Trade and investment issues, including agreements, and legal challenges in relation to the implementation of WHO FCTC: report by the Convention Secretariat

Conference of the Parties to the WHO Framework Convention on Tobacco Control Seventh session Delhi, India, 7–12 November 2016 Provisional agenda item 6.7 FCTC/COP/7/21 29 July 2016 66 Trade and investment issues, including agreements, and legal challenges in relation to the implementation of WHO FCTC 66 Report by the Convention Secretariat INTRODUCTION 1. At its sixth session (Moscow, Russia, 13–18 October 2014), the Conference of the Parties (COP) adopted Decision FCTC/COP6(19) entitled “Trade and investment issues, including international agreements, and legal challenges in relation to implementation of the WHO FCTC”. Against the background of industry efforts to use international trade and investment agreements to challenge tobacco control measures taken to implement the WHO FCTC and the burden this places on governments, the COP requested the Convention Secretariat to prepare a report on the potential impact of new trade and investment provisions on WHO FCTC implementation in developing countries. 2. This report has been prepared pursuant to this mandate and discusses the key characteristics of new trade and investment agreements, provides an overview of the WHO FCTC implementation challenges that exist with international investment agreements, highlights issues with WHO FCTC and international investment agreements in light of recent developments, and offers policy options for treaty design, treaty network management and ways to overcome implementation challenges. New trade and investment agreements – key characteristics 3. The universe of trade and investment agreements continues to grow. By the end of 2015, the number of international investment agreements (IIAs) had reached a total of 3 304 treaties, including 2 946 bilateral investment treaties (BITs) and 358 treaties with investment provisions (TIPs) 1 . Although the annual number of new treaties is continuing to decline, some recent treaties involve a large number of parties, carry significant economic and political weight, and contain far-reaching and/or novel commitments. 4. While it is difficult to draw an exact line between “old” and “new” trade and investment agreements, older agreements typically protect foreign investments only after their establishment in 1 UNCTAD, ‘World Investment Report 2016: Investor Nationality-Policy Challenges’ (United Nations, New York and Geneva 2016) 101, available at http://unctad.org/en/PublicationsLibrary/wir2016_en.pdf. TIPs include, among other things, free trade agreements, regional trade and investment agreements, economic partnership agreements, trade and investment framework agreements, cooperation agreements, etc. FCTC/COP/721/ 2 the host country (“post-establishment” investment protection), contain a limited number of often vaguely-formulated substantive protection standards that leave a considerable amount of interpretative discretion to arbitral tribunals, and most of the time include investor-State dispute settlement (ISDS). 5. By contrast, recent trade and investment agreements are becoming more complex and detailed. Often they contain commitments deeper than those undertaken in the World Trade Organization (WTO) – e.g. “TRIPS plus”, i.e. more far-reaching intellectual property protection than those provided by the TRIPS agreement – and/or disciplines currently not covered by the WTO agreements (e.g. on investment, regulatory cooperation, competition, environment etc.). With respect to international investment rule-making, newer agreements show a greater variety compared to older IIAs. Some treaties contain substantive investment protection standards and detailed provisions governing ISDS; others contain only limited investment provisions and/or provide for an institutional framework for the parties to promote and cooperate on investment without the possibility of recourse to ISDS. A small, but increasing number of trade and investment agreements contain so-called pre-establishment commitments, adding a liberalization dimension to typical (post-establishment) protections standards. 6. Recent IIAs increasingly incorporate clauses that explicitly safeguard the State’s right to regulate, and/or other clauses that aim at aligning IIAs with sustainable development objectives (e.g. more circumscribed dispute settlement, promotion of responsible investment, ensuring coherence between IIAs and other bodies of law). For example, 58% of IIAs concluded between 2010 and 2014 contain exception clauses on grounds of public policy (compared to 12% of IIAs concluded before 2010), while 53% of IIAs concluded between 2010 and 2014 contain a clarification of the indirect expropriation clause (compared to 20% of IIAs concluded before 2010) 2 . 7. This report focuses on those trade and investment agreements that provide the investor with an ISDS mechanism, i.e. that afford tobacco companies the possibility to challenge national tobacco control measures 3 . IIA-related challenges for the implementation of the WHO FCTC – An overview 8. The report of the working group “Sustainable measures to strengthen implementation of the WHO FCTC” identified several constraints to WHO FCTC implementation, such as “interference by the tobacco industry in tobacco-control policy development; lack of or insufficient political will; insufficient financial resources for tobacco control; and lack or weakness of intersectoral coordination within the country, including lack of understanding, interest or commitment of sectors other than health regarding the need for intersectoral action on tobacco control 4”. 