTAINS CONFIDENTIAL INFORMATION
6.15 As discussed in Counter-Memorial, it falls to Claimants to prove by “convincing evidence” that the SPR and 80% Requirement were not bona fide exercises of Uruguay’s police power.455 For the reasons presented in Chapters 3 and 4, they cannot hope to meet that burden.
The evidence plainly shows that both measures were taken with ample justification and after due consideration for the single purpose of protecting public health.456 It is unchallenged that they were adopted in good faith and applied in a non-discriminatory manner. As such, they constituted valid exercises of Uruguay’s sovereign police powers that, by definition, do not constitute a compensable expropriation under international law. Article 5 of the BIT therefore does not apply.
II. Claimants Had No Trademark Rights Capable of Being Expropriated
6.16 Uruguay previously showed that “for there to have been an expropriation of an investment or return (in a situation involving legal rights or claims as distinct from the seizure of physical assets) the rights affected must exist under the law which creates them, in this case, the law of [Uruguay].”457 Claimants do not challenge this point.
455 Counter-Memorial, ¶ 7.25. See also Quasar de Valores SICA V S.A., et al. v. Russian Federation, SCC Case No. 24/2007, Award (20 July 2012) (Brower, Landau, Paulsson), ¶ 181 (RL-198); Vivendi II, ¶ 7.5.22 (CLA-210) (where the tribunal found that the “record [was] clear” that the measures at issue “were not legitimate regulatory responses … but were sovereign acts designed illegitimately to end the concession or to force its renegotiation.”) (emphasis added)). 456 See supra Chapters 3(I) and 4(II). With respect to Claimants’ contention that the measures were “not proportional,” it is telling that aside from this lone, conclusory assertion, Claimants make no actual argument that the regulations were disproportionate. In any event, such an argument would be readily defeated by the undisputed fact that the measures Claimants challenge have not substantially deprived them of the value of their investment, which, as discussed below, continues to operate at a profit. See infra, ¶¶ 6.33-6.37. 457 Counter-Memorial, ¶¶ 7.48-7.50. See EnCana Corporation v. Republic of Ecuador (hereinafter “EnCana v. Ecuador”), LCIA Case No. UN3481, Award (3 Feb. 2006) (Crawford, Grigera Naón, Thomas), ¶ 184 (RL-167); Z. Douglas, THE INTERNATIONAL LAW OF INVESTMENT CLAIMS (2009), p. 187 (RL-38(bis)) (The existence of international intellectual property treaties “does not absolve a tribunal from the task of applying the municipal law of the host state to resolve any dispute about the existence of intellectual property rights as part of a covered investment.”); Z. Douglas, Property, Investment, and the Scope of Investment Protection Obligations, in THE FOUNDATIONS OF INTERNATIONAL INVESTMENT LAW (Z. Douglas, J. Pauwelyn & J. Viñaules eds., 2014), p. 402 -128- CONTAINS CONFIDENTIAL INFORMATION
6.17 They persist instead in arguing that the SPR and the 80% Requirement indirectly expropriated their trademarks by “banning or substantially interfering with their use.”458
According to Claimants, Uruguayan trademark law gives them a guaranteed “right to use” their marks, an ostensible right with which the challenged measures interfere.459 Claimants are mistaken.
6.18 The issue of whether or not Uruguayan trademark law recognizes an affirmative “right to use” is comprehensively addressed in Chapter 9 of this Rejoinder.460 The core point is clear: consistent with the international law on which it is based, Uruguayan intellectual property law only confers on trademark registrants the negative right (ius prohibendi) to prevent others from using their marks. That right was not affected by the SPR or 80% Requirement; Claimants can still prohibit third-parties from using their registered trademarks. Since that is the only right
Claimants have, there could not have been an expropriation. Uruguayan law does not give them the guaranteed right to use their marks in commerce, as they claim.461 Indeed, Claimants’ own
(RL-279) (explaining that rights over intellectual property “can only exist by reference to their proper law—the national system of law that created them. This is the exclusive object of an expropriation claim…”); A. Newcombe & L. Paradell, Expropriation, in LAW AND PRACTICE OF INVESTMENT TREATIES: STANDARDS OF TREATMENT (2009), p. 350 (RL-269). (stating that the “rights associated with any investment are normally determined by local law. Thus, the nature and scope of property rights are determined by the law of the state in which the property is located (the lex situs).”); C. McLachlan, et al., INTERNATIONAL INVESTMENT ARBITRATION: SUBSTANTIVE PRINCIPLES (2007), ¶ 8.65 (RL-41(bis)) (“The property rights that are the subject of protection under the international law of expropriation are created by the host State law. Thus, it is for the host State to define the nature and extent of property rights that a foreign investor can acquire.”) (emphasis added). 458 Reply, ¶ 187. See also Memorial, ¶ 212 (arguing that they “registered and acquired ownership of their trademarks in accordance with Uruguayan trademark law, and [] thereby obtained the right to use those trademarks. As a result of the SPR, they cannot use many of the trademarks, and the appearance of those that they can use is corrupted due to the limited space for displaying the trademarks as a result of the 80/80 regulation.”) (emphasis added). 459 Reply, ¶¶ 107-139; Memorial, ¶¶ 84, 87-91, 212, 214, 240, 244, 257-260. 460 See supra, Chapter 9(II). 461 Second Expert Report of Prof. Andrea Barrios Kübler (19 Sept. 2015) (hereinafter “Barrios Second Report”), § II (REX-016).
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expert, Professor Fischer has expressly admitted this in his writings outside the context of this arbitration.462 Their expropriation claim therefore cannot stand.
6.19 Moreover, even if Claimants had an affirmative right to use their trademarks (which they do not), that right would arise only with respect to validly registered trademarks.463 Yet, as also detailed in Chapter 9, Claimants did not in fact have registered trademarks for any of the seven brand variants they claim that they were compelled to withdraw from the market at the time the
SPR was adopted.464
III. Claimants’ Investment Has Not Been Expropriated Because It Retains Significant Value
6.20 Uruguay’s Counter-Memorial also demonstrated that to succeed on an indirect expropriation claim, a claimant must show that the questioned measure is “sufficiently restrictive” so as “to render almost without value the rights remaining with the investor.”465 That is distinctly not the case here. Claimants’ own evidence shows that their investment retains considerable value despite the challenged measures.466 Tribunals have uniformly rejected indirect expropriation claims in similar circumstances.467
6.21 Claimants choose not to dispute these points on either the law or the facts. Instead, they invite the Tribunal to go where no tribunal has gone before. In particular, Claimants press a
462 See Document submitted by AUDAPI to the DNPI (15 Feb. 2012) (AB-57) (cited in Barrios Second Report, ¶¶ 12-16 (REX-016)). 463 See Counter-Memorial, ¶¶ 9.20, 9.38, 9.48-9.82. 464 See supra Chapter 9(III). See also Counter-Memorial, ¶¶ 9.48-9.82. 465 See Counter-Memorial, ¶¶ 7.32-7.33, 7.43-7.44. 466 Ibid., ¶¶ 7.38-7.45. 467 See ibid., ¶¶ 7.33-7.37.
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theory of what might be called “partial” indirect expropriation, and argue that each of their
“brand assets” is “an individual investment in its own right” that has been expropriated.468 In the case of the SPR, they say, Ordinance 514 deprived the seven brand variants they withdrew from the market of “all value.”469 In the case of the 80% Requirement, they contend that Decree 287
“impair[ed] Claimants’ ability to charge a price premium” for their remaining variants.470 On this basis, Claimants urge this Tribunal to apply the substantial deprivation test not to their investment as a whole but separately to each of several of its constituent parts.
6.22 It bears noting in the first instance that this new argument compels Claimants to redefine their investment. In their Request for Arbitration, they claimed that their investment consisted of their (1) manufacturing facilities; (2) shares in Abal; (3) rights to royalty payments; and (4) trademarks.471 Claimants’ pleadings at the jurisdictional stage took the same position.472 These, moreover, were the investments that the Tribunal determined fell within the scope of Article 1(2) of the BIT.473 Now, at the merits stage, Claimants re-characterize their investment to include what they call “brand assets”474 and ask the Tribunal to treat each as a stand-alone investment.475
468 Reply, ¶ 180. 469 Ibid., ¶ 179. 470 Ibid., ¶ 178. 471 Claimants’ Request for Arbitration (19 Feb. 2010), ¶¶ 64-66. 472 Claimants’ Counter-Memorial on Jurisdiction (23 Jan. 2012), ¶ 183. 473 Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, Decision on Jurisdiction (2 July 2013) (Bernardini, Born, Crawford), ¶¶ 183, 194 (RL-206). 474 According to Claimants’ new theory, “brand assets” are a hybrid breed of investment comprised of “brand families, brand variants, trademarks and other intellectual property rights associated with those brands.” Reply, ¶ 107. 475 Even on Claimants’ own admission, a brand variant is a subsidiary element comprised of two separate elements: trademarks, which create visible manifestation of a brand variant, and goodwill, which arises from the perception of the visible elements. Memorial, ¶¶ 67-70, 92.
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6.23 Investment arbitration tribunals have routinely rejected analogous attempts to carve investments into such fine slices in the context of indirect expropriation claims.476 They have recognized the economic reality that investments are comprised of a complex combination of assets, rights and interests connected by a unity of economic purpose.477 As a result, “a given element of a complex operation should not be examined in isolation because what matters is to assess the operation globally or as a whole.”478
476 See Venezuela Holdings, B.V., Mobil Cerro Negro Holding, Ltd., Mobil Venezolana de Petróleos Holdings, Inc., Mobil Cerro Negro, Ltd. & Mobil Venezolana de Petróleos, Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Award (9 Oct. 2014) (Guillaume, Kaufmann-Kohler, El-Kosheri), ¶¶ 283, 286, 287 (RL-312) (declined claims of indirect expropriation of discrete assets, holding that “under international law, a measure which does not have all the features of a formal expropriation may be equivalent to an expropriation if it gives rise to an effective deprivation of the investment as a whole.” (emphasis added)); Burlington Resources Inc. v. Republic of Ecuador and Empresa Estatas Petróleos del Ecuador (PetroEcuador), ICSID Case No. ARB/08/5, Decision on Liability (14 Dec. 2012) (Kaufmann-Kohler, Stern, Orrego Vicuña), ¶¶ 257, 258, 260, 398, 456 (CLA-274) (declined claims of indirect expropriation of parts of assets, holding: “Applied to the investment as a whole, the criterion of loss of the economic use or viability of the investment implies that the investment as a whole has become unviable. The measure is expropriatory, whether it affects the entire investment or only part of it, as long as the operation of the investment cannot generate a commercial return.”) (emphasis added); CMS Gas Transmission Co. v. Argentine Republic, ICSID Case No. ARB/01/8, Award (12 May 2005) (Orrego Vicuña, Lalonde, Rezek) (hereinafter “CMS v. Argentina”), ¶¶ 256-257, 263-264 (CLA-093) (rejecting the possibility that the claimant’s overall investment can be dissembled into a number of discrete rights, and that each of them is capable of being expropriated independently of the overall investment); Nykomb Synergetics Technology Holding AB v. The Republic of Latvia, SCC, Arbitral Award (16 Dec. 2003) (Haug, Schütze, Gernandt), ¶ 4.3.1 (RL-290); Telenor Mobile Communications A.S. v. The Republic of Hungary (hereinafter “Telenor v. Hungary”), ICSID Case No. ARB/04/15, Award (13 Sep. 2006) (Goode, Allard, Marriott), ¶ 67 (RL-78) (expressly rejected the “partial expropriation” theory, holding that “the investment must be viewed as a whole and that the test the Tribunal has to apply is whether, viewed as a whole, the investment has suffered substantial erosion of value.”) (emphasis added); Marvin Roy Feldman Karpa v. United Mexican States (hereinafter “Feldman v. Mexico”), ICSID Case No. ARB(AF)/99/1, Award (16 Dec. 2002) (Kerameus, Covarrubias Bravo, Gantz), ¶ 111 (RL-201) (rejecting the possibility that denial of the right to export tobacco could constitute an expropriation, insofar as the investor could still export other products (e.g., alcoholic beverages) and was still in control of its enterprise); Pope & Talbot Inc. v. Government of Canada, NAFTA, Interim Award (26 June 2000) (Dervaird, Greenberg, Belman), ¶¶ 96, 102 (CLA-216) (having concluded that “the Investment’s access to the U.S. market is a property interest subject to protection under Article 1110,” the tribunal nevertheless considered the investment as a whole when it concluded that no expropriation had occurred.). 477 Enron Corp. & Ponderosa Assets, L.P. v. The Argentine Republic, ICSID Case No. ARB/01/3, Decision on Jurisdiction (14 Jan. 2004) (Orrego Vicuña, Gros Espiell, Tschanz), ¶ 70 (RL-55) (holding that “an investment is indeed a complex process including various arrangements, such as contracts, licenses and other agreements leading to the materialization of such investment, a process in turn governed by the Treaty. This particular aspect was explained by an ICSID tribunal as “the general unity of an investment operation” and by another tribunal considering an investment based on several instruments as constituting “an indivisible whole.”) (emphasis added). 478 Joy Mining Machinery Limited v. The Arab Republic of Egypt, ICSID Case No. ARB/03/11, Decision on Jurisdiction (6 Aug. 2004) (Orrego Vicuña, Craig, Weeramantry), ¶ 54 (RL-63) (emphasis added).
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6.24 Burlington v. Ecuador is a useful example, particularly since Claimants themselves rely on it to support their expropriation claim.479 There, the claimant submitted that, in addition to other discrete assets, its rights under certain production sharing contracts (PSCs) “constituted in and of themselves the investment” that had been indirectly expropriated by the Ecuadorian tax law at issue.480 The tribunal rejected the argument. It held that in the context of indirect expropriation claims the analysis must focus on the investment as a whole, not on its discrete parts. It stated:
The Treaty provides that “investments shall not be expropriated.” The Tribunal understands from this formulation that the focus of the expropriation analysis must be on the investment as a whole, and not on discrete parts of the investment. Other international tribunals have adopted the same approach. ...
[Therefore] the Tribunal considers that a broader view of investment must be adopted, a view that encompasses Burlington’s investment “as a whole.” Burlington’s investment is not composed solely of the rights of its subsidiary under the PSCs, even if those rights constituted the most valuable portion of Burlington’s investment. Burlington’s investment included its shares in [its subsidiary], the infrastructure and equipment employed to exploit oil reserves, any other tangible property related to the project, the monetary and asset contributions made to carry out its operations, and the physical possession of the Blocks.
...
Applied to the investment as a whole, the criterion of loss of the economic use or viability of the investment implies that the investment as a whole has become unviable. The measure is expropriatory, whether it affects the entire investment or only part of it, as long as the operation of the investment cannot generate a commercial return.481
479 Reply, ¶ 185 n.306. 480 Burlington Resources Inc. v. Republic of Ecuador and Empresa Estatas Petróleos del Ecuador (PetroEcuador), ICSID Case No. ARB/08/5, Decision on Liability (14 Dec. 2012) (Kaufmann-Kohler, Stern, Orrego Vicuña), ¶ 258 (CLA-274). 481 Ibid., ¶¶ 257, 260, 398 (emphasis added).
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6.25 Feldman v. Mexico is also instructive. Claimant there owned a company that exported various Mexican products and depended on tax rebates from Mexico. When Mexico denied rebates on the export of cigarettes, the claimant complained of an indirect expropriation, arguing that the action deprived him of the benefit of that line of exports.482 In its Award, the tribunal focused on the measure’s impact on claimant’s entire export business, not just its cigarette business. Because it found that claimant continued to enjoy the “right to engage in the exportation of alcoholic beverages, photographic supplies, contact lenses, powdered milk and other Mexican products,” it rejected the claim.483
6.26 Claimants’ “partial” indirect expropriation claim is contradicted even by their own authorities. They cite, for example, Telenor v. Hungary.484 Yet, in that case, the tribunal held that
“the investment must be viewed as a whole and that the test the Tribunal has to apply is whether, viewed as a whole, the investment has suffered substantial erosion of value.”485 Telenor failed that test precisely because its investment as a whole remained profitable.486
6.27 Left with no actual decisions or holdings to rely on, Claimants pluck obiter dictum from
Chemtura487 in which the tribunal hypothesized that “one could think of cases where one specific asset (a building, a piece of land, a line of business) which represents a part of the value of all the different assets held by a foreign investor in the host State has been entirely expropriated.”488
482 Feldman v. Mexico, ¶ 109 (RL-201). 483 Ibid., ¶ 111. 484 Reply, ¶ 185. 485 Telenor v. Hungary, ¶ 67 (RL-78) (emphasis added). 486 Ibid., ¶ 79. 487 Reply, ¶ 181. 488 Chemtura v. Canada, ¶ 249 (RL-53).
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Claimants, however, make no effort to explain how this hypothesis might apply in the present case. As the tribunal’s actual decision makes clear, it does not.
6.28 Claimant Chemtura owned a crop protection business in Canada that sold several pesticide product lines. One of them included lindane-based products. “[M]otivated by the increasing awareness of the dangers presented by lindane for human health and the environment,”489 Canada canceled the company’s lindane registrations. Chemtura complained that Canada had expropriated its investment “by implementing measures which had the effect of depriving it of the whole of the reasonably to be expected economic benefit of its lindane seed treatment investment in Canada.”490
6.29 The tribunal rejected the claim. It found that the cancellation of claimant’s lindane product line did not amount to a substantial deprivation of the “overall sales of Chemtura” generated by its remaining pesticide products.491 “Under these circumstances,” the tribunal concluded, “the interference with the Claimant’s investment cannot be deemed ‘substantial.’”492
Chemtura thus defeats Claimants’ expropriation claim here.493
489 Ibid., ¶¶ 266, 259. 490 Chemtura Corporation v. Government of Canada, UNCITRAL, Claimant’s Reply (15 May 2009), ¶ 535 (RL- 296). 491 Chemtura v. Canada, ¶ 263-264 (RL-53) (emphasis added). 492 Ibid., ¶ 263. 493 Claimants also truncate obiter dicta from Corn Products and Fireman’s Fund to mislead this Tribunal that those decisions support their claim of partial expropriation. Reply, ¶ 181 n.297. Both tribunals stated: “The taking must be a substantially complete deprivation of the economic use and enjoyment of the rights to the property, or of identifiable distinct parts thereof (i.e., it approaches total impairment).” Corn Products v. Mexico, ¶ 87(c) (citing Fireman’s Fund v. Mexico, ¶ 176(c) (RL-169)) (CLA-272) (emphasis added). The italicized part of the quote, which Claimants delete, makes all the difference, because it shows what the tribunals really meant: taking of a part must result in total impairment of the whole. This is corroborated by the facts in Corn Products and the disposition of claims. There, the imposition of taxes on products not made from cane sugar caused a U.S. manufacturer of high fructose corn syrup to close one of its plants and suffer reduction of profits. The tribunal held that there was no partial or any kind of expropriation, since the claimant failed to “show that there had been such a degree of -135- CONTAINS CONFIDENTIAL INFORMATION
6.30 As stated, the Reply does not identify a single case accepting a claim of a “partial” indirect expropriation, because none exists. Claimants’ effort to find implicit support for their claim is equally unavailing.494 They cite, for example, EnCana v. Ecuador for the ostensible proposition that a single asset is “capable of being expropriated by itself.”495 EnCana does not support Claimants’ case here, however.
6.31 At issue in EnCana was Ecuador’s denial of VAT refunds to claimant’s local subsidiaries. Claimant raised an expropriation claim in two ways: either Ecuador directly expropriated an alleged right to tax refunds, or it indirectly expropriated the claimant’s local subsidiaries, because the denial of the refunds had such a significant impact on the subsidiaries as to be equivalent to their expropriation.496 The tribunal rejected both claims.497 The fact that it had to decide separately whether an asset could be directly expropriated provides no support to
Claimants’ claim of “partial” indirect expropriation.
6.32 If, for example, an investor owns 13 buildings, a direct taking of even one constitutes an expropriation. A generally-applicable regulation that prohibits the use of seven of the same
interference as to sterilise its business.” Corn Products v. Mexico, ¶ 92 (CLA-272). The tribunal added that “Government measures which have a detrimental effect on an investor’s markets…are not expropriatory unless they have the effect of destroying the business in question.” Ibid., ¶ 93. The Corn Products tribunal thus applied the substantive deprivation test to the investment as a whole. In Fireman’s Fund, indirect expropriation claims were also declined. Fireman’s Fund v. Mexico, ¶ 218 (RL-169). 494 See Reply, ¶ 182 (citing Middle East Cement). Claimants’ reliance on Middle East Cement is misplaced. There the tribunal simply “followed the order of the claims as presented” by Claimants. Middle East Cement Shipping and Handling Co. S.A. v. Arab Republic of Egypt, ICSID Case No. ARB/99/6, Award (12 Apr. 2002), ¶ 95 (CLA-206) (Böckstiegel, Bernardini, Wallace). It thus separately dealt with the revocation of a license to import cement and seizure of a vessel. See ibid., ¶¶ 97-129, 131-151. The fact that it addressed different governmental measures differently affecting different property rights serves no basis for an inference of partial expropriation. Moreover, the revocation of the import license destroyed the whole investment related to importing and storing cement. Ibid. ¶ 82. 495 Reply, ¶ 184. 496 EnCana v. Ecuador, ¶¶ 171, 172, 179 (RL-167). 497 Ibid., ¶¶ 172-199.
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buildings due to high levels of asbestos is different. Whether or not the regulation constitutes an indirect expropriation has to be assessed by reference to its effect on the value of the investor’s investment as a whole. And this is exactly the test the EnCana tribunal applied with respect to the indirect expropriation claim, holding that:
[A]lthough the EnCana subsidiaries suffered financially from the denial of VAT and the recovery of VAT refunds wrongly made, they were nonetheless able to continue to function profitably .... There is nothing in the record which suggests that the change in VAT laws or their interpretation brought the companies to a standstill or rendered the value to be derived from their activities so marginal or unprofitable as effectively to deprive them of their character as investments.498
6.33 The same rule applies to Claimants’ expropriation claim in this case. The effect of the
SPR and 80% Requirement on Claimants’ investment as a whole has not rendered their
“activities so marginal or unprofitable as effectively to deprive them of their character as investments.”
6.34 The accounting metrics of Claimants’ own damages experts prove this true. Using
Navigant’s model, for instance, Claimants’ investment exhibits positive cash flows in perpetuity, notwithstanding the SPR and 80% Requirement.499 An analysis of the royalties Abal paid to its co-claimants leads to similar conclusions. The graph below shows the royalties Abal paid to
498 Ibid., ¶ 174 (emphasis added). The tribunal in Waste Management II, a case also mistakenly cited by Claimants (Reply, ¶ 181, n.297), dealt with the analogous situation as in En Cana and similarly dismissed the claims of indirect expropriation. See Waste Management, Inc. v. United Mexican States, ICSID Case No. ARB(AF)/00/3, Award (30 Apr. 2004) (Crawford, Civiletti, Magallón Gómez) (hereinafter “Waste Management II”), ¶ 177-178 (CLA-225). 499 Second Expert Report of Brent C. Kaczmarek and Kiran P. Sequeira (17 Apr. 2015), ¶ 220 (CWS-017) and Appendices E and F thereto.
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PMP between 2005 and 2013.500 The values depicted are taken from Abal’s audited financial statements and stated in constant 2014 US Dollars.
6.35 As this figure reflects, Abal has paid PMP more in royalties every single year between
2009 and 2013 than it did in 2008, the last year before the SPR and 80% Requirement went into effect, or in any other year prior to the adoption of the two measures. Indeed, in all three of the most recent years for which information is available, it paid royalties more than 50% greater than it did in 2008.
500 This graph begins in 2005 instead of 2004 because no Royalties Expense is provided in the 2004 Audited Financial Statement. See Abal Hermanos, Financial Statements (31 Dec. 2004) (C-297).
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6.36 An analysis of Abal’s total gross profits between 2005 and 2013 is equally revealing.
Except only for 2010 (when Abal sold cigarettes below cost for a period of time501), its total gross profit was higher every year after the regulations were implemented than it was in 2008.502
These facts are shown in the graph below.
6.37 Claimants therefore have no serious argument that the SPR and 80% Requirement rendered their investment without value. To the contrary, Claimants continue to reap significant returns on their investment in Uruguay.
501 Counter-Memorial, ¶¶ 10.22-10.47. 502 This conclusion is also corroborated by Abal’s net income and royalty revenue to PMP, which has been higher since 2012 than before 2009.
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6.38 Claimants also contend that “while Abal has grown more profitable since 2011, Abal would have been even more profitable if Respondent had not adopted the challenged measures.”503 As Uruguay demonstrated, however, the mere fact that a measure has had a negative impact on an investment’s profitability is insufficient to meet the substantial deprivation standard.504 This settled proposition was left without any response in Claimants’ Reply. Instead, they attempt to enlist new legal authorities to salvage their claim. But even those authorities do not help them.
6.39 Claimants invoke, for example, Spyridon Roussalis v. Romania. Yet, the tribunal in that case rejected claimants’ indirect expropriation claims, stating:
Acts that create impediments to business do not by themselves constitute expropriation. In order to qualify as indirect expropriation, the measure must constitute a deprivation of the economic use and enjoyment, as if the rights related thereto, such as the income or benefits, had ceased to exist.505
503 Reply, ¶ 342 (emphasis in original). 504 See, e.g., Feldman v. Mexico, ¶ 112 (RL-201) (rejecting claims of indirect expropriation, the tribunal held that “not all government regulatory activity that makes it difficult or impossible for an investor to carry out a particular business, change in the law or change in the application of existing laws that makes it uneconomical to continue a particular business, is an expropriation.”) (emphasis added); Archer Daniels Midland Co. and Tate & Lyle Ingredients Americas, Inc. v. United Mexican States, ICSID Case No. ARB(AF)/04/05, Award (21 Nov. 2007) (Cremades, Rovine, Siqueiros), ¶¶ 251, 246, 247 (RL-178) (holding that “no expropriation occurs unless the measure’s degree of interference is substantial. ... [T]he loss of benefits or expectation…is not a sufficient criterion for an expropriation.” The Tribunal found that the tax was “not sufficiently restrictive” to support a conclusion that it had “effects similar to an outright expropriation,” because “[t]he tax did not frustrate the complete operation of [the investor’s] activities in Mexico.”) (emphasis added); LG&E Corp. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability (3 Oct. 2006) (de Maekelt, Rezek, van den Berg) (hereinafter “LG&E v. Argentina, Decision on Liability”), ¶ 191 (RL-65) (rejecting indirect expropriation claims, the tribunal held: “Interference with the investment’s ability to carry on its business is not satisfied where the investment continues to operate, even if profits are diminished.”) (emphasis added); Waste Management II, ¶¶ 159-160 (CLA-225) (holding that “the loss of benefits or expectations is not a sufficient criterion for an expropriation, even if it is a necessary one,” and declining expropriation claims because the investor failed to show “arbitrary intervention by the State amounting to a virtual taking or sterilizing of the enterprise.”) (emphasis added). See also I. Brownlie, PRINCIPLES OF PUBLIC INTERNATIONAL LAW (5th ed., 1998), p. 535 (RL-229) (“State measures, prima facie a lawful exercise of powers of government, may affect foreign interests considerably without amounting to expropriation.”) (emphasis added). 505 Spyridon Roussalis v. Romania, ¶ 328 (RL-193) (emphasis added).
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6.40 That standard plainly is not met here. Claimants have failed to show that their rights related to their investment ceased to exist.506
*
6.41 In sum, because the SPR and 80% Requirement were bona fide exercises of Uruguay’s sovereign police power, because Claimants did not have the rights they now claim were expropriated, and because their investment as a whole was not substantially deprived of its value,
Claimants’ expropriation claim must be rejected.
506 Claimants also cite to Tecmed v. Mexico. Yet, in that case, the tribunal set a very high standard for indirect expropriation, requiring the claimant to show that the measures at issue “radically deprived [it] of the economic[] use and enjoyment of its investments … in such a way that ‘[] any form of exploitation thereof…’ has disappeared; i.e. the economic value of the use, enjoyment or disposition of the assets or rights affected … have been neutralized or destroyed.” Tecmed v. Mexico, ¶¶ 115-116 (CLA-203) (emphasis added). To be sure, the tribunal found that the claimant in that case had met this high standard, but only because Mexico’s refusal to renew claimant’s landfill license coupled with an order to cease operations “fully and irrevocably destroyed” the claimant’s “economic and commercial operations” and “benefits and profits.” Ibid., ¶ 117. The effect of those measures was so severe that it “neutralize[d]” the “full … value” of the whole investment project. Ibid., ¶ 121. Tecmed was, in short, left with virtually nothing. Ibid., ¶ 188. Claimants refer to CME v. Czech Republic, but that case, too, is very different. The tribunal held that a finding of indirect expropriation “would require, at the very least, that the Tribunal be satisfied that there was deliberate government interference,” which “effectively neutralize[d] the benefit of the property.” CME Czech Republic B.V. (The Netherlands) v. Czech Republic, UNCITRAL, Partial Award (3 Sept. 2001) (Kühn, Hándl, Schwebel) (hereinafter “CME v. Czech Republic, Partial Award”), ¶¶ 608, 604 (CLA-202) (emphasis added). The tribunal deemed that test met, but only because the respondent’s actions were not a “normal [exercise of regulatory power] in compliance with and in execution of the law” but rather were “actions designed to force the foreign investor” to renounce its “basic rights for the protection of its investment.” The result was to “destroy[] the legal basis for the foreign investor’s business in the Czech Republic,” such that it could not continue its operations in the country. Ibid., ¶ 608. Claimants’ reliance on the Vivendi v. Argentina is equally misplaced. Unlike here, the Vivendi claimants “were radically deprived of the economic use and enjoyment of their investment, the benefits of which (i.e., the right to be paid for services provided) had been effectively neutralized and rendered useless.” Vivendi II, ¶ 7.5.34 (CLA-210).
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CHAPTER 7.
URUGUAY DID NOT BREACH ARTICLE 3(2) OF THE BIT WITH RESPECT TO FAIR AND EQUITABLE TREATMENT
7.1 Uruguay’s Counter-Memorial demonstrated that Article 3(2)’s “fair and equitable treatment” provision has its roots in the customary international law minimum standard of treatment, which tribunals still routinely apply.507 Even if that standard has evolved, the threshold for finding a breach of it remains high.508 It is violated only by State conduct that is egregious, i.e., that amounts “to an outrage, to bad faith, to willful neglect of duty or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency.”509
7.2 Claimants’ Reply takes a different view and wrongly contends that Article 3(2) of the
BIT contains a so-called “autonomous” FET standard. Claimants also wrongly assert that the measures they challenge violated this autonomous standard because they (1) were arbitrary; (2) frustrated Claimants’ legitimate expectations; and (3) undermined the stable and predictable legal framework existing when they invested in Uruguay.510
7.3 Uruguay will show that none of Claimants’ arguments withstand scrutiny in the pages that follow. Before doing so, however, it notes that the Parties’ debate over the applicable standard, while important in principle, is entirely academic in the context of this case. Whether
507 Counter-Memorial, ¶ 8.3. 508 Ibid., ¶ 8.6. 509 Ibid., ¶ 8.4 (citing LFH Neer & Pauline Neer v. Mexico, United States-Mexico General Claims Commission, 4 U.N.R.I.A.A. 60, Decision (15 Oct. 1926), pp. 61-62 (CLA-237)). See Biwater Gauff Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22, Award (22 July 2008) (Born, Landau, Hanotiau) (hereinafter “Biwater v. Tanzania”), ¶¶ 597-599 (CLA-013). 510 Reply, ¶ 212.
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the standard to be applied is the customary international law minimum standard of treatment, as
Uruguay says, or an “autonomous” standard, as Claimants say, the result is the same. Either way,
Claimants lose. As Uruguay will show, Claimants have not demonstrated—and cannot demonstrate—that either the SPR or the 80% Requirement was arbitrary, frustrated their legitimate expectations or undermined legal stability in Uruguay.
I. The Standard Applicable to Article 3(2) Is the Customary International Law Minimum Standard of Treatment
A. The Principle of Contemporaneity Dictates the Conclusion That the Applicable Standard is the Minimum Standard of Treatment
7.4 As stated, Claimants’ Reply argues that Article 3(2) establishes a broad, free-standing standard “that is not lowered by any link to customary international law.”511 As they see it, what constitutes fair and equitable treatment under the BIT “is not limited to a minimum standard of treatment.”512 The contemporaneous views of their home State, Switzerland, shows Claimants to be wrong.
7.5 Claimants’ expansive reading of Article 3(2) violates the principle of contemporaneity, which requires that a treaty’s terms be interpreted according to the meaning they possessed when it was concluded in the light of circumstances then prevailing.513 When the BIT was concluded,
511 Reply, ¶ 214. 512 Ibid., ¶ 230. 513 Case concerning rights of nationals of the United States of America in Morocco (France v. United States of America), Judgment (27 Aug. 1952), I.C.J. Reports 1952, p. 176, at p. 189 (RL-108). See also Wintershall v. Argentina, Award, ICSID Case N0. ARB/04/14, 8 Dec. 2008 (Narimán, Torres Bernárdez, Bernardini), ¶¶ 128-129 (RL-82) (“It is the text of this treaty that has to be interpreted; and interpreted in the light of the 1969 Vienna Convention, as well as on the principle of contemporanity. … [O]n ‘the principle of contemporanity’: viz. that the terms of a treaty have to be interpreted according to the meaning they possessed (and in the circumstances prevailing), at the time the treaty was concluded.”) (emphasis added). In ICS v. Argentina, the tribunal stated that the principle of contemporaneity “requires that the meaning and scope of this term be ascertained as of the time when [the Contracting Parties] negotiated their BIT.” ICS Inspection and Control Services Limited (United Kingdom) v. -144- CONTAINS CONFIDENTIAL INFORMATION
the Parties understood FET to mean the international minimum standard of treatment. The fact that Article 3(2) makes no specific reference to customary international law is immaterial.
7.6 The commentary to the 1967 OECD Draft Convention on the Protection of Foreign
Property confirms that the phrase “fair and equitable treatment” was considered at the time to refer to the minimum standard of treatment. A 2012 UNCTAD study explains:
[T]here is evidence suggesting that even an unqualified FET obligation should be equated to the minimum standard of treatment under customary law. In particular, the commentary to the 1967 OECD Draft Convention on the Protection of Foreign Property, which included an unqualified FET formulation, equated FET to the minimum standard.514
The study also explains that this same understanding endured at least for the next 20 years:
This understanding was further confirmed in 1984 when the OECD Committee on International Investment and Multinational Enterprises reported, ‘[a]ccording to all Member countries which have commented on this point, fair and equitable treatment introduced a substantive legal standard referring to general principles of international law even if this is not explicitly stated.’515
7.7 A 1979 Swiss Foreign Office Statement (cited by Uruguay in the Counter-Memorial) further confirms that Switzerland in particular interpreted FET to refer to the traditional minimum standard—as one would expect, since Switzerland is an OECD member State.516
Argentina, UNCITRAL, PCA Case No. 2010-9, Award on Jurisdiction, 10 Feb. 2012 (Dupuy, Torres Bernández, Lalonde) ¶ 289 (RL-112). See also The Ambatielos Claim (Greece, United Kingdom of Great Britain and Northern Ireland), Award (6 Mar. 1956), RIAA Vol. XII, p. 83, at pp. 108-109 (RL-44); Lord McNair, THE LAW OF TREATIES (1961), p. 467 (RL-90) (referring to “the rule that when there is a doubt as to the sense in which the parties to a treaty used words, those words should receive the meaning which they bore at the time of the conclusion of the treaty”). 514 UN Conference on Trade and Development, UNCTAD Series on International Investment Agreements II, Fair and Equitable Treatment: A Sequel (2012), p. 21 (RL-274). 515 Ibid. (emphasis added). 516 Counter-Memorial, ¶ 8.12. See L. Caflisch, Swiss Practice in Public International Law, 36 SWISS DIRECTORY OF PUBLIC INTERNATIONAL LAW 139 (1980), p. 178 (RL-221) (“One thus references the classic principle of -145- CONTAINS CONFIDENTIAL INFORMATION
According to that statement, FET “references the classic principle of public international law according to which States must provide foreigners in their territory the benefit of the international ‘minimum standard’.”517
7.8 Claimants’ Reply argues that in its statement, “Switzerland was not expressing a view that the FET standard is limited to the minimum standard of treatment under customary international law.”518 Claimants base this argument on what they represent as “the Foreign Office
Statement,”519 the text of which they claim goes on to state that the FET standard may also encompass “the duty to respect other relevant covenants [of the treaty] in accordance with good faith.”520 Claimants’ representation as to the source of this latter statement is false. It distinctly was not, as Claimants state, the Swiss Foreign Office that made it. Rather, it was the commentator (albeit a distinguished one) in whose article the statement is quoted stating his personal opinion.521 The Swiss Foreign Office Statement thus stands exactly as Uruguay cited it.
7.9 Claimants also attempt to support their argument by reference to the dictionary definitions of “fair” and “equitable.”522 Yet, this ignores the fact that, as former ICJ President
international law according to which States must provide foreigners in the territory the benefit of the international ‘minimum standard’, that is, to accord them a minimum of personal, procedural and economic rights.”). 517 Counter-Memorial, ¶ 8.12. See L. Caflisch, Swiss Practice in Public International Law, 36 SWISS DIRECTORY OF PUBLIC INTERNATIONAL LAW 139 (1980), p. 178 (RL-221) (“One thus references the classic principle of international law according to which States must provide foreigners in the territory the benefit of the international ‘minimum standard’, that is, to accord them a minimum of personal, procedural and economic rights”). 518 Reply, ¶ 222 (emphasis in original). 519 Ibid., ¶ 224. 520 Ibid., ¶ 223 (citing L. Caflisch, Swiss Practice in Public International Law, 36 SWISS DIRECTORY OF PUBLIC INTERNATIONAL LAW 139 (1980), p. 179 (RL-221)). 521 This is not the only time Claimants seriously misrepresent the sources they are citing. As described in ¶ 9.42, Claimants also falsely label one of their sources relating to their arguments on the scope of Uruguayan IP law. 522 Reply, ¶ 215.
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Rosalyn Higgins observed, fair and equitable treatment is a “legal term[] of art.”523 Recourse to ordinary dictionary definitions are thus of little use. More helpful is an examination of the origins of this term of art. As Professor Nikken described in his Separate Opinion in Suez v. Argentina, the phrase “fair and equitable treatment” was originally devised as a more neutral, less offensive
(to developing States, especially in Latin America) expression of what had previously been called the “international minimum” standard of treatment.524 In other words, as a legal term of art, FET was intended to mean exactly the same thing as the international minimum standard.
7.10 Claimants therefore cannot rewrite Article 3(2) by ignoring the contemporaneous understanding of its content and, instead, relying on subsequent awards made in the context of different BITs.
B. Article 3(2) Establishes A High Threshold for Finding An FET Violation
7.11 Uruguay explained in its Counter-Memorial that the customary international law minimum standard of treatment was articulated long ago in Neer v. Mexico.525 Claimants’ Reply responds that the international law minimum standard has evolved beyond Neer’s requirement
523 Oil Platforms (Islamic Republic of Iran v. United States), Judgment (12 Dec. 1996), Separate Opinion of Judge Higgins, I.C.J. Reports 1996, p. 847, ¶ 39 (RL-286). 524 Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal S.A. v. Argentine Republic, ICSID Case No. ARB/03/19, Separate Opinion of Pedro Nikken (30 July 2010), ¶ 15 (RL-300) (“‘International minimum standard’ was a ‘forbidden phrase’ in a treaty for the very many countries that had rejected that standard, because it was associated with unjust international relations, as has been recognized by scholars who have addressed the issue. The explanation suggested by the NAFTA Free Trade Commission interpretation, which reveals the intention of the NAFTA Parties to consider fair and equitable treatment and international minimum standard as identical, was that a formula had to be found for saying the same thing but with different words, neutral words, which were not historically demonized.”). See also Barcelona Traction, Light and Power Company, Ltd. (Belgium v. Spain), Judgment, Separate Opinion of Judge Padilla Nervo (5 Feb. 1970), I.C.J. Reports 1970, p. 243, at p. 246 (RL-282) (stating: “The history of the responsibility of States in respect of the treatment of foreign nationals is the history of abuses, illegal interference in the domestic jurisdiction of weaker States, unjust claims, threats and even military aggression under the flag of exercising rights of protection, and the imposing of sanctions in order to oblige a government to make the reparations demanded”). 525 Counter-Memorial, ¶ 8.4.
