Philip Morris Claims Australia’s Plain Cigarette Package Plan is Illegal

Philip Morris International Inc. (PM), the world’s largest publicly traded tobacco company, said an Australian proposal requiring cigarettes to be sold in plain packages violates a treaty with Hong Kong and may cause billions of dollars in damages.

The maker of Marlboro and Peter Jackson cigarettes said it served the government with a notice of claim stating its intention to pursue its case in international arbitration. Hong Kong has a 1994 treaty with Australia prohibiting the forced removal of trademarks, Anne Edwards, a Philip Morris spokeswoman, said in a phone interview today.

The Australian proposal is the first in the world to ban all logos and different colorings on cigarette packages. New Zealand, Canada and the U.K. had considered the move and didn’t put it in place because of concerns it would be illegal, British American Tobacco Plc (BATS) said in April. British American Tobacco said it’s also considering its legal options.

“There’s a massive public policy argument here,” Wayne Condon, a partner at Griffith Hack who specializes in intellectual property law, said in a phone interview. “The Commonwealth government would be facing a multimillion dollar claim, if not more,” should the tobacco companies succeed.

Under the Australian constitution, parliament can’t make laws under which the government would acquire property without providing adequate compensation.

Trademarks Are Property

“It is property,” Condon said, referring to the tobacco companies’ logos and trademarks that are used on cigarette packages. “The law defines trademarks as property.”

Philip Morris’s Asian unit is based in Hong Kong and owns Philip Morris Ltd., the Australian unit.

“Damages caused by plain packaging may amount to billions of Australian dollars,” Edwards said. The tobacco company took the legal action to protect investors in Hong Kong, she said.

Australia has already banned the public display of tobacco products in most retail outlets. The government plans to outlaw logos on cigarette packs and force them to be sold in plain dark olive packaging, carrying health warnings instead of company logos. Cigarette brand names will appear on the packages in the same size and style of printing. The legislation, if passed by parliament, will come into force on Jan. 1, 2012.

A television advertising campaign, backed by Imperial Tobacco Australia Ltd. and titled “Stop This Nanny State,” urges Australians to contact their political representatives and stop the plain packaging law.

Won’t Be Intimidated

Australian Prime Minister Julia Gillard said she won’t be intimidated by the tobacco companies.

“We’re not taking a backward step,” she told Australian Broadcasting Corp. radio today. “We’ve made the right decision and we’ll see it through.”

The government raised tobacco taxes by 25 percent last year as it seeks to curb smoking, which is the nation’s largest single preventable cause of death, according to Health Minister Nicola Roxon.

“We don’t believe that taking that action is in breach of any of our international obligations,” Roxon told Sky News today. “We believe that we are able, and the Australian people I think would expect their government, to take action in the interests of public health.”

The government has received legal advice and believes it’s on “very strong ground” in drafting the law, Roxon said in an interview on Australian Broadcasting’s Lateline program April 7.

Mandatory Negotiations

The notice served by Philip Morris begins a mandatory period of negotiations to resolve the dispute, the company said. If an agreement isn’t reached in three months, the tobacco company plans to take the dispute to arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law.

Philip Morris will suggest the arbitration hearing be held in Singapore, Edwards said.

In this case, the government may be intruding into the fundamental right of companies to exercise and exploit the intellectual property which they were granted, Condon said.

“What company would stand for having its brands, which are worth billions, taken away from them?” Scott McIntyre, a spokesman at British American Tobacco, said in April. “A large brewing company or fast food chain certainly wouldn’t, and we’re no different.”

McIntyre didn’t respond to a request for comment today.

Winfield Maker

British American Tobacco, maker of Winfield cigarettes, Australia’s best-selling brand, had 42 percent share of the grocery and supermarket cigarette sales and 56 percent share of convenience store sales in 2007, according to a Tobacco in Australia report, which was produced by the Cancer Council of Victoria.

Philip Morris had a 40 percent share of the grocery and supermarket sales and a 33 percent share of convenience store sales while Imperial Tobacco had an 18 percent, according to the report.

Winfield had a 31.7 percent share of the market, followed by Philip Morris’s Peter Jacksons at 18 percent.

About 15,000 Australians die each year from tobacco-related diseases caused by smoking, with social, health and economic costs put at A$30 billion ($31 billion) annually, Roxon said.

British American Tobacco has won a preliminary ruling in a separate case in the Australian state of Victoria over the covering up of labels with health warnings.

Trojan Infringement

Supreme Court Judge Elizabeth Hollingworth ruled in December that British American Tobacco could pursue a claim that its trademark was infringed by Trojan Trading Co. a distributor of Captain Black cigars, which covered the label with a health warning. Trojan said it was following the law in placing the graphic warning on the package.

British American Tobacco is seeking access to the legal advice the government received. The tobacco company failed in forcing the government to release the documents through a Freedom of Information request.

A federal appeals court has agreed to hear the case on Aug. 3 in Melbourne.

George Williams, a constitutional law professor at the University of New South Wales in Sydney said Australia’s top court has never addressed this particular question.

“The tobacco companies have a hard road ahead,” Williams said in a phone interview today. “They’re quite likely to lose.”

To contact the reporters on this story: Robert Fenner in Melbourne at rfenner@bloomberg.net; Joe Schneider in Sydney at jschneider5@bloomberg.net

To contact the editor responsible for this story: Douglas Wong at dwong19@bloomberg.net

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