9. Some of the key features of new trade and investment agreements may be perceived as potentially adding to these implementation challenges, in particular for developing countries. This was highlighted in the discussion of this issue during COP6, and was subsequently confirmed by information received informally from a number of WHO FCTC Parties that have recently been confronted with such challenges. Accordingly, three implementation challenges merit attention: intersectoral coordination and cooperation; lobbying activities by the tobacco industry; and lack of (financial and human) resources. 2 UNCTAD, ‘World Investment Report 2016’ (n 1) 114. 3 For this reason, the remainder of this report uses the term ‘IIA’ interchangeably with ‘trade and investment agreements’. 4 FCTC/COP/6/19 (18 June 2014) para 1. FCTC/COP/7/21 3 10. Intersectoral coordination and cooperation between the trade/investment and health departments. The increasing scope of regulatory areas covered by IIAs and their more far-reaching commitments create a complexity that heightens the need for higher interdepartmental coordination. Such coordination and cooperation is essential for a coherent interplay of IIAs and the WHO FCTC, and respective implementation activities. Lack of or insufficient coordination and cooperation may lead to investment policy design that does not adequately reflect the requirements or needs of tobacco control policies. 11. Lobbying activities by the tobacco industry. Efforts to influence policymakers, including threats to commence legal action at the domestic or international level are an important and constant implementation challenge. Corporate activities and the perceived risk of being exposed to costly arbitration and damages awards through the existence of ISDS in many IIAs may create a “chilling” effect on governments’ regulatory action. These efforts are all the more effective for countries with less technical and financial capacity to properly assess and respond to the broad range of legal, economic and political arguments that may be made. 12. Lack of (financial and human) resources. Lack of resources is an implementation challenge in its own right, but also exacerbates the above-mentioned challenges. Lack of financial resources typically leads to a lack of human resources and/or technical capacity, which in turn may make interministerial coordination more difficult, reduce the capacity to respond to investment claims and in sum, make some governments more vulnerable to tobacco industry pressure. Technical capacity and human resources are not only needed for tobacco control policymaking, but are also necessary for investment policymaking (e.g. for the design and negotiation of sustainable development-friendly IIAs, for the evaluation of existing IIAs and the assessment of their potential for exposure to investor claims). The WHO FCTC and IIAs – some issues in light of recent developments 13. With 180 Parties at the time of writing, the WHO FCTC is a powerful, evidence-based public health treaty developed in response to the globalization of the tobacco epidemic. Parties to the Convention affirm their determination to give priority to their right to protect public health and commit to undertake a range of complementary demand reduction and supply reduction measures, both domestically and through international cooperation. 14. The WHO FCTC and its implementation guidelines may be relevant to the interpretation and application of international trade and investment law in a number of ways, in particular in the form of evidence of the broad international consensus on the seriousness of the harm caused by tobacco use and on the types and necessity of measures that contribute to reducing tobacco use, and protecting and promoting public health 5 . 15. Most recently, the impact of the WHO FCTC and the work of the COP has been highlighted in the outcome of two high-profile investment arbitrations brought by Philip Morris against Australia and Uruguay. While the investment arbitration claim against Australia’s plain packaging legislation was dismissed as an “abuse of rights” without proceeding to a merits determination6, the investment arbitration claim against Uruguay 7 was dismissed on the merits, finding (with frequent references to 5 FCTC, ‘Workshop on Trade and Investment Issues relevant to Implementation of the WHO Framework Convention on Tobacco Control’, Background paper (27 March 2014) 3, available at http://www.who.int/fctc/2014_PM_WHO_FCTC_wshop_backgroundpaper.pdf. 6 Philip Morris Asia Ltd v Commonwealth of Australia, PCA Case No. 2012-12, Award (17 December 2015) (redacted version). 