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 CONTAINS CONFIDENTIAL INFORMATION CONTAINS CONFIDENTIAL INFORMATION 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 - i - CONTAINS CONFIDENTIAL INFORMATION 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 - ii - CONTAINS CONFIDENTIAL INFORMATION 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 - iii - CONTAINS CONFIDENTIAL INFORMATION 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