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that State conduct be found “egregious” or “shocking” in order to constitute a violation of that standard.526 Uruguay disagrees. As the tribunal in Glamis Gold v. United States observed:
Although situations may be more varied and complicated today than in the 1920s, the level of scrutiny is the same. The fundamentals of the Neer standard thus still apply today: to violate the customary international law minimum standard of treatment codified in Article 1105 of the NAFTA, an act must be sufficiently egregious and shocking – a gross denial of justice, manifest arbitrariness, blatant unfairness, a complete lack of due process, evident discrimination, or a manifest lack of reasons – so as to fall below the accepted international standards ....527
7.12 The critical question is not whether the Neer standard as such has endured verbatim.
Rather, it is whether the same heightened standard for a finding of a breach of the minimum standard under customary international law continues to exist. As the quotation from the Glamis
Gold case makes clear, it does.528
7.13 Other tribunals agree. The high Neer standard has been applied in recent cases. In
Biwater Gauff v. Tanzania, for example, the tribunal found: “Th[e] threshold [for finding a
526 Reply, ¶ 231. 527 Glamis Gold, Ltd. v. United States of America, UNCITRAL, Award (8 June 2009) (Young, Caron, Hubbard), ¶ 616 (RL-183) (emphasis added). 528 Claimants suggest that Uruguay’s reliance on NAFTA jurisprudence is misplaced, because “tribunals have repeatedly refused to embrace cases decided under NAFTA’s standard or narrow the scope of autonomous FET provisions.” Reply, ¶ 227. Claimants completely ignore a consistent body of jurisprudence from tribunals that, while opting for a so-called “autonomous” standard, have nevertheless relied upon NAFTA cases. See, e.g., Biwater v. Tanzania, where the Tribunal relied on three different NAFTA awards to analyze the threshold for finding a breach of the FET obligation and found that: “These were, of course, statements made in the context of Article 1105(1) of NAFTA, which contains slightly different wording to the BIT here, and has also been the subject of a binding interpretation by the NAFTA Free Trade Commission (FTC). However, notwithstanding these factors, the Arbitral Tribunal considers that the description of the general threshold for violations of this standard is appropriate in the context of Article 2(2) of the [Tanzania-United Kindom] BIT.” Biwater v. Tanzania, ¶ 599 (CLA-013). Similarly, in Jan de Nul v. Egypt, a dispute under the Belgium-Luxembourg-Egypt BIT, the Tribunal relied on NAFTA awards to find the appropriate test to analyze a breach of FET and found: “Albeit rendered in the context of Article 1105(1) of the NAFTA and the minimum standard of customary international law, the Tribunal finds this test appropriate.” Jan de Nul N.V. v. Arab Republic of Egypt, ICSID Case No. ARB/04/13, Award (6 Nov. 2008) (Kaufmann-Kohler, Mayer, Stern), ¶¶ 187, 192-194 (RL-181).
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breach of FET] is a high one.”529 In reaching that conclusion, the tribunal relied on Waste
Management II, where it was stressed that the minimum standard is breached by State conduct that is “arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice.”530 More recently, the Hochtief AG v. Argentina tribunal noted that “the threshold for a treaty breach set by Waste Management II is representative of the approach taken by investment tribunals to this question, and agree[d] that this is the proper approach to the interpretation of the FET obligation.”531
7.14 Claimants cannot hope to meet this high threshold in the present case. As explained in
Chapters 3 and 4 of this Rejoinder, there is nothing about either the SPR or the 80% Requirement that is the least bit arbitrary, let alone sufficiently so to fall below the international minimum standard of treatment.
7.15 In any event, even if Article 3(2) were deemed to create an “autonomous” FET standard
(quod non) the result would be no different. Uruguay has treated Claimants fairly and equitably for the reasons explained below.
II. Even if an Autonomous Standard Were Applied, Uruguay Has Not Breached It
7.16 Although they argue that Article 3(2) creates an “autonomous” standard of treatment,
Claimants are unable to identify the content of a single such standard. Instead, they cherry-pick the standards they prefer from a collection of largely irrelevant awards. On that basis, Claimants
529 Biwater v. Tanzania, ¶ 597 (CLA-013). 530 Waste Management II, ¶ 98 (CLA-225). 531 Hochtief AG v. The Argentine Republic, ICSID Case No. ARB/07/31, Decision on Liability (29 Dec. 2014) (Lowe, Brower, Thomas), ¶ 219 (RL-313). See also Cargill, Incorporated v. United Mexican States, ICSID Case No. ARB(AF)/05/2, Award (18 Sept. 2009) (Pryles, Caron, McRae), ¶ 284 (RL-186) (stating that “even as more situations are addressed, the required severity of the conduct as held in Neer is maintained”).
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contend that the FET standard consists of the following amalgamated elements: (1) non- arbitrariness; (2) the protection of legitimate expectations; and (3) legal stability.532 Even assuming arguendo that these constitute valid lenses for examining the SPR and 80%
Requirement, Claimants still cannot make out their case.
A. The SPR and 80% Requirement Are Not Arbitrary
7.17 Showing why neither the SPR nor the 80% Requirement are arbitrary requires first defining what “arbitrary” means as a matter of international law. Claimants’ Reply misstates
Uruguay’s argument in that respect. They say that in Uruguay’s view, an action is not arbitrary
“so long as it has any connection with a stated objective.”533 But that is not what Uruguay argues.
7.18 Uruguay’s Counter-Memorial made clear that the test for arbitrariness is that set forth by the Chamber of the ICJ in the ELSI case. There, the Chamber specifically held: “Arbitrariness is not so much something opposed to a rule of law .... It is a willful disregard of due process of law, an act which shocks, or at least surprises, a sense of juridical propriety.”534
7.19 Claimants’ Reply largely bypasses the ELSI standard, except to suggest that it somehow creates a “novel—and extremely low—standard of arbitrariness.”535 Claimants’ treatment of the
ELSI case is curious, if telling, given the ICJ’s unquestioned authority on matters of international law. Indeed, exactly for that reason, it remains the decision most often quoted and relied upon by
532 Reply, ¶ 236. 533 Ibid., ¶ 237 (emphasis added). 534 Counter-Memorial, ¶ 8.16, (citing Elettronica Sicula S.p.A. (ELSI) (United States v. Italy), Judgment (20 July 1989), I.C.J. Reports 1989, p. 15 (hereinafter “ELSI”), ¶ 128 (CLA-088) (emphasis added)). 535 Reply, ¶ 237.
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investment tribunals when deciding questions of arbitrariness (just as Uruguay demonstrated in its Counter-Memorial536). ELSI is also commonly cited by commentators as the standard definition of what “arbitrary” means under international law.537
7.20 Rather than deal with the ELSI standard head-on, Claimants instead attempt to distinguish the investment cases Uruguay cited in its Counter-Memorial that refer to that standard. They suggest, for example, that the tribunal in El Paso v. Argentina defined arbitrariness more broadly based, in part, on the Black’s Law Dictionary.538 Yet, as the full passage from the case Claimants themselves cite makes clear, the tribunal merely took note of the dictionary definition in describing the ordinary meaning of “arbitrary.”539 Immediately after that passage the tribunal
536 Counter-Memorial, ¶¶ 8.17-8.19. See also Siemens v. Argentina, ¶ 318 (CLA-144) (“The Tribunal considers that the definition in ELSI is the most authoritative interpretation of international law and it is close to the ordinary meaning of the term emphasizing the willful disregard of the law.”); Duke Energy Electroquil Partners and Electroquil S.A. v. Republic of Ecuador, ICSID Case No. ARB/04/19, Award (18 Aug. 2008) (Kaufmann-Kohler, Gómez Pinzón, van den Berg) (hereinafter “Duke Energy v. Ecuador”), ¶ 378 (CLA-098); LG&E v. Argentina, Decision on Liability, ¶ 157 (RL-65); Noble Ventures, Inc. v. Romania, ICSID Case No. ARB/01/11, Award (12 Oct. 2005) (Böckstiegel, Lever, Dupuy), ¶ 176 (RL-165); Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12, Award (14 July 2006) (Rigo Sureda, Lalonde, Martins), ¶¶ 391-392 (CLA-296); Alex Genin, Eastern Credit Limited, Inc. & A.S. Baltoil v. Republic of Estonia, ICSID Case No. ARB/99/2 Award (25 June 2001) (Fortier, Heth, van den Berg), ¶ 371 n.98 (RL-157); El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15, Final Award (31 Oct. 2011) (Caflish, Stern, Bernardini) (hereinafter “El Paso v. Argentina”), ¶ 319 (CLA-102); Cargill, Incorporated v. United Mexican States, ICSID Case No. ARB(AF)/05/2, Award (18 Sept. 2009) (Pryles, Caron, McRae), ¶ 291 (RL-186); BG Group Plc. v. Argentina, UNCITRAL (U.K.-Argentina BIT), Final Award (24 Dec. 2007) (Alvarez, Garro, van den Berg), ¶ 341 (CLA-084); International Thunderbird Gaming Corporation v. United Mexican States, UNCITRAL, Award (26 Jan. 2006) (van den Berg, Portal Ariosa, Wälde), ¶ 194 (RL-166); AIG Capital Partners, Inc. v. Republic of Kazakhstan, ICSID Case No. ARB/01/6, Award (7 Oct. 2003) (Nariman, Bernardini, Vukmir), ¶¶ 10.5.1, 10.5.2 (RL-289); Loewen Group, Inc. and Raymond L. Loewen v. United States of America, ICSID Case No. ARB(AF)/98/3, Award (26 Jun. 2003) (Mason, Mikva, Mustill), ¶¶ 131, 132 (CLA-169); Técnicas Medioambientales Tecmed, S.A. v. United Mexican States, ICSID Case No. ARB (AF)/00/2, Award (29 May 2003) (Naón, Rozas, Verea), ¶ 154 (CLA-203); Mondev International Ltd. v. United States of America, ICSID Case No. ARB(AF)/99/2, Award (11 Oct. 2002) (Stephen, Crawford, Schwebel), ¶ 127 (RL-117); Pope & Talbot, Inc. v. Government of Canada, UNCITRAL, Award in Respect of Damages (31 May 2002) (Dervaird, Greenberg, Belman), ¶ 63 (CLA-297). 537 L. Reed, et al., A GUIDE TO ICSID (2011), p. 80 (RL-270); C. Schreuer, Protection Against Arbitrary or Discriminatory Measures in THE FUTURE OF INVESTMENT ARBITRATION (2009), p. 184 (CLA-281). 538 Reply, ¶ 239. 539 Ibid.
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stated that “according to international law” arbitrariness means exactly what the ICJ said in the
ELSI case.540
7.21 Claimants also contend that the tribunal’s reliance on the ELSI definition in Cargill v.
Mexico is irrelevant because the tribunal referred to it in the context of a NAFTA claim, which was “limited to the customary international law minimum standard of treatment.”541 That is nonsense. The definition of what “arbitrary” means is in no way dependent on whether a claim arises under NAFTA or a BIT. The word means what it means. The ELSI definition of arbitrariness has therefore been followed by NAFTA and non-NAFTA tribunals alike as “the most authoritative interpretation of international law.”542
7.22 In any event, whether “arbitrary” is defined in accordance with the decision of the ICJ
Chamber in ELSI or in accordance with the dictionary is also largely an academic debate here.
Either way, Claimants cannot hope to show that the SPR or 80% Requirement were arbitrary.543
7.23 Even the decisions Claimants rely on stand unambiguously for the proposition that arbitrariness exists only where a measure was capricious, despotic or lacking a foundation based on reasoned judgment. LG&E v. Argentina, for example, shows that even when tribunals look beyond the ELSI standard, they remain reluctant to characterize measures as arbitrary without
540 El Paso v. Argentina, ¶ 319 (CLA-102). 541 Reply, ¶ 238. 542 Siemens v. Argentina, ¶ 318 (CLA-144). See also legal authorities cited in Uruguay’s Counter-Memorial, ¶¶ 8.17- 8.19. 543 Claimants also make a misconceived argument that Uruguay’s reliance on ELSI’s definition of arbitrariness “reads out of fair and equitable treatment the essential element of reasonableness.” Reply, ¶ 237. They further rely on Biwater, Rumeli and Saluka to incorrectly suggest that the test of “arbitrariness” is the same as that of “unreasonableness.” Ibid. Biwater, Rumeli and Saluka, however, are wholly inapposite to the question at hand because the test of “unreasonableness” they stated came in the context of addressing the wholly separate obligation not to unreasonably impair investments. Uruguay addresses those cases in Chapter 8 in the context of refuting Claimant’s spurious allegations that the measures they challenge unreasonably impaired their investments.
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evidence of “‘[] willful disregard of due process of law, [or] an act which shocks, or at least surprises, a sense of juridical propriety’.”544 In the end, the tribunal found that the measures at issue in that case could not be considered arbitrary, because they “were the result of reasoned judgment rather than simple disregard of the rule of law.”545 It is the same with the SPR and 80%
Requirement. Both were plainly the result not just of “reasoned” judgment but sound judgment.
There is therefore no basis on which to find them arbitrary.
7.24 With respect to the SPR, Uruguay showed first in its Counter-Memorial and again in
Chapter 3 of this Rejoinder that it was a responsible regulatory measure adopted to prevent the tobacco industry from continuing to perpetuate the false belief that some cigarettes are less harmful than others.546 It was, moreover, adopted after extensive deliberations among medical doctors and other public health experts with extensive knowledge and experience in the realm of tobacco control.547 Claimants cannot dispute these facts, and their arguments to the contrary are entirely unavailing.
7.25 Claimants’ contention that the SPR was arbitrary is also directly contradicted by the world’s leading health authorities (whose conclusions Claimants never once challenge, or even mention, in their Reply). In their joint Written Submission to this Tribunal, the WHO and FCTC
Secretariat conclude that there is “a substantial body of evidence that prohibiting brand variants is an effective means of preventing misleading branding of tobacco products.”548 On that basis,
544 LG&E v. Argentina, Decision on Liability, ¶ 157 (RL-65) (citing ELSI, ¶ 128 (CLA-088)). 545 LG&E v. Argentina, Decision on Liability, ¶ 162 (RL-65). 546 See supra Chapter 3; Counter-Memorial, Chapter 4. 547 See supra ¶¶ 3.83-3.108; Counter-Memorial, ¶¶ 4.98-4.110. 548 WHO & WHO FCTC Secretariat Submission, ¶ 90.
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they conclude that the SPR is an “effective means of protecting public health.”549 PAHO echoes these views in its own Written Submission to the Tribunal, which states: “Uruguay’s tobacco control measures are a reasonable and responsible response to the deceptive advertising, marketing and promotion strategies employed by the tobacco industry, they are evidence based, and they have proven effective in reducing tobacco consumption.”550
7.26 Claimants’ argument that the 80% Requirement is arbitrary is equally without merit. As discussed in Chapter 4 of this Rejoinder, Claimants no longer seriously contest the empirical evidence that supports Uruguay’s decision to increase the size of warning labels from 50% to
80%.551 Instead, they mischaracterize the genesis of the policy and present the Tribunal with a caricature of the facts. As Uruguay has shown, the truth is that the measure was adopted at the initiative of Uruguay’s public health experts and by instruction of the President (himself an oncologist) in direct response to recent policy guidelines from the WHO for the purpose of increasing warning label effectiveness.552
7.27 As with the SPR, Claimants’ argument that the 80% Requirement was arbitrary is also flatly refuted by the WHO, the FCTC Secretariat and PAHO, all of which back this regulatory measure without qualification.553
549 Ibid. 550 PAHO Submission, ¶ 100. 551 See supra ¶¶ 4.3, 4.26-4.44. 552 See supra ¶¶ 4.8-4.25. 553 See WHO & WHO FCTC Secretariat Submission, ¶ 90; PAHO Submission, ¶ 100.
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7.28 In sum, these were well-reasoned measures adopted after due deliberation for a legitimate public purpose. Both have also been expressly endorsed by the world’s leading health authorities. Claimants’ attempt to characterize them as arbitrary must therefore be rejected.
7.29 Claimants’ argument should also be rejected for another reason: both regulations grew directly out of Claimants’ own misconduct, including their prolonged effort to conceal smoking’s harmful health effects and then their marketing of “health reassurance” cigarettes as a
“safer” alternative to full-strength variants. Equity precludes Claimants from arguing that they are the ones who have been treated unfairly.
7.30 Claimants’ Reply disagrees and argues that the unclean hands doctrine does not apply here both because it “is not well recognized in investment law”554 and because they have never been convicted of fraud in Uruguay.555 The first point is wrong and the second is immaterial.
7.31 Uruguay’s Counter-Memorial cited several decisions rejecting investment claims arising from fraudulent investments.556 Claimants attempt to dismiss these as irrelevant because they supposedly related to the issue of jurisdiction.557 Claimants thus suggest that a different approach applies when a claimant’s misconduct is invoked as a defense on the merits rather than as a bar to jurisdiction. Yet, there is no principled reason for adopting a different approach on the merits as compared to jurisdiction. Unclean hands inheres in the notion of equity; it therefore has a particular role to play as a defense to an investor’s claim that it has been treated unfairly.
554 Reply, ¶ 266. 555 Ibid., ¶ 270. 556 Counter-Memorial, ¶¶ 8.27-8.28. 557 Reply, ¶ 269.
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7.32 Indeed, Claimants’ own reasoning refutes their argument. They claim that “the unclean hands doctrine only applies when a plaintiff has engaged in illegal activity that is directly related to the remedy the plaintiff is seeking.”558 That, of course, can be true either on jurisdiction or on the merits. Moreover, in this case, the remedy Claimants seek is directly related to their bad acts.
In particular, the SPR and 80% Requirement are direct outgrowths of Claimants’ history of deceit. Elemental fairness dictates that they be denied the relief they request.
7.33 The fact that no Uruguayan court “has ever found that Claimants engaged in fraud”559 is beside the point. In neither the Plama nor Fraport case (cited by Uruguay in the Counter-
Memorial) was the claimant found guilty of fraud by a domestic court.560 Moreover, the point is not whether a party has been conclusively determined to have committed a crime, it is only whether the party has an established history of misconduct relating to their claim which equity dictates should bar relief. And on this critical point, Claimants have little to say.
7.34 Claimants’ Reply attaches various labels to Uruguay’s recitation of the facts; they call them “irrelevant,” “inappropriate,” and “offensive.”561 Yet, never once do Claimants deny them.
Instead, Claimants pursue a series of ever more disingenuous gambits to get out from under their
558 Ibid., ¶ 23 (emphasis in original). 559 Ibid., ¶ 270. 560 Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Award (27 Aug. 2008) (Salans, van den Berg, Veeder), ¶¶ 134-135 (CLA-222); Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines, ICSID Case No. ARB/03/25, Award (16 Aug. 2007) (Fortier, Cremades, Reisman), ¶¶ 396-404 (RL-175). See also Phoenix Action, Ltd. v. Czech Republic, ICSID Case No. ARB/06/5, Award (15 Apr. 2009) (Stern, Bucher, Fernández-Armesto), ¶ 106 (CLA-135) (“States cannot be deemed to offer access to the ICSID dispute settlement mechanism to investments not made in good faith.”) (emphasis added); Gustav F W Hamester GmbH & Co KG v. Republic of Ghana, ICSID Case No. ARB/07/24, Award (18 June 2010) (Stern, Cremades, Landau), ¶¶ 123-124, 127 (RL-299) (“An investment will not be protected if it has been created in violation of national or international principles of good faith; by way of corruption, fraud or deceitful conduct; or if its creation itself constitutes a misuse of the system of international investment protection. … It will also not be protected if it is made in violation of the host State’s law[.]”) (emphasis added). This analysis is the same regardless of the stage of investment. 561 Reply, ¶ 21.
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shadow. For example, they say “Respondent’s story is predominantly drawn from the findings of a single judge in Washington, DC”562 whose decision finding them liable for racketeering they call an “outlier” and “aberrational.”563
7.35 This audacious assertion flies in the face of reality. In the first place, Uruguay’s “story” was based on much more than the judge’s findings. As reflected in the Counter-Memorial and the footnotes to it, much of the story actually comes from Claimants’ own documents, which tell it more compellingly than any court decision could.
7.36 Moreover, the judge’s findings cannot so blithely be dismissed. The case in question was brought by the U.S. Department of Justice (“DOJ”), which accused Claimants and eight other tobacco companies of engaging in a racketeering scheme that spanned decades. The court ultimately agreed with the DOJ in a judgment delivered after seven years of discovery and a nine-month trial involving live testimony from 84 witnesses. Many of the most damning witnesses were Claimants’ former employees and many of the most damning documents came from Claimants’ files. The judgment was, moreover, upheld by a unanimous panel of the United
States Court of Appeals, which found that the “cigarette companies remain reasonably likely to continue engaging in fraud and deception.”564 The U.S. Supreme Court denied review. The outcome thus reflects the collective views of the Executive and Judicial branches of the U.S.
Government.
562 Ibid., ¶ 22. 563 Ibid., ¶¶ 22, 272. 564 U.S. Surgeon General, The Health Consequences of Smoking: 50 Years of Progress (2014) p. 802 (R-285) (citing United States v. Philip Morris USA Inc., 686 F.3d 832, 839 (D.C. Cir. 2012) (RL-303)).
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7.37 Claimants’ attack on the case as an “outlier” is based purely on the fact that other courts sitting in individual and/or class action tort cases have sometimes declined to give preclusive effect to the court’s findings. Those decisions, however, concerned only the technical application of a doctrine known in American legal parlance as “offensive nonmutual issue preclusion,”565 a strict procedural doctrine that determines when findings in one case may be applied in another.
Those cases in no way undermine the validity of the DOJ’s case or its findings, which, as stated, are based largely on the tobacco industry’s own documents, and testimony from its former executives and scientists. Indeed, other U.S. courts have found the tobacco companies liable for fraud based on much of the same conduct detailed in the DOJ case.566
7.38 Claimants also attempt to deflect the Tribunal’s attention from their past misconduct by claiming that “[v]irtually all of Respondent’s allegations regarding so-called ‘industry deception’ relate to conduct in the United States by companies that are not parties to this arbitration.”567
This is disingenuous in the extreme. At the time of the decision in the DOJ case, Philip Morris
International and Philip Morris USA were sister subsidiaries of Altria, Inc. with intertwined
565 Shaffer v. R.J. Reynolds Tobacco Co., 860 F. Supp. 2d 991, 995 (D. Ariz. 2012) (CLA-251) (defining the standard). See also Schwab v. Philip Morris USA, Inc., 449 F. Supp. 2d 992, 1077-1078 (E.D.N.Y. 2006) (CLA- 261) (discussing the same standard labeled “offensive collateral estoppel” by this court). 566 Two seminal cases are Engle v. R.J. Reynolds Tobacco and Price v. Philip Morris USA. In the 2000 Engle decision, which spawned years of litigation lasting until the present, the court upheld the jury’s finding that the tobacco companies, including Philip Morris, were liable for fraud and conspiracy in intending that “the public rely upon that which the defendants generated over extended periods of time and which the defendants knew were false,” as well as its award of punitive damages in the amount of $144.08 billion dollars. Engle v. RJ Reynolds Tobacco, No. 94-08273 CA–22, 2000 WL 33534572, p. *3 (Fla. Cir. Ct. Nov. 6 2000) (RL-287). In Price v. Philip Morris, the court found that Philip Morris violated the Illinois Consumer Fraud and Deceptive Business Practices Act and awarded the plaintiffs $10.1 billion dollars, a judgment that was reversed on appeal because of U.S. federal preemption law but recently reinstated. See Price v. Philip Morris, Inc., 9 N.E. 3d 599 (Ill. App. Ct. 2014) (RL-310). 567 Reply, ¶ 271.
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operations.568 It was only after the court’s judgment, and only after it became apparent that the prospects for Claimants’ business were far brighter outside of the United States, that PMI was spun off into a truly separate entity.569
7.39 Moreover, authorities around the world have come to similar conclusions as the DOJ and the U.S. federal courts, including on the issue of the tobacco industry’s deceptive use of descriptors to mislead consumers about the health effects of their products. For example, the
Australian Competition and Consumer Commission concluded after investigation that the tobacco industry, including Philip Morris, had breached the deceptive conduct provisions of
Australia’s Trade Practices Act by marketing “light” and other similar cigarettes as less harmful.570 Philip Morris agreed to remove those products from the market rather than contest the Commission’s findings.571 Italy’s antitrust authority similarly concluded that the tobacco industry’s marketing of “light” and similar cigarettes constituted false advertising and ordered the tobacco industry, including Philip Morris, to remove those products from the market.572
7.40 Still further affirmation can be found in the terms of the FCTC itself, which expressly calls on States around the world to take steps to undo the effects of the industry’s deceptive
568 United States v. Philip Morris USA, Inc., Amended Final Opinion, Case No. 99-2496 (GK) (D.D.C. 2006), p. 323 n.13 (RL-171) (noting that that Defendant Altria effectively and actively controlled the activities of all of its subsidiaries, including PMI). 569 Philip Morris International, 2008 Annual Report (2008), p. 2 (R-384); “Altria to spin off Philip Morris International”, NBC News (29 Aug. 2007), available at http://www.nbcnews.com/id/20494757/ns/business- world_business/t/altria-spin-philip-morris-international (R-381) (citing the move as “designed to give the overseas maker of Marlboros and other cigarette brands more freedom to pursue sales growth in emerging markets” where it would no longer need to contend with the “legal and regulatory constraints facing its domestic counterpart, Philip Morris USA”.). 570 Australian Competition & Consumer Commission, “ACCC resolves ‘light’ and ‘mild’ cigarette investigation with Imperial Tobacco” (7 Nov. 2005) (R-378). 571 Ibid. 572 E. Povoledo, “National Fight Against Smoking Attacks ‘Light’ and ‘Mild’ Brands”, Italy Daily (1 Oct. 2002) (R- 376).
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marketing by banning misleading descriptors and adopting plain packaging.573 Indeed, the FCTC contains an entire article on “liability” (Article 19), the purpose of which is “to hold the tobacco industry liable for its abuses.”574
7.41 Perhaps Claimants most disingenuous argument is that Uruguay’s presentation of the facts “ignores a critical fact: tobacco companies began low-tar and low-nicotine cigarettes at the urging of the international public health community.”575 It is true that health authorities believed for some time that there may have been health benefits to smoking lower tar cigarettes. It is also true, however, that the tobacco industry, including Claimants, knew this to be false very early on but acted to conceal this fact from public health authorities.576
7.42 A 1977 memorandum addressed to Philip Morris’s Director of Research acknowledged, for example, that “it would certainly seem that the campaign for low nicotine [and tar] cigarettes is misguided and rests on a set of fallacious premises,” and concluded that it is “clear” that “the major body of data that has been used to justify the campaign for low nicotine [and tar] cigarettes does nothing of the sort.”577 In response, Philip Morris decided to conceal this information from public health authorities and continue marketing its “health reassurance” cigarettes as healthier
573 WHO, FCTC, Arts. 11, 13 (RL-20); COP-FCTC, Article 11 Guidelines, ¶ 43 (RL-13); COP-FCTC, Guidelines for Implementation of Article 13 of the WHO FCTC, ¶¶ 38, 39, 43 (RL-133). 574 World Health Organization, “The WHO Framework Convention on Tobacco Control: an overview” (Jan. 2015), p. 4 (R-429). 575 Reply, ¶ 274. 576 See Counter-Memorial, Chapter 4; Altria Group, Inc. v. Good, Brief for the United States as Amicus Curiae Supporting Respondents, U.S. Supreme Court (June 2008), pp. 8-11 (RL-295); U.S. Department of Health and Human Services, National Institutes of Health (NIH), National Cancer Institute, Smoking and Tobacco Control, Monograph 13: Risks Associated with Smoking Cigarettes with Low Machine-Measured Yields of Tar and Nicotine, NIH Publication No. 02-5074 (Oct. 2001), p. 233 (R-11) (“Internal tobacco company documents demonstrate that the cigarette manufacturers recognized the inherent deception of advertising that offered cigarettes as ‘Light’ or ‘Ultra-Light,’ or as having the lowest tar and nicotine yields.”). 577 Philip Morris Internal Document, S. Schachter, Pharmacological and Psychological Determinants of Smoking (2 Mar. 1977), Bates No. 1000046626-1000046661, pp. 1000046655, 1000046660 (R-101).
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than others.578 A 1974 Philip Morris inter-office memorandum entitled “Moral Issue on FTC
Tar” could not be clearer. It stated: “Some concern has been expressed concerning the moral obligation of Philip Morris (and perhaps the tobacco industry) to reveal to the FTC [Federal
Trade Commission] the fact that some cigarette smokers may be getting more tar than the FTC rating of that cigarette. ... I believe that there need be no such concern, at least from a position of morality.”579 As a result, public health authorities labored under the false impression that lower tar cigarettes were a “healthier” option long after the industry itself knew better.
7.43 In sum, it is cynical for Claimants to claim the benefit of the BIT’s FET provisions when their own misconduct is what led directly to the measures they challenge as “unfair.”
B. Claimants Did Not Have Any “Legitimate Expectations” Capable of Being Frustrated
1. There Can Be No Legitimate Expectations In the Absence of a Specific Commitment or Promise
7.44 Claimants’ argument that the measures they challenge frustrated their legitimate expectations fares no better. In order to establish a breach of FET on this basis, Claimants would have to show that they had legitimate expectations arising from specific commitments or assurances that Uruguay made to them.580 This they cannot do.
578 The U.S. Federal Trade Commission (FTC) even requested comments on the issue in the early 1980s. Rather than sharing their research that smoking light cigarettes did “not achieve any reduction in smoke intake,” and that people do not smoke like the smoking machine, tobacco representatives, including PMI, instead argued that “compensatory smoking behavior was not relevant.” Altria Group, Inc. v. Good, Brief for the United States as Amicus Curiae Supporting Respondents, U.S. Supreme Court (June 2008), p. 9 (RL-295). 579 Philip Morris Internal Document, Memorandum from R. Fagan to H. Wakeham (7 Mar. 1974), Bates No. 3990438852-3990438853, p. 3990438852 (R-95). 580 See Counter-Memorial, ¶¶ 8.31-8.35.
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7.45 Claimants’ Reply first tries to argue that “legitimate expectations” are not contingent on the existence of specific assurances by a host State.581 Invoking Tecmed, Claimants insist that a host State is required to “provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment.”582 Claimants’ reliance on Tecmed is misplaced for a number of reasons.
7.46 First, on the facts, Claimants have made absolutely no showing that the alleged “basic expectations” they cite—“that they would be able to use and enjoy their brand assets and trademarks”583—were, in the words of Tecmed, “taken into account ... to make the[ir] investment.” Counsel says they were, but there is nothing in the record to support that statement.
Without that support, there is no basis on which the Tribunal can find that Claimants ever had the expectations their lawyers now claim they did.
7.47 Second, on the law, Tecmed is a poor foundation on which to build an argument. Uruguay showed in its Counter-Memorial that the decision is a lonely outlier.584 Claimants respond by claiming that “Tecmed’s interpretation is widely accepted by arbitration tribunals and awards and international scholars.”585 As support for this sweeping assertion, they cite just two sources: (1) an article by their legal expert (albeit on other issues), Jan Paulsson; and (2) the partial award in
CME. Neither helps their argument.
581 Reply, ¶ 250. 582 Ibid., ¶ 247. 583 Ibid., ¶ 212. 584 Counter-Memorial, ¶ 8.34. 585 Reply, ¶ 247.
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7.48 Professor Paulsson’s article does not speak of “basic expectations that were taken into account by the foreign investor to make the investment” (the words of the Tecmed tribunal) but rather “reasonable” expectations. And the jurisprudence is clear that “reasonable” expectations must be based on specific assurances made at the time of investment.586 The panel in the annulment proceedings in MTD v. Chile specifically took note of the “strenuous criticism [of
Tecmed’s FET standard] from the Respondent’s expert, Mr. Jan Paulsson,” in which he “note[d], inter alia, the difference between the TECMED standard and that adopted in other cases.”587
Professor Paulsson thus actually contradicts Claimants’ argument.
7.49 The partial award in CME does not help Claimants either. It did not even refer to Tecmed, much less endorse the standard it articulated. Moreover, the tribunal in that case dealt with a situation not present here: the “evisceration of arrangements”—contractual arrangements and a broadcast license—which authentically formed the basis for the investment at issue.588 Claimants themselves admit that contracts constitute “specific commitments” that give rise to “legitimate expectations.”589 CME, like Professor Paulsson, thus undermines Claimants’ case.
7.50 Despite Claimants’ efforts to make it appear otherwise, Tecmed stands alone. The tribunal in White Industries v. India made this abundantly clear, observing that the decision
586 Duke Energy v. Ecuador, ¶ 351 (CLA-098) (noting that “the expectation could only have been deemed reasonable if it had been based on clear assurances from the Government.”). 587 MTD Equity Sdn Bhd. & MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Decision on Annulment (21 Mar. 2007) (Guillaume, Crawford, Ordóñez Noriega), ¶ 66 (CLA-041). 588 In CME, the legal arrangements whose “evisceration” brought about a breach of the fair and equitable treatment standard under the applicable BIT were found to be tantamount to specific commitments by the host State: a license scheme for television broadcasting and, subsequently, a joint venture agreement, under which the Czech subsidiary of the claimant operated a private broadcasting station. CME v. Czech Republic, Partial Award, ¶¶ 460-574 (CLA- 202). 589 Reply, ¶ 252 n.422 (citing El Paso v. Argentina (CLA-102)).
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has been subject to ... valid criticism. The so-called Tecmed standard is potentially very broad in application. Indeed ... “it is actually not a standard at all; it is rather a description of a perfect public regulation in a perfect world, to which all states should aspire but very few (if any) will ever attain.”590
7.51 In addition to placing ill-conceived reliance on Tecmed, Claimants also erroneously contend that “[l]egitimate expectations may arise without specific, explicit promises to an investor.”591 Tribunals, they say, “have rejected the proposition that government representations and assurances must take a particular form,”592 and instead have endorsed the standard of a “very diffuse general expectation.”593 Claimants are wrong again. To quote White Industries v. India once more:
[L]egitimate expectations about the treatment of investments will arise “based on the conditions offered by the host State at the time of the investment.” [Investment treaty] jurisprudence highlights that, to create legitimate expectations, State conduct needs to be specific and unambiguous. Encouraging remarks from government officials do not of themselves give rise to legitimate expectations. There must be an “unambiguous affirmation” or a “definitive, unambiguous and repeated assurances.” The conduct must be targeted at a specific person or identifiable group.”594
590 White Industries Australia Limited v. The Republic of India, UNCITRAL, Final Award (30 Nov. 2011) (Brower, Lau, Rowley), ¶¶ 10.3.5-10.3.6 (NS-27). 591 Reply, ¶ 250. 592 Ibid., ¶ 252. 593 Ibid., ¶ 254. 594 White Industries Australia Limited v. The Republic of India, UNCITRAL, Final Award (30 Nov. 2011) (Brower, Lau, Rowley), ¶¶ 10.3.7 (NS-27) (citing A. Newcombe & L. Paradell, LAW AND PRACTICE OF INVESTMENT TREATIES, pp. 281-282 (2009) (RLA-248)) . See also EDF (Services) Ltd. v. Romania, ICSID Case No. ARB/05/13, Award (8 Oct. 2009) (Bernardini, Derains, Rovine), ¶ 217 (CLA-224) (stating: “Except where specific promises or representations are made by the State to the investor, the latter may not rely on a bilateral investment treaty as a kind of insurance policy against the risk of any changes in the host State’s legal and economic framework. Such expectation would be neither legitimate nor reasonable.”); Ulysseas, Inc. v. Republic of Ecuador, UNCITRAL, Final Award (12 June 2012) (Bernardini, Pryles, Stern), ¶ 249 (RL-196) (following EDF); Duke Energy v. Ecuador, ¶ 351 (CLA-098) (noting that “clear assurances from the Government” were needed); PSEG Global Inc. & Konya Ilgin Elektrik Üretim ve Ticaret Limited Şirketi v. Republic of Turkey, ICSID Case No. ARB/02/5, Award (19 Jan. 2007) (Orrego Vicuña, Fortier, Kaufmann-Kohler), ¶ 241 (RL-172) (noting that “legitimate expectations by definition require a promise of the administration on which Claimants rely to assert a right that needs to be observed”); GEA -164- CONTAINS CONFIDENTIAL INFORMATION
7.52 Claimants attempt to shore up their argument by reference to El Paso v. Argentina, which they cite for the proposition that “no general definition of what constitutes a specific commitment can be given, as all depends on the circumstances.”595 Claimants have taken this quotation entirely out of context, however. In its decision, the tribunal specifically explained what may and what may not constitute a specific commitment capable of giving rise to a legitimate expectation:
There can indeed exist specific commitments directly made to the investor – for example in a contract or in a letter of intent, or even through a specific promise in a person-to-person business meeting – and not simply general statements in treaties or legislation which, because of their nature of general regulations, can evolve.
...
A commitment can be considered specific if its precise object was to give a real guarantee of stability to the investor. Usually general texts cannot contain such commitments, as there is no guarantee that they will not be modified in due course. However, a reiteration of the same type of commitment in different types of general statements could, considering the circumstances, amount to a specific behaviour of the State, the object and purpose of which is to give the investor a guarantee on which it can justifiably rely.596
7.53 As two distinguished commentators observed with respect to the El Paso Award: “[I]t seems that two types of commitments might be considered ‘specific’: those specific as to their
Group Aktiengesellschaft v. Ukraine, ICSID Case No. ARB/08/16, Award (31 Mar. 2011) (van den Berg, Landau, Stern), ¶¶ 283, 287, 291 (RL-191) (in which the Tribunal searched the record in vain for an “unconditional promise”). 595 Reply, ¶ 252. 596 El Paso v. Argentina, ¶¶ 376-377 (CLA-102) (emphasis added, original emphasis omitted). Claimants’ reliance on Electrabel S.A. v. Republic of Hungary, see Reply, ¶ 254 n.431, is also misplaced. Even though the Tribunal found that, “While specific assurances given by the host State may reinforce the investor’s expectations, such an assurance is not always indispensable,” the Tribunal clarified that such specific assurances will “make a difference in the assessment of the investor’s knowledge and of the reasonability and legitimacy of its expectations.” Electrabel S.A. v. Republic of Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability (30 Nov. 2012) (Veeder, Kaufmann-Kohler, Stern), ¶ 7.78 (RL-200).
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addressee and those specific regarding the object and purpose.”597 Leading treatises and reviews of international investment awards agree.598
7.54 In light of the above, it is clear that absent specific commitments or assurances to it by a host State, an investor has no basis on which to claim any “legitimate expectations.” And since
Claimants can point to no such specific commitments or assurances in this case, their FET claim fails.
2. Uruguay Made No Specific Commitments to Claimants Capable of Giving Rise to Legitimate Expectations
7.55 As stated, the alleged expectations Claimants claim to have when they made their investment in Uruguay were that “they would be able to use and enjoy their brand assets and trademarks.”599 Claimants contend that this expectation arose out of the facts that:
(i) Claimants own the intellectual property rights, including the trademarks, that form the core components of the branding on their cigarette packages; (ii) those intellectual property rights are property rights protected under Uruguayan law; (iii) Claimants have a right to use their intellectual property rights under Uruguayan law; (iv) Claimants had used their intellectual property and brand assets without disruption over many decades, and in the process have created substantial brand value, (v) the production and sale of tobacco products has at all times been legal in Uruguay; and (vi) Respondent encouraged further investment in Abal’s production and marketing of cigarettes through the Declaration of Promoted Activity for
597 Violation of Investor Rights under Investment Treaties, in FOREIGN INVESTMENT DISPUTES: CASES, MATERIALS AND COMMENTARY (R.D. Bishop, J. Crawford, et al., eds., 2014), Chapter 9, ¶ 375. (RL-278) 598 See, e.g., A. Newcombe & L. Paradell, LAW AND PRACTICE OF INVESTMENT TREATIES (2009), pp. 281-282 (RL- 248) (“IIA jurisprudence highlights that, to create legitimate expectations, state conduct needs to be specific and unambiguous. Encouraging remarks from government officials do not of themselves give rise to legitimate expectations. There must be an ‘unambiguous affirmation’ or a ‘definitive, unambiguous and repeated’ assurance. The conduct must be targeted at a specific person or identifiable group. For example, in Tecmed, CMS, LG&E, Enron, Azurix, BG, Sempra and Siemens there were specific representations that were crystallized into the terms of licenses or concession contracts under which the foreign investment operated.”) (emphasis added). 599 Reply, ¶ 212.
