June, 2011:

These arguments are all a paper-thin house of cards, starting with the central problem that plain packaging will not extinguish brand identities. All brands will still carry brand names allowing smokers to clearly exercise their freedom of choice to select between the much-vaunted but mostly non-existent differences in brands. This is critical, because in the highly unlikely event of a ruling by the High Court in favour of the industry, all calculations of compensation will need to take account that branding differences have only been diminished, not extinguished.

Given that some 30-40 nations now have appropriated massive sections of packs with graphic warnings and that not a cent has been claimed or awarded in brand damage  anywhere in the world for this egregious assault on brand identity, the prospects of any claim for huge compensation even in the unlikely event of a favourable ruling are vanishingly small. The companies would need to demonstrate with precision that sales losses arose from losing colours, logos and different pack shapes, not brand names.

Given that consumption is falling every year, this task would be like unraveling gossamer while wearing boxing gloves.

Few of those megaphoning this legal Armageddon appear to have even read the draft Bill itself. Section 11  makes it clear that plain packaging won’t apply if it were to be determined (by a court) that its operation would result in an acquisition of property otherwise than on just terms. So in the unlikely event that the High Court says there is an acquisition of property (more on this below), the legislation would revert to a fallback position in the regulations under which “the trade mark may be used on the packaging of tobacco products, or on a tobacco product, in accordance with any requirements prescribed in the regulations”.

In other words, the bill has been drafted with a get-out-of-jail-free card under which plain packaging will not proceed if the court said it was an unjust acquisition. So massive damages or compensation will simply not arise.

Moreover, Monash University’s Prof Mark Davison has explained “As for the Constitutional argument that the legislation acquires property on other than just terms, Professor Craven, a noted Constitutional expert, has since observed on Radio National’s Background Briefing that the tobacco industry’s prospects of success are about the same as a three-legged horse has of winning the Melbourne Cup. The reason for his view is simply explained. The extinction of rights or the reduction of rights is not relevant. The government or a third party must acquire property as a consequence of the legislation.

“The government does not wish to use the tobacco trade marks. Nor does it want third parties to do so. It does not desire to or intend to acquire any property. The proposition that prohibitions on the use of property do not constitute an acquisition of property was confirmed by the High Court as recently as 2009. In that case, the High Court held that the government was entitled to extinguish property rights in licences of farmers to take bore water.”

But the industry and its errand boys, such as those at the Institute of Public Affairs, nonetheless know that the threat of a massive legal penalty will get them headlines. A big number is required and the number that has been selected is $3 billion … per year. So where did this satisfyingly large number come from? It started circulating in May 2010 and has been repeated countless times since by frothing shock-jocks and some who should have known better.

Step forward Tim Wilson, the director of intellectual property and the Free Trade Unit and the IPA. Wilson sent asubmission to Senator Steve Fielding’s inquiry into plain packaging where we can examine his prowess with the numbers.

At page four in his executive summary he says plain packs would lead to a court order to award the tobacco industry  between $378 million and $3027 million per year. Table 2 (page 13) in his submission shows two lines of numbers for the total value of tobacco sales in Australia in 2006: one for the value including excise tax (which goes to the government) and one for the sales value ex-tax (in other words the returns to manufacturers and retailers combined). By taking the trouble to differentiate the two, Wilson must know that no court would order the return of the tobacco tax component to the companies: it’s the ex-tax value that fuels such a pipe-dream.

Wilson then calculates the ex-tax value on two assumptions: a 10% and a 30% fall in sales  each year that might follow the introduction of plain packs. He calculates these two figures at $378 million and $1.135 billion. So where does the $3 billion factoid come from? Are you ready for this? The tax-included sales value of a 30% fall is $3.027 billion.

So how reasonable are Wilson’s assumptions that plain packs will cause a fall of a minimum 10% through to 30% a year? Between 1999 and 2003 the average annual fall in total dutied cigarettes was just 2.6%. The most sales haveever fallen in one year was just shy of 10% in 1999 after the combined impact of a change in the way  cigarettes were taxed (from weight to per stick) and a big boost to the national quit campaign by health minister Michael Wooldridge.

Most analysts of the likely impact of plain packaging believe that its main impact will be on children over the next generations. Just as no Australian aged under 19 today has ever seen a local tobacco ad or tobacco sponsored sporting event, no child growing up after 2010 will ever see carcinogenic  tobacco products packaged in carefully market researched attractive boxes. Smoking rates by kids today are the lowest ever recorded. Plain packs are expected to continue that downward momentum, starving the industry of new generations of new smokers as older smokers quit and die early. Plain packs will probably not influence long-term, older smokers much.

Wilson’s $3 billion number is thus based on a projected decline, which is so far off the planet of declines ever recorded, that it is dreamland stuff. Worse, it appears to be a willful selection of the tax-included biggest number he could sight in his own table. To the delight of the industry, it has now become a virulent factoid with Google showing more than 7000 hits for “plain packs cigarettes” and “$3 billion”.  Tim, you are a true contributor to informed public debate.

*Simon Chapman is professor of public health at the University of Sydney.