7 Philip Morris Brands SARL, Philip Morris Products S.A. and Abal Brothers (S.A.) v Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, Award (8 July 2016). FCTC/COP/721/ 4 the WHO FCTC) that the implemented Uruguayan labelling and packaging measures did not violate any of the invoked investment protection obligations of the Switzerland-Uruguay BIT. 16. Together with other recent judicial decisions giving precedence to public health considerations over the commercial interests of the tobacco industry 8 , this award sends a very positive signal to Parties to continue implementing tobacco control measures. At the same time, Parties should be mindful of the fact that the IIA universe remains highly fragmented; consideration of how WHO FCTC provisions may interplay with (existing and future) trade and investment provisions therefore remain relevant. 17. Parties should also be mindful of the possible interaction between the WHO FCTC and trade and investment agreements. The WHO FCTC does not restrict parties to enter into bilateral or multilateral agreements, but it mandates (Article 2.2) that later agreements must be compatible with the WHO FCTC 9 . Accordingly, IIA negotiators should give careful consideration to the regulatory space needed to implement WHO FCTC policies, and craft IIAs accordingly 10 . 18. Domestic policymaking should be shielded from possible industry influence, including in regulatory cooperation processes. Article 5.3 of the WHO FCTC mandates that when setting and implementing their public health policies with respect to tobacco control, “Parties shall act to protect these policies from commercial and other vested interests of the tobacco industry in accordance with national law”. The guidelines for implementation of WHO FCTC Article 5.3 recommend inter alia to “[e]stablish measures to limit interactions with the tobacco industry and ensure the transparency of those interactions that occur 11”. New trade and investment agreements increasingly contain provisions on “regulatory cooperation” or “regulatory coherence”, recommending or requiring Parties to give interested persons, which may include companies and lobbying organisations, “a voice” in regulatory deliberations 12 . While typically unenforceable through ISDS, health policymakers should be aware of this potential gateway for tobacco industry to exert influence. 19. Health warnings and labelling requirements, and their potential impact on intellectual property (IP) rights as protected investment, should be considered when devising IIAs. Article 11 (1) of WHO FCTC obliges parties to implement, in accordance with national law, effective health warnings on the packaging of tobacco products and prohibit false or misleading packaging and labelling. These health warnings and packaging requirements (including plain packaging) may be seen as touching on IP rights (in particular trademark rights). To the extent that such IP rights are covered by IIAs, they benefit from investment protection guarantees, such as the prohibition of indirect expropriation and the obligation to afford fair and equitable treatment (FET). Even though the Philip Morris v Uruguay 8 See ECJ, Poland v Parliament and Council, Case C-358/14, Judgment (4 May 2016); Pillbox 38 (UK) Limited v Secretary of State for Health, C-477/14, Judgment (4 May 2016); Philip Morris Brands SARL and Others v Secretary of State for Health, C-547/14, Judgment (4 May 2016); United Kingdom High Court of Justice, Queen´s Bench Division, British American Tobacco and Others v Secretary of State for Health, Case Nos: CO/2322/2015, CO 2323/2015, CO/2352/2015, CO/2601/2015 and CO/2706/2015, Jugdment (19 May 2016); Supreme Court of India, Karnataka Beedi Industry Association and Anr. v Union of India and Anr., Special Leave Petition (C) Nos. 10119-10121, Order (4 May 2016). 9 WHO, ‘Confronting the Tobacco Epidemic: In a new Era of Trade and Investment Liberalization’ (WHO 2012) 75-76, available at http://apps.who.int/iris/bitstream/10665/70918/1/9789241503723_eng.pdf. 10 See below paras 22 ff; see also UNCTAD-WHO FCTC, ‘International Investment Law and the WHO Framework Convention on Tobacco Control’, IIA Issues Note No. 2/2016 (UNCTAD/WHO FCTC forthcoming). 11 Guidelines for implementation of Article 5.3 of the WHO Framework Convention on Tobacco Control, para 17 (2), available at http://www.who.int/fctc/treaty_instruments/Guidelines_Article_5_3_English.pdf. 12 See e.g. Art. 25.8 TPP: ‘The Committee shall establish appropriate mechanisms to provide continuing opportunities for interested persons of the Parties to provide input on matters relevant to enhancing regulatory coherence.’ FCTC/COP/7/21 5 award suggests that packaging and labelling measures will under normal circumstances not infringe on these investment obligations, careful consideration of the scope of IIAs (i.e. the coverage or not of such IP rights) and the obligations they place on governments may still be prudent in the negotiation of new agreements. 20. Tobacco advertising, promotion and sponsorship bans should be taken into account when negotiating treaties with a liberalization dimension. WHO FCTC Article 13 (2) requires that parties undertake a comprehensive ban, including cross-border, on all tobacco advertising, promotion and sponsorship in accordance with their constitution or constitutional principles. Depending on the way they are crafted, treaties with liberalization/pre-establishment commitments could potentially constrain such bans. With a view to retaining regulatory flexibility, careful attention should be given to the scheduling of commitments and reservations in such treaties. 