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Investment Project of ABAL HNOS S.A., which Respondent issued in 2002.600
These expectations, if they even existed, do not arise from any specific commitments made by
Uruguay. Nor are they reasonable; they are based on false premises.
7.56 It bears emphasis at the outset that the legitimacy of an investor’s expectations must be assessed at the time the investment was made. In Frontier Petroleum, the tribunal held:
Tribunals have stated consistently that protected expectations must rest on the conditions as they exist at the time of the investment. They have pointed out that a foreign investor has to make its business decisions and shape its expectations on the basis of the law and the factual situation prevailing in the country as it stands at the time of the investment.601
7.57 Uruguay made this point in its Counter-Memorial602 and Claimants nowhere dispute it.
By itself and without more, this limitation renders irrelevant points (iv), (v) and (vi) above, in which Claimants purport to base their expectations on “facts” occurring after they made their investment in Uruguay.
600 Ibid., ¶ 249. 601 Frontier Petroleum Services Ltd. v. Czech Republic, UNCITRAL, Final Award (12 Nov. 2010) (Williams, Alvarez, Schreuer), ¶ 287 (CLA-105). See also Duke Energy v. Ecuador, ¶ 340 (CLA-098) (stating: “To be protected, the investor’s expectations must be legitimate and reasonable at the time when the investor makes the investment. … In addition, such expectations must arise from the conditions that the State offered the investor and the latter must have relied upon them when deciding to invest.”) (emphasis added, internal citations omitted); Parkerings-Compagniet AS v. Republic of Lithuania, ICSID Case No. ARB/05/8, Award (11 Sept. 2007) (Lévy, Lew, Lalonde) (hereinafter “Parkerings v. Lithuania”), ¶ 331 (RL-177) where the tribunal found that “[I]n the situation where the host-State made no assurance or representation, the circumstances surrounding the conclusion of the agreement are decisive to determine if the expectation of the investor was legitimate. In order to determine the legitimate expectation of an investor, it is also necessary to analyse the conduct of the State at the time of the investment” (emphasis added); GAMI Investment Inc v. United Mexican States, UNCITRAL, Final Award (15 Nov. 2004) (Reisman, Lacarte Muró, Paulsson), ¶¶ 93-94 (CLA-270) (where the tribunal held that its mandate was to assess how the legal regime in place at the time of the investment had been applied to the investor and not whether it was the proper legal regime.) 602 Counter-Memorial, ¶ 8.41.
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7.58 Claimants’ argument stumbles over another threshold problem; namely, the fact, discussed above,603 that there is no evidence to support the allegation that they actually had the putative expectations they now invoke. The Tribunal has before it only the post hoc argumentation of counsel, no actual information as to whether or not Claimants truly possessed these “expectations” when they invested in Uruguay more than 35 years ago.604
7.59 Claimants’ argument fails for still other reasons as well. They base their claim that they expected they “would be able to use and enjoy their brand assets and trademarks” on the ostensible fact that they own intellectual property with respect to which they have a “right to use” under Uruguayan law.605 Even if this were true, which it is not, this is not the sort of specific commitment or assurance that has been recognized as giving rise to legitimate expectations. Instead, it is a “general statement” in municipal legislation which, in the “nature of general regulations, can evolve.”606 Nor does Claimants’ argument that their mere registration of their trademarks constituted a “specific assurance” from Uruguay help them.607 This is nothing more than an ordinary administrative act carried out pursuant to the terms of municipal law and bears none of the characteristics of an “assurance” of any kind, much less a specific one.
7.60 Still further, Claimants’ ostensible expectations turn on the existence vel non of a “right to use” trademarks under Uruguayan law. In the absence of that right, no legitimate expectations could arise. And as Uruguay demonstrated in its Counter-Memorial and will again in Chapter 9 of this Rejoinder, Uruguayan trademark law (like international trademark law) does not confer
603 See supra ¶¶ 7.46, 7.55-7.65. 604 Claimant’s Request for Arbitration (19 Feb. 2010), ¶ 15. 605 Reply, ¶¶ 212, 249. 606 El Paso v. Argentina, ¶ 376 (CLA-102). 607 Reply, ¶ 256.
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on trademark holders an affirmative “right to use” their marks in commerce. It gives them only the negative right to exclude others from using those trademarks.608
7.61 Commentators have written that,
for regulatory measures which from the outset do not interfere with IP protection due to the general negative rights character of IP rights, the grant of an IP right again cannot create any expectations that such measures will not be introduced in relation to the exploitation of an IP protected product: As negative rights, IP rights allow a right holder to prevent anyone else to utilize the protected subject matter ... in any commercially relevant way— without guaranteeing a positive (exclusive) right to exploit. The limitation to negative rights allows governments to impose further regulatory controls on the utilisation and exploitation.609
Because the “right” they invoke does not exist, Claimants’ cannot have had “legitimate expectations” that they would have been able permanently to exercise it.
7.62 Moreover, Claimants cannot credibly argue that they had “legitimate expectations” that
Uruguay would forever refrain from adopting tobacco control regulations restricting their marketing activities in order to protect public health. They said exactly the opposite to Uruguay in the 2004 letter cited in Chapter 2610 in which Abal acknowledged that the “broad regulation of tobacco, combined with its effective application, can achieve important public health objectives.”611 Consistent with that view, Claimants accepted without protest Uruguay’s 2005 prohibition on their marketing of Marlboro Lights and other variants using similarly misleading descriptors, notwithstanding the fact that they were prevented from further using these variants
608 See infra ¶¶ 9.32-9.46. 609 H.G. Ruse-Khan, “Litigating Intellectual Property Rights In Investor-State Arbitration: From Plain Packaging to Patent Revocation”, Society of International Economic Law Working Papers, No. 2014/21 (8 July 2014), Chapter III.1.b (emphasis added) (RL-277). 610 See supra ¶ 2.2. 611 Abal Hermanos S.A., Recommendations for a comprehensive regulation of tobacco products (9 July 2004), p. 1 (R-166).
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and their associated trademarks. The SPR simply extended the 2005 prohibition to other variants based on the same finding: that other variants perpetuated the same false message that some cigarettes are less unhealthy than others. The 80% Requirement did not prevent the use of any of
Claimants’ trademarks; it merely left less space for them, so that larger and more effective health warnings could appear on the packages.
7.63 Claimants are thus reduced to invoking a series of unrelated instruments to salvage their claim. They cite, for example, Uruguay’s Investment Law as another would-be source of their
“legitimate expectations.”612 This argument fails for at least three reasons: (1) there is no connection between Uruguay’s investment law and the expectations Claimants claim to have; (2) like Uruguay’s trademark law, the investment law constitutes general municipal legislation, not a specific assurance; and (3) the law dates to 1998,613 nearly 20 years after Claimants made their investment in Uruguay.
7.64 Finally, Claimants mention the Declaration of Promoted Activity for Investment Project of ABAL HNOS S.A. issued in 2002.614 There are at least two reasons this too gives Claimants no comfort. First, there is, as in the case of the Investment Law, no connection between the
Declaration and the expectations Claimants profess they had. The Declaration had nothing to do with Claimants’ alleged intellectual property rights but rather afforded them a time-limited package of tax incentives. Second, the Declaration was made more than 20 years after Claimants invested in Uruguay.
612 Reply, ¶ 255. 613 Investment Promotion Law No. 16.906, Art. 1 (C-410). 614 Reply, ¶ 258.
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7.65 For these reasons, Claimants cannot demonstrate either that they had the expectations they allege or that those expectations, if they really had them, were entitled to protection under
Article 3(2) of the BIT.
C. Uruguay Did Not Deprive Claimants of Legal Stability
7.66 Uruguay’s Counter-Memorial showed that States have the inherent right to regulate their affairs, and that this right is not abrogated by any obligation to provide investors a “stable and predictable legal system” (whatever that might mean) that could be read into Article 3(2).615
7.67 Claimants’ Reply takes this and distorts it into the remarkable assertion that Uruguay now “disclaims any obligation to provide a stable legal environment for investors.” 616 This is absurd. Uruguay’s position is: first, the cases that have held that the FET obligation includes the implicit obligation to provide a stable legal framework are the subject of considerable debate.
Tribunals have split on the issue and many have taken the view that FET provisions are not stand-alone guarantees of legal stability.617
7.68 Second, even if FET provisions include an implicit undertaking to provide a stable framework, that does not operate as a shackle that restrains a State’s inherent right to regulate. In
615 Counter-Memorial, ¶¶ 8.45-8.52. 616 Reply, ¶ 263. 617 See Total S.A. v. Argentine Republic, ICSID Case No. ARB/04/1, Decision on Liability (27 Dec. 2010) (Sacerdoti, Alvarez, Marcano), ¶¶ 115-116 (RL-190), where the tribunal held specifically that “This absence [of ‘stable framework’ language in the preamble], indicates, at a minimum, that stability of the legal domestic framework was not envisaged as a specific element of the domestic legal regime that the Contracting Parties undertook to grant to their respective investors.” See also Continental Casualty Company v. Argentine Republic, ICSID Case No. ARB/03/9, Award (5 Sept. 2008) (Sacerdoti, Veeder, Nader) (hereinafter “Continental Casualty v. Argentina”), ¶ 258 (CLA-096) (holding “[s]tability of the legal framework is undoubtedly conducive to attracting foreign investments …. On the other hand, it would be unconscionable for a country to promise not to change its legislation as time and needs change …. Such an implication as to stability in the BIT’s Preamble would be contrary to an effective interpretation of the Treaty; reliance on such an implication by a foreign investor would be misplaced and, indeed, unreasonable.”) (emphasis added).
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Renee Levi v. Peru, a case on which Claimants themselves rely,618 the tribunal held that “stability does not mean a freezing of the legal system or making it impossible for the State to reform laws and other regulations in force at the time the investor made the investment.”619 In Enron v.
Argentina, the tribunal similarly observed that “the stabilisation requirement does not mean the freezing of the legal system or the disappearance of the regulatory power of the State.”620
7.69 Furthermore, and especially, a State’s sovereign right to regulate in the public interest takes on particular importance in matters of public health, particularly where, as here, the issues are quite literally of life and death.
7.70 Claimants’ Reply again misrepresents Uruguay’s position. They misstate it to be that
“there is an implicit public health exception [to the BIT] that allows Respondent to regulate the tobacco industry in any way it sees fit, regardless of how unfair and inequitable the regulation might be.”621
7.71 This, of course, is not Uruguay’s position. As stated repeatedly in the Counter-Memorial and in this Rejoinder, Uruguay claims that it has the sovereign right to exercise its police powers
618 Reply, ¶ 263 n.452. 619 Renée Rose Levy de Levi v. Republic of Peru, ICSID Case No. ARB/10/17, Award (26 Feb. 2014) (Oreamuno, Hanotiau, Morales Godoy), ¶ 319 (RL-207). 620 Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Award (22 May 2007) (Orrego-Vicuña, van den Berg, Tschanz), ¶ 261 (CLA-028). See also EDF (Services) Ltd. v. Romania, ICSID Case No. ARB/05/13, Award (8 Oct. 2009) (Bernardini, Rovine, Derains), ¶ 218 (CLA-224) (citing approvingly to Parkerings v. Lithuania, ¶ 332 (RL-177) (“Save for the existence of an agreement, in the form of a stabilization clause or otherwise, there is nothing objectionable about the amendment brought to the regulatory framework existing at the time an investor made its investment.”)). To the same effect is AES Summit Generation Limited and AES-Tisza Erömü Kft v. The Republic of Hungary, ICSID Case No. ARB/07/22, Award (23 Sept. 2010) (von Wobeser, Stern, Rowley), ¶ 9.3.31 (RL-100) where the tribunal rejected the claims of an FET breach because “no specific commitments were made by Hungary that could limit its sovereign right to change its law (such as a stability clause) or that could legitimately have made the investor believe that no change in the law would occur.”; Parkerings v. Lithuania, ¶ 333 (RL-177) (stating that that “an investor must anticipate that the circumstances could change, and thus structure its investment in order to adapt it to the potential changes of legal environment.”). 621 Reply, ¶ 265.
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in a non-arbitrary and non-discriminatory manner to protect public health, and that its adoption of the SPR and 80% Requirement constitute such exercises. As such, they do not undermine the
“legal stability” to which Claimants contend they are entitled.
7.72 Uruguay agrees with the El Paso tribunal’s cogent formulation of the balance to be struck. It stated: “Under a FET clause, a foreign investor can expect that the rules will not be changed without justification of an economic, social or other nature. Conversely, it is unthinkable that a State could make a general commitment to all foreign investors never to change its legislation whatever the circumstances, and it would be unreasonable for an investor to rely on such a freeze.”622
7.73 Claimants accept this formulation of the rule—and inadvertently defeat their own argument—when they state that the “guarantee of fair and equitable treatment includes an obligation not to make ‘unreasonable modifications of [the] legal framework’.”623 By their own logic then, the obligation does not apply to reasonable modifications of the legal framework, such as the SPR and the 80% Requirement.
*
7.74 In conclusion, there has been no violation of the international law standard for fair and equitable treatment. Even if an “autonomous” FET standard were to apply in this case, which it does not, Claimants have failed to demonstrate that Uruguay breached that standard. Uruguay
622 El Paso v. Argentina, ¶ 372 (CLA-102) (emphasis added). See also Continental Casualty v. Argentina, ¶ 258 (CLA-096) (holding that “it would be unconscionable for a country to promise not to change its legislation as time and needs change.”). 623 Reply, ¶ 262 (emphasis added).
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therefore respectfully submits that Claimants’ allegation that its investments were denied fair and equitable treatment under Article 3(2) of the BIT must be rejected.
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CHAPTER 8.
THE SPR AND 80% REQUIREMENT DID NOT UNREASONABLY IMPAIR CLAIMANTS’ USE AND ENJOYMENT OF THEIR INVESTMENT
8.1 Uruguay demonstrated in its Counter-Memorial that Claimants have not met the standard for establishing the unreasonableness of the measures they attack under Article 3(1) of the BIT because the SPR and 80% Requirement “bear a reasonable relationship to [the] rational policy” of protecting public health.624
8.2 Claimants do not directly challenge this legal standard. They would have no cause to do so. It has been consistently followed in cases involving provisions similar to Article 3(1) of the
Swiss-Uruguay BIT, including, inter alia, Saluka v. Czech Republic and Biwater v. Tanzania.625
In the same vein, the tribunal in Invesmart v. Czech Republic very recently applied just this standard to dismiss claims that respondent had acted unreasonably by denying a request for State aid.626 The tribunal held:
The standard to apply ... is whether the conduct of the Czech Republic bore a reasonable relationship to some rational policy. This question is to be distinguished from any consideration of the merits of the policy adopted by the Czech Republic.
624 Counter-Memorial, ¶¶ 8.54-8.60; Saluka v. Czech Republic, ¶ 460 (CLA-227); Biwater v. Tanzania, ¶ 693 (CLA- 013) (citing Saluka v. Czech Republic, ¶ 460 (CLA-227)). 625 Saluka v. Czech Republic, ¶ 460 (CLA-227); Biwater v. Tanzania, ¶ 693 (CLA-013). See also Invesmart v. Czech Republic, ¶¶ 453-460 (RL-297); AES Summit Generation Limited and AES-Tisza Erömü Kft v. The Republic of Hungary, ICSID Case No. ARB/07/22, Award (23 Sept. 2010) (von Wobeser, Stern, Rowley), ¶¶ 10.3.7, 10.3.34 (RL-100) (“There are two elements that require to be analyzed to determine whether a state’s act was unreasonable: the existence of a rational policy; and the reasonableness of the act of the state in relation to the policy. ... Having concluded that Hungary was principally motivated by the politics surrounding so-called luxury profits, the Tribunal nevertheless is of the view that it is a perfectly valid and rational policy objective for a government to address luxury profits.”); Spyridon Roussalis v. Romania, ¶ 324 (RL-193) (relying on Saluka, the tribunal held that “[i]n order for the State’s conduct to be justifiable or reasonable, it requires that the conduct ‘bears a reasonable relationship to some rational policy.’” (emphasis in original)). 626 Invesmart v. Czech Republic, ¶ 453 (RL-297).
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...
The Tribunal does not consider that it is required to form an opinion about the merits of the policies that underpinned the decisions made by the [respondent]. A state should not be held to an obligation to act in accordance with international best practice. To read such an obligation into a BIT is untenable.
The Czech Republic can be held to have acted reasonably so long as, in the Tribunal’s view, it did so out of some reasonable policy consideration, as opposed to conduct that was motivated by the intention to deprive an investor of the value of its investment.627
8.3 The tribunal concluded: “Whilst the merits of [the respondent’s] decision may be questioned,” it was “clear that [the respondent] acted in the interests of legitimate policy concerns ... and cannot, therefore be said to have acted unreasonably.”628 The tribunal also found no evidence to show that the respondent’s actions were motivated by the intention to deprive the investor of the value of its investment.629
8.4 Claimants’ Reply makes no effort to show that their claims satisfy these requirements, i.e., that Uruguay failed to act in the interests of legitimate policy concerns, or that it was motivated by an intention to deprive them of the value of their investment. Indeed, Claimants make neither allegation. They rely instead on a rote repetition of the assertion they made in their
Memorial; namely, that the same facts that allegedly show the regulations are arbitrary also
627 Ibid., ¶¶ 454, 459, 460. 628 Ibid., ¶ 462. 629 Ibid., ¶¶ 460-462. Invesmart, B.V. v. Czech Republic thus also refutes Claimants’ contention that a respondent’s intent to deprive an investment of value is not a necessary requirement to show the breach of the obligation not to impair investments by unreasonable measures. The tribunals in Saluka, Biwater, and CME found that the questioned actions entirely lacked justification and were targeted at the investors with the intent to deprive them of their investments. See Saluka v. Czech Republic, ¶¶ 481, 472 (CLA-227); Biwater v. Tanzania, ¶ 709 (CLA-013); CME CME v. Czech Republic, Partial Award, ¶ 612 (CLA-202). Claimants’ assertion that Saluka did not mention intent with respect to the first of its two findings of unreasonable impairment is not on point because that finding was one of a “discriminatory” measure rather than an “unreasonable” measure.
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prove that they are unreasonable.630 Claimants contend that “the terms ‘arbitrary’ and
‘unreasonable’ are interchangeable.”631 By their own logic, therefore, the facts Uruguay presented in Chapters 3 and 4 above (and Chapters 4 and 5 of the Counter-Memorial) that prove that the SPR and 80% Requirement were not arbitrary equally prove that they were not unreasonable.632
8.5 In the face of a mountain of contrary authority, Claimants turn to two awards, BG v.
Argentina and CME v. Czech Republic, to argue that reasonableness “should be measured against the expectations of the parties to the [BIT],” taking into account “what the parties to the [BITs] should jointly anticipate ... to be appropriate behavior in light of the goals of the BIT.”633
8.6 These awards apply a standard somewhat different from the overwhelming majority of cases where the standard is not “expectations,” but whether or not a questioned measure bears a reasonable relationship to a legitimate and rational policy objective. But even if the alternate standard Claimants propose were right (quod non), they would still not meet it. Indeed, the two cases from which Claimants attempt to find support actually defeat their claim, even under the standard applied in those cases.
8.7 The BG and CME tribunals made clear that what constitutes an appropriate action
“should be measured against the expectations of the parties to the [BIT],” not the expectations of
630 Reply, ¶ 280; Memorial, ¶ 251. 631 Memorial, ¶ 251, (citing National Grid P.L.C. v. Argentine Republic, UNCITRAL, Award (3 Nov. 2008) (Sureda, Kessler, Garro), ¶ 197 (CLA-221) and Plama Consortium Ltd. v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Award (27 Aug. 2008) (Salans, van den Berg, Veeder), ¶ 184 (CLA-222)). 632 See supra Chapter 3 & 4. 633 Reply, ¶ 281 (citing BG Group Plc. v. Argentine Republic, UNCITRAL, Final Award (24 Dec. 2007) (Alvarez, Garro, van den Berg), ¶ 341 (CLA-084) and CME v. Czech Republic, Partial Award, ¶ 158 (CLA-202)).
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a particular claimant. Here, Claimants have not shown—nor could they possibly show—that
Uruguay and Switzerland “jointly anticipate[d]” that by entering into the BIT they intended to derogate from each other’s right to exercise its police power, in good faith, to achieve a fundamental public objective,634 such as by adoption of a reasonable regulatory measure to protect public health. Claimants have presented no evidence whatsoever in regard either to
Switzerland’s or Uruguay’s expectations, let alone that they intended such a drastic limitation on their power to protect public health. Claimants speak only of their own alleged expectations, which are beside the point even under the standard applied by the two outlier cases which they invoke.
8.8 The difference between the cases finding unreasonable impairment and this case could scarcely be more apparent. There is nothing in the record of this case to suggest that Uruguay’s regulatory measures were motivated by anything other than a good faith belief that they would serve the indisputably legitimate objective of protecting public health, or that they were targeted at Claimants in order to deprive their investments of their value. Even Claimants do not make those allegations. To the contrary, the evidence thoroughly demonstrates (1) that the SPR and the
80% Requirement were adopted solely because Uruguay reasonably believed they would achieve important public health objectives; and (2) that they were adopted in good faith and applied generally and non-discriminatorily. Claimants therefore have no argument that either measure unreasonably impaired their investment, or otherwise violated Article 3(1) of the BIT.
634 Invesmart v. Czech Republic, ¶ 498 (RL-297) (“International investment treaties were never intended to do away with their signatories' right to regulate”). See also Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Decision on Jurisdiction and Liability (14 Jan. 2010) (Paulsson, Voss, Fernández-Armesto), ¶ 505 (RL-114); LG&E v. Argentina, Decision on Liability, ¶ 195 (RL-65); V. Lowe, Recognition or Expropriation, TRANSNATIONAL DISPUTE MANAGEMENT, Vol. 1, No. 3 (July 2004), p. 4 (cited in UNCTAD, EXPROPRIATION: A SEQUEL (2012), p. 80 (RL-254)) (RL-237).
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CHAPTER 9.
URUGUAY HAS NOT BREACHED ARTICLE 11 OF THE BIT
9.1 This Chapter responds to Claimants’ arguments that the SPR and 80% Requirement breached Article 11 of the BIT, which, they say, converts alleged commitments under Uruguay’s trademark laws into obligations protected by the BIT. Claimants’ contentions in this regard are flawed at every level. First, Article 11 does not provide BIT protection for alleged violations of rights granted by Uruguayan municipal law. Second, the trademark rights that Claimants invoke do not exist under Uruguayan law (or the international law on which it is based).
9.2 Section I addresses Claimants’ arguments concerning the meaning and scope of Article
11. It shows that Article 11 is different from typical umbrella clauses—a point emphasized in
Uruguay’s Counter-Memorial that Claimants’ Reply refuses to confront. As shown in the
Counter-Memorial, Article 11 plainly does not apply to generally applicable legislative and municipal “commitments” of the sort Claimants invoke.
9.3 Section II refutes Claimants’ contentions concerning the existence of the “commitment” they allege to have been made: the so-called guaranteed “right to use” their trademarks. No such right exists under Uruguayan law. Claimants themselves know there is no such right. So too does their Uruguayan IP law expert who, outside the context of this arbitration, has specifically written that Uruguayan trademark law does not confer a positive “right to use” a trademark; rather, it confers only a negative right to prevent others from using a registered mark. That right was left intact by the SPR and 80% Requirement. Section II further shows that even if such a positive right did exist (quod non), Claimants would not be able to claim its benefit because they did not, and do not, have registered trademarks in the brand variants about which they complain.
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I. Article 11 Does Not Convert Alleged Violations of Uruguayan Municipal Law Into Violations of the BIT
9.4 Uruguay made clear in its Counter-Memorial that Article 11 is not the umbrella clause
Claimants might wish for. The text of Article 11—which provides that each of the Parties “shall constantly guarantee the observance of commitments it has entered into with respect to the investments of the investor”—is different from standard umbrella clauses in other BITs.
9.5 Claimants disagree. According to their Reply, “[t]here is nothing unusual”635 about
Article 11. As they would have it, it is framed like any other umbrella clause. That being the case, they say, there is nothing to prevent it from covering Uruguay’s alleged “failure to observe commitments it had entered into through generally applicable laws and regulations,” i.e.,
Uruguayan Intellectual Property Law.636
9.6 Claimants are mistaken. Their argument requires disregarding (1) the actual text of the
BIT; (2) significant jurisprudence and commentary; and (3) their home State’s own interpretation of its meaning.
9.7 Claimants studiously ignore the critical threshold issue in discerning the meaning of
Article 11: the provision’s actual text. Their Reply devotes just two sentences to the issue. After quoting the text of Article 11, Claimants write: “This provision includes the core components of an umbrella clause: (1) a State obligation to observe (2) commitments entered into with respect to investments. There is nothing unusual about the BIT’s umbrella clause.”637
635 Reply, ¶ 286. 636 Ibid., ¶ 285. 637 Ibid., ¶ 286.
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9.8 Even these bare, conclusory assertions are inconsistent with the actual wording of Article
11. Article 11 does not state that the Parties have an “obligation to observe” commitments. It says something quite different; namely, that each Party shall “constantly guarantee the observance of commitments it has entered into ....” As a matter of simple semantics, the distinction between an obligation “to observe” commitments and a duty to “constantly guarantee the observance of commitments” is evident.
9.9 Uruguay’s Counter-Memorial took note of the many tribunals, scholars and practitioners who have remarked upon this unusual formulation, calling it:
“curiously worded” and giving “ground for a narrower construction”;638
“less clear and categorical than the phrase ‘any obligation it has assumed with regard to the specific investments in its territory’”;639 and
“more ambiguous” and “leav[ing] room for different interpretations.”640
9.10 Anthony Sinclair, for one, has articulated what such a different interpretation might be.
He writes: “It might for example, mean merely to provide a legal system and framework of institutions in which commitments may be enforced.”641 The Noble Ventures tribunal similarly observed that this unusual phraseology
638 Counter-Memorial, ¶ 9.13 (citing J. Crawford, TREATY AND CONTRACT IN INVESTMENT ARBITRATION (2007), p. 18 (CLA-116)). 639 Ibid., ¶ 9.11 (citing SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, ICSID Case No. ARB/02/6, Decision on Jurisdiction (29 Jan. 2004) (El-Kosheri, Crawford, Crivellaro), ¶ 97, 119 (CLA-058)). 640 Ibid., ¶ 9.12 (citing OECD, Interpretation of the Umbrella Clause in Investment Agreements, OECD Working Papers on International Investment, No. 2006/03 (Oct. 2006), p. 11 (RL-242)). 641 A. Sinclair, The Umbrella Clause Debate in INVESTMENT TREATY LAW: CURRENT ISSUES III (A. Bjorklund, et al., eds., 2009), p. 283 (RL-247).
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could be interpreted as laying down a kind of general obligation for the host State as a public authority to facilitate foreign investment, namely an obligation to “guarantee” the observance of the commitments that the host State has entered into towards investors of the other Party, being an obligation to be implemented by, in particular, the adoption of steps and measures under its own municipal law to safeguard the guarantee ... but without necessarily elevating municipal law obligations to international ones.642
9.11 Claimants do not bother to mention these sources, let alone explain why they are wrong.
They choose silence instead. Uruguay does not consider that the BIT’s text can be so easily ignored.
9.12 In Uruguay’s view, Sinclair’s interpretation is most consistent with Article 11’s plain language. The duty that Uruguay and Switzerland assumed was not “to observe” commitments as such, but rather to “constantly guarantee” their observance. Read most naturally, this connotes an undertaking to provide the sort of institutional framework to which Sinclair refers. Under this reading, there is no doubt that Uruguay met its obligation to provide the institutional framework necessary to guarantee the observance of its commitments to investors, including Claimants.
They do not argue otherwise.
9.13 Even if Article 11 could be read more broadly, there would still be no doubt that it cannot convert ostensible “commitments” arising under Uruguay’s generally applicable municipal IP law into treaty obligations. Uruguay’s Counter-Memorial annexed a 2003 interpretive letter that
Switzerland submitted to ICSID in the wake of the SGS v. Pakistan decision.643 In its letter,
Switzerland stated that “it was not the intention of the Swiss Authorities that the scope of Article
642 Noble Ventures, Inc. v. Romania, ICSID Case No. ARB/01/11, Award (12 Oct. 2005) (Böckstiegel, Lever, Dupuy), ¶ 58 (RL-165). 643 Letter from Amb. Marino Baldi, Swiss State Secretariat for Economic Affairs, to Mr. Antonio R. Parra, Deputy Secretary-General, ICSID, reprinted in 19 MEALEY’S INT. ARB. REP. E3 (1 Oct. 2003) (RL-259).
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11 ... include[d] municipal legislative or administrative or other unilateral measures.”644 The intended obligation only applied to “a commitment to a specific investment or a specific investor, either in a contract or an authorization ....”645 In the Swiss view, such commitments would typically take the form of “an investment authorization ... or a written agreement.”646
9.14 Claimants respond that Switzerland’s understanding is irrelevant because its letter related to Article 11 of the Switzerland-Pakistan BIT, not Article 11 of the Switzerland-Uruguay BIT.647
The distinction makes no difference; the text is exactly the same. It is not plausible to suggest that Switzerland intended the language to mean one thing in one treaty and another thing in the other. This truth, which is self-evident in any event, is only underscored by the fact that the language “shall constantly guarantee the observance of the commitments it has entered into” in both BITs came from the Swiss model BIT at the time.648
9.15 Claimants’ attempt to have Switzerland’s letter disregarded is also legally incorrect.
Article 32 of the Vienna Convention makes clear that tribunals may have “recourse” to an open- ended category of “supplementary means of interpretation” either to “confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31: (a) leaves the meaning ambiguous or obscure; or (b) leads to a result which is manifestly absurd or unreasonable.”649 It is, moreover, accepted that “[t]he drafters of
644 Ibid., p. 3. 645 Ibid. 646 Ibid. 647 Reply, ¶ 288. 648 See Swiss Standard Draft for Agreements on the Reciprocal Promotion and Protection of Investments (1 Jan. 1986), Art. 11 (R-70). 649 Vienna Convention on the Law of Treaties (with annex) (23 May 1969), 1155 U.N.T.S. 331 (RL-19).
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Article 32 did not provide an exhaustive list of supplementary means, as they wanted the interpreter to have a wide discretion in determining which means, in each given case, would help to reveal or confirm the meaning of a provision.”650
9.16 In applying Article 32, the Appellate Body of the World Trade Organization has noted that “it is possible that documents published, events occurring, or practice followed subsequent to the conclusion of the treaty may give an indication of what were, and what were not, the
‘common intentions of the parties’ at the time of the conclusion.”651 In fact, tribunals frequently take into account unilateral interpretations of specific BIT provisions made by one of the parties, particularly where, as here, it is the other party that later seeks to enforce that interpretation.652
9.17 As stated, this Swiss letter was sent in response to SGS v. Pakistan, in which the tribunal held that it could not read Article 11 to have the expansive interpretation advanced by claimants
650 Y. Le Bouthillier, Article 32, in THE VIENNA CONVENTIONS ON THE LAW OF TREATIES: A COMMENTARY, Vol. I (O. Corten & J. Klein eds., 2011), p. 851 (RL-273) (emphasis added). 651 WTO Appellate Body Report, European Communities—Custom Classification of Frozen Boneless Chicken Cuts, WT/DS269/AB/R & WT/DS286/AB/R (12 Sept. 2005), ¶ 305 (RL-291) (emphasis in original). 652 See HICEE B.V. v. Slovak Republic, UNCITRAL, Partial Award (23 May 2011) (Berman, Brower, Tomka), ¶ 136 (RL-111) (“[T]he Tribunal will restate what it considers to be the essential and quite simple fact: that in the process of giving its consent to be bound by the Agreement the Government of the Netherlands expressed itself formally, publicly, and in writing (with reasons) as to what had been intended by the key phrase in Article 1; and that the Government of Slovakia, now appearing before this Tribunal, espouses the same meaning for the provision in question […]The Tribunal is therefore in no doubt that the Dutch Explanatory Notes, given their terms and content, taken together with the viewpoint adopted in these proceedings by Slovakia, constitute valid supplementary material which the Tribunal may, and in the circumstances must, take into account in dealing with the question before it.”) Moreover, tribunals are also willing to consider interpretations of different BITs offered by different parties when construing the meaning of the particular BIT before them. Thus, tribunals have, for example, on several occasions taken into account the NAFTA parties’ post-ratification interpretation of that instrument’s “fair and equitable treatment” provision when interpreting similar provisions in entirely different BITs between entirely different parties. See, e.g., Liman Caspian Oil BV and NCL Dutch Investment BV v. Republic of Kazakhstan, ICSID Case No. ARB/07/14, Award (22 June 2010) (Böckstiegel, Hobér, Crawford) (hereinafter “Liman Caspian v. Kazakhstan”), ¶ 263 (RL-188); CMS v. Argentina, p. 283 (CLA-093); EDF International S.A. v. Argentine Republic, ICSID Case No. ARB/03/23, Award (11 June 2012) (Park, Kaufmann-Kohler, Remón), ¶ 1003 (CLA-278); Oko Pankki Oyj v. The Republic of Estonia, ICSID Case No. ARB/04/6, Award (19 Nov. 2007) (Wijnen, Fortier, Veeder), ¶ 235 (CLA-277). If, in construing a particular BIT, resort to the interpretations of different parties to different BITs is appropriate, then clearly it is also appropriate for the Tribunal to examine the Swiss interpretation of an identically-worded provision in the Switzerland-Pakistan BIT.
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in that case without evidence that this was the parties’ intent. Even as Claimants here argue that the letter is irrelevant because it applies to the Swiss BIT with Pakistan, they have no problem asking this Tribunal to apply that tribunal’s interpretation of the BIT, which the Reply emphasizes “contains the exact same umbrella clause as the Switzerland-Uruguay BIT.”653
Claimants try to find support in the tribunal’s statement that “commitments may be embedded in, e.g., the municipal legislative or other unilateral measures of a Contracting Party.”654 This quote does not help them, however. First, the tribunal itself found that this interpretation could not possibly be correct and therefore held that the clause “would have to be considerably more specifically worded before it can reasonably be read in the extraordinarily expansive manner submitted by the [investor].”655 Second, the Swiss letter explicitly denied this understanding of its treaty provision.
9.18 Claimants also strain to try to characterize their Uruguayan trademark claim as arising not from a “municipal legislative or administrative” commitment but rather from their registration of their trademarks. According to Claimants, a “trademark registration is a grant of the rights specified in Uruguayan law to an individual person or entity.”656 This too is a distinction without a difference—a fact that Claimants themselves admit. In describing their own position, Claimants state: “Respondent’s trademark law includes the commitment that trademark owners have the right to use their duly registered trademarks.”657 Claimants thus acknowledge
653 Reply, ¶ 287 (emphasis in original). 654 Ibid., ¶ 287 (citing SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13, Decision of the Tribunal on Objections to Jurisdiction (6 Aug. 2003) (Feliciano, Faurès, Thomas), ¶ 166 (CLA-059)). 655 Ibid., ¶ 171. 656 Reply, ¶ 290. 657 Ibid., ¶ 287.
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that the ostensible “commitment” they invoke arises from what they themselves call
“Respondent’s trademark law” (i.e., its municipal legislation). Yet, this is exactly the sort of general legislative measure Switzerland made clear was not covered by Article 11.
9.19 Claimants’ Reply erroneously asserts that this argument means Uruguay does not contest that “as a general matter, a State’s failure to observe commitments it has entered into through laws and regulations will breach an umbrella clause.”658 This is not true. Uruguay very much disagrees that “standard” umbrella clauses can be read to apply to general municipal law claims.
Tribunals have repeatedly held that such clauses “do not cover general requirements imposed by the law of the host State.”659 As aptly stated in Treaty and Contract in Investment Arbitration, “it is a confusion to equate a State law or regulation with an obligation entered into by the State ...
The enactment of a law by a State, whether it is specific or general, is not the entry by the State into an obligation distinct from the law itself.”660
658 Ibid., ¶ 286. 659 CMS Gas Transmission Co. v. Argentine Republic, ICSID Case No. ARB/01/8, Decision of the Ad Hoc Committee on the Application for Annulment of the Argentine Republic (25 Sept. 2007) (Guillaume, Elaraby, Crawford), ¶ 95(a) (RL-294). In Noble Ventures, Inc. v. Romania, the tribunal pondered: “In fact, one may ask what other obligations can the parties have had in mind as having been “entered into” by a host State with regard to an investment.” Here, of course, we know exactly what the parties had in mind, and it was decisively not legislative acts. Even without the certainty we have here, the tribunal reached the same understanding: “The employment of the notion ‘entered into’ indicates that specific commitments are referred to are not general commitments, for example by way of legislative acts.” Noble Ventures, Inc. v. Romania, ICSID Case No. ARB/01/11, Award (12 Oct. 2005) (Böckstiegel, Lever, Dupuy), ¶ 51 (RL-165). See also SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, ICSID Case No. ARB/02/6, Decision on Jurisdiction (29 Jan. 2004) (El-Kosheri, Crawford, Crivellaro), ¶ 121 (“For [the umbrella clause] to be applicable, the host State must have assumed a legal obligation, and it must have been assumed vis-à-vis the specific investment—not as a matter of the application of some legal obligation of a general character.”) (CLA-058). 660 J. Crawford, TREATY AND CONTRACT IN INVESTMENT ARBITRATION (2007), p. 20 (CLA-116).
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9.20 In any event, whatever the reading that may have been given to other, broader treaty provisions has no bearing on the interpretation of the distinct language of Article 11.661 Under any view, the alleged “commitments” arising from the general application of Uruguay’s trademark law do not fall within the scope of Article 11.
II. Uruguay Did Not Fail To Observe Any Obligations Under Uruguayan Law with Regard to Claimants’ Trademarks
A. Claimants Know They Have No Guaranteed Right To Use Their Trademarks
9.21 Like their Memorial, Claimants’ Reply mistakenly argues that the “challenged measures deprived Claimants of their right to use their trademarks.”662 According to Claimants, this putative “right to use their trademarks derives from (i) Uruguayan trademark law ..., and (2)
Uruguayan property law ....”663 Unlike their Memorial, the Reply now tries to buttress
Claimants’ argument by reference to international trademark conventions that supposedly support their reading of Uruguayan domestic law.664
9.22 Perhaps the most remarkable thing about Claimants’ arguments on the alleged “right to use” is their near-total failure to address the points Uruguay made in its Counter-Memorial.
Relying on detailed analysis of the specific provisions of Uruguayan trademark law,665 national
661 “These observations on the peculiarities of the wording of Article 11 of the Pakistan-Switzerland BIT lend weight to the conclusion that the SGS v Pakistan Tribunal was grappling with a different type of clause and that decision should fall outside the pool of ‘authorities’ that have discussed the meaning of the umbrella clause.” A. Sinclair, The Umbrella Clause Debate in INVESTMENT TREATY LAW: CURRENT ISSUES III (A. Bjorklund, et al., eds., 2009), p. 287 (RL-247). 662 Reply, ¶ 122. 663 Ibid., ¶ 125. 664 Ibid., ¶¶ 126-131. 665 Counter-Memorial, ¶¶ 9.24-9.25, 9.31.
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jurisprudence,666 the expert opinion of Professor Andrea Barrios,667 and even a letter to
Claimants’ from the World Intellectual Property Organization (“WIPO”),668 Uruguay disproved the existence of the ostensible right Claimants claim to possess. Except for only two passing references to Professor Barrios,669 Claimants do not engage with any of these authorities in their
Reply. The reason is simple: Claimants know they are wrong.
9.23 This is most easily demonstrated by reference to the writings of their own expert,
Professor Gustavo Fischer, outside the context of this arbitration. In a 2012 report he submitted to Uruguay’s IP agency, the National Directorate of Industrial Property (“DNPI” per its Spanish acronym),670 in his capacity as President of the Uruguayan Association of Industrial Property
Experts, Mr. Fischer wrote that under Uruguayan law, the registration of a trademark “does not in any way imply an authorization or qualification for the performance of the specific activity for which the registration is requested. This is because the National Directorate of Industrial
Property has not been assigned such task.”671 In support of this argument, he cited TCA Decision
No. 933/2010,672 the case Uruguay cited for the same proposition in its Counter-Memorial.673
9.24 Claimants’ own conduct is equally probative. As Uruguay pointed out in its Counter-
Memorial, Claimants did not raise a claim under Uruguayan trademark law in their challenges to
666 Ibid., ¶¶ 9.26-9.27. 667 First Expert Report of Prof. Andrea Barrios Kübler (2 Oct. 2014) (hereinafter “Barrios First Report”) (REX-004). 668 British American Tobacco Internal Document, Memorandum from L. Baeumer to D. Latham (5 July 1994), Bates No. 502592535-502592536 (R-135). 669 Reply, ¶¶ 134, 140. 670 The DNPI is part of the Ministry of Industry, Energy and Mines. 671 Document submitted by AUDAPI to the DNPI (15 Feb. 2012), p. 3 (AB-57). 672 Ibid., p. 4. See also Barrios Second Report, ¶ 25 (REX-016). 673 Counter-Memorial, ¶ 9.26 (citing TCA Decision 933, Case No. 527/2008 (11 Nov. 2010), pp. 5-6 (RL-211)).
