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July 9th, 2016:

New Lawsuit Risks for Philip Morris International Inc. as EU Anti-Smuggling Deal Expires

The litigation risk of Philip Morris International (NYSE: PM) just rose exponentially as its decade-old agreement with the European Union to combat cigarette smuggling expires and the commission has opted to not extend it. With its cloak of legal protection now removed, investors ought to expect anti-smoking activists to launch lawsuits against the tobacco company for its alleged role in the illicit cigarette trade.

It’s been argued that as government taxation of tobacco products approached usurious levels, the tobacco companies sought to minimize the duties they had to pay by conspiring with smugglers who were often connected to organized crime to trade cigarettes on the black market.

Investigations purported to show that executives of Philip Morris, Reynolds-American (NYSE: RAI), British American Tobacco (NYSEMKT: BTI), and others were well aware of the nefarious connections their shady partners had, and with lawsuits piling up against them, they entered into an agreement with the EU to be shielded from liability for smuggling in exchange for making annual payments to the European Commission (EC) that would go to programs to combat cigarette smuggling.

The deal was signed on July 9, 2004 and would run for a period of 12 years. Similar agreements were subsequently signed with British American Tobacco, Imperial Tobacco (NASDAQOTH: ITYBY), and Japan Tobacco (NASDAQOTH: JAPAF), but lawsuits against Reynolds’ R.J. Reynolds division are still going on.

Philip Morris says the agreements are effective and noted that seizure of its own branded cigarettes has declined by 85% since 2006.

According to an annual survey conducted by accounting giant KPMG for the EC at the behest of the tobacco companies, illegal cigarettes accounted for 9.8% of all cigarettes consumed in the European Union in 2015, or 53 billion cigarettes, representing a loss in tax revenues of 11.3 billion euros. Yet most of the illegal cigarettes, or 88%, come from markets outside of the EU, with Belarus being the biggest source of the illicit trade. That, says the tobacco industry, highlights the effectiveness of the agreement it has had with the member states.

Philip Morris noted, “With or without (the agreement’s) renewal, PMI’s priority remains the measures contained within it. PMI’s ongoing commitment to continued efforts and investments around the world to tackle illicit trade remains intact and stronger than ever.”

Anti-smoking activists would beg to differ, saying the tobacco companies have gotten off cheap, paying almost $2 billion over the life span of the agreements, thus insulating themselves from lawsuits, which, if successful, would undoubtedly be a much larger cost.

Tobacco Company Payments Made Expiration Date
Philip Morris $1.2 billion over 12 years July 9, 2016
Japan Tobacco $400 million over 15 years Dec. 14, 2022
Imperial Tobacco $300 million over 20 years Sept. 27, 2030
British American Tobacco $200 million over 20 years July 15, 2030

Data source: Tobacco Control.

The activists are calling for immediate investigations of the tobacco companies following the expiration of their respective agreements. Because Philip Morris’ agreement is the first to expire, it is the one that will have the anti-smoking lobby’s guns trained on it.

While the member states of the EU were reportedly in favor of extending the agreements, no doubt enjoying the cash that flowed into their coffers from the tobacco companies, the commission said it was no longer necessary as strict new laws enacted this year that require tracing of tobacco sales while banning certain types of cigarettes made the agreements obsolete.

The industry had also angered the commission by suing to prevent the new laws from taking effect. Now Philip Morris, as the biggest and most visible symbol of that opposition, and no longer possessing its cloak of legal protection, could very soon see a wave of lawsuits wash over it.

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PAHO/WHO congratulates Uruguay for successfully defending tobacco control policies, “a model for the region”

The Pan American Health Organization/ World Health Organization (PAHO/WHO) congratulated n Friday the Government of Uruguay for winning an international legal case brought by the Philip Morris tobacco company. Philip Morris challenged tobacco control regulations implemented by Uruguay in compliance with its obligations under the Framework Convention on Tobacco Control (FCTC), the world’s first international public health treaty negotiated under the auspices of WHO.

The World Bank’s International Centre for Settlement of Investment Disputes (ICSID) confirmed today that the measures applied by the Government of Uruguay to reduce tobacco consumption did not violate Philip Morris’ trade rights as established in investment agreements between Uruguay and Switzerland, where the company is headquartered.

“This decision serves not only as recognition of Uruguay’s continuing efforts to protect its population against tobacco consumption and exposure to secondhand smoke but also as a precedent and a call to all countries in the Americas and indeed worldwide to implement these measures without fear of violating any treaty, despite challenges by the tobacco industry,” said PAHO Director Carissa F. Etienne.