21. Particular attention should in general be paid to the domestic legislative and administrative processes in implementing and enacting all relevant WHO FCTC provisions to ensure that foreign tobacco investors may not claim unfair or inequitable treatment. Policy options for treaty design 22. Parties have a number of policy options to ensure that new IIAs grant regulatory space, including for specific public health objectives such as tobacco control policies: a) Exclude tobacco products, tobacco-related economic activity and regulatory action from treaty scope. The most comprehensive option is a complete carve-out from the treaty´s protection (and liberalization) commitments. While being the clearest approach, this is also the most far-reaching policy option, which could be difficult to achieve in a negotiating setting. b) Abandon or replace ISDS, e.g. replacing it with domestic dispute resolution or State-State dispute settlement. This option reduces the enforceability of the IIA, hence taking away a key legal tool for tobacco companies wishing to enforce alleged violation of rights. Relying exclusively on domestic courts has merits for countries with sound legal systems, good governance and effective local courts. State-State dispute settlement could avoid broader legitimacy concerns that have been raised in respect of ISDS, but might re-politicize investment disputes as in the pre-IIA era 13 . 23. In addition to the above, policymakers can limit the scope of ISDS. Two examples of this approach have made their way into recent IIAs: c) Include a denial of benefits (DOB) clause, as contained in Article 29.5 of the negotiated Trans-Pacific Partnership (TPP) agreement. Article 29.5 provides that a TPP Party “may elect to deny the benefits of [ISDS] with respect to claims challenging a tobacco control measure” or, “[i]f a Party has not elected to deny benefits with respect to such claims by the time of the submission of such a claim to arbitration (…) a Party may elect to deny benefits during the proceedings”. The term “tobacco control measure” is defined in a broad way as meaning any measure of a Party “related to the production or consumption of manufactured tobacco products (including products made or derived from tobacco), their distribution, labelling, packaging, advertising, marketing, promotion, sale, purchase, or use, as well as enforcement measures, such as inspection, recordkeeping, and reporting requirements 14”. This clause gives Parties the possibility to revoke their consent to ISDS in the case of claims challenging tobacco control measures both before or 13 UNCTAD, ‘World Investment Report 2015 : Reforming International Investment Governance’ (United Nations, New York and Geneva 2015) 147, 153, available at http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf. 14 Footnote 12 to Art. 29.5 TPP. FCTC/COP/721/ 6 after such a claim may have been brought. The latter clarification responds to previous inconsistent arbitral jurisprudence on whether or not a DOB clause without such clarification may be validly invoked after the commencement of arbitral proceedings. d) Include a “public policy carve out” for ISDS, such as the one contained in the 2015 China-Australia Free Trade Agreement (ChAFTA). According to its Article 9.11 (4), “[m]easures of a Party that are non-discriminatory and for the legitimate public welfare objectives of public health, safety, the environment, public morals or public order shall not be the subject of a claim” by an investor. If the respondent State considers an investment claim to concern one of the afore-mentioned public welfare objectives, it may issue a “public welfare notice” within 30 days, the arbitration proceedings must be suspended and a 90-day consultation period with the other treaty party starts. If the treaty parties agree that the public welfare exception is fulfilled, this decision is binding on the arbitral tribunal 15 . This clause has the merit of recognizing and supporting broader sustainable development objectives and re-establishing treaty parties’ control over the interpretation of public policy exceptions. 24. In addition to the above, policymakers have further options at hand in support of designing IIAs that grant regulatory space for sustainable development policies 16 . Examples include: e) Clarify substantive investment obligations of relevance for tobacco control. This is particularly relevant for the indirect expropriation and FET clauses 17 . Clarifications could guide arbitral interpretation of these standards in the sense that non-discriminatory tobacco control measures (such as plain packaging measures) do normally not constitute an indirect expropriation or a violation of fair and equitable treatment. f) Carefully crafted pre-establishment commitments. Attention should be paid to whether a positive- or negative-list approach is chosen and, in particular in the case of the latter, which reservations need to be lodged to retain adequate policy space for current and future public health (in particular tobacco control) measures 18 . For example, in the EU-Vietnam FTA, Vietnam scheduled commitments for