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either the SPR or the 80% Requirement before the national courts.674 If Claimants truly thought that Uruguayan law gave them the right they now claim, they would surely have made that argument before the appropriate domestic forum. The fact that they did not speaks volumes—as does their complete silence on the matter in the Reply.
9.25 Nor was that the first time Claimants failed to press a claim for the right they now profess to hold dear. In 2005, Uruguay passed a law banning misleading descriptors such as “light,”
“low,” “ultra-light,” etc. Claimants did not challenge the measure. In their own Counter-
Memorial on Jurisdiction in this case, Claimants wrote that “over the past decade PMI has supported extensive tobacco control legislation in Uruguay, and has not challenged laws that ... banned descriptors (terms such as ‘light’ and ‘mild’) ....”675 This is notable because Claimants had (and still have) registered trademarks for Marlboro “Lights” and Marlboro “Mild,” among others.676 Here, again, if they truly thought that the mere fact of registering a trademark gave them a guaranteed “right to use” the mark, they would have made that argument then.
9.26 Claimants’ behavior in this case is equally revealing. Their Request for Arbitration states no claim under Uruguayan law. They only “commitments” they claimed to be covered by Article
11 were those allegedly arising from the Paris Convention and TRIPS Agreement.
9.27 Between the time of their Request for Arbitration and their Memorial on the Merits,
Claimants appear to have thought better of their international IP claim (perhaps because WIPO
674 Ibid., ¶ 9.29. 675 Claimants’ Counter-Memorial on Jurisdiction (24 Sept. 2011), ¶ 4. See also Claimants’ Request for Arbitration (19 Feb. 2010), ¶ 22 (“Abal has also never raised any objection to or sought to challenge the proscription of misleading descriptors.”). 676 DNPI, Mark Details for “Marlboro Lights,” File No. 432034, available at http://www.dnpi.gub.uy (last visited 6 Sept. 2015) (R-414); DNPI, Mark Details for “Marlboro Mild Flavor,” File No. 368717, available at http://www.dnpi.gub.uy (last visited 25 June 2014) (R-342).
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had already directly told them it was without merit677). They changed tack and dropped their international trademark claim in favor of a domestic law one, hoping they might have better luck in this lesser known corner of the law. It is thus ironic that in their Reply Claimants turn back again to the same international conventions on which they specifically declined to press a claim in their Memorial.678 The argument still does them no good. As they were advised by WIPO in
1994:
[T]he countries of the Paris Union are bound to admit trademarks for registration notwithstanding the nature of the goods to which they are applied (Article 7). However, the Paris Convention does not contain any obligation to the effect that the use of a registered trademark must be permitted.679
9.28 Claimants know their position is unsupportable. Accepting it would not only remake the settled legal landscape in Uruguay, it would also lead to absurd results. Were Claimants correct, the mere fact of registering a trademark would guarantee the sale of any trademarked product, without regard to other considerations. Thus, for example, if Coke Light were found to cause cancer, Uruguay would be prevented from prohibiting its sale merely by virtue of the fact that it is a registered trademark680. That simply cannot be—and is not—the rule. Exactly as Claimants’ expert Professor Fischer noted, the registration of a trademark “does not in any way imply an
677 British American Tobacco Internal Document, Memorandum from L. Baeumer to D. Latham (5 July 1994), Bates No. 502592535-502592536 (R-135). 678 Claimants’ Request for Arbitration (19 Feb. 2010), ¶¶ 85, 86. 679 British American Tobacco Internal Document, Memorandum from L. Baeumer to D. Latham (5 July 1994), Bates No. 502592535-502592536, p. 2 (emphasis added) (R-135). 680 DNPI, Mark Details for “Coca-Cola Light,” File No. 451301, available at http://www.dnpi.gub.uy (last visited 6 Sept. 2015) (R-422).
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authorization or qualification for the performance of the specific activity for which the registration is requested.”681
B. Uruguayan Trademark Law Is Clear: Registrants Do Not Have a Right To Use, Only a Right To Exclude Others from Using
9.29 Despite all the above, Claimants persist in arguing that Uruguayan law confers on trademark registrants a guaranteed “right to use.” According to Claimants, this right derives from
“(i) [Uruguayan] laws incorporating Article 11 of the MERCOSUR Harmonization of
Intellectual Property Regulations Protocol (‘MERCOSUR Protocol’), the TRIPS Agreement, and the Montevideo Treaty, along with TCA jurisprudence; and (ii) Uruguayan property law, which provides that trademarks are property and property owners have the right to use their property.”682
9.30 One source is conspicuously missing from this list: Uruguay’s actual trademark law, Law
No. 17,011. That is because there is no provision in the law that creates a right to use a trademark, as distinguished from the right to prevent others from using it. Nor does any treaty to which Uruguay is party create or recognize a right to use a trademark.
9.31 To be sure, all persons doing business in Uruguay, including Claimants, have the freedom to engage in commerce, and to market products bearing their marks, whether the trademark is registered or not. That freedom, however, exists under Article 36 of the Constitution, and is independent of the trademark law. It is also expressly subject to any “limitations imposed by
681 Document submitted by AUDAPI to the DNPI (15 Feb. 2012), p. 3 (AB-57). 682 Reply, ¶ 125.
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general interest which the law may enact.”683 What registration under the trademark law adds to this freedom is the right to prohibit others from using the same or similar marks. It does not convert the qualified freedom under the Constitution into a guaranteed “right to use” the trademark, so as to bar the government from regulating or restricting the trademark or the underlying product in the public interest.684
C. Uruguayan Trademark Law Does Not Grant a Right To Use
9.32 Uruguay’s Counter-Memorial showed that the principal right that its trademark law confers on trademark holders is the right to exclude others from using the mark in commerce.
Article 14 of Law No. 17,011 provides: “The right to oppose the use or registration of any trademark that could lead to confusion between goods or services shall belong to the person that meets all the requirements of the present law.”685 As Professor Barrios explains, the corollary of this right to exclude is that only the trademark holder, and no one else, can use the trademarks, if such use is permitted.686
9.33 Claimants are unable to point to any provision of the trademark law that recognizes the right they claim. Revealingly, Claimants’ argument under the heading “Uruguay Trademark Law
Protects the Right to Use Trademarks” ignores Uruguay’s actual trademark law (Law 17,011)
683 Constitution of the Oriental Republic of Uruguay, Art. 36 (RL-1(ter)). Article 36 provides in full: “All people can dedicate themselves to any labor, harvest, industry, trade profession or any other legal activity, with exception of those for which limitations imposed by general interest which the law may enact.” 684 Barrios Second Report, ¶ 74 (REX-016); See also Witness Statement of Brenda Justo Delorenzi (16 Sept. 2015) (hereinafter “Justo Witness Statement”), ¶¶ 5-14 (RWS-008); Expert Report by Octavio Espinosa (17 Sept. 2015) (hereinafter “Espinosa Report”), § A.2 (REX-012). 685 Uruguayan Law No. 17,011 (25 Sept. 1998), Art. 14 (C-135). See also Counter-Memorial, § 9.A.1. 686 Barrios First Report, ¶ 60 (REX-004).
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and goes straight into a discussion of the MERCOSUR Protocol. (The reasons Claimants resort to the MERCOSUR Protocol are unavailing and addressed in paragraphs 9.50-9.57 below.)
9.34 The only authority Claimants cite to support their position on the content of Uruguay’s trademark law is the TCA’s decision in Marcelo Lopez, Alejandro Ignacio v. The Ministry of
Industry, Energy and Mines. As Claimants would have it, the TCA “recognized that trademark holders have the right to the exclusive and effective use of their trademarks”687 because it quoted a portion of the writings of Professor Beatriz Bugallo in which she referred to the positive aspect of a trademark holders’ rights as including “the effective use” of the mark.688
9.35 Claimants continue to misunderstand the nature of trademark rights. Professor Bugallo’s writings, when quoted in full, make this clear. In the portion of her treatise cited by Claimants, she explains that a trademark holder’s right “consists of the effective use—commercial use—of the sign within the scope of the functions of the corresponding market, and emerges as an ambit reserved for the owner of the trademark as a result of the powers of exclusion granted to the owner by law.”689 Professor Barrios explains:
Dr. Bugallo does not say that the Trademark Law enshrines any right to use a trademark, but states that the authority or right to exclude third parties from the market (called the negative facet), renders the exclusive use of the registered trademark in the marketplace possible. Thus, the so called positive facet seeks to explain the consequence of the exercise of the exclusive rights, that is, the authority to exclude third parties from the
687 Reply, ¶ 132. 688 Ibid., ¶ 132 n.187. 689 B. Bugallo, INTELLECTUAL PROPERTY (2006), p.177 (CLA-180). Professor Bugallo also writes: “In terms of the positive side of the trademark rights it corresponds to determining of what this own exclusive conduct consists. That is to say, let us determine of what consists that “right of opposing the use” established in Art. 14 of the Trademark Law. Traditionally it has been said that the holder has the exclusive ‘use of the trademark.’ ... In this sense the Trademark Law grants the holder of a registered trademark an exclusive right to the use or exploitation of the mark.” Ibid., p.180 (CLA-180).
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market: such that only the trademark owner (and no one else) has the possibility to use the trademarks in business.690
9.36 Professor Barrios further notes that the TCA decision in the case Claimants cite makes explicit reference to the right to exclude (“ius prohibendi”) conferred by Article 14 of Law No.
17,011. In contrast, it makes no reference, directly or indirectly, to the existence of an affirmative
“right to use” a trademark.691
9.37 Uruguay’s Counter-Memorial cited a TCA decision more directly on point, in which the
Tribunal ruled that the mere fact of registering a trademark does not equate to a right to use it.692
In Decision 933/2010, the TCA specifically held:
The registration of a trademark does not assume its use. Moreover, it does not include an authorization to operate in the local financial market, such that if the plaintiff were seeking to carry out financial activities in our country, it would have to be granted prior authorization from the central bank, but not before [registration], when what it is seeking is to preserve or protect the business name of its company with respect to third parties ....693
9.38 Claimants’ Reply tellingly steers clear of this decision and mentions it only in a footnote where they assert: “Respondent is wrong to rely on this case because the case deals with the right to register a trademark, not the right use a trademark.”694 But that is exactly the point. In
Claimants’ view, the mere registration of a trademark creates the right to use it. Yet, the TCA made it abundantly clear that registration does not constitute “an authorization to operate,” i.e., use, the mark. Moreover, Decision 933/10 is the case that Professor Fischer himself cited in his submission to the DNPI quoted above as authority for the proposition that there is no right to use
690 Barrios Second Report, ¶ 35 (REX-016). 691 Ibid., ¶ 36. 692 Counter-Memorial, ¶ 9.26. 693 TCA Decision 933, Case No. 527/2008 (11 Nov. 2010), pp. 5-6 (RL-211) (emphasis added). 694 Reply, ¶ 140 n.207.
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a trademark under Uruguayan trademark law.695 Notably, in his previous writings, after stating that the registration of a trademark “does not in any way imply an authorization or qualification” for its use, Professor Fischer also stated: “On the contrary, the concession of a trademark registration means only that its owner will have the rights that the Trademark Act confers on the owners of trademark registrations, that is, the right to prevent others from using a trademark or trademarks that may be confused with their own, to oppose registrations that are identical or similar to their trademarks ....”696
9.39 Professor Fischer’s previously expressed views are entirely consistent with the position and practice of the DNPI. As attested in the annexed statement of Dr. Brenda Justo Delorenzi, the Director of the DNPI’s Trademark Examination Area, “the position and practice of the DNPI has always been that a registered trademark does not confer on its owner a right of use, but rather a right to exclude third parties from using it.”697
9.40 Because Uruguay’s trademark law does not grant a “right to use,” Claimants are reduced to arguing that such a right can be inferred from Property Law.698 Claimants’ argument rests on a two-part assumption: first, “[u]nder Uruguayan law, trademark rights are a form of property”;699 and, second, that “property owners have the right to use their property.”700 Here, once more,
Claimants are confused. Uruguay’s Civil Code expressly establishes separate provisions for
695 Document submitted by AUDAPI to the DNPI (15 Feb. 2012), p. 4 (AB-57). 696 Ibid., p. 3. 697 Witness Statement of Dr. Brenda Justo Delorenzi Witness Statement (16 Sept. 2015) (hereinafter “Justo Witness Statement”), ¶ 12 (RWS-008). 698 Reply, § I.E.2.c.(ii); Expert Rebuttal Opinion by Professor Gustavo Fischer (17 Apr. 2015) (hereinafter “Fischer Second Report”), § II.B (CWS-024). 699 Reply, ¶ 134. 700 Ibid.
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tangible property, on the one hand, and intellectual property, on the other. Article 491 of the
Civil Code states: “The inventions of talent or wit are the property of their author and shall be governed by special laws.”701
9.41 Claimants mistakenly respond that this “simply means that both the specialized intellectual property laws and the Code’s general property provisions apply to trademarks.”702
Yet, Professor Barrios explains that “[t]he text of Articles 33 of the Constitution and 491 of the
Civil Code do not permit two interpretations, clearly establishing that Intellectual Property is governed by a special Law—currently Law 17,011.”703 The imperative phrase “shall be governed by special laws” leaves no room for the application of still other, additional laws beyond those
“special” ones.
9.42 Claimants attempt to support their argument by citing a book that they incorrectly call the
“Official Commentary to the Code,”704 thus suggesting that the source is the definitive commentary issued by the Government of Uruguay. This is false. The book is not an “Official
Commentary.” Its actual title is “Civil Code Annotated.” As its title suggests, it consists of a listing of sources (assembled in 1950 by four jurists associated with the University of
Montevideo) that make reference to the various provisions of the Code. Even in footnote,
701 Uruguayan Civil Code, Art. 491 (emphasis added) (C-266).The original Spanish reads: “Las producciones del talento o del ingenio son una propiedad de su autor y se regirán por leyes especiales…” (emphasis added). 702 Reply, ¶ 140 (emphasis in original). 703 Barrios Second Report, ¶ 88 (REX-016). 704 Ibid. (citing Civil Code by Orestes Araújo, Oscar Arias Barbé, Saul D. Cestau, Manuel O. López, Tomo Segundo, Libro Segundo, Biblioteca de Publicaciones Oficiales de la Facultad de Derecho y Ciencias Sociales de la Universidad de Montevideo, Montevideo, 1950 (CLA-327)).
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Claimants misrepresent the source. They cite the title as “Civil Code,” again suggesting an official source.705
9.43 The language Claimants cite comes from one of the annotations in the collection that corresponds to a decision of a Court of Appeals dating back more than 80 years to 1934. Yet, even that “authority” is directly contradicted by the very next annotation, which corresponds to a decision of the High Court of Justice (Uruguay’s then Supreme Court), which states that
“[o]wnership of manufacturer’s trademarks is governed by special law, which means provisions of the Civil C[ode] cannot be applied.”706 In any event, as a civil law country, the only valid source of law in Uruguay are the laws themselves.707
9.44 The conclusion that the general property provisions of the Civil Code do not apply follows even from the reasoning of Claimants’ own expert. In his second opinion, Professor
Fischer writes that “if a special law and a general law establish the same result, both laws apply.”708 Yet, as just noted, Uruguay’s trademark law and its Civil Code do not establish the
“same result.” There is no “right to use” under Uruguayan trademark law; the only right is a negative one. This special rule thus trumps the general rule stated in the Civil Code even if the
Code were to govern trademark rights (which it does not).
9.45 The error in Claimants’ conflation of intellectual property with tangible property was exposed by no less an authority than WIPO. In a 2013 report, WIPO wrote:
705 Reply, ¶ 140 n.206. 706 Código Civil Anotado, párrafo 75 (CLA-327). 707 Barrios Second Report, ¶ 89 (REX-016). 708 Fischer Second Report, ¶ 46 (CWS-024).
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IPRs [intellectual property rights] differ sharply from property rights in tangible goods.
...
[P]osession over a tangible good is rivalrous and therefore de facto excludes others per se from possessing it. ... That is why property rights in tangible goods are primarily defined as rights to use and exploit. There is no need for the law to establish the right to prevent others from using a piece of land as a primary prerogative, because that exclusion is a natural (if not physical) consequence of possession. By contrast, IPRs are property rights in intangible goods. Being intangible, the possession of their subject matter does not de facto impede per se others from possessing them simultaneously. In economics jargon, IPRs cover non-rival subject matter. Therefore, the right in that subject matter must be primarily protected by a legal right to exclude others from using (or copying) them, for possession alone is not enough to secure exclusivity. This explains why intellectual property rights are usually stated in a negative manner (i.e., the right to exclude others from doing something rather than the positive right to do something), as opposed to rights in tangible goods.709
9.46 For all these reasons, Claimants are wrong that Uruguayan law grants trademark holders a right to use their marks in commerce. The mere act of registering a trademark cannot be used as a shield against government regulatory action that restricts the use of such marks, or the products with which they are associated. To the extent that Claimants might have the general freedom to use their marks in commerce, that freedom is subject to the State’s inherent right to regulate, as Article 36 of the Constitution makes clear. Uruguay’s exercise of that right in adopting the SPR and 80% Requirement do not violate its trademark law, as Claimants mistakenly suggest. Claimants in fact retain the only right the registration of their trademarks actually gives them; namely, the right to prevent others from also using their marks. The measures Claimants challenge therefore did not breach Uruguayan municipal law or, for that reason, Article 11 of the BIT.
709 World Intellectual Property Organization (WIPO), Refusals to License IP Rights – A Comparative Note on Possible Approaches (Aug. 2013), ¶ 7 (RL-275). See also Expert Report of Nuno Pires de Carvalho (16 Sept. 2015) (hereinafter “Carvalho Report”), ¶ 8 (REX-017).
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D. None of the International Intellectual Property Conventions on Which Claimants Rely Recognize a Right To Use
9.47 Having failed to demonstrate that Uruguay’s law creates an absolute right to use a trademark, the Reply turns to international law in an attempt to find support for their claim.710 As noted, this is more than a little ironic because Claimants earlier abandoned their international trademark argument in this case. It is therefore not surprising that they cannot find a single treaty provision that gives them the right they claim.
9.48 Claimants rely on four international conventions: the (1) the MERCOSUR Protocol; (2) the Paris Convention; (3) the TRIPS Agreement; and (4) the 1892 Montevideo Treaty. None of these conventions recognizes a right to use. They therefore afford no basis for arguing that
Uruguayan law recognizes such a right.
1. The Mercosur Protocol
9.49 Claimants’ Reply relies principally on the MERCOSUR Protocol. As Claimants see it,
Article 11 of the Protocol expressly confers a right to use on trademark owners.711 They base their argument on the wording of Article 11, the English translation of which, according to
Claimants, reads as follows: “The registration of a trademark shall grant the owner an exclusive right of use, and the right to prevent any person from performing, without the [trademark owner’s] consent, the following acts ....”712
710 See Reply, ¶¶ 110-111, 126-131. The Reply is accompanied by a new legal expert on international intellectual property law, Professor Christopher Gibson. See Expert Report of Professor Christopher Gibson (17 Apr. 2015) (hereinafter “Gibson Report”) (CWS-023). 711 Reply, ¶ 126. 712 Reply, ¶ 126 (emphasis in original) (citing MERCOSUR Harmonization of Intellectual Property Regulations Protocol (hereinafter “MERCOSUR Protocol”), Art. 11 (C-155)).
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9.50 Claimants’ argument is premised on an incorrect translation. The authentic Spanish text of Article 11 actually refers to “el derecho de uso exclusivo,”713 which in English means “the right of exclusive use.”714 The equally authentic Portuguese text is to the same effect; it refers to
“o direito de uso exclusivo.”715 Mr. Nuno Carvalho, WIPO’s Director of the Intellectual Property and Competition Policy Division, and former Counselor in the WTO’s Intellectual Property
Division, explains the importance of this distinction:
The “exclusive right to use” and the “right of exclusive use” are not the same. ... The “right of exclusive use” is a common term used in trademark statutes. It does not mean a positive right of use, nor could it mean it, in view, as explained, of the inherently negative nature of intellectual property rights. What it means, indeed, is the exclusionary power of trademark owners. The statute does not confer the right to use per se, but its exclusivity. So, trademark owners are entitled to use the powers they are vested in so as to exclude third parties.716
9.51 The MERCOSUR Protocol thus does not create a right to use (which would be wholly unprecedented in the international system).717 As Mr. Carvalho explains, “it merely uses affirmative language to describe a negative right. Instead of saying that trademark owners are
713 Protocolo de Armonización de Normas sobre Propiedad Intelectual en el MERCOSUR, en Materia de Marcas Indicaciones de Procedencia y Denominaciones de Origen (MERCOSUR Protocol Authentic Spanish Text) (5 Aug. 1995), Art. 11 (RL-262). The full Spanish text of Article 11 reads: “El registro de una marca conferirá a su titular el derecho de uso exclusivo, y de impedir a cualquier tercero realizar sin su consentimiento, entre otros, los siguientes actos: uso en el comercio de un signo idéntico o similar a la marca para cualesquiera productos o servicios cuando tal uso pudiese crear confusión o un riesgo de asociación con el titular del registro; o un daño económico o comercial injusto por razón de una dilución de la fuerza distintiva o del valor comercial de la marca, o de un aprovechamiento indebido del prestigio de la marca o de su titular.” 714 Carvalho Report, ¶ 43 (REX-017). 715 Protocolo de Harmonização de Normas sobre Propriedade Intelectual no MERCOSUL, em Matéria de Marcas, Indicações de Procedência e Denominações de Origmen (MERCOSUR Protocol Authentic Portuguese Text) (5 Aug. 1995), Art. 11 (RL-263). The full Portuguese text of Article 11 reads: “O registro de uma marca conferirá a seu titular o direito de uso exclusivo, e de impedir, a qualquer terceiro, de praticar, sem seu consentimento, entre outros, os seguintes atos: uso no comércio de um signo idêntico ou similar à marca para quaisquer produtos ou serviços quando esse uso possa criar confusão ou um risco de associação com o titular do registro; ou um prejuízo econômico ou comercial injusto em razão de uma diluição da força distintiva ou do valor comercial da marca, ou de um aproveitamento indevido do prestígio da marca ou de seu titular.” 716 Carvalho Report, ¶ 45 (REX-017). 717 Ibid., ¶ 47 (REX-017).
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entitled to prohibit the use by third parties, it says that the use is exclusive.”718 Mr. Octavio
Espinosa, former Director of the Legislative and Legal Advice Division of WIPO, shares Mr.
Carvalho’s views.719
9.52 The fact that the MERCOSUR Protocol does not break new ground and establish a right found nowhere else in international treaty law is still further confirmed in its Preamble, the final paragraph of which provides that the States Parties agree
that said rules and principles [to guide the administrative, legislative and judicial actions of each Party State with respect to the recognition and application of intellectual property rights regarding trademarks] should conform with the norms established in the existing multilateral instruments at the national level, particularly the Paris Convention ... and the Agreement on Aspects of Intellectual Property Related to Commerce [TRIPS] ....720
Article 11 and the rest of the MERCOSUR Protocol are therefore intended to conform to the
Paris Convention and the TRIPS Agreements, neither of which creates a right to use.
9.53 Moreover, even if the MERCOSUR Protocol did recognize an affirmative right to use, which it does not, Claimants would not be endowed with this right as, by its terms, the Protocol only applies between States Parties that have ratified it; that is, Uruguay and Paraguay.721
Professor Fischer disagrees and asserts that “the treaties entered into by Uruguay, once their constitutional cycle is complete, form part of the system of laws of Uruguay and are binding on
Uruguayan courts and government agencies.”722 Even if that were true, it would not mean that
Article 11 entered into the corpus of Uruguayan law as a free-standing provision of universal
718 Ibid., ¶ 47 (REX-017). 719 Espinosa Report, ¶ 129 (REX-012). 720 MERCOSUR Protocol, preamble (C-155). 721 Barrios Second Report, ¶ 53 (REX-016); Espinosa Report, ¶ 136 (REX-012). 722 Fischer Second Report, ¶ 12 (CWS-024).
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application, such that Claimants could avail themselves of it. To the contrary, it would mean only that the Protocol as a whole became part of Uruguayan law; all the limitations and other conditions stated in it would still be fully applicable. As a result, trademark holders from States other than Paraguay could not claim rights under it.723
9.54 Evidently accepting this reality, Claimants make one last grasp for the benefit of the
(wholly fictitious) right to use they claim the Protocol creates. They argue that, as a signatory of the TRIPS Agreement, Uruguay “is bound by [Article 4 of] the TRIPS Agreement to extend any benefits granted to Paraguay trademarks holders to trademark holders from other World Trade
Organization Members.”724
9.55 Claimants should have kept reading. Article 4 of the TRIPS Agreement further provides that:
Exempted from this obligation are any advantage, favour, privilege or immunity accorded by a Member: ... (d) deriving from international agreements related to the protection of intellectual property which entered into force prior to the entry into force of the WTO Agreement, provided that such agreements are notified to the Council for TRIPS and do not constitute an arbitrary or unjustifiable discrimination against nationals of other Members.725
9.56 Based on this provision, Argentina, Brazil, Paraguay and Uruguay in 1998 notified the
TRIPS Council of the Treaty of Asunción, of which the MERCOSUR Protocol is an “integral part,”726 thus availing themselves of the exemption.727 The result, Mr. Carvalho writes, is that
723 Barrios Second Report, ¶ 53 (REX-016). 724 Reply, ¶ 128. 725 Agreement on Trade-Related Aspects of Intellectual Property (1 Jan. 1995), Art. 4(d) (C-359). 726 MERCOSUR Protocol, Art. 26 (C-155).
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“any benefits granted by Uruguay to Paraguay stay with Paraguay, and cannot be extended to other WTO Members, unless Uruguay, voluntarily, decides to do so.”728 In other words, even if the MERCOSUR Protocol recognized a right to use (quod non), Claimants are in no position to claim the benefit of that right.729
2. The Paris Convention and TRIPS Agreement
9.57 Uruguay’s Counter-Memorial demonstrated that neither the Paris Convention nor the
TRIPS Agreement recognizes an affirmative right to use.
9.58 Claimants’ Reply does not address the Paris Convention. The fact that it does not create such a right can therefore be considered settled.
9.59 The TRIPS Agreement receives only slightly more attention in the Reply. Claimants resort to a combination of different TRIPS provisions which, they say, “[w]hen read together ... imply at least qualified right to use ....”730 Claimants’ equivocal language speaks for itself.
9.60 Their equivocation is well-justified. A WTO panel has definitively rejected the argument
Claimants make. It ruled:
[The] TRIPS Agreement does not generally provide for the grant of positive rights to exploit or use certain subject matter, but rather provides for the grant of negative rights to prevent certain acts. This fundamental feature of intellectual property protection inherently grants Members freedom to
727 See World Trade Organization, Council for Trade-Related Aspects of Intellectual Property Rights, Notification Under Article 4(d) of the Agreement – Argentina, Brazil, Paraguay, Uruguay, Nos. IP/N/4/ARG/1, IP/N/4/BRA/1, IP/N/4/PRY/1, IP/N/4/URY/1 (14 July 1998) (NC-16). See also Carvalho Report, ¶ 49 (REX-017). 728 Carvalho Report, ¶ 49 (REX-017); See also Espinosa Report, ¶ 136 (REX-012). 729 Carvalho Report, ¶ 50 (REX-017). See also Barrios Second Report, ¶ (REX-016). 730 Reply, ¶ 129 (emphasis added).
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pursue legitimate public policy objectives since many measures do not require an exception under the TRIPS Agreement.731
9.61 Messrs. Carvalho and Espinosa explain in great detail why the provisions of the TRIPS
Agreement that Claimants attempt to stitch together do not recognize a right to use.732 Because
Claimants themselves devote so little attention to the issue, Uruguay will not burden the Tribunal by belaboring the point here. It invites the Tribunal to read Messrs. Carvalho and Espinosa’s reports. When it does, it will see that Claimants’ position is at odds with the language of the
TRIPS Agreement, and the overwhelming majority of commentators and other authorities.733
3. The 1892 Montevideo Treaty
9.62 Finally, Claimants’ Reply digs deep into the dusty annals of history to argue that
Uruguayan law has “recognized a right to use since the 19th century, when it signed the
Montevideo Treaty” in 1892.734 According to Claimants, the Montevideo Treaty “provides trademark holders with the express and unequivocal right to use a trademark.”735 Claimants are again mistaken. First, the Montevideo Treaty applies only as between the States Parties thereto; namely, Uruguay, Argentina, Bolivia, Paraguay and Peru.736 Thus, even if it did create a right to use, which it plainly does not, Claimants would be in no position to invoke that right.737
731 WTO Panel Report, European Communities – Protection of Trademarks and Geographical Indications for Agricultural Products and Foodstuffs: Complaint by the United States, WT/DS174/R, adopted on 15 Mar. 2005, ¶ 7.210 (NC-04). See also Carvalho Report, ¶ 12 (REX-017). 732 Carvalho Report, ¶¶ 6-42(REX-017); Espinosa, ¶¶ 69-125 (REX-012) 733 Carvalho Report, ¶ 11 (REX-017). 734 Reply, ¶ 131. 735 Ibid. 736 Organization of American States, Department of International Law, Status of Treaties: F-7 - Treaty on Trademarks and Manufacturer’s Trademarks, available at http://www.oas.org/juridico/spanish/firmas/f-7.html (last visited 6 Sept. 2015) (R-438). 737 Espinosa Report, ¶¶ 140-144 (REX-012).
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9.63 Second, Claimants cite Article 2 of the Montevideo Treaty for the proposition that the ownership of a trademark includes the right to use it. Yet, before one gets to Article 2, Article 1 defines the scope of what such “use” entails. Like the MERCOSUR Protocol, it refers to the
“right to use exclusively” (“el derecho de usar exclusivamente”).738 This is the “use” to which
Article 2 refers. And as Mr. Carvalho explains in connection with the MERCOSUR Protocol, it does not constitute an affirmative right to use in the sense Claimants contend.739 Not surprisingly, Claimants point to no authority to support their novel interpretation of this ancient text.
9.64 In summary, as shown by the plain text of Uruguay’s trademark law, confirmed by the
TCA, underscored by administrative practice and reflected in international law, Uruguayan law does not endow trademark holders with an affirmative right to use.
III. Claimants Did Not Register the Marks That Form the Basis of Their Claim
9.65 Claimants’ attempt to invoke Article 11 of the BIT fails for still another reason. Even if
Uruguayan trademark law conferred a right to use on trademark holders, Claimants would be in no position to avail themselves of that right due to their failure to register the trademarks about which they complain.
9.66 In its Counter-Memorial, Uruguay explained that, under domestic law, “the protection that comes with the registration of a trademark covers only the marks exactly as registered.”740 It
738 Treaty on Trademarks and Manufacturer’s Trademarks, EIF 16 Jan. 1889, approved by Uruguay in Law No. 2,207 of 1 Oct. 1892, Art 1 (C-367). 739 Espinosa Report, ¶ 143 (REX-012). 740 Counter-Memorial, ¶ 9.53; Barrios First Report, ¶ 96 (REX-004).
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then showed that the particular variants about which Claimants complain were not registered at the time the SPR was adopted.741
9.67 Claimants respond that it does not matter that the variants affected by the SPR were not the same as any of the trademarks they had registered. As they see it, those variants were protected because they maintain what Claimants call the distinctive features of the originally registered trademark.742 Claimants entirely ignore the actual law on which they base their claim—Uruguayan trademark law—and instead ground their position on Art. 5(C)(2) of the Paris
Convention. But the operative provisions of the applicable Uruguayan law cannot so easily be ignored.
9.68 The text of the relevant provisions of Uruguay’s trademark law and its implementing regulations are absolutely clear. They merit quotation at length.
Uruguayan Law No. 17,011
Art. 13. When registration of a mark is granted, its owner acquires the protection it confers and may not request a new registration for an identical mark and with regard to the same classes, in full or in part, without previously or simultaneously relinquishing the prior registration, in full or in part, as applicable.
Art. 31. Once the registration application is submitted, no modifications will be allowed to the representation of the mark. All requests for modification shall be cause for a new registration request.743
Uruguayan Decree No. 34/99
Article 33. The renewal application may not introduce any changes to the trademark, nor expand the list of products or services covered by the registration.
741 Counter-Memorial, ¶¶ 9.48-9.76. 742 Reply, ¶¶ 110-111; Gibson Report, ¶¶ 6-48 (CWS-023); Fischer Second Report, ¶ 54 (CWS-024). 743 Uruguayan Law No. 17.011 (25 Sept. 1998), Arts. 13, 31 (AB-21).
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Article 83. The National Directorate of Industrial Property will regulate, through resolution proceedings, the other formalities of the documents it deems relevant.744
DNPI Resolution No. 21/2001 of 14 November 2001
“ ... The Technical Director of Industrial Property HEREBY RESOLVES: ...
2) The names and domiciles of trademark owners shall only be modified in the event of typographical errors and limits on protection.-
3) Any modifications made to the sign shall require a new registration application ....”745
9.69 Thus, the rights arising from the registration of a trademark cover only the mark precisely as it was registered. Any change requires a new registration. Professor Barrios explains that “[i]t cannot be supposed that a trademark registered in the Trademark Registry in Uruguay extends beyond the sign as it was registered as a trademark.”746 Dr. Justo of the DNPI confirms that “[i]t is the practice of our Office that the protection granted by the registration of registered trademarks is limited to the sign that was the subject of registration, and any change to that sign must be the subject of a new registration.”747
9.70 As stated, Claimants seek to get around the applicable Uruguayan law by invoking
Article 5(C)(2) of the Paris Convention, which provides:
Use of a trademark by the proprietor in a form differing in elements which do not alter the distinctive character of the mark in the form in which it was registered in one of the countries of the Union shall not entail invalidation
744 Uruguayan Decree No. 34/99 (27 Jan. 1999), Arts. 33, 83 (AB-24(bis)). 745 DNPI Resolution No. 21/2001 (14 Nov. 2001) (AB-85). 746 Barrios Second Report, ¶ 99 (REX-016). 747 Justo Witness Statement, ¶ 15 (RWS-008).
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of the registration and shall not diminish the protection granted to the mark.748
Claimants wrongly argue that Article 13 of Uruguay’s trademark law is inconsistent with this provision.749 It is not.
9.71 Mr. Carvalho explains that Article 13 of Law 17,011 and Article 5(C)(2) of the Paris
Convention are entirely consistent. In the first place, Article 5(C)(2) has nothing to do with a
Member State’s registration requirements. It applies only to the question of the protection afforded to marks that have already been registered. It requires that protection not be denied when there is no change in the “distinctive character” of a mark as registered when it is used in commerce. Uruguayan law meets that requirement. Articles 23 and 81 of Uruguay’s trademark law permit trademark holders to enforce their marks against third parties even in the case of
“similar” and “imitation” (i.e., non-identical) marks.750
9.72 Conversely, Article 13 of Law 17,011 is not about enforceability of trademarks against third parties but rather about the formal requirements for registration. Mr. Carvalho states: “In this regard, the Paris Convention does not impose any specific requirement upon Contracting
Parties. The State Parties are free to require that any variations of trademarks be subject to new registrations.”751
748 Paris Convention on the Protection of Industrial Property (20 Mar. 1883), Art. 5(C)(2) (AB-04). 749 Reply, ¶¶ 110-111. 750 Uruguayan Law No. 17.011 (25 Sept. 1998), Arts. 23, 81 (AB-21(bis)). 751 Carvalho Report, ¶ 59 (REX-017).
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9.73 Moreover, “Article 13 corresponds to a well-established practice according to which registration of trademarks does not cover changed or altered trademarks.”752 Indeed, as Mr.
Carvalho describes in his report, there was a specific proposal to include a provision in the Paris
Convention that changes to “non-essential characteristics of a registered trademark would not require new registrations.”753 That proposal was, however, rejected in favor of the different approach followed in Article 5(C)(2). There is therefore no inconsistency between Uruguayan law and the Paris Convention.
9.74 In any case, even if there were, Claimants would still have no basis for their claimed trademark rights in regard to the variants that were never registered. The marks in dispute did not have the same “distinctive character”754 of the marks they originally registered, and therefore should have been separately registered, even under Claimants’ misreading of the Paris
Convention.
9.75 The contrast between the Marlboro Lights trademark Claimants registered and the
Marlboro Gold package for which they claim protection provides a useful example. Claimants do not deny that there are differences between the two. Professors Gibson and Fischer argue, however, that the distinctive character of the two marks is the same since “both contain the word
‘Marlboro’ written in the same distinctive typeface, the classic chevron or ‘rooftop’ symbol, and the distinctive Philip Morris coat of arms placed just above the word ‘Marlboro’.”755
752 Ibid., ¶ 60 (REX-017). 753 Ibid., ¶ 62 (REX-017). 754 Paris Convention on the Protection of Industrial Property (20 Mar. 1883), Art. 5(C)(2) (AB-04). See also Gibson Report, ¶ 12 n.10 (CWS-023) (discussing the legislative history of Art. 5(C)(2) Paris Convention). 755 Reply, ¶ 114.
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9.76 To accept their view, one would have to regard the change in brand name, wording and packaging from “Lights” to “Gold” as only a minor and unremarkable variation. The argument strains credulity. How can such a significant change in language be non-distinctive? Further, if
Marlboro Gold is protected by the registration for Marlboro Lights because it shares (1) the
“Marlboro” name; (2) the chevron; and (3) the Philip Morris coat of arms, then it would be unnecessary to register any other Marlboro trademark sharing those same characteristics.
Applying this logic, the registration for Marlboro Lights would extend protection not only to
Marlboro Gold but also Marlboro Red, Marlboro Blue and Marlboro Fresh Mint, or Marlboro
Black for that matter, so long as those central characteristics remained the same. That cannot be and is not the case, and Claimants know it. That is why they intended to obtain separate registration for Marlboro Black until the SPR was adopted. These are all different marks that require different registrations.
9.77 Mr. Carvalho agrees:
The question, therefore, is whether Marlboro Gold is an alteration of the distinctive character (in Paris Convention terms) or a material alteration (in U.S. legal terms) of Marlboro Light. The answer is yes. Both the term “light” and the gold color have significant strength and meaning for consumers. Therefore, the introduction of the altered trademark on the Uruguayan market should have been accompanied by a new registration. The previous registration of Marlboro Light does not encompass such a significantly material alteration.756
756 Carvalho Report, ¶ 64 (REX-017). In In re Reese Brothers, the U.S. Patent & Trademark Office Trademark Trial and Appeal Board did not accept an amendment to the registration of the trademark KETTLE CLUB, which sought to change the registration to THE RED KETTLE CLUB. The applicant argued that the mere addition of the name of a color did not materially alter the initial mark, much like Claimants here. However, the Board disagreed, and found: “The addition of the word ‘RED’ in fact changes the commercial impression of the mark.” Trademark Trial and Appeal Board, In re Reese Brothers, Inc., U.S. Dept. of Commerce Patent and Trademark Office, Serial No. 74/668,052 (9 Mar. 1999), p. 5 (NC-20). See also Carvalho Report, ¶ 65 (REX-017).
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9.78 Professor Barrios, like Mr. Carvalho, similarly concludes that the other variants
Claimants invoke also changed the distinctive character of the original trademark.757 As a result,
Claimants would have had to register their marks for these variants in order to be able to avail themselves of the (non-existent) right to use them that they contend Uruguayan law establishes.758
*
9.79 Finally, Claimants argue that Uruguay is somehow “barred” from challenging their
“ownership of their trademarks” on the merits because it did not challenge Claimants’ description of its trademarks during the jurisdictional phase.759 This argument is also baseless.
