Plain Packaging of Tobacco Products in Australia: Title and subTitle BreakA Novel Regulation Faces Legal Challenge

There are global concerns that tobacco branding and packaging have a powerful role as “silent salesmen.”¹ Several countries, including the United Kingdom and Canada, have considered but not pursued regulation to restrict branding and other embellishments on tobacco products. The inevitability of a protracted and expensive legal battle with the tobacco industry, and the possibility that regulation in this area may not survive legal challenge, have chilled interest. The US Food and Drug Administration (FDA) has proposed placing stronger warnings and graphic images about tobacco-related diseases on cigarette packages, although several major tobacco companies have filed a lawsuit against the FDA alleging that mandatory placement of such warning labels is a violation of their First Amendment rights.

Australia has become the first country to pass legislation mandating plain packaging of tobacco.² Beginning December 1, 2012, all tobacco products must be sold in drab brown packs that have prominent health warnings and are devoid of graphic trademarks and other embellishments (Figure). Wrangling in the courts is already under way, and the nature of the legal challenges is becoming clear. The future of Australia's plain packaging mandate will turn on questions in constitutional, trade, and investment law.

British American Tobacco, Imperial Tobacco, Japan Tobacco, and Philip Morris each filed constitutional challenges in December 2011. These claims center on section 51(xxxi) of the Australian Constitution, which allows Parliament to make laws with respect to “the acquisition of property on just terms.” In general, this means that owners of property the government acquires are entitled to compensation. The constitutions of many countries contain a similar rule; in the United States, it appears in the “takings clause” of the Fifth Amendment.

The term property in section 51(xxxi) has been interpreted broadly³ to include rights to intellectual property,⁴ such as trademarks. The plain packaging mandate will substantially restrict the rights of tobacco companies to use their marks, thereby reducing the value of this property. The contestable question is whether the mandate amounts to an “acquisition.” Under Australian constitutional law, an acquisition of property has 2 elements: the government must obtain a proprietary benefit, and there must be a corresponding relationship between the gain of that benefit and the loss of property rights.⁵ This is where the constitutional challenge is likely to founder. The government will not use the tobacco trademarks, and it is unlikely to obtain proprietary benefits from them, much less make gains that correspond to the tobacco companies' losses. Consequently, the plain packaging law does not look vulnerable to this line of attack.

The primary objection to the plain packaging mandate under international trade law relates to World Trade Organization (WTO) rules governing intellectual property. These are set out in the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which is an integral part of the WTO treaty that binds all 153 WTO members, including Australia and the United States.

There are 2 main issues related to TRIPS. The first is whether WTO members must grant trademark owners a right to use their trademarks. Article 16.1 states that owners “have the exclusive right to prevent all third parties not having the owner's consent from using . . . identical or similar signs.” Also required under TRIPS is that trademarks “may be neither denied registration nor invalidated,” except in special circumstances.⁶ There is some contention that article 16.1 creates a positive right for owners to use their trademarks.^{7 - 8} However, that view has no firm basis in the text of TRIPS. Moreover, a WTO dispute settlement panel has emphasized that TRIPS “does not generally provide for the grant of positive rights.”⁹ The plain packaging law restricts the right of tobacco companies to use their trademarks; it does not bar the companies from preventing others from using them, nor does it invalidate or deny the registration of any trademark. This distinction may seem semantic, but from a legal standpoint it is critical.

The second issue is whether TRIPS permits WTO members to restrict the use of trademarks for the purpose of protecting public health. Article 20 of TRIPS provides that trademark use “shall not be unjustifiably encumbered,” without specifying what types of encumbrance are justifiable. Nevertheless, article 8.1 states that members may adopt “measures necessary to protect public health,” provided such measures are consistent with TRIPS. Moreover, the WTO Ministerial Conference has affirmed that TRIPS “does not and should not prevent Members from taking measures to protect public health.”¹⁰ In sum, encumbrances on trademarks that are designed to protect public health are unlikely to breach TRIPS. This bodes well for the legality of a plain packaging mandate.

Nearly all countries enter investment protection agreements with other countries, typically in the form of bilateral investment treaties and preferential trade agreements containing investment provisions. Australia has 26 such agreements in force and the United States has 54. In November 2011, Philip Morris Asia Limited filed a claim against Australia under the Australia–Hong Kong bilateral investment treaty, alleging that the plain packaging law expropriates intellectual property. (In a remarkable move, this Hong Kong–based subsidiary of the Philip Morris conglomerate purchased a 100% stake in Philip Morris [Australia] Limited only months before the legislation was introduced, presumably to pave the way for this claim.)

Of all the looming legal challenges, investment protection claims are the most difficult to dismiss. Disputes over investment treaties are adjudicated by tribunals staffed by a shifting cast of arbitrators. Previous decisions do not have binding force on future decisions. Unlike WTO disputes, which must be commenced by WTO members, private investors may litigate perceived breaches of most investment protection agreements. Thus, outcomes in this setting may be somewhat unpredictable.

Nonetheless, Australia's plain packaging law appears to be on fairly solid ground under international investment law. In adjudicating previous expropriation claims, tribunals have outlined a series of relevant considerations, including whether the government has acquired the investor's property rights,⁹ whether the interference with those rights is proportionate to a public interest objective, the degree and duration of the interference, and the legitimate expectations of investors.¹⁰ Although the plain packaging law will interfere with investors' rights, and do so indefinitely, the law measures up quite well against the other considerations. For instance, the serious health risks associated with smoking make it likely the law will be judged proportionate to the objective of protecting public health. In addition, Australia's long history of progressively sterner tobacco regulation—including ending the use of “light” and “mild” labels and mandating graphic health warnings in 2006—make arguments that tobacco company investors had legitimate expectations of unfettered use of their trademarks difficult to maintain.

The stage is set for some spirited legal battles over tobacco packaging. In the United States, litigation will test whether the FDA's attempt to impose graphic warning labels violates constitutional protection of commercial free speech. In global markets, where more than 20 other countries already require graphic warnings, the leading edge of labeling regulation is the requirement that such warnings appear against a standard drab background. Australia has emerged as a proving ground for this next step.

Before Australia's legislation was finalized, the tobacco industry had launched a multimillion dollar public relations campaign opposing the law. The public relations and litigation strategies are intertwined: for example, the industry's advertisements have declared that the government's initiative will waste taxpayers' money by miring the government in costly litigation. However, the Australian government has good prospects of winning this legal battle. It will be worth watching developments from abroad, not least because most of the legal questions resemble those likely to confront plain packaging initiatives elsewhere.