advertising services, but excluded “advertising for cigarettes” from this commitment 19 . Policy options for treaty network management 25. While more recent IIAs increasingly include clauses that aim to explicitly preserve regulatory space, including for tobacco control policies, the existing stock of old IIAs remains a challenge. This is particularly so because old IIAs with broad and vaguely-formulated clauses may offer an incentive for investors to try and “shop” into such treaties, e.g. by way of corporate restructuring as also seen in the recent Philip Morris Asia v Australia case. 26. Attention therefore needs to be given to the systemic risks and incoherence of the large body of old treaties. States wishing to reform their existing stock of IIAs may consider formally amending IIAs 15 Art. 9.18 (3) China-Australia FTA. 16 For the Roadmap for IIA reform see UNCTAD, ‘WIR 2015’ (n 13) 165 and in general UNCTAD, ‘Investment Policy Framework for Sustainable Development 2015’ (‘IPFSD 2015’) (United Nations New York and Geneva 2015) 73 ff, available at http://unctad.org/en/PublicationsLibrary/diaepcb2015d5_en.pdf. 17 WHO, ‘Confronting the Tobacco Epidemic’ (n 9) 66; UNCTAD-WHO FCTC Issues Note (n 10) 20. 18 UNCTAD, ‘IPFSD 2015’ (n 16) 107 (para 6.2.1) and 120 (para 4.1). 19 European Union-Vietnam Free Trade Agreement, Investment chapter, Section 3, Sub-section 1, Art. 1 (1), available at http://trade.ec.europa.eu/doclib/docs/2016/february/tradoc_154210.pdf. Another option is to limit investor´s access to ISDS to post-establishment matters, excluding claims with respect to pre-establishment commitments. FCTC/COP/7/21 7 that contain clauses with potentially ambiguous implications for public health or tobacco control measures. Alternatively, States may issue joint interpretations of relevant terms or provisions to guide arbitral interpretation. 27. While national-level and bilateral reforms constitute an important stepping-stone towards harnessing the IIA system in the pursuit of sustainable development (including the protection of public health), only intensified collaboration and coordination between countries at all levels (including regional and multilateral) will ultimately allow the systemic risks of fragmentation and incoherence arising from the large body of old IIAs to be addressed. International organizations with the necessary expertise, such as UNCTAD, may provide countries with support and guidance in this regard. Policy options for the WHO FCTC – implementation challenges 28. Improve intersectoral coordination. Parties may wish to aim at institutionalizing and enhancing intersectoral coordination and cooperation mechanisms and procedures. Such procedures are indeed indispensable for treaty design that takes the necessary account of tobacco control policies. This applies especially to the coordination between the health and trade ministries, but should in a systemic perspective also include other ministries potentially concerned by the scope of trade and investment agreements (such as economic development, planning, environment, labour etc.). Subject to resources, such institutionalization could be achieved e.g. through interministerial meetings and review committees, standardized reporting requirements or centralized regulatory assessment mechanisms. The formulation of broader national development plans and strategies, integrating other health, trade and investment policy concerns, could serve as a framework for institutionalising intersectoral coordination and cooperation. 29. Curtail activities by the tobacco industry. Parties should aim to minimize opportunities for industry influence in regulatory processes (in line with the obligation contained in Article 5.3). This entails raising awareness among domestic policymakers of possibilities of influence in general, but in particular with respect to regulatory cooperation provisions increasingly found in new trade and investment agreements that may institutionalize interaction between policymakers and industry stakeholders. Domestic policymakers should also ensure the strict enforcement of penal sanctions against bribery and corruption by whomever committed. 30. Make available (financial and human) resources. Efforts should be made to increase financial and technical resources, particularly for and in developing countries. National and international organisations with the relevant expertise (such as the Convention Secretariat, WHO, WHO FCTC Knowledge Hubs established by the Convention Secretariat or UNCTAD) should continue to assist Parties in addressing their obligations and provide support to build domestic technical capacities. In line with the United Nations Sustainable Development Goals (SDGs), innovative international financing mechanisms and multistakeholder partnerships should be explored to enhance developing countries’ financial and technical capacities to implement legitimate, non-discriminatory public health policies. Initiatives such as the “Anti-Tobacco Trade Litigation Fund”, established by the Bloomberg Philanthropies and Bill and Melinda Gates Foundation, are commendable mechanisms and may serve as an example for replication. ACTION BY THE CONFERENCE OF THE PARTIES 31. The COP is invited to note this report and provide further guidance. = = =