9.80 There was no reason for Uruguay to object to Claimants’ description of their investment at the jurisdictional phase. Uruguay did not, and does not, dispute that Claimants have some registered trademarks sufficient to satisfy the definition of an “investment” under Article 1(2) of the BIT. There was therefore no reason to challenge Claimants’ description of their investment, all the more so because the other elements of the investment they described—FTR’s shares in
Abal and PMP’s right to royalty payments—also plainly fell within Article 1(2)’s definition.
9.81 Moreover, Uruguay could not have known that Claimants intended to press a claim under
Uruguayan trademark law until they filed their Memorial. Their Request for Arbitration made no
757 Barrios Second Report, ¶¶ 105-107 (REX-016). See also Espinosa Report, ¶¶ 164-165 (REX-012). With respect to Marlboro Fresh Mint, Claimants argue that “Respondent also argues that Claimants do not own trademark rights for Marlboro Fresh Mint because the trademark was registered in September of 2008—before the SPR entered into force (in February of 2008), but after the SPR was adopted (in August of 2008).” Reply, ¶ 120 (emphasis in original). Claimants are mischaracterizing Uruguay’s argument. Uruguay’s point was that Claimants did register the trademark, but did so fully aware that it would have to be removed from commerce given the enactment of the SPR. 758 Carvalho Report, ¶ 69 (REX-017). 759 Reply, § I.E.1.
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such claim. There was thus no reason for Uruguay to challenge their compliance with their registration obligations at any point before filing its Counter-Memorial, which is exactly what it did. Claimants’ procedural argument is therefore baseless.
*
9.82 In sum, because Article 11 does not provide BIT protection for alleged violations of municipal law, and because the putative trademark rights Claimants invoke do not exist in any event, their claim under Uruguayan trademark law must be denied.
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CHAPTER 10.
CLAIMANTS ARE NOT ENTITLED TO THE RELIEF THEY REQUEST
10.1 Claimants are not entitled to any relief, let alone the restitution and monetary compensation that they seek, because they have failed to meet their burden of establishing
Uruguay’s international responsibility. There is no liability; therefore, there are no grounds for relief.
10.2 Aside from the absence of liability, Claimants’ arguments for restitution and damages also fail because Claimants have not met their burden of proving, in the case of restitution, that there is a legal basis for such relief in these circumstances; and, in the case of damages, the (1) existence, (2) cause, or (3) quantum of the alleged harm suffered.
10.3 As shown in Section I, there is no legal basis for Claimants’ request for restitution. This is a case of a sovereign State’s regulation of the marketing of products that indisputably have adverse impacts on public health. The State has exercised its police power in good faith to further its (and society’s) interests in promoting and protecting public health. As such, it is not within the power of a BIT tribunal to order Uruguay to rescind its duly adopted regulations, any more than a tribunal could order a State to withdraw highway safety signals or abolish sanitary food requirements, or derogate laws prohibiting pollution of the air or fresh water supply.
Further, an order of restitution would be impossible to enforce, and wholly disproportionate in light of the undisputed harm caused by tobacco consumption (more than 6,000 deaths per year in
Uruguay alone) and the State’s unquestioned interest in promoting and protecting public health.
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10.4 In Section II, Uruguay shows that Claimants have not proven that the SPR and 80%
Requirement are the cause of the economic losses they claim to have suffered. Claimants’ allegations on both harm and causation are contradicted by their own evidence.
10.5 Claimants have also failed to prove the quantum of their alleged damages, as described in
Section III. Their monetary claims are speculative and do not provide a reliable basis upon which damages can be awarded. Further, their calculations are rife with errors and unsubstantiated assumptions, which grossly inflate their claims (by a factor of over 250%). Finally, the interest they seek is excessive and legally unsupportable.
10.6 Even as inflated by Claimants, the damages they seek are remarkably small. A claim of
US$ 22.3 million, excessive as it may be, is hardly significant for a multinational company with annual net revenues of over US$ 29.8 billion760. Why do they even bother about such a paltry sum? Because this case is not about economic losses suffered in Uruguay, which represents the tiniest of markets in Claimants’ worldwide business. It is about PMI’s effort to block the public health objectives of a small country, increase its costs of adopting reasonable measures to advance those objectives by forcing it to spend millions in legal fees and other expenses, and, especially, to dissuade larger countries, with larger markets, from following Uruguay’s example.
Philip Morris’ internal documents, produced during discovery in these proceedings, spell out that the real purpose of this arbitration is
760 Philip Morris International, 2014 Annual Report, p. 2 (C-487). 761
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10.7 Philip Morris is entitled to pursue its global opposition to tobacco control regulation by all lawful political means, in Uruguay and around the world. But when they seek to strangle bona fide public health measures—against the leading preventable cause of death and disease in the world—by means of the BIT arbitration process, they commit an abuse of that system. Uruguay is far from alone in holding this view.762 Accordingly, Uruguay seeks reimbursement from
Claimants of all fees and expenses it has incurred as result of this vexatious arbitration, as addressed in Section IV.
I. Claimants are Not Entitled to Restitution
10.8 Claimants seek two remedies, in the alternative: (1) juridical restitution (as well as damages incurred until the date of “withdrawal” of the SPR and 80% Requirement) or (2) monetary compensation for historical and future losses. Both requests are legally flawed. This
Section shows why Claimants are not legally entitled to restitution. The remaining Sections show why they are not entitled to damages, and why Uruguay is entitled to have its legal expenses and costs reimbursed.
762 See, e.g., PAHO & WHO, Strengthening the Capacity of Member States to Implement the Provisions and Guidelines of the WHO Framework Convention on Tobacco Control, Art. 1 (R-230) (urging Member States to “oppose attempts by the tobacco industry or its allies to interfere with […] public health measures designed to protect the population from the consequences of tobacco consumption […]”); Conference of the Parties to the Framework Convention on Tobacco Control (COP-FCTC), Punta del Este Declaration on the Implementation of the WHO Framework Convention on Tobacco Control (19 Nov. 2010), Preamble (RL-135) (declaring the FCTC Parties’ “concern regarding actions taken by the tobacco industry, at a national or international level, which interfere with the implementation of public health policies with respect to tobacco control”).
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10.9 In its Counter-Memorial, Uruguay demonstrated that awarding Claimants restitution by compelling Uruguay to repeal the SPR and 80% Requirement is not an appropriate remedy,763 and that it would be “utterly unrealistic” for this Tribunal “to order [Uruguay] to turn back to the regulatory framework existing before the [public health] measures were adopted.”764 In their
Reply, Claimants offer no arguments that could lead to a different result.
10.10 Claimants assert that they “are entitled to claim restitution under the BIT.”765 This contention is unfounded. Claimants have identified no provision in the BIT to support their claim. Indeed, there is none. The Treaty does not confer any right to restitution.
10.11 Claimants attempt to find support in the obiter dicta from Chorzów Factory, in which the
Permanent Court of International Justice (“PCIJ”) stated that the obligation to make full reparation may also take the form of restitution.766 This statement does not help Claimants.
Chorzów Factory establishes that obligations engendered by State responsibility in the investor-
State context may be different from the obligations that arise on the inter-State plane. In that case, Germany sought reparation for damages suffered in its capacity as a sovereign State.767
763 Counter-Memorial, ¶¶ 10.6-10.12. 764 Occidental Petroleum Corporation and Occidental Exploration and Production Company. v. Republic of Ecuador, ICSID Case No. ARB/06/11, Decision on Provisional Measures (17 Aug. 2007) (Fortier, Stern, Williams) (hereinafter “Occidental v. Ecuador, Decision on Provisional Measures”), ¶ 81 (RL-176) (citing CMS v. Argentina, ¶ 406 (CLA-093)). 765 Reply, § III(B). 766 Ibid., ¶¶ 367-368. 767 The Court made clear (1) that “the object of the German application” was only “to obtain reparation due for a wrong suffered by Germany in her capacity as a contracting Party to the Geneva Convention,” which was “a question of the German Government’s own rights[;]” and (2) that Germany did not bring claims “as representative of the individuals who have suffered injury[.]” The Court referred to the damages suffered by the companies involved in that case (Oberschlesische and Bayerische) not to redress their rights, but only to determine whether the damages claimed by Germany had occurred at all since Germany was a creditor of Treuhand, the sole shareholder of Oberschlesische that owned the factory, and held a lien on the shares. The Court also emphasized that the Geneva Convention established an elaborate, separate system of remedies for private claims by permitting individuals to bring their grievances before the Upper Silesian Arbitral Tribunal and German-Polish Mixed Arbitral Tribunal. Case - 216 - CONTAINS CONFIDENTIAL INFORMATION
Discussing the scope of the obligation to make full reparation, the PCIJ held, in a key, but sometimes overlooked (especially by Claimants), passage, that:
Rights or interests of an individual the violation of which rights causes damage are always in a different plane to rights belonging to a State, which rights may also be infringed by the same act. The damage suffered by an individual is never therefore identical in kind with that which will be suffered by a State[.]768
10.12 It follows that reparation may differ depending on whether an alleged breach concerns the rights of a sovereign State or the rights of a private entity. Professor Zachary Douglas puts this point succinctly, explaining that the quoted passage from Chorzów Factory:
... highlights that there is a substantive difference between the reparation for wrongs done to individuals and to States and thus compels a measure of caution in approaching the Court’s classic statement on restitution as the primary remedy in international law and the measure of damages in lieu in the context of the investor/State regime.769
10.13 Contrary to Claimants’ reading, Chorzów Factory thus does not support their claim to restitution.
10.14 Claimants also rely on Article 35 of the ILC Articles on Responsibility of States for
Internationally Wrongful Acts (“ARSIWA”).770 Such reliance is misplaced. By their terms, the
ARSIWA “do[] not apply to obligations of reparation to the extent that these arise towards or
Concerning the Factory at Chorzów (Germany v. Poland), Judgment (13 Sept. 1928), P.C.I.J. Series A, No. 17 (hereinafter “Factory at Chorzów”), at pp. 16-17 (CLA-240). 768 Ibid., at p. 17 (emphasis added). 769 Z. Douglas, Other Specific Regimes of Responsibility: Investment Treaty Arbitration and ICSID in THE LAW OF INTERNATIONAL RESPONSIBILITY (J. Crawford, A. Pellet & S. Olleson, eds. 2009), p. 832 (RL-271). See also Z. Douglas, THE INTERNATIONAL LAW OF INVESTMENT CLAIMS (2009), p. 101 (RL-38(bis)). 770 Reply, ¶ 370.
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are invoked by a person or entity other than a State.”771 Article 33(1) makes this clear by providing that “[t]he obligations of the responsible State set out in [Part II of the ARSIWA, including the obligation to make restitution,] may be owed to another State, to several States, or to international community as a whole[.]”772 The plain language of Article 33(1) thus “excludes secondary obligations owed to non-states from the scope of the ARSIWA.”773
10.15 Elaborating on this point, the Special Rapporteur on State Responsibility observed:
the ILC Articles make no attempt to regulate questions of breach between a state and a private party such as a foreign investor. Those rules must be found elsewhere in the corpus of international law, to the extent they exist at all.774
10.16 Because the ARSIWA “contain[] no rules and regulations of State Responsibility vis-à- vis non-State actors[,]” the Wintershall tribunal held that “[t]ribunals are left to determine the
‘ways in which State Responsibility may be invoked by non-State entities’ from the provisions of the text of the particular Treaty under consideration.”775
771 J. Crawford, THE INTERNATIONAL LAW COMMISSION’S ARTICLES ON STATE RESPONSIBILITY: INTRODUCTION, TEXT AND COMMENTARIES (2002), Article 28, Commentary (3), p. 193 (RL-267) (emphasis added). 772 Ibid., Article 33(1), p. 209 (RL-267) (emphasis added). 773 J. Crawford, STATE RESPONSIBILITY: THE GENERAL PART (2013), p. 549 (RL-276) (emphasis added). 774 J. Crawford, Investment Arbitration and the International Law of Investment Claims Articles on State Responsibility, 25 ICSID REV. 127 (2010), p. 130 (RL-272). See also Z. Douglas, Other Specific Regimes of Responsibility: Investment Treaty Arbitration and ICSID in THE LAW OF INTERNATIONAL RESPONSIBILITY (J. Crawford, A. Pellet & S. Olleson, eds. 2009), p. 820 (R-374). 775 Wintershall Aktiengesellschaft v. Argentine Republic, ICSID Case No. ARB/04/14, Award (8 Dec. 2008) (Nariman, Torres Bernárdez, Bernardini), ¶¶ 112-113 (RL-82) (citing J. Crawford, The International Law Comission’s Articles on State Responsibility of States for Internationally Wrongful Acts: a Retrospect, 96 AM. J. INT’L L. (2002), p. 888 (RL-266)). See also J. Crawford, Investment Arbitration and the International Law of Investment Claims Articles on State Responsibility, 25 ICSID REV. 127 (2010), p. 130 (RL-272) (concurring with this proposition).
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10.17 The extent to which Claimants are entitled to invoke Uruguay’s responsibility is clearly defined by the BIT. And this Treaty, as shown above, contains no provision that entitles
Claimants to an award of restitution.776
10.18 Uruguay also demonstrated in its Counter-Memorial that it is well-established in investment arbitration that where a State “in the exercise of its sovereign powers” has adopted laws or regulations that affect the rights of a foreign investor, restitution “must be deemed legally impossible.”777 Claimants casually dismiss the cited cases as irrelevant, arguing that “most of
[them] implicate questions of sovereign control over natural resources.”778 This purported factual distinction has no merit. As one noted commentator has observed, “if the subject matter of an obligation falls within the inherent competence of the state,” as in the case of the protection of
776 See supra ¶ 10.10. 777 See, e.g., Occidental v. Ecuador, Decision on Provisional Measures, ¶ 79 (RL-176) (noting that it is “well established” that where a State “in the exercise of its sovereign powers” has adopted laws or regulations that affect the rights of a foreign investor, restitution “must be deemed legally impossible.”); LG&E Energy Corp., et al. v. Argentine Republic, ICSID Case No. ARB/02/1, Award (25 July 2007) (de Maekelt, Rezek, van den Berg) (hereinafter “LG&E v. Argentina, Award”), ¶ 87 (RL-174) (“[J]udicial restitution … impl[ies] modification of the current legal situation by annulling or enacting legislative and administrative measures that make over the effect of the legislation in breach. The Tribunal cannot compel [a State] to do so without a sentiment of undue interference with its sovereignty.”) (emphasis added); Amco Asia Corporation and others v. Republic of Indonesia, ICSID Case No. ARB/81/1, Award (20 Nov. 1984) (Goldman, Foighel, Rubin) (hereinafter “Amco Asia v. Indonesia”), ¶ 202(ii) (CLA-243) (“It is obvious that this Tribunal cannot substitute itself for the Indonesian Government, in order to cancel the revocation and restore the license; such actions are not even claimed, and it is more than doubtful that this kind of restitution in integrum could be ordered against a sovereign State.”) (emphasis added); Libyan American Oil Company (LIAMCO) v. Government of the Libyan Arab Republic, Award (12 Apr. 1977), reprinted in 20 I.L.M. 1 (1981) (hereinafter “Libyan American Oil v. Libya”), pp. 168-169 (RL-146) (“[R]estitutio in integrum claimed as a principal remedy by LIAMCO as well as the remedy of a Declaratory Award declaring the invalidity of Libya’s title to LIAMCO’s nationalized rights, are to be rejected in accordance with prevalent international practice, and because they are practically incapable of compulsory execution; [M]oreover, the said remedies are liable to encroach upon the principle of the sovereignty of States and the indisputable and unappealable character of all ‘Acts of State’[.]”) (emphasis added). See also Counter-Memorial, ¶¶ 10.6-10.12. 778 Reply, ¶ 372.
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public health, “an order to restore the status quo ante may be inappropriate or even futile, and compensation the only effective remedy.”779
10.19 Claimants’ attempt to distinguish these authorities on their facts leaves untouched their underlying reasoning, which the LG&E v. Argentina tribunal summarized as follows:
[J]udicial restitution ... impl[ies] modification of the current legal situation by annulling or enacting legislative and administrative measures that make over the effect of the legislation in breach. The Tribunal cannot compel [a State] to do so without a sentiment of undue interference with its sovereignty.780
10.20 Indeed, no investment arbitration tribunal has ever imposed juridical restitution by ordering a State to repeal legal regulations. Claimants make no mention of this fact.
10.21 Even if Claimants were otherwise entitled to restitution, quod non, it should nonetheless be refused because it would impose an obviously disproportionate burden on Uruguay.781
779 J. Crawford, STATE RESPONSIBILITY: THE GENERAL PART (2013), p. 469 (RL-276). 780 LG&E v. Argentina, Award, ¶ 87 (RL-174). Claimants mislead the Tribunal by asserting that the LG&E tribunal ordered judicial restitution in that case, compelling Argentina to restore a tariff scheme offered to the claimant. (Reply, ¶ 373). This is patently wrong. The tribunal ordered no restitution in that case. It merely recognized that, after the state of necessity was over, Argentina had discretion either to restore the tariff regime or to pay compensation for losses (LG&E Energy Corp., et al. v. Argentine Republic, Decision on Liability, ¶ 265 (RL-65)). For other authorities explaining the reasons for legal impossibility of restitution in investment arbitration, see also Amco Asia v. Indonesia, ¶ 202(ii) (CLA-243) (“It is obvious that this Tribunal cannot substitute itself for the Indonesian Government, in order to cancel the revocation and restore the license; such actions are not even claimed, and it is more than doubtful that this kind of restitution in integrum could be ordered against a sovereign State.”); Libyan American Oil v. Libya, pp. 168-169 (RL-146) (“[R]estitutio in integrum claimed as a principal remedy by LIAMCO as well as the remedy of a Declaratory Award declaring the invalidity of Libya’s title to LIAMCO’s nationalized rights, are to be rejected in accordance with prevalent international practice, and because they are practically incapable of compulsory execution; moreover, the said remedies are liable to encroach upon the principle of the sovereignty of States and the indisputable and unappealable character of all ‘Acts of State.’”). 781 Occidental v. Ecuador, Decision on Provisional Measures, ¶¶ 82-84 (RL-176) (Juridical restitution “even if possible, will nevertheless be refused if it imposes too heavy a burden on the party against whom it is directed.” The tribunal further held that “[t]o impose on a sovereign State reinstatement of a foreign investor in its concession, after nationalization or termination of a concession license or contract by the State, would constitute a reparation disproportional to its interference with the sovereignty of the State when compared to monetary compensation.”) (emphasis added). See also J. Crawford, THE INTERNATIONAL LAW COMMISSION’S ARTICLES ON STATE RESPONSIBILITY: INTRODUCTION, TEXT AND COMMENTARIES (2002), Article 35(b), p. 213 (RL-267).
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Uruguay showed that every year more than 6,000 Uruguayans die from smoking-related illnesses.782 Claimants do not dispute this figure. Based on Claimants’ average historical market share between 2000 and 2008 of this means that the deaths of nearly people a year are attributable to Claimants’ activities. Uruguay also showed that it incurs at least US$
150 million annually, in direct health care costs that smoking imposes on the Uruguayan economy.783 Claimants do not dispute this figure either. Using their historical average market share, this translates into nearly in annual health care costs for Uruguay that are attributable to Claimants’ activities.
10.22 Requiring Uruguay to repeal the SPR and 80% Requirement, especially in the face of tobacco consumption’s undisputed impact on public health, would be to assume the authority to order a State to reverse the exercise of its sovereign police power to protect public health.
Uruguay respectfully submits that such an order would be “legally impossible.”
II. Claimants Have Failed to Establish that the Challenged Measures Caused the Harm They Claim to Have Suffered
10.23 In order to receive an award for damages, a claimant must prove both “the fact of its loss or damage” and “the necessary causal link between the loss or damage and the treaty breach.”784
Claimants here have failed on both counts.
782 See supra ¶ 2.1. 783 Counter-Memorial, ¶ 3.100; Reply on Jurisdiction, ¶ 246. The numbers are updated based on Appendix C of Analysis Group’s Second Report. 784 The Rompetrol Group N.V. v. Romania, ICSID Case No. ARB/06/3, Award (6 May 2013) (Berman, Donovan, Lalonde) (hereinafter “Rompetrol v. Romania”), ¶ 190 (RL-204); S. Ripinsky & K. Williams, DAMAGES IN INTERNATIONAL INVESTMENT LAW (2008), p. 135 (RL-246(bis)); B. Cheng, GENERAL PRINCIPLES OF LAW AS APPLIED BY INTERNATIONAL COURTS AND TRIBUNALS, pp. 169-170 (RL-36(ter)).
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A. Alleged Harms from Increasing the Size of Health Warning Labels
10.24 It is not immediately obvious why Claimants would suffer economic losses from having to increase the size of health warnings from 50% to 80% of the pack. This still left space for brand logos and all other forms of product identification previously included on the packs, even if some of it had to be reduced in size. Claimants have submitted no evidence that customers in
Uruguay were no longer able to identify their products. How then did this regulation result in lost sales or income? Unsurprisingly, Claimants fail to show that it did. What they resort to is a contorted effort to demonstrate that somehow, some way, losses were incurred. The effort fails.
10.25 In their Reply, Claimants argue that the 80% Requirement “substantially diminished the value of Abal’s remaining brand assets” by impairing Claimants’ “ability [to] charge a higher price without losing market share.”785 That is the nature of the harm they claim: that they were unable to charge higher prices without losing market share. Let us leave to one side, for the moment, that losing market share may, by microeconomic law, be an inevitable result of charging higher prices, having nothing to do with increasing the size of health warning labels.
The facts are even more fatal to Claimants’ argument: following adoption of the 80%
Requirement, Claimants were able to charge higher prices without losing market share, thus proving, by their own standard, that their “brand assets” did not diminish in value.
10.26 Initially, Claimants argued that the 80% Requirement “substantially diminished” the value of each of the four brands that they continued to sell after the SPR caused them to remove a number of variants from the market. The four that remained were: Fiesta, Marlboro Red, Philip
785 Reply, ¶¶ 337, 352.
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Morris and Casino.786 In the Reply, Claimants dropped their claim down to three—Marlboro
Red, Philip Morris and Casino—admitting that there was no harm to Fiesta. But that is a significant admission, because what is true for Fiesta is also true for the other three.
10.27 According to Claimants’ expert, Navigant,
787 That is true. In fact,
788 This is a “recovery,” if anything, from the situation in 2008, before the 80%
Requirement was adopted, not a “recovery” from the impact of the Requirement. Navigant thus reached the conclusion that it is
789
10.28 The same factors that led Navigant to this conclusion also prove that the 80%
Requirement has not adversely impacted , which accounts for
of the damages Claimants seek on account of that Requirement.790
Claimants argue that: (1) before the 80% Requirement, they were able to increase both
Marlboro’s market share and its price premiums over competitor brands; and (2) this “trend
786 Memorial, ¶¶ 98, 183. 787 Second Expert Report of Brent C. Kaczmarek and Kiran P. Sequeira (17 Apr. 2015) (hereinafter “Second Navigant Report”), ¶¶ 17, 111 (CWS-017). 788 Expert Sur-Rebuttal Report of Jeffrey A. Cohen (20 Sept. 2015) (hereinafter “Second Analysis Group Report”), Appendix C (REX-014). 789 Second Navigant Report, ¶ 17 (CWS-017). See also ibid. ¶¶ Tables 3, 18-19, 21 (removing Fiesta from claimed losses). Claimants’ position on Fiesta, however, is inconsistent. While relying on Navigant’s damages figure, which no longer includes Fiesta, the Reply nonetheless states: “Claimants also seek damages for brand assets that lost value due to the 80/80 requirement which are: (1) Marlboro Red, (2) Philip Morris, (3) Fiesta, and (4) Casino.” Reply, ¶ 112, n.156 (emphasis added). 790 See Second Navigant Report, Tables 19, 21, 22 (CWS-017).
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reversed” afterwards, because they were no longer able to increase
.791 Both of these claims are incorrect.
10.29 First, as Mr. Jeffrey Cohen explains in his second expert report, although
.793 Thus, the alleged pre-regulation
“trend”—of market share and price premium rising in tandem—did not actually exist. The opposite was often true.
10.30 Second, as Mr. Cohen explains, by 2013—the first full year after the adoption of the 80%
Requirement that Marlboro Red returned to pre-2008 price premiums—
795 Here, again, by Claimants’ own standard, Marlboro Red was more successful after the 80% Requirement than before. There is no evidence of economic loss.
791 Reply, ¶ 347; Second Navigant Report, ¶¶ 58-59 (CWS-017). 792 Second Analysis Group Report, ¶ 30 and Figure 1 (REX-014). 793 See ibid., Figure 1. 794 Ibid., ¶ 13 (first emphasis added, second in original). 795 Ibid., ¶ 13 and Figure 1.
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10.31 Claimants argue that
796 But they fail to show that this decline was caused by the 80% Requirement—because it was not. The Requirement went into effect in December 2009, more than a year before
10.32
. There is no credible argument that these changes in market share were attributable to the 80% Requirement, as opposed to
Claimants’ pricing decisions. Further, the allegation that Claimants “lost the ability [to] charge a higher price” for Marlboro Red as a result of the Requirement is plainly false because they continued to
10.33 This leaves only two other brands purportedly impacted by the 80% Requirement: Casino and Philip Morris. As Claimants’ experts make clear, however, both of these are
796 Reply, ¶ 351 (quoting Second Navigant Report, ¶ 37 (CWS-017)). See also Reply, ¶ 348; Second Navigant Report, ¶¶ 14, 36, 41 (CWS-017); Expert Report of Brent C. Kaczmarek and Kiran P. Sequeira (3 Mar. 2014) (hereinafter “First Navigant Report”), ¶¶ 17, 82 (CWS-013).
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797 Any allegation of impact to these brands is therefore inconsistent with Claimants’ position that the 80% Requirement
798 No such has ever been charged for these two .
10.34 In spite of the evidence and the absence of economic data, Claimants argue that the 80%
Requirement “reduces the visibility of brands and weakens brand loyalty,” “leaving consumers less loyal to brands and less willing to pay higher prices for them.”799 As noted in the Counter-
Memorial, these allegations are pure assertion unsupported by proof.800 There is no evidence that
Claimants lost sales or customers because of the latter’s inability to identify brands after the size of health warning labels was increased. The Reply offers none. And the evidence disproves that this actually occurred.
10.35 Although Claimants fail to acknowledge it, their own confidential July 2009 public opinion survey, commissioned soon after the 80% Requirement was enacted, found that
801 To the same effect, Euromonitor has repeatedly confirmed the brand loyalty of Uruguayan consumers in the years since the 80% Requirement
797 First Navigant Report, ¶ 10, Table 3 (CWS-013). 798 Memorial, ¶ 104; Reply, ¶ 337. See also First Navigant Report, ¶ 17 (CWS-013) (arguing that the 80% Requirement has “eroded Abal’s ability to command a premium price for its branded products that remain in the market.”) (emphasis added). 799 Reply, ¶¶ 7, 87. 800 Counter-Memorial, ¶ 10.23.
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was implemented.802 This evidence contradicts Claimants’ argument that the Requirement left insufficient room for meaningful branding and reduced brand loyalty as a result. Significantly,
Claimants have submitted no data showing actual sales losses attributable to the reduction in space for their brand identification and other promotional material.
10.36 In sum, there is no factual foundation for Claimants’ allegation that the 80% Requirement has harmed the value of any of the cigarette brands that they marketed after that Requirement came into effect.803
B. Alleged Harms from Removal of Brand Variants from the Market
10.37 Uruguay does not deny the SPR caused Claimants to remove certain variants from the market, and that this could have, at least theoretically, caused decreased sales. But Claimants must prove their claimed harms and they have not done so.
10.38 Claimants themselves acknowledge that several of their variants had
before the SPR and 80% Requirement were enacted. This was the case for three of the variants they claim were removed from the market because of the regulations—Premier, Premier Extra and Galaxy— 804 Similarly, Fiesta 50 50, another variant that was removed, had 805 four months before
802 Euromonitor International, Tobacco in Uruguay (Oct. 2012), p. 26 (R-417) (“most consumers remained loyal to the brands of their preference” in 2011); Euromonitor International, Cigarettes in Uruguay (Oct. 2013), p. 1 (C-166) (consumers “kept purchasing their favourite brands” in 2012); Euromonitor International, Tobacco in Uruguay (Oct. 2014), p. 26 (C-373) (“Uruguayan smokers are quite loyal to brands[.]”). 803 Claimants are claiming in damages resulting from the 80% Requirement, in addition to the Decree’s revocation. Second Navigant Report, Table 22 (CWS-017). 804 First Navigant Report, ¶¶ 108, 197 n.162 (CWS-013). 805 Claimants’ monthly sales data records sales for Abal Historical Sales Volume and Revenue 1999- 2014 (C-372). The data is the same in the corrected version of (C-372) that was produced by Claimants on 23 June - 227 - CONTAINS CONFIDENTIAL INFORMATION
the measure’s enactment (and before, according to Claimants, they had any knowledge it would be enacted806).
10.39 Claimants nevertheless claim damages resulting from their removal of both Fiesta 50 50 and Fiesta Blue from the market. But the evidence shows that the Fiesta brand family, reduced to a single variant (Fiesta) after the SPR, generated
. The following chart807 shows that
2015. These documents report the same total sales for 2008 as Navigant’s updated Appendix K. No
806 Claimants’ witness, Chris Dilley, states that Abal first learned about the possibility of the SPR in July 2008. Witness Statement of Mr. Chris Dilley (27 Feb. 2014), ¶ 6 (CWS-005). 807 This graph is based on Abal Historical Sales Volume and Revenue 1999-2014 (C-372) and Cigarette Consumption - Tax Collection Data (C-506).
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10.40 As this chart shows, Claimants cannot rely on the supposition that removal of variants from the market in response to the SPR necessarily resulted in decreased sales revenue. An alternative, which they have failed to disprove, is that, as in the case of the Fiesta brand family, consumers may have simply switched to Fiesta from Fiesta 50 50 and Fiesta Blue, resulting in no loss of overall sales revenue. It is Claimants’ burden to prove that the harms they allege actually occurred. As shown above and in the Counter-Memorial,808 they have failed to do so, at least in regard to their removal from the market of Premier, Premier Extra, Galaxy, Fiesta 50 50 and
Fiesta Blue.
10.41 The data also show that the two eliminated Fiesta variants, as well as Philip Morris Blue,
809 Claimants have provided no evidence that the
if they had remained on the market.
10.42 As for Marlboro Fresh Mint, Claimants state that it
810 In fact, their records show that this variant was not even registered in Uruguay until 5 September 2008 (three weeks after the SPR was enacted on 18 August); nor was it launched onto the Uruguayan market until
808 Counter-Memorial, ¶¶ 10.22-10.47. 809 Fiesta Blue was launched in 2002 and had a share of Its share . Second Analysis Group Report, Appendix C (REX-014). Likewise, in the three months (January-March 2008) that sales are recorded,
. Abal Historical Sales Volume and Revenue 1999-2014 (C-372); Second Analysis Group Report, Appendix C (REX-014).
Abal Historical Sales Volume and Revenue 1999-2014 (C-372). See also Second Analysis Group Report, Appendix C (REX-014). 810 Memorial, ¶ 97.
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811 Thus, as Uruguay stated in the
Counter-Memorial, “Marlboro Fresh Mint did not exist when the SPR was enacted,”812 and
Claimants both “sought to register it at a time when they were fully aware they would not be able to use it”813 and introduced it “fully aware that it would have to be removed from the market
months after its introduction.”814 Consequently, there are no reliable sales or market share data on which to base any calculation of “lost” sales or revenues as a result of its quick and fully anticipated removal. All Claimants can do is speculate and that is, indeed, all that they do.
10.43 This leaves Marlboro Blue and Marlboro Gold as variants removed from the market following the adoption of the SPR. Between 2006 and 2008, these products generated sales that produced market shares of respectively.815 Claimants argue that all of these sales were lost as a result of the SPR. But the evidence demonstrates otherwise. First, Claimants’ market share has not declined by (the combined market share of Marlboro Blue and
Marlboro Gold prior to the SPR). It was
816 To the extent Claimants suffered any loss in sales or share, the evidence shows that there were other causes, unrelated to the SPR (or the 80% Requirement), which produced the alleged losses they attempt to attribute to the two regulatory measures.
811 Counter-Memorial, ¶ 9.62. 812 Ibid., ¶ 4.135, n.506. 813 Ibid., ¶ 9.51, n.978. 814 Ibid., ¶ 9.62. See also Reply, ¶ 41 (conceding that “[t]he SPR as finally enacted did not permit ‘double presentations[,]’” or “one non-flavored product (e.g., Marlboro Red) and one flavored variant (e.g., Marlboro Fresh Mint)[,]” which had been discussed as a possibility before the regulation was finally enacted). 815 Second Analysis Group Report, Appendix C (REX-014). 816 Even in the two years where Claimants’ market share was
Second Analysis Group Report, Appendix C (REX-014).
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10.44 One such cause was what Euromonitor describes as Claimants having “failed to react fast enough with the launching of replacement brands to substitute those that had to be phased out.
Both Monte Paz and BAT took advantage of this late reaction and capitalised on it, increasing— even if marginally—their respective market shares.”817 Claimants had known about the pending implementation of the SPR since at least July 2008.818 There is no reason that Benson & Hedges could not have been introduced well before November 2009, particularly given that it was already “a well known brand in other parts of the world”819 and did not have to be invented from scratch. Other causes of the “harms” Claimants allege to have suffered are discussed below.
C. The Harms Allegedly Suffered by Claimants Are Attributable to Factors Other than the 80% Requirement and the SPR
10.45 It is not Uruguay’s burden to prove that the cause of every lost sale experienced by
Claimants since 2009 was unrelated to the two challenged measures. Rather, having defined their injury as the entire universe of lost sales and related profits and royalties experienced since 2009, it is Claimants who must establish that, but for the challenged measures, those losses would not have occurred. They cannot meet this burden because the losses they suffered were caused in whole or in part by events other than the two measures.
10.46 Claimants agree that they must prove that their alleged losses were “proximately caused” by the challenged measures because there is “a threshold beyond which damage, albeit linked to
817 Euromonitor International, Tobacco in Uruguay (Aug. 2010), p. 19 (R-229(bis)). A similar explanation is reflected in Claimants’ internal documents. See, e.g., “First readings - Innovation alternatives for Uruguay” (13 Apr. 2010), Philip Morris Brands, et al. Internal Document, Bates No. PMIUY-00005760 (R-406) (explaining that it had proven difficult to associate
818 Witness Statement of Mr. Chris Dilley (27 Feb. 2014), ¶ 6 (CWS-005). 819 Memorial, ¶ 100.
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the wrongful act, is considered too indirect or remote.”820 Claimants also accept that they are
“not entitled to damages for an injury that is not proximately caused by the respondent’s wrongful conduct”821 and that “[t]he proper standard for causation under international law requires a ‘sufficient causal link which is not too remote’ between the government act and the injury.”822 Finally, the Parties are in agreement that “an intervening act may break the chain of causation between a State’s wrongful act and the investor’s injuries, thereby releasing the State of its obligation to pay reparations to the injured investor.”823
10.47 Based on these well-established principles, investment tribunals have held that a claimant’s own strategic decisions are capable of “fatally sever[ing] the chain of causation” and, when they do, a respondent State “cannot be held liable for [a claimant’s] bad business decisions.”824 That is the case here. Claimants’ own intervening acts, especially their pricing decisions between 2009 and 2014, as well as other factors unrelated to the 80% Requirement or the SPR, caused the “losses” for which they attempt to hold Uruguay responsible.
10.48 The first of these intervening factors was Uruguay’s June 2009 tax increase (a measure that Claimants have never challenged). As explained in the Counter-Memorial, Uruguay increased taxes on cigarettes by 30%, which caused an increase in prices and a corresponding
820 Biwater v. Tanzania, ¶ 785 (CLA-013). See also Micula v. Romania, ICSID Case No. ARB/05/20, Award (11 Dec. 2013) (Lévy, Alexandrov, Abi-Saab) (hereinafter “Micula v. Romania”), ¶¶ 926-927 (RL-308) (explaining that an intervening event that “makes the original wrongful conduct of the State become too remote” will “release the State from liability” to pay related damages). 821 Reply, ¶ 353. 822 Ibid., ¶ 354 (citing ILC Articles on State Responsibility, Commentary to Art. 31, note (10) (CLA-061)). 823 Reply, ¶ 355. 824 Micula v. Romania, ¶¶ 1154-55 (RL-308).
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reduction in sales.825 Claimants’ internal documents demonstrate that it significantly impacted their sales. For instance, in an October 2009 presentation, Claimants treated the June 2009 tax increase as a separate cause that had
A few months later, Claimants’ Chris Dilley wrote that, in Uruguay,
827 No argument has been made (or could be made) that this adverse economic impact was caused by the 80% Requirement or the SPR. Indeed, Claimants themselves have conceded that it was separately caused.828 Accordingly, losses related to this intervening factor cannot legitimately be claimed as damages in these proceedings.
10.49 The second intervening factor was Claimants’ decision, in November 2009—just five months after the 30% tax increase—to raise prices further. As shown in the Counter-Memorial,
Claimants in what Euromonitor calls “an effort to
825 Counter-Memorial, ¶ 10.36. See also Second Analysis Group Report, ¶ 40 (REX-014).
827 Diego Cibils has since reported that Abal suffered a Witness Statement of Diego Cibils (28 Feb. 2014) (hereinafter “Cibils First Statement”), ¶ 34 (CWS-004). 828 See, e.g.,
Cibils First Statement, ¶ 34 (CWS-004). However, Navigant has only partially modeled the 2009 tax in the but-for scenario. Mr. Cohen points out that Navigant ignores the relationship between this tax and volume, including any effect the 2009 tax had on the illicit market in its but-for scenario, and does not correctly calculate the average 2009 but-for price. See Second Analysis Group Report, ¶¶ 36-49 (REX-014).
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make consumers aware that it was fighting unreasonable governmental taxing measures.”829
They did so alone; none of the other tobacco companies operating in Uruguay followed them.
Predictably, Abal’s sales Claimants’ own experts acknowledge that this
830 In particular, Navigant has admitted that 831 and that it
832
10.50 Claimants’ internal documents likewise establish the
833 They also demonstrate that the decision to
834 Accordingly, this is not a case in which
Claimants “had little choice in taking the action they did,”835 but one in which they must accept the consequences of their own business decision.
829 Euromonitor International, Tobacco in Uruguay (Aug. 2010), p. 19 (R-229(bis)). 830 Counter-Memorial, ¶ 10.37 (citing First Navigant Report, ¶ 79, Figure 11 (CWS-013)). 831 Second Navigant Report, ¶ 14 (CWS-017). See also First Navigant Report, ¶ 78 (CWS-013) (conceding that
832 Second Navigant Report, ¶ 61 (CWS-017). 833 See, e.g.,
834
). 835 Inmaris Perestroika Sailing Maritime Services GmbH and Others v. Ukraine, ICSID Case No. ARB/08/8, Award (1 Mar. 2012) (Alexandrov, Rubins, Cremades) (excerpts), ¶ 382 (RL-302).
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10.51 After their ill-advised , Claimants reversed course and began to engage in
836 This is the third intervening factor severing the link, if any, between
Uruguay’s challenged measures and any economic losses incurred by Claimants. By April 2010,
Claimants’ prices were so low that for Marlboro Red they were receiving only
837 As Uruguay pointed out in the
Counter-Memorial, Claimants “sold below its total costs from December 2009 and below the average variable cost since March 2010 until, at least, December 2010.”838 As any student of
Economics 101 would expect, this led to a massive surge in market share: Claimants’ share grew to in 2010, its largest ever.839 But this was at the expense of profits. As Navigant explains,
840 In 2010, Abal’s
841 This extreme pricing strategy and its predictable effects on net revenue were Claimants’ responsibility, not
Uruguay’s.
836
837 See Second Navigant Report, Updated Appendix E (CWS-017) and Abal Historical Sales Volume and Revenue 1999-2014 (C-372). 838 Counter-Memorial, ¶ 10.42 (quoting Uruguayan Ministry of Economy and Finance (MEF), Resolution 128/2013 (23 Oct. 2013), pp. 2-4 (R-278)). See also Abal’s filing with the Ministry of Economy and Finance’s Commission on the Promotion and Defense of Competition (7 Nov. 2012) (AG-41). 839 Second Analysis Group Report, Appendix C (REX-014). 840 First Navigant Report, ¶ 80 (CWS-013). See also Reply, ¶ 351
841 Second Navigant Report, ¶ 61 (CWS-017). See also Cibils First Statement, ¶ 34 (CWS-004) ( (emphasis added).
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10.52 Claimants argue that their drastic was aimed at
842 and 843 If this were true, Claimants significantly overshot the mark, and sacrificed profits on the altar of market share. This major miscalculation on their part was plainly not Uruguay’s fault. Certainly,
Uruguay cannot be held responsible for Claimants’ decision to sell its products below cost. What on earth would drive them to do that?
10.53 According to Uruguay’s Ministry of Economy and Finance, there was method to
Claimants’ apparent madness. As the Ministry found in October 2013, Claimants engaged in a predatory pricing scheme, and deliberately sold below cost and accepted substantial losses in order to drive its competitors out of what they perceived as an increasingly tight market.844 The effort succeeded; BAT exited the market “almost immediate[ly]” after Claimants’ price cutting began.845
10.54 Although Claimants’ illegal scheme was discussed in the Counter-Memorial,846 the Reply does not mention it. This is a striking omission because Claimants’ unlawful conduct was indisputably an intervening factor sufficient to sever the chain of causation between the challenged measures and any losses stemming from the price drop. In Micula v. Romania, the tribunal dismissed certain claims for damages (i.e., financial penalties for failure to pay taxes)
842 See Second Navigant Report, ¶ 15 (CWS-017). 843 Reply, ¶ 348. 844 Uruguayan Ministry of Economy and Finance (MEF), Resolution 128/2013 (23 Oct. 2013), pp. 2-4 (R-278). This was not the first time Claimants manipulated prices to prevent competition. According to Euromonitor, Abal and Monte Paz “had an implicit price agreement, which ended [in 1992,] the year that Abal Hnos started lowering prices in an effort to increase share as well as to attempt to deter the imminent entrance of British American Tobacco into the market.” Euromonitor International, Tobacco in Uruguay (Aug. 2011), p. 15 (R-412). 845 MEF, Resolution 128/2013 (23 Oct. 2013), pp. 3 (R-278). See also First Navigant Report, ¶ 22 n.3 (CWS-013). 846 Counter-Memorial, ¶¶ 10.38-43.
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because the claimants’ own decision not to pay their taxes (“a strategic choice, which eventually proved to be the wrong one”) “fatally sever[ed] the chain of causation.”847 As the tribunal explained, “Romania cannot be held liable for the Claimants’ bad business decisions, especially if such decisions may have implied a failure to comply with certain legal obligations, namely the payment of taxes.”848 The same logic applies here. Uruguay cannot be held liable for Claimants’ business decisions, especially when they constituted a violation of the legal obligation not to engage in predatory pricing.
10.55 A fourth intervening factor was Uruguay’s further tax increase of February 2010.
Claimants argue that “the reason Uruguay increased taxes in 2010 was largely because Abal reduced its prices on cigarettes sold in Uruguay in December 2009.”849 But Claimants have never challenged that measure. In fact, they fully expected it.
In other words, Claimants were fully aware that their own price slashing was highly likely to lead to a tax increase, which is a consequence they knowingly brought upon themselves.
10.56 There are other factors, entirely unrelated to the challenged regulations, that also impacted Claimants’ sales and profits, including, most importantly: the overall decline in the
847 Micula v. Romania, ¶ 1154 (RL-308). 848 Ibid., ¶¶ 1154-55. 849 Reply, ¶ 383. 850
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cigarette market;851 changing consumer preferences toward roll-your-own tobacco;852
; and the point- of-sale advertising ban that was implemented in 2014.855 Claimants’ Reply either denies or ignores all of these causal factors.
10.57 Reduced sales as a result of any of these factors are in no way consequences flowing from the commission of an internationally wrongful act. There is no chain of events connecting such damage to the challenged regulations856—no “link between the [allegedly] wrongful act[s] and the damage in question.”857
10.58 The Reply argues that “[w]here a State causes injury, the State must compensate the injured party even if factors outside of the State’s control also contributed to the injury.”858 True
851 Uruguay is a declining market for cigarettes in general, and before either of the challenged measures entered into force. Counter-Memorial, ¶¶ 10.34-35. 852 In its 31 May 2010 filing in connection with the investigation into its pricing behavior, Abal claimed that Monte Paz had lost sales between January 2009 and April 2010 because of “a general reduction in the size of market of legal cigarettes” caused by factors including “the change in preference of consumers toward roll-your-own tobacco.” Abal Hermanos S.A.’s Filing with the Uruguayan Ministry of Economy and Finance’s Commission on the Promotion and Defense of Competition, Case No.22/010 (31 May 2010), p. 18, ¶ 44 (R-408). 853
854
855 The ban on advertisement and promotion of tobacco products at the point of sale was enacted via Decree No. 317/014 in November 2013. Uruguayan businesses are no longer allowed to visibly display tobacco products, and any information about them is limited to a simple list of the products and their price. 856 See SAUR International S.A. v. Argentine Republic, ICSID Case No. ARB/04/4, Award (22 May 2014) (Fernández-Armesto, Hanotiau, Tomuschat), ¶ 346 (RL-311) (“The cause and the damage must be linked by a chain of events.”). 857 Biwater v. Tanzania, ¶ 785 (CLA-013). 858 Reply, ¶ 354.
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or not, it must still first be established that the “State causes injury.” And, as Claimants accept,
“an intervening act may break the chain of causation between a State’s wrongful act and an investor’s injuries, thereby releasing the State of its obligation to pay reparations to the injured investor.”859 The three cases cited in the Reply860 are therefore inapposite. They are not cases, like this one, where the causal effects of the State’s acts were unproven, or where intervening acts by Claimants themselves caused the damage or broke the chain of causation. The United
States in no way contributed to the seizure of its diplomats as hostages in Iran,861 and the United
Kingdom had nothing to do with either the mining of its ships in the Corfu Channel case862 or the looting and destruction of private British property in the Zafiro case.863 The situation in this case is entirely different.
10.59 Even when proximate causation has been shown, “under the principles of contributory negligence[] and damage mitigation[] tribunals have felt entitled to substantially reduce compensation[] if they considered that the investor contributed substantially to risk or damage and did not apply professional due diligence.”864
10.60 As to contributory fault, Article 39 of the ILC’s Articles on State Responsibility
(Claimants’ favored source) establishes that, “[i]n the determination of reparation, account shall
859 Ibid., ¶ 355. 860 Ibid., ¶ 354. 861 United States and Diplomatic and Consular Staff in Tehran, Judgment (24 May 1980), I.C.J. Reports 1980, pp. 29-33 (CLA-292). 862 Corfu Channel case (United Kingdom v. Albania), Judgment (9 Apr. 1949), I.C.J. Reports 1949, pp. 17-23 (CLA- 291). 863 Zafiro Case (D. Earnshaw and Others (Great Britain) v. United States), Award (30 Nov. 1925), 6 U.N.R.I.A.A. 160, pp. 160-161 (RL-280). 864 T. Wälde & B. Sabahi, Compensation, Damages and Valuation in International Investment Law, TRANSNATIONAL DISPUTE MANAGEMENT, Vol. 4, No. 6 (Nov. 2007), pp. 37-38 (RL-244).
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be taken of the contribution to the injury by willful or negligent action or omission” of the entity seeking compensation.865 Thus, even in situations in which “damage has been caused by an internationally wrongful act of a State,” the conduct of the injured party is relevant, insofar as that party “has materially contributed to the damage by some willful or negligent act or omission.”866
10.61 Investment tribunals have substantially reduced the amount of compensation when the harm suffered was caused in part by the investor’s own negligent business decisions867 or unlawful acts.868 As the tribunal explained in MTD v. Chile, “BITs are not insurance against business risk,”869 and in this case, too, Claimants “should bear the consequences of their own
865 International Law Commission, Draft articles on Responsibility of States for Internationally Wrongful Acts, with commentaries (2001), Article 39, p. 109 (RL-130). See also ibid., Article 31, Commentary note (12), p. 93. 866 Ibid., Article 39, Commentary note (1), pp. 109-110. “[W]illful or negligent” is understood to include actions or omissions “which manifest a lack of due care on the part of the victim of the breach for his or her own property rights,” and “the relevance of any negligence to reparation will depend upon the degree to which it has contributed to the damage as well as the other circumstances of the case.” Ibid., Article 39, Commentary note (5), p. 110. 867 See, e.g., MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Award (25 May 2004) (Sureda, Lalonde, Oreamuno Blanco) (hereinafter, “MTD v. Chile, Award”), ¶¶ 178, 242-43 (CLA- 042) (reducing damages by 50% because claimants “had made decisions that increased their risks in the transaction” and “incurred costs that were related to their business judgments irrespective of the breach”); Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12, Award (14 Jul. 2006) (Sureda, Lalonde, Martins), ¶¶ 414, 425-26, 429 (CLA-296) (reducing damages from the over $438 million sought to $60 million, in part because the claimant had paid an unreasonably high price to acquire the contract, a decision that “no well-informed investor” would have made); Bogdanov v. Moldova, SCC, Arbitral Award (22 Sept. 2005) (Cordero Moss, sole arbitrator), ¶ 5.2 (RL-292). 868 See, e.g., Occidental Petroleum Corporation and Occidental Exploration and Production Company v. Republic of Ecuador, ICSID Case No. ARB/06/11, Award (5 Oct. 2012) (Fortier, Williams, Stern), ¶¶ 679, 680, 687 (RL-305) (reducing damages by 25% because the claimant “acted negligently and committed an unlawful act,” which “contributed in a material way to the prejudice which they subsequently suffered”); Occidental Petroleum Corp. v. Republic of Ecuador, ICSID Case No. ARB/06/11, Dissenting Opinion of Professor Stern (20 Sept. 2012), ¶¶ 7-8 (RL-304) (arguing that a 50/50 split would have been more justified); Yukos Universal Ltd v. Russian Federation, PCA Case No. AA227, Final Award (18 July 2014) (Fortier, Poncet, Schwebel) (hereinafter, “Yukos v. Russia”), ¶¶ 1611, 1615, 1637 (CLA-290) (finding that Yukos’ tax avoidance “breached the legislation and abused the low tax regimes” and reducing damages by 25% “as a result of [this] material and significant mis-conduct” by which claimants “contributed to the extent of 25 percent to the prejudice which they suffered”). 869 MTD v. Chile, Award, ¶ 178 (CLA-042). - 240 - CONTAINS CONFIDENTIAL INFORMATION
actions as experienced businessmen,” including the unwise and illegal business decisions they made and “risks [they] took irrespective of [Uruguay’s] actions.”870
10.62 In sum, Claimants seek to recover for losses that have not actually occurred, as well as losses that were not caused by the challenged measures but rather by entirely unrelated factors, including Claimants’ own willful conduct. Claimants have not met their burden of proving that, but for the 80% Requirement and the SPR, those losses would not have arisen or were foreseeable results of the challenged measures, as opposed to the result of Claimants’ own business decisions, taxes or other intervening factors that broke the chain of causation.871
Claimants’ story relies on the simplistic assumption that “the challenged measures caused Abal’s losses,”872 but they have failed to show how this is so, or to establish “a sufficient causal nexus between the claimed illegality and the asserted loss[.]”873
870 MTD v. Chile, Award, ¶ 178 (CLA-042). 871 Claimants argue that Article 5 of the BIT “requires ‘effective and adequate’ compensation for expropriated investments” and that “there is no reason to adopt a different” standard of compensation for the alleged breaches of BIT’s Articles 3(1), 3(2), and 11. Reply, ¶ 376. That is wrong. Claimants cannot extrapolate the claimed damages for expropriation to all other alleged Treaty breaches. Even if they were able to demonstrate a violation of any non- expropriatory provisions, they would be entitled to damages only for the actual losses incurred as a result of the internationally wrongful act. Feldman v. Mexico, ¶ 194 (RL-201) (The tribunal held that “what is owed by the responding Party” for the breach of a national treatment obligation “is the amount of loss or damage that is adequately connected to the breach.”) (emphasis added); MTD v. Chile, Award, ¶ 241 (CLA-042) (The tribunal did not use the standard of compensation for expropriation to calculate damages for an FET breach, but, instead, awarded damages based on “eligible expenditures” related to the project minus “the residual value of the investment and the damages that can be attributed to business risk.”) (emphasis added). In this case, the Tribunal has no basis upon which to determine damages for the alleged breaches of Articles 3(1), 3(2), 11, or of any other provisions of the BIT because Claimants neither demonstrated actual losses from the alleged breaches, nor proved a causal link, nor particularized the damages suffered. 872 Reply, ¶ 361. 873 Rompetrol v. Romania, ¶ 288 (RL-204).
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III. Claimants’ Valuation of their Alleged Losses Contains such Significant Errors and Unsupported Assumptions as to Render It Unusable
10.63 To be entitled to compensation under the Switzerland-Uruguay BIT, Claimants must prove economic harm caused by the 80% Requirement or the SPR. As shown in Section II above, these conditions precedent have not been satisfied. Claimants have proven neither harm nor causation. Even beyond these fatal defects, Claimants have not presented the Tribunal with a set of calculations upon which an award damages can be based.
10.64 Through the use of a discounted cash flow model, Claimants purport to establish their losses by comparing the value of cash flows and royalty payments in the actual world to a hypothetical but-for scenario in which the challenged measures were never adopted.874 Claimants continue to adopt an ex-post approach by calculating “losses” as of the current date.875 By using unreasonable assumptions, Claimants’ damages experts, Navigant, devise unrealistically high cash flows and royalties in the but-for scenario, and unreasonably depressed cash flows and royalties in the actual scenario. The result of this contrived approach is grossly inflated damages.
10.65 Many of these indefensible assumptions and other serious errors were explained in the first expert report of Jeffrey Cohen, submitted with Uruguay’s Counter-Memorial. In Claimants’
Reply and second Navigant report they were unable to provide even a colorable rebuttal to Mr.
874 Navigant also puts forth a market-based analysis as a “reasonableness check.” As Mr. Cohen explains, this market approach does not provide meaningful support for the amount of damages alleged because the same multiple could result in substantially different damages figures. See Second Analysis Group Report, ¶¶ 60-61 (REX-014). 875 Second Navigant Report, ¶ 18 (CWS-017). Claimants have no legal basis in this case to quantify their alleged losses as of a current day in order to recover heightened damages. Instead, their putative losses have to be quantified as of the date of an alleged wrongful act. See Factory at Chorzow, p. 47-48 (CLA-240); Government of the State of Kuwait v. American Independent Oil Company, Final Award (24 Mar. 1982) (Reuter, Sultan, Fitzmaurice), reprinted in 21 ILM 976 (RL-283) (the tribunal assessed the value of assets as of the date of the expropriation decree); Amoco International Finance Corp. v. Government of the Islamic Republic of Iran, et al., Award No. 310-56-3 (14 July 1987), reprinted in 15 IRAN-U.S. CL. TRIB. REP. 189 (1987), ¶ 196 (RL-151); Mr. Franz Sedelmayer v. The Russian Federation, SCC, Arbitral Award (7 July 1998) (Magnusson, Wachler, Zykin) (CLA-057).
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Cohen’s points, and instead made corrections in their model, reducing their alleged damages by
US $4 million (or 16%).876 But they have maintained their flawed approach in all other respects.
As a result, Navigant’s damages analysis is still afflicted with fundamental flaws in methodology, as described in the second Cohen report, annexed hereto.
10.66 Most egregiously, Navigant continues to quantify damages for the 80% Requirement without establishing that Claimants’ ability to charge higher prices has been impaired. In fact,
Navigant cuts 18% of the total damages claimed in the first Navigant report877 in one fell swoop because it could not
878 This is a remarkable admission. With the removal of from its damages claim, Navigant confirms what Uruguay has being saying all along: the 80%
Requirement has not impacted the pricing of Claimants’ remaining variants. If Claimants were correct in claiming that the 80% Requirement impaired their ability to charge higher prices for its brands, there is no reason that this should not apply to
10.67 Historical evidence also contradicts Navigant’s claims. Indeed, Mr. Cohen shows that when Uruguay introduced a regulation requiring health warning labels to cover 50% of tobacco packages, Claimants’
879 As a result, no damages can be reliably concluded from Navigant’s model for the 80% Regulation.880
876 Second Analysis Group Report, ¶ 6(i) (REX-014). 877 Ibid., ¶ 20. 878 Second Navigant Report, ¶ 17 (CWS-017). 879 Second Analysis Group Report, ¶ 17 (REX-014). 880 See also supra, ¶¶ 10-24-10.36.
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10.68 Navigant’s model is also plagued by a number of other unfounded assumptions (some of which are highly sensitive in the model) and calculation errors, making their damages valuation entirely unreliable. By using aggressive and unsupported assumptions, Navigant drives up revenues and understates costs in its but-for scenario, and fails to consider reasonable offsets in its actual scenario. Once corrected, Navigant’s damages calculation plummets by approximately
60%, a magnitude so significant that it casts serious doubt on the reliability of Navigant’s model and its utility in these proceedings.881 In the sections that follow, Uruguay addresses some of these modeling errors.
A. Navigant Continues To Overestimate Sales Volumes in the But-for Scenario
10.69 As explained in Uruguay’s Counter-Memorial, one way that Navigant artificially increases revenues in the but-for scenario is by overestimating Claimants’ market share and the size of the overall cigarette market.882
10.70 First, Navigant makes unrealistic projections of market shares for Claimants’ products. In his first expert report, Mr. Cohen observed that Navigant had over-estimated the market share of the Marlboro brand family and Marlboro Red.883 For example, Navigant’s model assumed a
in market share for Marlboro Red in just three years, rising from
881 Second Analysis Group Report, ¶ 64 (REX-014). 882 Memorial, ¶ 10.55. 883 Mr. Cohen also pointed out that Abal’s overall market share had declined from Navigant does not (nor could it) dispute the fact that Abal’s market share was declining even before the contested Regulations were enacted. Rather they blame the decline in Abal’s market share on the poor performance of its own Fiesta brand against strong competition from Mailhos brands. See Second Navigant Report, ¶¶ 106-112 (CWS-017). In his second report, Mr. Cohen shows that all of Abal’s declining market share could not be explained by Fiesta’s underperformance alone. This is because the market share of the remaining variants had flat-lined around between 2005-2008. Yet, Navigant models the combined market share to grow (without justification) to Indeed, this projected growth exceeds the annualized growth rate between 2000-2008. See Second Analysis Group Report, ¶ 25 and Figure 3 (REX-014).
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By doing this, Marlboro Red’s market share was projected to be
884
10.71 Significantly, Navigant does not disagree with Mr. Cohen’s factual observations, but only challenges his conclusions.885 Therefore, despite the facts, Navigant maintains the same unsupported assumption in the projected but-for market share for the Marlboro brand family and each variant.886 Essentially, Navigant attempts to justify its rosy assumptions about market shares by focusing on a longer time horizon (i.e., between 2000 to 2008).887 But the circumstances in the years before 2005 are far different from those existing at the time the challenged regulations were adopted, and, therefore, cannot serve as the basis for extrapolating future trends.
10.72 Prior to the two regulations, most of the growth in the Marlboro family and Marlboro
Red’s market shares occurred when Claimants had decreased prices.888 After the introduction of the FCTC and Uruguay’s 2005 tobacco control measures based thereon (which Claimants have not challenged), Marlboro Red’s market share 889 Claimants understood Marlboro
Red’s between 2005 and 2008 perfectly.890 According to an internal
Philip Morris market analysis,
¶ 31.
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891
If Navigant had used the more realistic, historical average for the four years preceding the two regulations, “losses” would be reduced by 892
10.73 Navigant’s projections of Casino’s market share are also divorced from reality. Although
Navigant assumes that Casino would maintain its 2008 market share in perpetuity in the but-for scenario, a correct analysis of Navigant’s data reveals that its market share
.893 The evidence, again, contradicts Navigant’s assumption. If corrected, “losses” are reduced by nearly 894
10.74 Second, Navigant continues to increase sales volume in the but-for scenario by artificially increasing the size of the legal market for cigarettes in the but-for world, irrespective of the evidence to the contrary.895 Navigant persists in incorporating the alleged growth in illicit sales in 2009 to estimate legal consumption but for the regulations.896 In so doing, it continues to deny the reality that tobacco prevalence has significantly decreased in Uruguay in the last decade, as addressed in Chapter 5 of this Rejoinder. It also fails to apply the relationship between illicit sales and higher taxes that it recognizes elsewhere,897 and makes no adjustment to isolate the possible effects of the June 2009 tax increase from those of the regulations at issue. Navigant
891
892 Second Analysis Group Report, ¶ 32 (REX-014). 893 Ibid., ¶ 33. 894 Ibid., ¶ 34 and Figure 7. 895 First Analysis Group Report, ¶ 48 (REX-005); supra Chapter 5. 896 Second Navigant Report, ¶ 140 (CWS-017). 897 Ibid., ¶ 103.
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10.75 Not only is this pure supposition, it runs counter to the findings of researchers and the first-hand experience of Philip Morris itself. Mr. Cohen highlights several studies that demonstrate that taxes increase illicit sales and decrease legal sales.898 Furthermore, internal
Philip Morris market research confirms that
899 In fact, Mr. Militsyn (Claimants’ witness) confirms that this is precisely what happened following the 2009 and 2010 tax increases.900 One need only look at actual sales data to see the effects of higher taxes on sales volumes. In the third quarter of 2009, following the June 2009 tax increase, industry sales fell compared to the previous year.901 To test the sensitivity of Navigant’s model to this assumption, Mr. Cohen sets the legal market in the actual and but-for scenario at the same value. Using this more realistic assumption, “losses” allegedly caused by the challenged regulations drop by another
902
898 Second Analysis Group Report, ¶ 46 (REX-014) (citing Allen, Elizabeth, “The Illicit Trade in Tobacco Products and How to Tackle It,” International Tax and Investment Center, (24 Sept. 2013) (AG-1), Cooper, Adrian and Daniel Witt, “The Linkage Between Tax Burden and Illicit Trade of Excisable Products,” World Customs Journal 6(2), (Sept. 2012) (AG-4), Farrell, Lisa and Tim Fry, “Is Illicit Tobacco Demand Sensitive to Relative Price?”, Economic Papers 32(1), (Mar. 2013) (AG-6)). 899
900 Second Witness Statement of Mr. Roman Militsyn (13 Apr. 2015), ¶ 10 (CWS-016). 901 Second Analysis Group Report, ¶ 46 (REX-014)
902 Second Analysis Group Report, ¶ 49 (REX-014).
- 247 - CONTAINS CONFIDENTIAL INFORMATION B. Claimants’ Assumption that Excise Taxes Will Not Exceed Inflation Is Contradicted by Economic Data
10.76 Uruguay previously pointed out several mistakes relating to Navigant’s assumptions about excise taxes. First, while the 2010 IMESI tax increase is included in the actual scenario, it is not taken into account in the but-for model.903 Second, both scenarios assume that taxes will only grow by the rate of inflation despite evidence that taxes have risen higher than inflation.
Third, Navigant made a calculation error in implementing its flawed time-weighted average approach for the 2009 IMESI in the but-for model. Navigant’s model still reflects these errors.904
10.77 Navigant stubbornly attempts to defend the use of different excise taxes in the actual and but-for scenarios. It continues to argue that the 2010 IMESI should be excluded from the but-for scenario because it was a response to Claimants’ decision to which
Navigant, without foundation, treats as a response to the challenged regulations.905 This is belied by complaints of another cigarette manufacturer that Claimants cut their prices below cost to unfairly capture consumers from their competitors, and drive them from the market, which
Uruguay’s Ministry of Economy and Finance subsequently found to be the case.906
10.78 Moreover, consistent with its practice in previous years, Uruguay has continued to raise taxes above inflation since the disputed regulations. In fact, the Uruguayan government raised the IMESI tax on 22 December 2014, several months before Navigant filed its second report.
903 In Navigant’s but-for scenario, it starts growing IMESI at the rate of inflation in 2010 but in the actual scenario it uses actual taxes until 2014 and then grows IMESI with inflation. See Second Navigant Report (CWS-017), Updated Appendices C and E. 904 Navigant concedes that it miscalculated the number of days that the higher excise tax was in force in 2009. This error resulted in a reduction of damages of approximately See Second Navigant Report, ¶¶ 117, 144 (CWS-017). 905 Ibid., ¶ 103. 906 See Counter-Memorial, ¶¶ 10.40-10.42. See also, supra, ¶¶ 10.51-10.54.
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More recently, the IMESI was again increased, on 24 June 2015. These tax increases demonstrate a continued trend of raising taxes greater than the rate of inflation.
10.79 Ironically, Navigant agrees with Mr. Cohen’s analysis that the IMESI grew at a higher rate than inflation in the historic period.907 Navigant nevertheless claims its assumption is conservative because Claimants’ prices would have risen at rates higher than the growth of taxes.908 But this defies a basic law of economics, as well as Claimants’ own evidence: namely, that higher prices will result in lower sales volume. Mr. Cohen concludes: “[i]f volume declines as a result of higher prices such that total revenue declines—then there is nothing ‘reasonable and conservative’ about Navigant’s assumption.”909
C. Navigant Continues To Inflate the 2009 But-for Price, and Thus Claimants’ Prices in Perpetuity
10.80 Another key driver in Navigant’s model is the 2009 but-for price, which establishes the base for growing prices into perpetuity. As a result, even a marginal overestimation of these prices leads to a substantial overestimation of damages.910
10.81 Navigant’s estimate of the 2009 but-for price is problematic on two counts. First,
Navigant used a simple average rather than a volume-weighted average across different pack sizes and pack types, which is inconsistent with Navigant’s approach to calculating a volume-
907 As Mr. Cohen states: “Navigant ignor[es] economic evidence that from the July 2007 tax reform to December 31, 2009, IMESI grew at an annual rate of 11.1 percent while inflation grew at an annual rate of only 7.7 percent.” First Analysis Group Report, ¶ 39 (REX-005). 908 Second Navigant Report, ¶ 100 (CWS-017). 909 Second Analysis Group Report, ¶ 51 (REX-014). 910 First Analysis Group Report, ¶ 54 (REX-005).
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weighted price in the actual world. 911 Second, Navigant chose a different source to calculate the but-for 2009 price. While Navigant used the Distributor Price List in the but-for world, it used monthly revenue and volume data for each variant in the actual world.912
10.82 In its second report, Navigant accepts the first criticism but not the second.913 This alone decreases alleged damages by 914
10.83 For the second criticism, Navigant contends that wholesale prices are more appropriate to use in the but-for world because Claimants’ sales volumes were distorted.915 However, Mr.
Cohen points out that, mathematically, any distortion in sales volume would cancel out any distortion in revenue, leaving prices unaffected by Navigant’s alleged volume distortion.916 In fact, Navigant’s use of actual wholesale prices from January to June 2009 shows that it considers prices to be unaffected by the challenges during this period.917
10.84 In addition, Mr. Cohen explains why Navigant’s continued use of the simple time- weighted average rather than volume-weighted average to calculate the average 2009 but-for price is flawed. Navigant takes the simple average of prices for January to June 2009 and
911 First Analysis Group Report, ¶ 55 (REX-005). 912 Ibid., ¶ 57. 913 Second Navigant Report, ¶¶ 94-95, 109 (CWS-017). 914 Ibid., ¶ 94. See also ibid. updated Appendix H.1. 915 Ibid., ¶ 96. 916 Second Analysis Group Report, ¶ 43. (REX-014). 917 Second Navigant Report, updated Appendix C, fn 12 (CWS-017). It further bears mention that Navigant claims that Mr. Cohen’s method yields results that are similar to the prices implied using the Distributor Price list for the historical period between 2005-2008 (Second Navigant Report, ¶ 97 (CWS-017)). Claimants use this factoid to incorrectly assert that “Mr. Cohen’s method would actually increase Claimant’s damages, had Navigant adopted it” (Reply, ¶ 386). There is no support for this conclusion. Claimants use a time period prior to the calculation of damages and attempt to draw a conclusion for future years based on just two data points. Put in context, this assertion is absurd.
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extrapolates this price for the entire year. The problem is that this gives equal weight to every period, even though after the introduction of the June 2009 tax.918 As a result, the model overstates prices in the but-for scenario, which in turn overstates damages. When the volume-weighted method is applied, damages are reduced by another
919
D. Navigant’s Model Continues To Misstate Marketing Expenses
10.85 The underestimation of costs in the but-for scenario also results in inflated damages. In his initial expert report, Mr. Cohen discovered an inconsistency in the inclusion of certain marketing expenses between Navigant’s actual and but-for models.920 In its second report,
Navigant admits that it erred by double counting some marketing expenses in the actual scenario and has corrected its flawed assumptions with the audited 2013 financial statements.921
10.86 Nevertheless, this does not correct all of Navigant’s errors. Navigant still misstates certain marketing expenses: Philip Morris’ higher projected marketing expenses are assigned to
Fiesta and Fiesta’s lower projected marketing expenses are allocated to Philip Morris for the years 2009-2011 in Navigant’s but-for scenario. Although this error was raised in Mr. Cohen’s initial report,922 Navigant has not fixed it. This has implications for the model. As Mr. Cohen explains: “Given that Navigant has removed the Fiesta cash flows from its updated damages model, Navigant has removed the higher projected expenses that should correctly be assigned to
918 Second Analysis Group Report, ¶¶ 40-41. 919 Ibid., ¶ 42. However, if revenue over volume data is used instead of wholesale prices, the reduction in damages would be even greater. 920 First Analysis Group Report, ¶¶ 62-66 (REX-005). 921 Second Navigant Report, ¶ 115 (CWS-017). 922 See Backup to Cohen Initial Report, Marketing Adjustment.xlsx (REX-005).
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Philip Morris, and should be offset against Philip Morris revenues in the damages model.”923
After correcting for this error, damages decrease by another 924
E. Navigant Continues To Overstate Damages by Failing To Offset Revenues from Benson & Hedges in the Actual Scenario
10.87 In his first expert report, Mr. Cohen pointed out that the value of Benson & Hedges should be deducted from the but-for value in calculating damages for three reasons.925 First,
Claimants admit that Benson & Hedges 926
Second, Navigant does not include Benson & Hedges in its but-for scenario,
927 Third, it is likely that Benson & Hedges consumed a portion of the sales of Marlboro Gold.928
10.88 Navigant largely repeats the same arguments against offsetting the value of Benson &
Hedges from its first report. Those arguments have already been addressed in Mr. Cohen’s first report.929 In addition, Navigant makes a new claim that an offset is unwarranted because Benson
& Hedges failed in capturing the entire segment of the market for Marlboro Gold.930 This argument is unavailing. Mr. Cohen explains that:
the level of sales is irrelevant to the question of whether or not Benson & Hedges should be included as an offset. If it exists in the actual scenario as a consequence
923 Second Analysis Group Report, ¶ 58 (REX-014). 924 Ibid., ¶ 58 and Figure 7. 925 First Analysis Group Report, ¶¶ 58-61 (REX-005). 926 Cibils First Statement, ¶ 24 (CWS-004). See also Second Witness Statement of Mr. Diego Cibils (17 Apr. 2015), ¶ 11 (CWS-018); Second Witness Statement of Mr. Roman Militsyn (13 Apr. 2015), ¶ 5 (CWS-016). 927 First Analysis Group Report, ¶ 59 (REX-005). 928 Ibid., ¶ 60. 929 Ibid., ¶¶ 58-61. 930 Second Navigant Report, ¶ 124 (CWS-017).
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of the SPR, then its value should be offset against the value of the but-for scenario brands, regardless of its ‘success’ relative to Marlboro Gold.931
10.89 Despite its protests, Navigant does attempt to calculate the present values of Benson &
Hedges’ cash flow and royalties.932 However, it calculates them erroneously.933 Given that the present value of cash flows is and the present value of royalties is
, the total present value of Benson & Hedges is Navigant also fails to include the historical value of Benson & Hedges’ cash flow and royalties (amounting to
). Therefore, the total size of the Benson & Hedges offset is
, based on Navigant’s own calculations, further reducing the damages allegedly suffered by Claimants as a result of the SPR.934
*
10.90 After removing 80% Requirement damages and correcting for just these errors and unsupported assumptions (including sensitivities), Claimants’ alleged damages topple by at least
60% to no more than 935 In light of this large variance and the flawed assumptions that it represents, Navigant’s entire valuation calculation is rendered suspect. In these circumstances, Claimants have failed to meet their burden to establish not only the
931 Second Analysis Group Report, ¶ 52 (REX-014). 932 Second Navigant Report, ¶ 211 (CWS-017). 933 Navigant incorrectly calculates the value of Benson & Hedges to be See Second Expert Report of Navigant, ¶ 211. This error is repeated in Claimant’s Reply brief at footnote 701. 934 Second Analysis Group Report, ¶ 53 (REX-014). Navigant’s argument that any revenues earned by Benson & Hedges would have to be offset by other unspecified brands is not supported. There is no basis for its claim to use Marlboro Blue and Fresh Mint as a “proxy” for the value of variants that would have been launched but for the SPR. No economic analysis has been conducted to estimate the performance of these brands nor has any work been done on possible cannibalism. And certainly two variants cannot serve as proxies for other brands without any analysis. 935 Ibid., ¶ 64 and Figure 7.
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existence and cause of the claimed damages, but also the quantum. In Uruguay’s submission, no damages (much less interest) can be awarded on this flimsy basis.
F. Claimants’ Interest Demands Are Inappropriate
10.91 Claimants seek pre-judgment interest on their alleged historical losses and post-judgment interest on their entire damages claim until the date of payment. Their demand for interest at a commercial borrowing rate is unjustified and should not exceed the risk-free rate. Nor would they be entitled to receive more than simple interest.
1. The Interest Rate Claimants Seek Is Excessive
10.92 In their Reply, Claimants again try to justify a LIBOR plus four percent rate as necessary to cover Claimants’ assumed “opportunity costs.”936 As stated in Uruguay’s Counter-Memorial, the goal under the Treaty is to achieve “effective and adequate compensation,” not provide a windfall on the basis of speculative gains.937 To accomplish this, the most appropriate measure is a risk-free rate of return, such as the rate for U.S. Treasury bonds. This rate represents a proxy return a claimant could have received on a less risky investment, thereby precluding uncertain and speculative returns.938 This is why a risk-free rate of return approach is “the one most rationally justified and tends to be preferred by arbitral tribunals.”939
936 Reply, ¶¶ 392, 395. See also Memorial, ¶ 301. Claimants also allege, without support beyond their own damages expert, that Uruguay’s requested rate would create incentives for delayed payment. Reply, ¶ 397. Yet, Claimants have offered no reason why Uruguay would not pay this claim. Furthermore, as far as the pre-judgment rate is concerned, there is no risk of default in payment. 937 Counter-Memorial, ¶¶ 10.83-10.86. 938 See ibid., ¶ 10.83. See generally F.M. Fisher & R.C. Romaine, Janis Joplin’s Yearbook and the Theory of Damages, 5 J. ACCOUNTING, AUDITING & FINANCE 3 (1990) (RL-264). 939 S. Ripinsky & K. Williams, DAMAGES IN INTERNATIONAL INVESTMENT LAW (2008), p. 373 (RL-246(bis)). See also Yukos v. Russia, ¶ 1685 (CLA-290); Gold Reserve Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/09/1, Award (22 Sept. 2014) (Dupuy, Williams, Bernardini) (hereinafter “Gold Reserve v. Venezuela”), ¶ - 254 - CONTAINS CONFIDENTIAL INFORMATION
10.93 A LIBOR plus four percent rate is, in essence, a borrowing rate at which Claimants might have been charged had they needed to borrow money between the alleged breach and the payment of the award. This rate, however, is subjective and unjustified. In fact, Claimants are unable to cite any cases that awarded a LIBOR plus four percent rate. Furthermore, “not all parties who suffer from delayed payment actually borrow,” 940 and there has been no suggestion that Claimants needed to borrow money as a result of the challenged regulations. For these reasons, tribunals have not adopted the use of borrowing rates.941
2. Compound Interest Is Not Appropriate
10.94 Claimants also demand that any interest awarded to them accrue on a compound basis because, according to them, “compound interest is the international standard in most time value applications.”942
10.95 Claimants mischaracterize both the state of the law and the authorities cited in Uruguay’s
Counter-Memorial. Even Claimants’ legal authority does not support its position on interest. As
853 (CLA-255); LG&E v. Argentina, Award, ¶ 102 (RL-174); CMS v. Argentina, ¶ 471 (CLA-093); Siemens v. Argentina, ¶ 396 (CLA-144); BG Group Plc. v. Republic of Argentina, UNCITRAL, Final Award (24 Dec. 2007) (Garro, van den Berg, Aguilar Alvarez), ¶ 455 (CLA-084); Feldman v. Mexico, ¶ 211 (RL-201); Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v. United Mexican States, ICSID Case No. ARB(AF)/04/05, Award (21 Nov. 2007) (Cremades, Rovine, Siqueiros), ¶ 300 (RL-178); J. Gotanda, Awarding Interest in International Arbitration, 90 AMERICAN JOURNAL OF INTERNATIONAL LAW 40 (1996), p. 59 (RL-265). 940 S. Ripinsky & K. Williams, DAMAGES IN INTERNATIONAL INVESTMENT LAW (2008), pp. 369-370 (RL-246(bis)) (citing Sylvania Technical Systems, Inc. v. Government of the Islamic Republic of Iran, Iran-U.S. Claims Tribunal Case No. 64, Award No. 180-64-1 (27 June 1985), p. 15 (RL-284)). 941 Gold Reserve v. Venezuela, ¶ 853 (CLA-255) (“The Tribunal considers that […] it need not compensate Claimant as a ‘borrower.’”); Siemens v. Argentina, ¶ 396 (CLA-144) (“The Tribunal considers that the rate of interest to be taken into account is not the rate associated with corporate borrowing […].”) (emphasis added). See also Sylvania Technical Systems, Inc. v. Government of the Islamic Republic of Iran, Iran-U.S. Claims Tribunal Case No. 64, Award No. 180-64-1 (27 June 1985), p. 15 (RL-284); LG&E v. Argentina, Award, ¶ 102 (RL-174) (“The Tribunal disallows the Claimants’ expert proposal to use Argentina’s borrowing rate as speculative and extemporaneous.”); Yukos v. Russia, ¶¶ 1680-1681 (CLA-290) (rejecting borrowing rate because “[t]here is no evidence that Claimants had to borrow money because they were not compensated at the time of the expropriation”). 942 Reply, ¶ 398.
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explained by the ILC, the rule is that “compound interest is not generally awarded,”943 which is a position that still governs today944 in the absence of a clear justification to the contrary.945
Tribunals have long upheld this principle and continue to do so.946
943 United Nations General Assembly (UNGA), Third report on State Responsibility by Mr. James Crawford, Special Rapporteur: Addendum, UN Doc. A/CN.4/507/Add.1 (15 June 2000), ¶ 211 (RL-231); International Law Commission, Draft articles on Responsibility of States for Internationally Wrongful Acts, with commentaries (2001), Commentary 9, Art. 38, p. 109 (RL-130) (An injured party does not have “any entitlement to compound interest, in the absence of special circumstances which justify some element of compounding as an aspect of full reparation.”) (emphasis added). 944 The ILC specifically refused to make compound interest the default rule in controversies for compensation. United Nations General Assembly (UNGA), Third report on State Responsibility by Mr. James Crawford, Special Rapporteur: Addendum, UN Doc. A/CN.4/507/Add.1 (15 June 2000), ¶¶ 207-208 (RL-231). 945 C. Brower & J. Sharpe, Awards of Compound Interest in International Arbitration: The Aminoil Non-Precedent, in GLOBAL REFLECTIONS ON INTERNATIONAL LAW, COMMERCE AND DISPUTE RESOLUTION: LIBER AMICORUM IN HONOUR OF ROBERT BRINE (G. Aksen, et al., eds. 2005) (hereinafter, “Brower & Sharpe”), p. 160 (RL-268). 946 Lahoud v. Democratic Republic of Congo, ICSID Case No. ARB/10/4, Award (7 Feb. 2014) (Park, Hafez, Ngwe), ¶¶ 633, 664(iv) (RL-309); Abengoa S.A. and Cofides S.A. v. United Mexican States, ICSID Case No. ARB(AF)/09/2, Award (18 Apr. 2013) (Mourre, Siqueiros Twomey, Fernández Armesto), ¶ 797 (RL-306); AHS Niger v. Republic of Niger, ICSID Case No. ARB/11/11, Award (15 July 2013) (Mantilla-Serrano, Hubert, Kenfack- Douajni) (excerpts), ¶¶ 157, 167(5) (RL-307); Mr. Franck Charles Arif v. Republic of Moldova, ICSID Case No. ARB/11/23, Award (8 Apr. 2013) (Cremades, Hanotiau, Knieper), ¶¶ 616-620 (CLA-229); RosInvestCo UK Ltd. v. Russian Federation, SCC Case No. V079/2005, Final Award (12 Sept. 2010) (Böckstiegel, Steyn, Berman), ¶ 689 (CLA-139); Saipem S.p.A. v. People’s Republic of Bangladesh, ICSID Case No. ARB/05/07, Award (30 June 2009) (Kaufmann-Kohler, Otton, Schreuer), ¶ 212 (RL-184); Duke Energy v. Ecuador, ¶ 491 (CLA-098); Desert Line Projects LLC v. Republic of Yemen, ICSID Case No. ARB/05/17, Award (6 Feb. 2008) (Tercier, Paulsson, El- Kosheri), ¶ 298 (RL-179); Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v. United Mexican States, ICSID Case No. ARB(AF)/04/05, Award (21 Nov. 2007) (Cremades, Rovine, Siqueiros), ¶ 300 (RL-178); CMS v. Argentina, ¶ 471 (CLA-093); Occidental Exploration & Prod. Co. v. Republic of Ecuador, UNCITRAL, LCIA Case No. UN3467, Final Award (1 July 2004) (Orrego Vicuña, Brower, Barrera Sweeney), ¶ 217 (CLA-071); CME Czech Republic B.V. v. Czech Republic, UNCITRAL, Final Award (14 Mar. 2003) (Kühn, Schwebel, Brownlie), ¶¶ 641, 647 (CLA-293); Autopista Concesionada de Venezuela C.A. (“Aucoven”) v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/00/5, Award (23 Sept. 2003) (Kaufmann-Kohler, Böckstiegel, Cremades), ¶¶ 387, 397 (RL-288); Nykomb Synergetics Technology Holding AB v. Republic of Latvia, SCC, Arbitral Award (16 Dec. 2003) (Haug, Schütze, Gernandt), p. 41 (RL-290); Feldman v. Mexico, ¶ 211 (RL- 201); Southern Pacific Properties (Middle East) Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/84/3, Award on the Merits (20 May 1992) (Jimenez de Arechaga, El Mahdi, Pietrowski), ¶ 257 (CLA-215). In contrast to this precedent, Claimants argue that simple interest is not appropriate on the basis of the decision made by the Santa Elena tribunal. Reply, ¶ 400 (citing Santa Elena v. Costa Rica (CLA-214)). However, this decision only renders it permissible to award compound interest, if the circumstances allow. Reply, ¶ 97 (determining that compound interest “is not excluded where it is warranted by the circumstances of the case”). This case has also been has been called into question. Brower & Sharpe, p. 177 (RL-268) (stating “[w]hatever might be said about the Santa Elena, Metalclad, and Wena decisions, they certainly did not offer ‘detailed consideration’ of the state of the law as regards interest, let alone justify their departure from a century of consistent arbitral jurisprudence.”).
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10.96 The international law rule providing for simple interest on compensation awards persists.
Claimants have failed to demonstrate why their circumstances should cause a departure from the general rule. Their request for compound interest must be rejected.
IV. Uruguay is Entitled to Recover Its Fees and Expenses
10.97 The circumstances surrounding these proceedings warrant the recovery of Uruguay’s arbitration costs. In the Chapters 3 and 4, Uruguay explains the important public health objectives that the SPR and 80% Requirement were designed to address. The public purposes of these regulations were undeniably understood by Claimants and the rest of the tobacco industry.
The need for them was brought on by Claimants’ own deceptive practices carried out over many decades. Uruguay took action, as any responsible sovereign State would, to protect the public against the effects of these practices. Claimants’ challenge is spurious.
10.98 Claimants’ true motivations are far from honorable. Claimants’ own internal strategy documents concerning this case reveal what the global community already knows: that Claimants brought this arbitration as a tactic to intimidate other countries (particularly, less developed countries where smoking is still on the rise and public funds are scarce) with the legal troubles and expenses that would befall them if they were to implement stronger tobacco control regulations, as Uruguay did. As Claimants said in their own words: they intended to make
Uruguay “an example for the world,” regardless of the cost,947 using this arbitration as
948 Claimants’ own internal documents confirm that their
947 Email from Chris Dilley, Philip Morris International, to Malcolm Healey, Philip Morris International (25 Aug. 2009), Bates No. PMIUY-00029487 (R-354). 948
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10.99 Uruguay should not be forced to pay for Claimants’ abusive manipulation of the BIT arbitration process to freeze or roll back tobacco control efforts around the world.
10.100 Uruguay, therefore, requests that the Tribunal order Claimants to reimburse it for all legal fees and disbursements associated with defending against this arbitration, pursuant to Article
28(1) of the ICSID Arbitration Rules and Article 61(2) of the ICSID Convention.
949 See also “Tobacco”, Last Week Tonight with John Oliver (HBO) (15 Feb. 2015), available at http://www.hbo.com/last-week-tonight-with-john-oliver/episodes/02/26-february-15-2015/video/ep-26- clip-big-tobaccos-still-at-it.html (R-431);
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CHAPTER 11.
CLAIMANTS WERE NOT DENIED JUSTICE BY THE URUGUAYAN COURTS
11.1 Claimants’ allegation that the rejection by the Tribunal Contencioso Administrativo
(“TCA”) of their challenges to the SPR and the 80% Requirement constituted a “denial of justice” is entirely without merit. Having failed to demonstrate unreasonableness in Uruguay’s regulatory actions, they contend that Uruguay’s courts committed an injustice by refusing to annul those actions. They argue in vain. The TCA gave Claimants a fair hearing in both cases and published reasoned decisions in accordance with Uruguayan law, in which Claimants’ arguments and evidence were addressed. International law demands no more.
11.2 Claimants’ objections concerning the TCA’s handling of their challenge to the SPR boils down to the argument that because the TCA’s decision in their case contains three references to another company’s trademarks, and because the TCA declined to correct this oversight on the grounds that it was “not material,” they were denied justice under international law. The claim fails on its face. Not only did the TCA not deny Claimants justice when it found that the obvious clerical error in its earlier decision was “not material,” it was entirely right in so finding, as
Uruguay will show below.
11.3 Claimants’ complaints about the TCA’s handling of their challenge to the 80%
Requirement is equally baseless. The alleged contradiction they point to between the TCA’s decision on their administrative action and the earlier decision of the Supreme Court of Justice
(“SCJ”) is the result of the normal functioning of the Uruguayan system. Under its Constitution,
Uruguay has two separate, co-equal judicial branches, composed of regular courts headed by the
SCJ and administrative tribunals headed by the TCA. Neither branch is in principle subordinate
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to the other, or bound by the decisions of the other. Hence, the TCA is constitutionally empowered to interpret a law differently than the SCJ, as long as the SCJ has upheld the constitutionality of the law. This has been true since long before Claimants invested in the country. It is exactly what happened in this case. They therefore cannot be heard to complain that the Uruguayan judicial system—which is recognized as one of the best in the world—functioned as designed.
11.4 In their Reply, Claimants barely confront Uruguay’s arguments. They simply rehash their case, which, as shown in the Counter-Memorial, does not survive an examination of the two
TCA decisions they attempt to impugn. Ignoring Uruguay’s arguments does not make them disappear. This Chapter further explains why Claimants’ attack on what is internationally recognized as one of the best judicial systems in the world is entirely unjustified.
11.5 Section I highlights the legal principles applicable to a denial of justice claim, none of which Claimants dispute: (1) a stringent standard of proof applies to denial of justice claims; (2) international courts and tribunals must take care to not confound a claim for a denial of justice with an appeal from the decisions of a national judiciary; and, as pointed out in a recent award that Claimants’ experts find particularly pertinent, (3) these principles coalesce into a
“presumption of legality” of the decisions of domestic courts.950
950 Flughafen Zürich A.G. and Gestión e Ingenería IDC S.A. v. The Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/19, Award (18 Nov. 2014) (Fernández-Armesto, Alvarez, Vinuesa) (hereinafter “Flughafen v. Venezuela”), ¶ 637 (CLA-248) (“[A] series of clarifications must be made so that the concept of denial of justice does not deteriorate into an appeal on the merits used inappropriately by the appellants to have judgments with which they simply disagree reviewed. To do so, we must commence with the principle that all actions taken by a State are presumed legal and that the party alleging a denial of justice must prove otherwise.”) (emphasis added).
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11.6 Section II demonstrates that Claimants were not in any way denied justice by the TCA’s rejection of their challenge to the SPR. The TCA considered, and refuted, all of their arguments that the SPR was an unlawful administrative act. At the time, the TCA was reviewing multiple challenges to the SPR by various tobacco companies. It rejected all of these challenges on the same grounds: that the Ministry of Public Health’s adoption of the SPR was a lawful exercise of its authority under Article 9 of Law 18,256. The references to BAT’s trademarks in its decision in Claimants’ case does not indicate that it failed to consider Claimants’ arguments, or erroneously ruled on BAT’s application instead of Claimants’, nor does it constitute a “grave” procedural error having an impact on the outcome of the proceedings. To the contrary, the
TCA’s decision shows clearly that Claimants’ arguments and evidence were considered, and
Claimants’ case was decided, with the same result as the cases brought by BAT and Monte Paz.
There was no denial of justice.
11.7 Section II also shows that the TCA likewise did not deny Claimants justice when it rejected their application for clarification and expansion of its decision rejecting their challenge to the SPR. The ruling on that subsequent application makes clear that it was duly considered and found wanting because the “errors” Claimants’ purport to have found in the initial decision were “not material, nor do they justify reexamining the basis of the judgment” on the lawfulness of the SPR.
11.8 Finally, Section II shows that Claimants failed in their duty to exhaust local remedies before bringing their claim under the BIT, including by failing to make recourse to Uruguay’s
SCJ. They had an available and potentially effective remedy: to challenge the constitutionality of the law pursuant to which the SPR was adopted (Article 8 of Law 18,256). Had they pursued such a constitutional challenge and been successful, the TCA’s decision upholding the SPR
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would have been effectively nullified. Yet, Claimants failed to pursue, let alone exhaust, this remedy. On this ground as well, their denial of justice claim fails.
11.9 Section III demonstrates that Claimants’ denial of justice claim concerning their unsuccessful challenge to the 80% Requirement is equally without merit. This claim is based on what Claimants call a “contradiction” between the ruling of the SCJ on the constitutionality of the law pursuant to which the 80% Requirement was adopted (Article 9 of Law 18,256) and the decision of the TCA upholding the lawfulness of the Requirement as a matter of administrative law. But there was no “contradiction,” only the normal and proper functioning of the Uruguayan justice system, in which two parallel and co-equal judicial structures—one headed by the SCJ and the other by the TCA—operate within separate spheres of competence.
11.10 As Uruguay explained in the Counter-Memorial—and as Claimants did not contest in the
Reply—it is a fundamental aspect of the Uruguayan constitutional order that the TCA, acting within its sphere of competence, is not bound to follow the rulings or interpretations of the SCJ, except in one circumstance: when the SCJ declares a law unconstitutional. When that happens, the TCA may not deem lawful any administrative actions taken pursuant to that law. In contrast, when the SCJ upholds a law’s constitutionality, on whatever basis, the TCA is free to interpret the law for itself, including by giving it an interpretation different from the one adopted by the
SCJ. That is what the TCA did in upholding the lawfulness of the 80% Requirement in the face of Claimants’ challenge. It interpreted Article 8 of Law 18,256 more broadly than the SCJ did. In doing so, it properly exercised its constitutional authority and discretion under Uruguay’s long- established judicial framework. That is not a denial of justice.
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11.11 Claimants’ argument that the SCJ’s decision interpreting Article 8 constituted res judicata precluding the TCA from giving the law a different interpretation is wrong. In the first place, it fails to account for the fundamental division of competencies between the SCJ and the
TCA that has characterized Uruguay’s constitutional order since long before Claimants invested in the country. The SCJ’s interpretation that Article 8, though constitutional, did not delegate to the Ministry of Public Health the power to require warnings covering an area larger than 50% of cigarette packages was not binding on the TCA and did not form an “absolutely inseparable logical precedent” of the Court’s ruling on the law’s constitutionality. In any event, Claimants fail to satisfy the “triple identity” test for application of res judicata: identity of cause of action, parties and relief sought. This in itself defeats their res judicata argument.
11.12 Finally, Section IV addresses the issue of remedies for a denial of justice. Although the subject is entirely hypothetical because no denial of justice occurred, Uruguay nevertheless shows that Claimants’ claim for damages is unfounded, speculative and unproven. Their damages claim requires the Tribunal to presume that the TCA would have ruled in their favor, and struck down the SPR and 80% Requirement “but-for” the errors that were allegedly committed. There are two flaws in this argument (apart from the fact that no errors were committed). First, it calls for the Tribunal to speculate on how the Uruguayan courts would have ruled on matters of Uruguayan law. Second, it ignores the evidence that the TCA’s rulings were not only correct under Uruguayan law but also unaffected by any of the errors that were allegedly committed. Hence, Claimants suffered no damages as a result of the actions they characterize as a denial of justice.
11.13 Uruguay’s submissions in this Chapter are supplemented by the reports of three legal experts who rebut each of the points raised by the experts cited in Claimants’ Reply. Uruguay’s
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experts are: (1) Professor Nico Schrijver of Leiden University, Faculty of Law; (2) Professor
Emeritus Lucius Caflisch of the Graduate Institute of International and Development Studies; and (3) Professor Santiago Pereira Campos, an expert in Uruguayan procedural law from the
University of Montevideo, School of Law.
11.14 Professor Schrijver’s report explains why Uruguay is correct on the standards applicable to denial of justice claims under international law, and why there was no denial of justice in this case. Professor Caflisch shows that Claimants were required to exhaust all available and effective remedies before claiming a denial of justice in regard to the TCA’s rejection of their challenge to the SPR, and concludes that their claim must fail because they did not pursue an available and effective recourse to Uruguay’s SCJ. Finally, Professor Pereira explains the issues of Uruguayan administrative and procedural law relevant to the claims at hand, and concludes that the challenged TCA decisions were fully reasoned and justified under Uruguayan law, that no violation of procedural due process occurred, and that the TCA’s decisions were not affected by the “errors” it allegedly committed.
I. The Threshold for Proving a Denial of Justice Claim under International Law Is a High One
11.15 Claimants agree that only “fundamentally unfair proceedings will result in a denial of justice.”951 But they remain conspicuously silent on the principles that, as explained in
951 This high threshold is further confirmed in the recent Flughafen v. Venezuela award which, as Prof. Schrijver points out, “both Judge Schwebel and Paulsson find particularly pertinent.” Second Legal Opinion of Prof. Nico Schrijver (10 Sept. 2015) (hereinafter “Schrijver Second Opinion”), ¶ 5 (REX-010). The tribunal in that case pointed out that denial of justice in international law only occurs in the event of a decision which has been rendered after a “profoundly flawed” process (procedimiento profundamente viciado), or which is otherwise “manifestly inadmissible and illegal” (manifiestamente inadmisible y antijurídico). Ibid. (citing Flughafen v. Venezuela, ¶ 636 (CLA-248)). In the same context, Claimants refer to Prof. Schrijver’s list of “potential indicators that a specific decision was arbitrary, malicious, or otherwise demonstrating a lack of due process” to argue that “any one of these circumstances could give rise to a denial of justice.” Reply, ¶ 297 (citing Legal Opinion of Prof. Nico Schrijver (22
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Uruguay’s Counter-Memorial, follow from such a high threshold. First, denial of justice claims are of a “demanding nature,”952 and are subject to a more stringent standard of proof than that applicable to alleged breaches of other BIT standards.953 Second, international courts and tribunals are precluded from “taking sides” on complex questions of domestic law over which the disputing parties advance different but plausible interpretations.954
11.16 In his Second Legal Opinion, Professor Schrijver confirms and supplements the aforementioned principles by reference to recent authority. In accordance with Flughafen v.
Venezuela, only “grave” procedural errors—that is, errors having an impact on the very outcome of the domestic court proceedings—may result in a denial of justice.955 Furthermore, as the tribunal in the recent Mamidoil v. Albania award pointed out, international courts and tribunals
Sept. 2014) (hereinafter “Schrijver First Opinion”), ¶ 26(b)-(d) (REX-008)). To the extent that Claimants suggest that these circumstances could automatically give rise to a denial of justice, they mischaracterize the law and Prof. Schrijver’s position. In a passage that is omitted from Claimants’ (selective) citation to his first Legal Opinion, Prof. Schrijver goes on to state: That said, these [circumstances] are simply indicators. Indeed, the presence of any of these elements may not automatically attest to the impropriety of a particular decision. The fact, for example, that a court’s reasoning is succinctly expressed and not based on extensive analysis may not necessarily be an indication that the domestic decision was improper and discreditable. Nor will just any misapplication of the domestic procedural law be considered evidence of lack of due process, particularly in view of the great discretion that domestic courts have in relation to fact finding or evaluation of evidence. In fact, even an ultra petita decision may on occasion be judged as a proper outcome. (emphasis added).
Schrijver First Opinion, ¶ 26 (REX-008). See also Schrijver Second Opinion, ¶ 7 (REX-010) (“[a]ny alleged irregularities must be appreciated in their proper context”). 952 Jan Oostergetel and Theodora Laurentius v. Slovak Republic, UNCITRAL, Final Award (23 Apr. 2012) (Kaufmann-Kohler, Wladimiroff, Trapl) (hereinafter “Oostergetel v. Slovakia”), ¶ 291 (RL-194). 953 Counter-Memorial, ¶¶ 11.15-11.17 and accompanying footnotes; Schrijver First Opinion, ¶¶ 14, 31-32 (REX- 008). 954 Counter-Memorial, ¶ 11.23 (citing Arif v. Moldova), ¶¶ 474-477, 481-482 (CLA-229)). 955 Schrijver Second Opinion, ¶¶ 6-7 (REX-010) (citing Flughafen v. Venezuela, ¶ 693 (CLA-248)). See also Schrijver First Opinion, ¶ 29 (REX-008) (“[N]ot just any shortcomings in the organization and conduct of domestic judicial proceedings will amount to a denial of justice, but only the particularly serious ones.”).
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are not “super-appellate” courts, nor do they have competence to correct the application of domestic law by domestic courts or the reasoning of domestic decisions.956
11.17 These well-established principles coalesce, as the Flughafen v. Venezuela tribunal pointed out,957 into a “presumption of legality” of the decisions of domestic courts, which the claimant bears the burden of overcoming.958 In the present case, such a presumption relates to a justice system whose independence, freedom from improper influence and commitment to the rule of law is widely recognized as among the best not only in South America but also in the world.959 Challenging the legality of decisions of the highest courts of such a justice system is therefore a formidable task and requires much more than the voicing of disagreements on questions of law and the reasoning of the TCA.
A. The TCA Did Not Deny Claimants Justice When It Rejected Their Challenge to the SPR
11.18 Claimants argue that the TCA denied them justice because it failed to address any of their three claims against the SPR: (1) that it violated the reserva de la ley principle (which states that only the legislature has the power to severely impair constitutional rights); (2) that it exceeded and was inconsistent with Law 18,256; and (3) that the Ministry of Public Health was not competent to impose it because Law 18,256 did not expressly grant such authority to the
956 Mamidoil Jetoil Greek Petroleum Products Societe S.A. v. Republic of Albania, ICSID Case No. ARB/11/24, Award (30 Mar. 2015) (Knieper, Banifatemi, Hammond) (hereinafter “Mamidoil v. Albania”), ¶ 764 (RL-314). 957 Flughafen v. Venezuela, ¶ 637 (CLA-248). 958 See also Schrijver Second Opinion, ¶ 13 (REX-010). 959 Claimant has not dared to challenge the Uruguayan judiciary’s impeccable performance in rule of law and judicial performance-related indices maintained by various prestigious non-governmental organizations and the U.S. State Department. See Counter-Memorial, ¶¶ 11.44-11.50; Expert Opinion of Prof. Santiago Pereira Campos (19 Sept. 2015) (hereinafter “Pereira Opinion”), ¶¶ 32-39 (REX-015).
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Ministry.960 According to Claimants, the TCA decided the first claim “based on evidence and arguments made by a different party, BAT, in an entirely different proceeding,” and “entirely failed” to address the second and third claims.961
11.19 These allegations are meritless.
B. The TCA Considered and Dismissed Claimants’ Reserva De La Ley Claim
11.20 Claimants maintain that the TCA rejected the reserva de la ley claim “as presented and litigated by BAT, not Abal.”962 According to Claimants, this is because (a) the TCA decision
“refers to Abal only in the title of the decision—throughout the rest of the decision it refers to
BAT,” (b) the decision “never discusses Abal’s trademarks; it only lists BAT’s trademarks,” and
(c) the decision “never discusses Abal’s expert evidence.”963
11.21 These arguments do not survive a reading of the TCA’s decision.
11.22 First, it is not true that the TCA decision “refers to Abal only in the title of the decision.”964 As Uruguay showed in its Counter-Memorial, the TCA clearly stated in its decision that the claim it was deciding was filed by Abal’s legal representative.965 Moreover, in the section of its decision called Resultando (“Findings of Fact”), the TCA described and addressed
Abal’s arguments,966 not BAT’s, which, as Claimants admit, were different from Abal’s.967 If the
960 Reply, ¶¶ 142, 311. 961 Ibid., ¶¶ 311, 144. 962 Ibid., ¶ 145. 963 Ibid., ¶ 145. 964 Ibid., ¶ 145. 965 Counter-Memorial, ¶ 11.79 (citing TCA Decision 509, Case No. 363/2009 (14 June 2011) (hereinafter “TCA Decision 509”), p. 2 (R-242)). 966 Counter-Memorial, ¶¶ 11.63, 11.66 (citing TCA Decision 509, pp. 2-3 (R-242)).
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TCA was indeed deciding BAT’s case, and not Abal’s, it would have addressed BAT’s arguments in its decision.968 But it did no such thing.
11.23 Second, the TCA’s references to BAT’s trademarks should be understood in the context of the TCA’s review of challenges to general administrative acts. (Claimants challenged the legality of Ordinance 514 as a matter of general administrative law; they did not challenge a specific resolution applying it to their factual circumstances.969) When the TCA addresses challenges filed by different parties against the same general administrative act, it tends to address them integrally.970 This is precisely what happened with the challenges filed by Abal,
BAT and Monte Paz against Ordinance 514, Ordinance 466 and Decree 287: they were all decided on uniform grounds.971 The legal foundation of this practice, according to Professor
Pereira, is “the very nature of administrative proceedings for the annulment of a general
967 Reply, ¶¶ 143, 148. For example, BAT did not argue that Article 44 of the Uruguayan Constitution did not give the MPH the power to enact the SPR, as Abal did. See Counter-Memorial, ¶ 11.68. Claimants’ incidental remark that the TCA did not actually address this argument in its judgment is belied by the judgment itself. At p. 13, the TCA stated that the SPR is “consistent with the spirit of the Constituent Assembly,” which it then expressly defined by reference to Article 44 of the Uruguayan Constitution. See TCA Decision 509, p. 13 (R-242). Curiously, Professor Abal argues that the Resultando section was not written by the judges of the TCA, and this presumably confirms that the TCA did not decide Abal’s case. Expert Opinion of Professor Alejandro Abal Oliú (8 Apr. 2015) (hereinafter “Abal Opinion”), ¶ 23 (CWS-14). Professor Abal furnished no evidence for his argument. In Professor Pereira’s personal experience, “judges in Uruguay have various styles of work and generally are personally involved in all aspects of the drafting of the judgment.” Professor Pereira adds that Professor Abal’s argument is also at odds with the principle of the inherent unity of judicial decisions. In other words, “by subscribing to [a judgment] [the deciding TCA Judges] become responsible for it in its entirety and not only in part.” Pereira Opinion, ¶ 132 (REX- 015) (emphasis in the original). 968 Claimants call this inescapable corollary of their own logic “sophistry.” Reply, ¶ 149. This is indeed an accurate description of Claimants’ arguments against TCA Decision 509. 969 Pereira Opinion, ¶¶ 76-78, 136 (REX-015). 970 Ibid., ¶¶ 154-156, 162 (“[i]n my opinion [] when a general administrative act is challenged, given that only matters of pure law are at issue, it is proper for the TCA to determine the validity of the legal act by assessing the administrative act integrally, with independence from arguments advanced by the parties.”) (REX-015). More generally, the TCA addresses “legally identical” cases by deferring to the grounds set forth in its previous judgments. See, e.g., TCA Decision 304 (12 Apr. 2011), p. 4 (C-358) (“the Court notes that there have been recent opinions in cases which are legally identical to this one, which must be deferred to [].”). 971 Pereira Opinion, ¶¶ 157-160, 178-179 (REX-015). For example, in its decision on BAT’s challenge, the TCA expressly stated that it was relying on the reasoning behind its decision on Abal’s “analogous” case. See TCA Decision 569, Case No. 298/2009 (26 July 2011), p. 7 (C-113).
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administrative decision, the purpose of which is to analyze whether or not the administrative decision is in accordance with the law.”972
11.24 The TCA’s references to BAT’s trademarks in ruling on Abal’s case, therefore, did not affect the outcome of Claimants’ challenge to the SPR. The TCA engaged in judicial review of the SPR and upheld its administrative legality by reference to relevant domestic legislation of general application, and Uruguay’s constitutional norms and international obligations.973 If the
SPR was lawful in respect of BAT’s trademarks, then it was ipso facto lawful in respect of
Claimants’, as well as those of any other producer or vender of tobacco products. Indeed, as Abal stated in its application to the TCA, tobacco companies in Uruguay were in the same factual situation:
Until the Ordinance entered into force on March 31, 2009, Abal—like Monte Paz and BAT—sold cigarettes in Uruguay under several different brands and each brand in different product varieties.974
11.25 In this context, the fact that the TCA judgment made three references to BAT’s trademarks may show, at most, that the TCA, already in receipt of BAT’s challenge,975 made an immaterial technical error in the transcription of its decision. It certainly cannot be taken to mean that the TCA “failed to consider Abal’s evidence and arguments.”976
972 Pereira Opinion, ¶ 156 (REX-015). 973 Counter-Memorial, ¶ 11.83. 974 Abal’s Request for Annulment of Ordinance 514 before the TCA (9 June 2009), Chapter II.A (C-041) (emphasis added). 975 BAT filed its application on 15 May 2009. See BAT’s Complaint in Challenge to Ordinance 514 (15 May 2009) (R-210). Abal filed its application on 6 June 2009. See Abal’s Request for Annulment of Ordinance 514 before the TCA (9 June 2009) (C-041). 976 Reply, ¶ 312.
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11.26 Third, Claimants’ argument that the TCA did not decide Abal’s claim because it did not make express mention of Abal’s “evidence”—that is, the expert opinions accompanying its substantive pleadings in the case977—is also wrong. As Uruguay explained in its Counter-
Memorial, these opinions formed the bases of Abal’s legal arguments and were therefore addressed by the TCA when it rejected those arguments.978 Professor Pereira explains that “it is very rare in Uruguay that the judgments of the TCA and of other courts refer to the opinions of experts in law, precisely because these opinions are part of the parties’ assertions and interpretation of the law.”979 Indeed, “there are no express references to party-submitted legal opinions in any of the judgments issued by the TCA regarding challenges brought by [the] tobacco companies BAT, Abal Hnos, and Monte Paz, against general administrative regulations on tobacco control.”980
11.27 In any event, the TCA was not under any procedural obligation to address or mention these expert reports as “evidence.” Professor Pereira further explains that in order to be considered “evidence,” and thereby subject to the rules of evidence under Uruguayan law, an expert opinion must, first, relate to questions of fact (and not questions of law) and, second, it must be prepared and submitted pursuant to an order of the respective court (and not unilaterally by one of the parties to the action).981 Expert opinions that do not meet these requirements are
977 Reply, ¶ 147. 978 Counter-Memorial, ¶¶ 11.73-11.74. 979 Pereira Opinion, ¶ 211 (REX-015). 980 Ibid., ¶ 212. 981 Ibid., ¶¶ 187, 191-193.
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simply complements to the legal arguments advanced by the party that produced them. They do not constitute evidence with probative value under Uruguayan law.982
11.28 Claimants’ expert opinions met none of the requirements to be considered evidence.
First, they referred exclusively to legal matters (the administrative legality of Ordinance 514 in light of applicable legal principles).983 Second, they were commissioned and submitted by
Claimants Abal.984 Therefore, they are in the nature of “assertions or complements to the legal reasoning of the party that produced them” and cannot be considered as evidence.985
11.29 In sum, Claimants’ contention that the TCA did not reject their reserva de la ley claim, but rather that “as presented and litigated by BAT,”986 is false. In fact, the TCA decision addressed Claimants’ arguments, and not those of BAT. It did not fail to consider their
“evidence.” And its references to BAT’s trademarks were immaterial to its ruling on the lawfulness of the SPR in Claimants’ challenge to it.
C. The TCA Considered and Dismissed Claimants’ Other Claims in Regard to the SPR
11.30 Claimants also fail to show that they were denied justice because the TCA neglected or refused to adjudicate their claims “that (i) the SPR exceeded and was inconsistent with Law
18,256; and (ii) the MPH was not competent to impose the SPR.”987
982 Ibid., ¶¶ 183, 194-195, 206. 983 Ibid., ¶¶ 189, 203. 984 Ibid., ¶¶ 190, 207-208. 985 Ibid., ¶¶ 198, 201-202, 204-205. 986 Reply, ¶ 145. 987 Ibid., ¶¶ 151-154. In a footnote of their Reply, Claimants add that the TCA also did not mention in its decision Abal’s argument that “it benefitted from a legal presumption that the SPR was invalid because the MPH and
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11.31 In its request to the TCA for clarification and expansion of its judgment, Claimants did not argue that the TCA had failed to adjudicate either of these claims. And for good reason: it did. As explained in Uruguay’s Counter-Memorial, the TCA described and addressed both arguments in question, holding that (1) the SPR “takes into account the ratio legis of Law
18,256” and is “designed to implement” it, and therefore is consistent with the Law;988 and (2) the MPH, in imposing the SPR, did “nothing more than interpret [] the spirit and purpose of the legal framework governed by this broad law enacted in protection of human health,” and therefore did not exceed its competence.989
11.32 These findings leave no doubt that the TCA decided Claimants’ claims. As Professor
Pereira points out, the TCA’s judgment “considered that the Ordinance has not gone beyond the limits of the law and that the MPH had the authority to issue it,” and that it did so in the parts of its decision called Conclusions of Law VI and VII.990
11.33 Claimants take issue with the level of detail in the TCA’s analysis of their arguments, but that is not sufficient grounds for establishing a denial of justice,991 especially when, under
Executive Branch had failed to respond to its procedural challenge against Ordinance 514.” Ibid., ¶ 143 n.211 (citing Abal Opinion, ¶¶ 21, 27 (CWS-014)). As Professor Pereira explains, however, the TCA made no mention of this argument because the alleged presumption is clearly inapplicable to the case at hand. The presumption does not operate vis-à-vis questions of law, such as the legality of Ordinance 514, which fall within the unfettered purview of the TCA to decide by virtue of the principle jura novit curia. Pereira Opinion, ¶¶ 216-219 (REX-015). 988 Counter-Memorial, ¶ 11.64 (citing TCA Decision 509, Case No. 363/2009 (14 June 2011), pp. 7, 10 (R-242)). 989 Counter-Memorial, ¶ 11.66 (citing TCA Decision 509, Case No. 363/2009 (14 June 2011), p. 12 (R-242)). Professor Pereira also points out that, in its final conclusions, the TCA made express mention to Law No. 9,202, which defines the jurisdiction of the MPH. Pereira Opinion, ¶ 171 (REX-015) (citing TCA Decision 509, Case No. 363/2009 (14 June 2011), p. 14 (R-242)). 990 Pereira Opinion, ¶¶ 167-172 (REX-015). 991 According to Prof. Schrijver: “The fact that a court’s reasoning has been succinctly expressed and not based on extensive analysis has not been taken as an indication that the domestic decision was improper and discreditable.” Schrijver Second Opinion, ¶ 10 (REX-010) (citing Sergei Paushok, et al. v. The Government of Mongolia, UNCITRAL, Award on Jurisdiction and Liability (28 Apr. 2011) (Lalonde, Grigera Naón, Stern), ¶ 629 (RL-75) (dismissing a denial of justice claim based on the fact that the judgment in question upheld a lower court ruling
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Uruguayan law, the TCA is not required to address each and every legal argument raised by the parties.992
11.34 Lastly, Claimants argue that the TCA’s rulings on these two claims “were part of [its] analysis of the reserva de la ley claim” and therefore do not amount to rulings on the claims themselves.993 This is not only incorrect, but it also conflicts with Claimants’ argument that the
TCA failed to address their reserva de la ley claim.
11.35 Claimants invoke the following passage from the TCA judgment, which they consider a
“roadmap showing that [the TCA] was discussing the reserva de la ley argument”994:
We must therefore examine whether such limitation on the right stipulated by Trademark Law [], arises from a regulation with sufficient rank to so limit it (art. 10 of the Constitution).995
11.36 However, in the very next passage—not quoted by Claimants—the TCA observed that
Ordinance 514 could be classified as an “implementing regulation,” which operates under “rules of higher rank, in this case a law [Law 18,256],” with the consequence that “any violation of said law or the principles informing it invalidates the regulation.”996 The TCA recalled that such
“without any detailed analysis”)); Liman Caspian v. Kazakhstan, ¶ 383 (RL-188) (holding that the fact that reasons were “succinctly expressed” in the judgment in question did not entail that “the underlying arguments were not considered”)). 992 In the exercise of its jurisdiction over challenges to general administrative acts, the TCA is bound by the parties’ requests for relief. It is not bound, however, by the legal grounds advanced by the parties in connection therewith. The principle jura novit curia, and its mandate to ensure that the Administration acted in furtherance of the general interest and within the bounds of the law, entitle the TCA to not conform its legal reasoning to the legal arguments raised by the parties (as long as this does not exceed the parties’ requests for relief). The TCA may even annul an administrative act on grounds that have not been argued by the parties. See Pereira Opinion, ¶¶ 174-176 (REX-015). See also ibid., ¶¶ 138-153. 993 Reply, ¶¶ 152, 154. 994 Reply, ¶ 154 n.236. 995 TCA Decision 509, Case No. 363/2009 (14 June 2011), p. 8 (R-242). 996 Ibid., p. 8.
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regulations “may only be applied to the matters reserved to the law where enabled by law, assuming a supplementary regulatory role with respect to said law.”997 It went on to affirm the nature of Ordinance 514 as an “implementing regulation,” “seek[ing] to provide general regulations for Law 18,256 and Decree 284/008, supplementing them and enabling and ensuring their implementation.”998 It then held:
This is not a case of invading areas of legislation reserved exclusively to the Law; on the contrary, the purpose is to implement the legal provisions through regulations that enable such ratio legis.999
11.37 This directly disproves Claimants’ argument and shows that the TCA did not decide on the consistency of the SPR with Law 18,256 or the competence of the Ministry to adopt it as a matter of reserva de la ley. Instead, it squarely addressed Claimants’ claims on these subjects.
D. The TCA Did Not Rely on Evidence That Claimants Had No Opportunity To Address
11.38 Claimants also argue that the TCA “violated Abal’s due process rights by denying Abal the opportunity to refute evidence that had been submitted in BAT’s case but that the TCA relied upon in deciding Abal’s case.”1000 The “evidence” in question is a statement made by Dr.
Winston Abascal, former Director of Uruguay’s National Tobacco Control Program, concerning the systematic noncompliance of tobacco companies and retailers with Uruguay’s 2005 ban on descriptors.1001 This statement was made publicly, and therefore was widely known to tobacco
997 Ibid., p. 9. 998 Ibid., p. 10. 999 Ibid., p. 10 (emphasis added). 1000 Reply, ¶ 146. 1001 See TCA Decision 509, Case No. 363/2009 (14 June 2011), p. 13 (R-242).
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companies in Uruguay, including Claimants. As Professor Pereira states, “maintaining that there was no opportunity to contradict a widely known fact is an unacceptable fallacy.”1002
11.39 Moreover, there is nothing in the TCA’s decision to suggest that it “relied upon” Dr.
Abascal’s statement.1003 The decision mentions it only once and then only in connection with its finding that the SPR adhered to the FCTC.1004 Notably, the TCA did not cite or otherwise rely on
Dr. Abascal’s statement in finding that the SPR was consistent with Law 18,256 or that the
Ministry of Public Health was competent to adopt it.
11.40 In short, the TCA’s mere reference to Dr. Abascal’s statement was not a “grave” procedural error—indeed, it was not an error at all—that affected the outcome of the case “to the point that the entire procedure becomes objectionable as required by the notion of procedural denial of justice.”1005
E. The TCA’s Rejection of Claimants’ Motion for Clarification and Expansion of Its Decision Was Neither Unreasonable Nor a Denial of Justice
11.41 Claimants take issue with the dismissal of Abal’s motion to clarify and expand the TCA’s decision, arguing that the TCA “intentionally and knowingly” refused to correct its mistakes.1006
However, the fact that the TCA did not agree with Abal’s motion does not amount to a denial of justice.
1002 Pereira Opinion, ¶ 108 (REX-015). 1003 In their Memorial, Claimants argued that the statement “formed an important part of the TCA’s reasons for dismissing Abal’s claims.” Memorial, ¶ 162. Claimants have not repeated that assertion in their Reply, nor have they addressed Uruguay’s showing that, in fact, the statement played no part in the TCA’s reasoning. 1004 TCA Decision 509, Case No. 363/2009 (14 June 2011), pp. 11, 13 (R-242). 1005 Oostergetel v. Slovakia, ¶ 287 (RL-194); Flughafen v. Venezuela, ¶ 693 (CLA-248). 1006 Reply, ¶¶ 156-157.
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11.42 The TCA’s review of Claimants’ post-decision petition makes abundantly clear that it considered the “alleged contradictions” in its initial decision and found that they were “not material, nor do they justify reexamining the basis of the judgment.”1007 Given all the points explained above, the TCA can hardly be faulted for rejecting the petition. Mere references to trademarks that had no effect on the TCA’s reasoning or judgment in Claimants’ case do not require a reexamination of the underlying judgment, and certainly do not turn that judgment into a denial of justice.
11.43 Claimants also argue that the TCA “did not provide any explanation regarding why or how the mistakes did not merit full reconsideration.”1008 This is also incorrect. The TCA explicitly stated that the alleged errors were “not material,” and failed to justify “reexamining the basis of the judgment,” because “such basis is consistent with the ratio legis of applicable law.”1009 This is an explanation, and it is more than sufficient.1010
11.44 Claimants’ denial of justice claim boils down to nothing more than this: the TCA should have corrected its decision by removing the references to BAT’s trademarks, or given them a better explanation of why it felt such removal was unnecessary, even though neither act would have any effect on the decision itself. There is no possible justification for characterizing this as a denial of justice.
1007 TCA Decision 801, Case No. 363/2009 (29 Sept. 2011), p. 1 (R-249). 1008 Reply, ¶ 156. 1009 TCA Decision 801, Case No. 363/2009 (29 Sept. 2011), p. 1 (R-249). 1010 Moreover, as Professor Rotondo explains, TCA decisions on motions to clarify and expand a judgment are typically succinct, especially when such motions are dismissed. Legal Opinion of Prof. Felipe Rotondo (22 Sept. 2014) (hereinafter “Rotondo Opinion”), ¶ 18 (REX-007).
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F. Claimants Failed To Exhaust All Available and Effective Local Remedies Against the TCA’s Decision
11.45 According to Claimants, Abal “had no further avenue of appeal and no other remedy it could have pursued to have its challenge to the SPR decided on the merits.”1011 Even if this were correct, which it is not,1012 it does not mean that Claimants exhausted all available and effective local remedies, in other words, all remedies that “could have had a significant effect” on rectifying the wrong about which they complained.1013 Uruguay explained in its Counter-
Memorial that Claimants could have challenged the constitutionality of Article 8 of Law 18,256, the provision under which the SPR was adopted, before Uruguay’s SCJ.1014 Indeed, the TCA itself alluded to that possibility when observing in its decision that “if [Abal] considers [Article 8 of Law 18,256] to be unconstitutional, this Court lacks jurisdiction to rule on the matter [].”1015
11.46 In their Reply, Claimants raise two arguments questioning the effectiveness of this constitutional remedy. First, Claimants argue that there were no grounds for them to challenge
1011 Reply, ¶ 157. 1012 As Professor Rotondo stated in his Opinion, Abal could have sought the revision of TCA Decision 509, given ample TCA jurisprudence upholding the availability of the remedy in order to challenge the presence of “a mistake of such relevance that compromised the action by itself.” Rotondo Opinion, ¶¶ 19, 40 (REX-007). Professor Abal did not address this option in his own Opinion, which casts serious doubts on his conclusion that Abal had exhausted all recourse before the TCA. According to Professor Pereira, the remedy of revision would have been a more appropriate remedy to address Claimants’ theory of serious defects in the TCA judgment than the remedy of clarification and expansion that Abal ultimately filed. Professor Pereira further explains that the TCA has gradually relaxed the requirements for the admission of a motion for revision, and has in fact admitted several cases of serious errors in the challenged judgment. Pereira Opinion, ¶¶ 248-261 (REX-015) (observing that “the TCA has allowed motions for revision even when the alleged ‘new evidence’ consisted of the impugned judgment and the criteria used by the Court to reach its decision, provided that the party cites serious errors of the Court and does not base his petition on mere criticism of the impugned decision.”). Claimants’ theory would have easily met such requirements and therefore, by failing to pursue the revision of the TCA judgment, Abal cannot be said to have exhausted all available and effective remedies within the TCA framework. Ibid., ¶ 262. 1013 Chevron Corporation (USA) and Texaco Petroleum Company (USA) v. Republic of Ecuador, UNCITRAL, Partial Award on the Merits (30 Mar. 2010) (Böckstiegel, Brower, van den Berg) (hereinafter “Chevron v. Ecuador”), ¶ 329 (RL-187). 1014 Counter-Memorial, ¶¶ 11.89-11.94. See also Rotondo Opinion, ¶ 40 (REX-007). 1015 TCA Decision 509, p. 12 (R-242).
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the constitutionality of Article 8.1016 That is wrong, as their constitutional challenge to the 80%
Requirement demonstrates. In that case, they argued to the SCJ that Article 9 of Law 18,256 amounted to conferral of unlimited power on the MPH to limit their alleged right to display their trademarks, contrary to the Constitution.1017 They could have made a similar SCJ challenge to the SPR, even following the TCA’s decision to uphold it, on the ground that the TCA’s interpretation of Article 8’s constitutionally limited their alleged right to market brand variants.1018
11.47 While the success of such a potential challenge cannot now be known, there is no question either about its availability or the fact that Claimants did not pursue it. It is not, as
Professor Paulsson appears to suggest,1019 Uruguay’s burden to show whether “reasonable prospects of success could have been attributed to it.”1020 It is Claimants’ burden to show that they pursued and exhausted all reasonable remedial actions. The evidence shows that they did not.
1016 Reply, ¶ 318. 1017 See Complaint of Abal Hermanos S.A., SCJ Case No. 1-65/2009, 11 Sept. 2009, pp. 2-3 (R-216) (“The question before the Court does not refer to whether the rights of ABAL may be limited by law for reasons of general interest; but whether the law may attribute that authority, “to delegate” such power to the Executive Branch. In fact, the Executive Branch, not finding any limits to the power conferred by the Law, promulgated Decree 287/009, establishing that warning labels would occupy almost the entire packaging—the lower 80% of both principal sides must be used for placing warnings imposed by the State.”). 1018 It may be recalled that the TCA found that the SPR was “designed to implement the purpose of Article 8,” and that “the scope of the ban established in Law 18,256 [] is so broad that [] the contested regulatory provision does nothing more than interpret, as an implementing regulation, the spirit and purpose of the legal framework governed by this broad law.” Immediately after this latter finding, the TCA stated that if, despite the above, “the claimant considers the law to be unconstitutional, [it] lacks jurisdiction to rule on the matter.” TCA Decision 509, pp. 10, 12 (R-242). 1019 Second Expert Report of Jan Paulsson (8 Apr. 2015) (hereinafter “Paulsson Second Report”), ¶ 43 (CWS-025) (“Respondent does not indicate on what basis Article 8 of Law 18,256 could be considered unconstitutional.”). 1020 See Schrijver Second Opinion, ¶ 45 (REX-010).
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11.48 Second, Claimants argue that they were not required under international law to challenge
“an entirely different measure, on entirely different legal grounds, before a court that is manifestly not a court of ‘appeal’ from the TCA and not authorized to review a TCA decision.”1021 This is also wrong. As long as a remedy is available and capable of affording effective relief, a claimant is obliged to exhaust it. There is no requirement under international law that it be squarely addressed by the same court or tribunal that issued the challenged decision, or a court with appellate jurisdiction over it.1022 Professor Paulsson himself admits that
a separate or collateral challenge, if demonstrably capable of eliminating or correcting the impugned court decision, may be considered part of the relevant remedies to be exhausted.1023
11.49 In this, Professor Paulsson is correct. The crucial question is whether the constitutional remedy could have been “capable of eliminating or correcting TCA Decision 509.” If the answer is yes, then it had to be exhausted before Claimants could have properly presented their denial of justice claim to this Tribunal.
11.50 In the event that the SCJ declared Article 8 of Law 18,256 unconstitutional, “all provisions affected thereby,” including the SPR, would have been rendered “inapplicable.”1024 In
1021 Reply, ¶ 319. 1022 Both Professors Schrijver and Caflisch point out that international law affords a State the opportunity to redress the wrong complained of through its legal system as a whole. Schrijver Second Opinion, ¶¶ 25-27, 29-30 (REX- 010); Caflisch Second Opinion, ¶¶ 8, 10 (REX-009). Depending on the circumstances of each case, this means that “the pursuit of remedies might not necessarily be exempted from the exhaustion requirement ‘due simply to their indirect nature’; for, what matters is whether the remedies could have had a ‘significant effect’ on rectifying the wrong complained of.” Schrijver Second Opinion, ¶ 29 (REX-010) (citing Chevron v. Ecuador, ¶ 329 (RL-187)) (emphasis added). Professor Paulsson’s prior views are consistent with this statement. In his capacity as sole arbitrator in Pantechniki v. Albania, Professor Paulsson did not exclude that the rule of exhaustion may require recourse to “indirect applications to parallel jurisdictions,” which, of course, must be determined “on a case-by-case basis.” Pantechniki S.A. Contractors & Engineers (Greece) v. Republic of Albania, ICSID Case No. ARB/07/21, Award (30 July 2009) (Paulsson, sole arbitrator), ¶ 96 (CLA-048) (emphasis added). 1023 Paulsson Second Report, ¶ 43 (CWS-025).
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other words, the SPR would have been invalidated, thereby rendering the TCA decision upholding its validity nugatory.1025 This is uncontroversial under Uruguayan law: the TCA has long accepted that a declaration of unconstitutionality shall cause “the lapse of the challenged act,” as well as of any confirmation of the challenged administrative act by the TCA.1026 Both
Professors Caflisch and Schrijver agree that this would sufficiently demonstrate that the constitutional appeal could have been an effective remedy1027 or, to use Professor Paulsson’s words, a remedy that is “demonstrably capable of eliminating or correcting the impugned court decision.”1028
11.51 The failure to exhaust local remedies—in particular, the failure to challenge the constitutionality of Article 8 before the SCJ in the same way Claimants had previously challenged Article 9—constitutes a separate and independent ground for rejecting Claimants’ denial of justice claim.
1024 Constitution of the Oriental Republic of Uruguay, Art. 258 (RL-1(ter)). Professor Abal opines that the Supreme Court’s decision “would not have changed the improper judgment of the TCA.” Abal Opinion, ¶ 66 (CWS-014). But his opinion is unsupported by any reference to authority and, moreover, does not address the import of Article 258 of the Uruguayan Constitution. 1025 Pereira Opinion, ¶¶ 232-233 (REX-015); Caflisch Second Opinion, ¶ 15 (REX-009). It follows that the constitutional appeal is not merely a local procedure that was “tangential” to Abal’s claims, as Judge Schwebel suggests. Expert Opinion of Judge Stephen M. Schwebel, ¶ 16 (CWS-015). Rather, as Professor Caflisch points out: “In the present context of the existence of administrative regulations based on a provision of a law that is susceptible of being invalidated as unconstitutional, the invalidation of the underlying law is not just an additional line of argument; it is central to the Claimants’ grievances.” Caflisch Second Opinion, ¶ 13 (REX-009) (emphasis added). 1026 See TCA Decision 138, Case No. 93/08 (1 Mar. 2011), p. 9 (R-237); TCA Decision 304 (12 Apr. 2011), p. 9 (C- 358). 1027 Caflisch Second Opinion, ¶ 15 (REX-009); Schrijver Second Opinion, ¶ 44 (REX-010). 1028 Paulsson Second Opinion, ¶ 43 (CWS-025).
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II. The TCA Did Not Deny Claimants Justice When It Rejected Their Challenge to the 80% Requirement
11.52 Claimants argue that the TCA decision rejecting Abal’s challenge to the 80%
Requirement constituted a denial of justice because it was based on an interpretation of the authorizing law—Article 9 of Law 18,256—that, in Claimants’ view, “openly” contradicted the
SCJ’s prior interpretation of the same law.
11.53 What is true is that the SCJ and the TCA interpreted the law differently. What is not true is that this constitutes a denial of justice.
A. The TCA Was Not Bound To Adhere to the Reasoning or Interpretation of the SCJ in the Latter’s Ruling on the Constitutionality of Law 18,256
11.54 The Uruguayan legal system has always contemplated, and countenanced, different—and even sometimes contradictory—rulings by the SCJ, on the one hand, and by the TCA, on the other. This is inherent in the very nature of the Uruguayan constitutional order. Under the
Constitution of 1952, Uruguay has, in effect, two separate, independent and co-equal judicial branches of government, one headed by the SCJ and the other headed by the TCA. Neither is subordinate to the other.1029 Both have the power to interpret laws. The SCJ reviews laws to determine their constitutionality.1030 The TCA reviews laws to determine the authority they lawfully convey to governmental agencies.1031 The only time the TCA is required to follow the
1029 See Rotondo Opinion, ¶¶ 7, 20-23, 29 (REX-007). 1030 Article 309 of the Constitution of Uruguay provides: “The Contentious-Administrative Tribunal shall hear pleas for the nullification of definitive administrative acts performed by the Administration in the exercise of its functions which are contrary to a rule of law or which are a distortion of authority.” Constitution of the Oriental Republic of Uruguay, Art. 309 (RL-1(ter)). 1031 Article 256 of the Constitution states: “Laws may be declared unconstitutional by reason of form or content, in accordance with the provisions of the following articles.” Under Article 257: “The Supreme Court of Justice has original and exclusive jurisdiction in the hearing and decision of such matters; and must render its decision in accordance with the requirement for final decisions.” Ibid., Arts. 256-257.
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SCJ is when the latter declares a law unconstitutional.1032 The TCA is then precluded from finding otherwise, “regardless of whether or not [it] shares the reasons of the Court’s judgment.”1033 Short of that, the TCA is free to adopt its own interpretation of a law, even if it differs from the interpretation given by the SCJ.
11.55 This is the nature of the Uruguayan constitutional system. It may differ from other national systems but it is not inherently unjust. It applies to all litigants equally and is a longstanding feature of the legal order that predates Claimants’ entry into the country, and is well known to Uruguayan lawyers and foreign investors.1034 Claimants cannot reasonably argue that
Uruguay has denied them justice by virtue of the normal functioning of its established constitutional order.
11.56 In fact, disagreement between the SCJ and the TCA is not uncommon in the Uruguayan legal system. Professor Pereira refers to cases arising out of administrative decisions of tax
1032 Article 258 of the Constitution provides: The declaration of the unconstitutionality of a law and the inapplicability of the provisions affected thereby, may be requested by any person who considers that his direct, personal, and legitimate interest is injured: (1) By means of lawsuit, which must be filed before the Supreme Court of Justice; (2) By plea of exception, which may be made in any judicial proceeding.
A judge or court which hears any judicial proceeding, or the Contentious-Administrative Tribunal, as the case may be, may also request the declaration of unconstitutionality of a law and its inapplicability, before rendering a decision. In this case and in that provided in numeral 2 above, the proceedings shall be suspended and the case referred to the Supreme Court of Justice.
Ibid., Art. 258 (emphasis added). 1033 Rotondo Opinion, ¶ 29 (REX-007). See also Pereira Opinion, ¶¶ 286-288 (REX-015). 1034 As pointed out by the tribunal in the Cotesworth & Powell case, “[n]o demand can be founded, as a rule, upon mere objectionable forms of procedure or the mode of administering justice in the courts of a country because strangers are presumed to consider these before entering into transactions therein.” Cotesworth & Powell (Great Britain v. Colombia), Award (Aug. 1875), reprinted in 2 MOORE INTERNATIONAL ARBITRATION 2050 (1898), p. 2083 (RL-137) (emphasis added).
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authorities petitioning the judiciary to order the closure of business establishments.1035 In one such case, an Uruguayan company asked the SCJ to declare unconstitutional a law that enabled the tax authorities to request from the judiciary the closure of its establishment on grounds that the law did not allow for a hearing prior to the issuance of the relevant administrative decision.
The SCJ upheld the constitutionality of the law. It concluded that, although the law did not provide for a hearing prior to the issuance of the administrative decision, the judicial proceeding following thereafter afforded the company due process.1036
11.57 The company then turned to the TCA to seek annulment of the administrative decision on closure of its establishment. The TCA, not considering itself bound by the reasons given by the
SCJ in its ruling upholding the constitutionality of the underlying law, annulled the administrative decision, finding that its issuance without a prior hearing did in fact violate the company’s constitutionally-protected due process rights.1037
11.58 Professor Pereira explains:
[O]n the one hand, the SCJ held that the law was constitutional and that there was no violation of due process, a fact that should have enabled the Judicial Branch to apply the penalty. However, while analyzing the legality of the administrative act, the TCA, applying the same rules that had previously been deemed constitutional by the SCJ, considered that the administrative decision to request the closure, without a prior opportunity of previous defense, was illegitimate and violated due process, and thereby had to be annulled.1038
1035 Pereira Opinion, ¶¶ 293-296 (REX-015). 1036 Uruguayan Supreme Court Decision No. 47/2007 (2 May 2007) (R-380). 1037 TCA Decision 516, Case No. 737/06 (15 Sept. 2009) (R-395). 1038 Pereira Opinion, ¶ 296 (REX-015).
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11.59 Such disagreements between national courts are not peculiar to the Uruguayan judicial system. (And even if they were, as Professor Paulsson has stated in his treatise on denial of justice in international law, “the vagaries of legal culture that enrich the world are to be respected.”1039) Professor Schrijver observes:
Different or even contradictory decisions are a normal fact of life in any legal system where the competence of judicial organs differs on the basis of functional specialization. Divergent outcomes are simply the consequence of the fact that different courts engage in different types of judicial review, in which context legislative acts are tested against different standards.1040
11.60 Claimants’ particular denial of justice claim is based on the SCJ’s ruling upholding the constitutionality of Article 8 of Law 18,256, concerning the size of health warning labels that the
MPH was authorized to require on cigarette packs. But the key point is that the SCJ found the law constitutional. That left the TCA free to adopt its own interpretation of the law, and the authority the law conferred on the MPH, even if its interpretation differed from that of the SCJ.
The TCA was not bound to agree with the SCJ’s interpretation that the law authorized the
Ministry to require warnings covering up to 50% of the pack. Rather, it was constitutionally empowered to reach a different conclusion; namely, that the law authorized the MPH to require warnings covering up to 80% of the pack.
11.61 Yes, the TCA adopted a different interpretation of the law than the SCJ. But, no, that was not a denial of justice. The TCA acted entirely within its own authority under Uruguay’s
Constitution. It ruled only after giving Claimants a full and fair opportunity to plead their case
1039 J. Paulsson, DENIAL OF JUSTICE IN INTERNATIONAL LAW (2005), p. 205 (R-239). 1040 Schrijver First Opinion, ¶ 52 (REX-008). See also Schrijver Second Opinion, ¶ 22 (REX-010). In Mamidoil v. Albania, the tribunal took note of the fact that the impugned judgment was “embedded in a legal system that is characterized by a division between public and private law as well as civil and administrative procedures” before concluding that it was not “clearly improper, discreditable or in shocking disregard of Albanian law.” Mamidoil v. Albania, ¶ 769 (RL-314).
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against the 80% Requirement. Claimants do not contend otherwise. The TCA issued a well- reasoned opinion that responded to Claimants’ arguments. Here again, they do not contend otherwise. There is therefore no basis on which to claim that Uruguay denied them justice.
11.62 In fact, the TCA and, more importantly, the SCJ itself expressly acknowledged in their decisions that the TCA had exclusive and unencumbered jurisdiction to assess the legality of the
80% Requirement for itself. Both courts stressed this in full awareness of the possibility that the
TCA’s interpretation of the law might be different than that of the SCJ’s. According to the SCJ:
The circumstance that the Executive Power has promulgated a decree establishing that the health warnings should occupy the lower 80% of both principal faces [Decree No 287/009] and, as a result, that it has interpreted the challenged legal norms in a manner different from that put forth, involves a question that cannot be reviewed by this body by virtue of the regime established in Section XV, Chapter IX of the Constitution.1041
11.63 The TCA, for its part, stressed that
it is not understood that the decision [of the SCJ] has the reach claimed by the plaintiff. Being an exclusive capacity of this administrative litigation jurisdiction the analysis of the legality of the contested decree, only this organ can analyze it, and according to what was said the contested decree does no other thing than reaffirming the legal will, enshrined in Law Number 18,256 and in its regulatory decree Number 284/2008, contemplating the spirit of the constitutional author to regulate aspects relating to health and public hygiene.1042
11.64 As the State Attorney for Administrative Litigation pointed out, in connection with the
SCJ’s decision, that “although the matter in dispute may be open to debate,” “it is in this case for annulment [i.e., the case before the TCA], as correctly affirmed by [the SCJ], that the legitimacy
1041 Supreme Court Decision No. 1713, “Abal Hermanos S.A. v. Legislative Power et al. – Unconstitutionality Action, Articles 9 and 24 of Law 18,256,” Docket File No. 1-65/2009 (10 Nov. 2010), p. 4 (C-051) (emphasis added). 1042 TCA Decision No. 512 on Abal’s Request for Annulment of Decree 287/2009 (28 Aug. 2012), p. 5 (C-116) (emphasis added).
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of the administrative actions must be assessed.”1043 These positions, according to Professor
Pereira, are “consistent with the Uruguayan jurisdictional system allocating the control of constitutionality of the laws and of the legality of administrative acts to two different, but co- equal, institutions, with original and exclusive competence.”1044
11.65 Claimants argue that these aspects of the Uruguayan legal system generate international responsibility and that Uruguay cannot avoid it by invoking its domestic legal order as a defense.1045 The argument is misguided. The relationship between the parallel systems of administrative and ordinary justice is a critical fact in determining whether justice was denied. It is in this sense that it is being invoked by Uruguay. All the more so given that (1) the judicial structure described above has been in place since long before Claimants invested in Uruguay; and (2) Claimants have acknowledged that relationship as evidenced, inter alia, by Abal’s procedural stance.1046 It would stretch the concept of denial of justice far beyond its limits to declare the Uruguayan constitutional order itself unjust, especially where, as here, it has been applied to Claimants impartially, non-discriminatorily and in a manner within its accepted limits.
11.66 Claimants maintain that Uruguay’s interpretation of the relevant constitutional norms is belied by the TCA’s ruling in the Castromán case.1047 As explained in Uruguay’s Counter-
Memorial, however, that case is inapposite because it relates to an entirely different question:
1043 Opinion of the State Attorney for Administrative Litigation, TCA Case No. 132/10 (27 Oct. 2011), p. 1 (R-250) (emphasis added). 1044 Pereira Opinion, ¶ 354 (REX-015). 1045 Reply, ¶ 323. 1046 Claimants admitted in their Memorial that “under the Uruguayan judicial system, Abal was required to litigate [its claims] in separate courts.” Memorial, ¶ 168. 1047 Reply, ¶ 325. Claimants mistakenly attribute the judgment to the SCJ.
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whether the TCA could confirm the legality of an administrative act even though the SCJ had previously declared unconstitutional the law upon which the act in question was based.1048
11.67 The case thus adds nothing to the present analysis. The TCA is indeed bound by the
SCJ’s determination that a given law is unconstitutional. This case at issue, by contrast, involves the opposite scenario: here, the law in question was ruled constitutional by the SCJ. The TCA is therefore unbound by the latter’s interpretation of the law.
11.68 Claimants’ expert, Professor Abal, states that the Castromán case did not revolve around the SCJ’s declaration of unconstitutionality,1049 but he is plainly wrong. According to the
Castromán decision itself: “[the] ‘crux’ of the principal question that the Court must resolve in this case”1050 was whether:
the challenged administrative act [should] be confirmed when a sentence of the Supreme Court declares unconstitutionality of the law on which the act is based and such sentence is recognized by the [TCA] before ruling on the merits of the principal question discussed in the proceedings[.]1051
11.69 The TCA defined the “situation of contradictory sentences” that would be “against logic and common sense” in terms of “one, the sentence declaring unconstitutionality of the law in the specific case and the other, the sentence of the [TCA], confirming the act.”1052 The judgment
1048 Counter-Memorial, ¶ 11.119. 1049 Abal Opinion, ¶ 83 (CWS-014). 1050 TCA Decision No. 138, Case No. 93/08 (1 Mar. 2011), p. 4 (R-237). 1051 Ibid. (underlined emphasis in the original). Later in its judgment, the TCA reiterates the crucial question as follows: In other terms, can an administrative act be confirmed (Article 309 of the Constitution) when the law on which the act is based had been declared to be inapplicable to the specific case because the Supreme Court had declared it to be unconstitutional?
Ibid. (emphasis added). 1052 Ibid. (emphasis added).
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therefore does not stand for the proposition that Professor Abal advocates, or otherwise limit the
TCA’s competence to interpret a law differently from the SCJ when the latter upholds its constitutionality.1053
B. Res Judicata Does Not Apply
11.70 Claimants’ last argument is that the TCA was bound to follow the SCJ’s interpretation of
Law 18,256 under the principle of res judicata.1054 That principle is inapplicable to the case at hand, however. Professor Pereira explains that under Uruguayan procedural law, res judicata applies only upon satisfaction of a “triple identity” test, which proscribes a further proceeding between (1) the same parties, (2) seeking the same relief, and (3) arising from the same cause of action.1055 The proceedings before the TCA and the SCJ do not meet that test: they are not between the same parties (the action of unconstitutionality of Article 9 of Law 18,256 was primarily addressed to the Legislative Power, whereas the action in the TCA for annulment of the 80% Requirement was addressed to the Executive Branch); they each sought different relief
(a declaration of unconstitutionality of a law versus annulment of an implementing regulation); and there were different causes of action (the compatibility of Law 18,256 with constitutional
1053 The same is the case with the other TCA judgment invoked by Professor Abal. See TCA Decision 304 (12 Apr. 2011), p. 4 (C-358) (“Should the challenged administrative act be upheld when a judgment from the Supreme Court declares the unconstitutionality of a law on which the act was based and that judgment is known to the Administrative Court prior to deciding the merits of the primary issue brought in the matter? This is the ‘quid’ of the primary issue that the Court must decide in this case.”), p. 5 (“In other words, can an administrative act be upheld (art. 309 of the Constitution) when the law on which the act is based has been declared inapplicable in the case at hand because the Supreme Court declared it unconstitutional?”) (emphasis added). See further Pereira Opinion, ¶¶ 299-305 (REX-015). 1054 Reply, ¶ 164. 1055 Pereira Opinion, ¶¶ 309-311 (REX-015).
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provisions versus the compatibility of the 80% Requirement with the provisions of Law
18,256).1056
11.71 Moreover, under Uruguayan law, res judicata only exceptionally extends beyond the holding of a judgment itself. Only rarely does it extend to the reasons that form an “absolutely inseparable logical precedent of the operative part.”1057 According to Professor Pereira, the SCJ’s finding that Law 18,256 did not delegate to the MPH the power to require warnings covering an area larger than 50% of the package does not form an “absolutely inseparable logical precedent” of the SCJ’s ruling that Law 18,256 is constitutional.1058 This is further reason why it need not have been accepted or followed by the TCA.
11.72 Indeed, as Professor Pereira further points out,1059 even if Professor Abal is correct that res judicata under Uruguayan law extends to the SCJ’s reasoning, as well as its holding (quod non), then the other reasons cited in the SCJ judgment would also have the force of res judicata, including the SCJ’s finding that the MPH “is competent in establishing all the measures it may deem necessary for ensuring the health of the population.”1060 Under Professor Abal’s theory, that ground, too, would be binding on the TCA, and would justify its finding that, as a measure deemed necessary by the Ministry to ensure public health, the 80% Requirement was lawful.
1056 Ibid., ¶¶ 316-321. 1057 Ibid., ¶¶ 330-332, 337-341. 1058 Ibid., ¶ 345. See also Rotondo Opinion, ¶ 53(b) (REX-007). 1059 Pereira Opinion, ¶¶ 346-349 (REX-015). 1060 Supreme Court Decision No. 1713, “Abal Hermanos S.A. v. Legislative Power et al. – Unconstitutionality Action, Articles 9 and 24 of Law 18,256,” Docket File No. 1-65/2009 (10 Nov. 2010), p. 3 (C-051) (emphasis added).
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11.73 In sum, for the reasons articulated above and in Uruguay’s Counter-Memorial, the TCA was not bound by the SCJ’s interpretation of Law 18,256.1061 In these circumstances, there was nothing improper about the TCA’s rejection of Claimants’ challenge to the administrative validity of the 80% Requirement.1062 As stressed by the tribunal in Iberdrola v. Guatemala,
“mere disagreement with the reasoning of the court decision, with the quality of the judgment, with the persuasiveness of its content or the surprise that the result may cause to the claimant does not constitute a denial of justice.”1063 Claimants’ allegations of treaty breach amount, in essence, to nothing more than a request that the Tribunal “sit as a court of appeal” on disputed matters of Uruguayan law, or on whether the Uruguayan constitutional order is inherently unjust, which is plainly not the role of an international tribunal in a BIT case.1064
*
11.74 For all the foregoing reasons, Claimants were not subjected to proceedings so fundamentally unfair as to warrant a finding of denial of justice. To the contrary, Claimants
1061 Moreover, the TCA was not required to follow the interpretation of the relevant legal provisions advocated by the legislature or the State Attorney General before the SCJ. Nor did the legislature’s interpretation of Law 18,256 amount to an authentic interpretation of the law, which “can only be made through the approval of a law, according to the procedures provided in the Constitution of the Republic.” Pereira Opinion, ¶ 356 (REX-015). 1062 Schrijver Second Opinion, ¶ 21 (REX-010). 1063 Iberdrola Energía S.A. v. Republic of Guatemala, ICSID Case No. ARB/09/5, Award (17 Aug. 2012) (Zuleta, Oreamuno, Derains) (hereinafter “Iberdrola v. Guatemala”), ¶ 504 (RL-199). 1064 See Arif v. Moldova, ¶ 481 (CLA-229) (“[T]he Tribunal is confronted with a complex question of Moldovan procedural law which has been answered differently and contradictorily by the judiciary and by learned experts on Moldovan law. Both interpretations are based on arguments and on the words and objectives of the law. The Tribunal is not in a position and has no competence to take sides in this controversy. If it tried, it would indeed sit as a court of appeal over decisions of the Moldovan judiciary.”) (emphasis added); Iberdrola v. Guatemala, ¶ 503 (RL- 199) (rejecting a claim of denial of justice because the claimant in fact was asking from the tribunal “to review the decision of the Constitutional Court and replace it with a new one, based on different criteria of interpretation, or to declare that there is denial of justice because the Court should have applied different interpretive criteria and reasoning,” a task which was “obviously [] not the function of this Tribunal.”); Mamidoil v. Albania, ¶ 764 (RL- 314). Even tribunals that have come to a different conclusion as regards the contents of domestic law from domestic courts have held that this was no indication that the domestic court decision constituted evidence of arbitrariness or bad faith. See Schrijver First Opinion, ¶ 27 n.68 (REX-008), and jurisprudence cited therein.
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accessed the Uruguayan legal system, one of the most highly respected in the world, without any undue impediment, presented arguments that were duly considered, and received fully reasoned decisions that conformed to Uruguayan law. They were therefore not denied justice by the
Uruguayan courts.
III. Claimants Are Not Entitled to Damages
11.75 Claimants are not entitled to damages or any other relief in regard to their denial of justice claim for the simple reason that they have failed to prove that they suffered a denial a justice. Uruguay’s courts acted justly in all respects and plainly did not violate any applicable international standards. Accordingly, there is no need for the Tribunal to consider the rest of this
Chapter; the question of damages does not arise. Nevertheless, in an overabundance of caution,
Uruguay submits this subsection as further grounds for not awarding Claimants the relief they seek.
11.76 Uruguay explained in its Counter-Memorial1065 that Claimants’ claim for “all past and future damages caused by the regulations that have remained in place as a result of the judgments”1066 is entirely speculative, insofar as it is premised on the assumption that “but-for” the alleged denial of justice, they would have prevailed in the Uruguayan courts on the merits of their challenges to the SPR and 80% Requirement.1067 There is no basis for such an assumption.
There is no reason to conclude that they would have succeeded in having either of the two
1065 Counter-Memorial, ¶¶ 11.127-11.142. 1066 Memorial, ¶ 296; Reply, ¶ 335. 1067 Schrijver Second Opinion, ¶ 59 (REX-010) (“[I]f Claimants want to recover the entire financial impact of the regulatory measures, they need to establish that they would have succeeded in their challenges before the domestic courts. This requires speculating how Uruguayan courts would have decided on such challenges ‘but-for’ the alleged denials of justice.”).
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measures annulled absent the circumstances about which they complain. Therefore, the damages sought are both unproven and un-provable.1068
11.77 In their Reply, Claimants reiterate their reliance on the Amco II, Roberts and Chattin cases for the propositions that: (1) the Tribunal is not required “to speculate regarding how a domestic adjudicative body would have resolved the claim had it conducted a fair proceeding”; and, instead, (2) it “need only ask what injury [Claimants] suffered as a result of the wrongful conduct.”1069 The former statement is correct but the latter is not. It does not follow from the first and merely begs the question. Yes, the Tribunal should not speculate on how the TCA would have ruled in a “fair proceeding” (which Claimants had). But, no, it should not presume, without proof, that an economic injury occurred. Claimants’ second statement assumes not only a denial of justice but that there was inevitably an economic injury, compensable in damages, resulting
1068 As affirmed by the learned tribunal in Rompetrol v. Romania: “To the extent [] that a claimant chooses to put its claim [] in terms of monetary damages, then it must, as a matter of basic principle, be for the claimant to prove [] its quantification in monetary terms and the necessary causal link between the loss or damage and the treaty breach.” Rompetrol v. Romania, ¶ 190 (RL-204) (emphasis added). Claimants appear to be also making, in passing, an alternative claim of reparation, consisting of the annulment of the SPR and 80% Requirement “on the assumption that the Uruguayan courts would have annulled them,” combined with an award of damages “for the harm caused by the regulations before the date of the award.” Reply, ¶ 335. This claim suffers from the same speculation and it too must be rejected as unproven. Professor Paulsson puts forward a third variation. According to him, the appropriate remedy in this case would be the annulment of the impugned TCA decisions, which should also entail the removal of their harmful effects, i.e., the application of the regulations to Abal. Paulsson Second Opinion, ¶¶ 69-70 (CWS- 025). Any other remedy “would create an iniquitous disincentive, allowing national authorities to treat foreigners as they wish, without heed to the limits of international law, and happily accepting the risk of isolated instances where the foreigner might have the resources and temerity to bring the matter to an international body.” Paulsson Second Opinion, ¶ 71 (CWS-025). This argument is wrong. First, the nullification of the TCA judgments could not possibly affect the legality of the challenged regulations because their judicial confirmation is not a prerequisite to their legal force, as will be explained further below. Second, as far as Professor Paulsson’s policy argument is concerned, it is not the proper role of an investment treaty tribunal to “‘discipline’ States in one way or another. Nor is it proper for an international tribunal to exercise authority over future conduct by a State.” Schrijver Second Opinion, ¶ 68 (REX- 010). Equally important, “the idea of punitive or exemplary damages [i.e., damages intended to reform or deter the defendant and others from engaging in conduct similar to that which formed the basis of the lawsuit] has no role to play in the contemporary Law of State Responsibility.” Ibid. See also International Law Commission, Draft articles on Responsibility of States for Internationally Wrongful Acts, with commentaries (2001), p. 99, Comment (4) to Art. 36 (RL-130) (“Compensation corresponds to the financially assessable damage suffered by the injured State or its nationals. It is not concerned to punish the responsible State, nor does compensation have an expressive or exemplary character.”) (emphasis added). 1069 Reply, ¶ 333.
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from it. That is not necessarily, and will not always be, the case, even when a denial of justice is proven. Not every denial of justice produces an economic injury. For example, if the same judicial decision would have resulted even if the alleged denial of justice had not been committed, what is the economic injury?
11.78 As explained in Uruguay’s Counter-Memorial,1070 and tellingly unanswered in
Claimants’ Reply, the Roberts and Chattin cases merely support the notion that a State may incur international responsibility for a denial of justice even if the underlying judicial action was substantively valid. Those cases do not stand for the proposition that every case of international responsibility involves an economic injury, let alone that damages should be awarded automatically, even when no economic injury has resulted or been proven.
11.79 As far as Amco II is concerned, Professor Paulsson wrote before the present proceedings that the case stands in contrast with other investment treaty awards, in which tribunals determined that it would not be appropriate to award damages in light of the investor’s failure to establish the requisite causal link between the treaty breach and the damages sought.1071 Other commentators have pointed out that a denial of justice claim should not lead to an award “as if the investor had prevailed in the incriminated litigation” because that would contravene the established prohibition against overcompensation in international law.1072
11.80 In any event, a closer look at the Amco II award shows that it is not helpful to Claimants here. The denial of justice in that case consisted of irregularities possibly “taint[ing] the
1070 Counter-Memorial, ¶¶ 11.125 n.1401, 11.132. 1071 J. Paulsson, DENIAL OF JUSTICE IN INTERNATIONAL LAW (2005), pp. 223-224, 227 (RL-239). 1072 T. Wälde & B. Sabahi, Compensation, Damages and Valuation in International Investment Law, TRANSNATIONAL DISPUTE MANAGEMENT, Vol. 4, No. 6 (Nov. 2007), p. 31 (RL-244).
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proceedings irrevocably”1073 in an administrative process that brought about the extinction of rights (arising out of an investment license) that Amco enjoyed up until that time under
Indonesian public law. In those circumstances, “[r]everting to the status quo ante required reinstating those public law rights [or] [] re-establishing the financial equivalent of those rights.”1074 The tribunal eventually granted the latter (without, however, deducting on account of the possibility that the investor might have disqualified itself as a licensee, as Indonesia argued, which gave rise to Professor Paulsson’s criticism, discussed above).
11.81 The present case is very different. Here, it is not the alleged denial of justice that brought about the alleged extinction or diminution of Claimants’ “rights.” Rather, the SPR and the 80%
Requirement are the “primary cause of Claimants’ alleged harm.”1075 They are, moreover, valid and effective as from the time of their adoption, and remain so even in the absence of any judicial review, unless they are subsequently annulled by the TCA (or the laws pursuant to which they were adopted are declared unconstitutional). As far as Claimants’ alleged “rights” are concerned, “the status quo ante is not different from the post-judgment status quo.”1076 The only right under Uruguayan law that the alleged denial of justice could conceivably have impaired is
Claimants’ right to a proper judicial review by the TCA of the administrative validity of the SPR and the 80% Requirement.1077 Applying the reasoning of the Amco II award to the circumstances
1073 Amco Asia Corporation and others v. Republic of Indonesia, ICSID Case No. ARB/81/1, Resubmitted Case: Award (31 May 1990) (Higgins, Lalonde, Magid) (hereinafter “Amco II”), ¶ 138 (CLA-160). 1074 Schrijver Second Opinion, ¶ 52 (REX-010). See also ibid., ¶ 53 (“By simply contrasting the scope of the legal rights and obligations under domestic law that the investor[] had prior to the impugned domestic judgment, with the changes in those rights and obligations that ensued as a result of that judgment, [the Amco II tribunal] [was] capable of establishing causality without having to step into the shoes of the domestic courts.”). 1075 Ibid., ¶ 53. 1076 Ibid. 1077 Ibid., ¶ 56.
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of the present case would mean—at most—reinstating such right, not compensating them for alleged losses resulting from adoption of the two regulatory measures themselves.
11.82 By seeking the “same quantum of damages” for the alleged violation of their procedural right as they are for the economic harm purportedly incurred as a result of the implementation of the SPR and the 80% Requirement, however, Claimants are assuming that they would have succeeded on the merits of their claims. That is something they cannot hope to prove before this
Tribunal, especially based on the evidence of record. As Professor Schrijver aptly puts it,
Claimants effectively ask the Tribunal to “step[] into the shoes of the Uruguayan courts and decid[e] for itself that the measures would have been repealed ‘but-for’ the alleged denials of justice.”1078 The Tribunal “should refuse to ‘speculate’ such outcome and should treat Claimants’ relief sought as unproven.”1079
11.83 But even “stepping into the shoes” of the TCA, which, Uruguay submits, would not be appropriate, leads to the conclusion that Claimants cannot show that they would have prevailed in the Uruguayan courts on the merits of their challenges to the SPR and the 80% Requirement.
In Chevron v. Ecuador,1080 the tribunal acknowledged that there is “uncertainty involved in the
1078 Ibid., ¶ 60. 1079 Ibid. (citing jurisprudence of the European Court of Human Rights, consistently disposing claims of compensation in relation to violations of the fair trial guarantees under Article 6 of the Convention occurring in the context of challenges of domestic regulatory measures by refusing to “speculate” as to whether the applicant would have succeeded in challenging the measures had the violation of the fair trial guarantees not occurred). 1080 Claimants argue that the Chevron award is “inapt” to the present case because the tribunal merely applied a standard agreed upon by the parties to that case. Reply, ¶ 332. See also Schwebel Opinion, ¶ 41 (CWS-015). However, it is evident from the text of the judgment that the tribunal considered the parties’ agreed-upon standard as an “elaboration of the Chorzów ‘but-for’ test in relation to wrongful acts caused by judicial organs.” Schrijver Second Opinion, ¶ 62 (REX-010) (citing Chevron v. Ecuador, ¶ 374 (RL-187)).
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litigation process” and that it should be accounted for in determining the applicable standard of review of the judgments of Ecuadorian courts.1081 In this connection, the tribunal held that
if the alleged breach were based on a manifestly unjust judgment rendered by the Ecuadorian court, the Tribunal might apply deference to the court’s decision and evaluate it in terms of what is ‘juridically possible’ in the Ecuadorian legal system.1082
11.84 Professor Pereira concludes, after examining both of the TCA’s challenged judgments, that they are fully justified and reasonable. They are without question “juridically possible” and entitled to deference. Moreover, as he emphasizes, the TCA decided the same challenges— brought by BAT and Monte Paz—to the same administrative measures in the same way. This shows not only that the outcomes of Claimants’ challenges were not just “juridically possible,” but that they were also entirely consistent with other rulings. On both accounts, Claimants cannot hope to establish that “in all probability” they would have prevailed on the merits of their challenges before the TCA.
11.85 In sum, Claimants’ claim for damages is speculative and un-provable, and provides no basis for an award of damages by the Tribunal. Even if the Tribunal were prepared to engage in speculation, which it should not, and decide for itself how it thinks the TCA should have ruled,
Claimants would still not be entitled to damages. There is no basis for concluding that the
Uruguayan courts would have, or should have, ruled in their favor on the merits of their challenges to the SPR or 80% Requirement.
1081 Chevron v. Ecuador, ¶ 379 (RL-187). The breach in that case was, however, based on undue delay. The tribunal held that it owed no deference to the Ecuadorian judgments issued after the date of consummation of the breach. 1082 Ibid. (emphasis added).
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CONCLUSIONS AND SUBMISSIONS
For all the reasons set forth above, the Oriental Republic of Uruguay submits:
1. Claimants’ claims should be dismissed in their entirety; and
2. Uruguay should be awarded compensation for all the expenses and costs associated with defending against these claims.
Dated: 20 September 2015
Respectfully Submitted,
______Paul S. Reichler Ronald E.M. Goodman Lawrence H. Martin Clara E. Brillembourg
FOLEY HOAG LLP 1717 K Street N.W. Washington, DC 20006
Professor Harold Hongju Koh 87 Ogden Street New Haven, CT 06511
Counsel for the Oriental Republic of Uruguay
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