She added that, “PAHO/WHO supported Uruguay’s defense of these measures, which were aimed at saving lives. This is a very important day for all, as this case becomes a model for the Region of the Americas and the world in fighting the tobacco epidemic irrespective of threats from the tobacco industry.”

In a letter to Tabaré Vázquez, President of Uruguay, Dr. Etienne offered her congratulations and said that the decision “reaffirms the sovereign right of States to protect the lives and health of their populations over commercial interests.”

In his address to the nation, President Vasquez stated, “We reaffirm our commitment to continue a direct and frontal fight against tobacco consumption to reduce more and more the heavy burden this epidemic places on our people and to continue to promote the full implementation of the Framework Convention on Tobacco Control, inviting all countries to join us in fighting this plague, without fear of reprisals from the powerful tobacco industry, just as Uruguay has done”.

PAHO/WHO views Uruguay’s laws and regulations aimed at reducing tobacco consumption as being fully aligned with the provisions of the FCTC. In force since 2005, the FCTC obliges its States Parties to apply a series of policies and measures to reduce tobacco consumption and protect their populations against secondhand smoke.

Philip Morris first presented its claim in February 2010, after Uruguay implemented regulations requiring health warnings to cover 80% of the main surface of tobacco packages, and limiting tobacco manufacturers to one unique package per cigarette brand. Uruguay presented written arguments defending its tobacco control efforts at ICSID, and PAHO/WHO supported the country’s defense with an amicus brief.

Despite the industry’s legal challenge, in 2014 Uruguay accomplished a full ban on tobacco advertising, promotion and sponsorship by including a new prohibition on product promotion and display at the point of sale. In addition, Uruguay became the second country in the Americas (after Nicaragua) to ratify the Protocol to Eliminate Illicit Trade in Tobacco Products, a new international treaty and the first FCTC protocol.

A 2012 study published in The Lancet showed an average 23% decline in tobacco consumption in Uruguay between 2005 and 2011. The decline was more pronounced among young people. A separate 2011 study showed an association between the implementation of regulations mandating smoke-free public places in Uruguay and a
22% decline in hospitalizations due to acute myocardial infarction.

Currently 30 of 35 countries in the Americas have ratified the FCTC, which calls for tobacco control measures including the use of graphic warnings on tobacco packaging; monitoring of tobacco consumption; measures to protect the population from secondhand smoke; support for smoking cessation; enforcement of bans on tobacco advertising, promotion and sponsorship and increased taxes on tobacco.

Tobacco kills some 6 million people worldwide each year, both through direct consumption and exposure to secondhand smoke. At least 1 million of these deaths occur in the Americas.

Tobacco giant loses lawsuit in Uruguay

The World Bank’s International Centre for Settlement of Investment Disputes has ruled in favor of Uruguay in a suit filed by Philip Morris International seeking compensation for economic damages caused by the nation’s anti-tobacco measures.

Uruguay imposed a ban on smoking in public spaces in 2006, as it raised taxes on tobacco products and forced firms to include large warnings and graphic images including diseased lungs and rotting teeth on cigarette packages.

It also banned the use of the words “light” and “mild” from cigarette packs to try to dispel smokers’ misguided beliefs that the products are safer.

“The health measures we implemented for controlling tobacco usage and for protecting the health of our people have been expressly recognised as legitimate and also adopted as part of the sovereign power of our republic,” Uruguayan President Tabare Vazquez said in a televised speech.

Vazquez, an oncologist, helped spearhead the measures during his first term in office from 2005 to 2010.

In a lengthy decision published on Friday, the ICSID said it had ruled to dismiss Philip Morris’ demand that the regulations be withdrawn, or not applied to the company, or that it be paid $US22 million ($NZ30 million) in damages instead.

It ordered the tobacco company to pay Uruguay $US7 million and to cover “all the fees and expenses of the Tribunal and ICSID’s administrative fees and expenses.”

Phillip Morris said it respected the tribunal’s decision.

“We’ve never questioned Uruguay’s authority to protect public health, and this case wasn’t about broad issues of tobacco policy,” Marc Firestone, Philip Morris International senior vice president and general counsel, said in a statement.

“The arbitration concerned an important, but unusual, set of facts that called for clarification under international law,” added Firestone.

The tobacco company said that it would like to meet with Uruguay’s government, to explore regulatory frameworks that would enable smokers “in the country to have informed access to reduced-risk alternatives to smoking.”

Action on Smoking and Health (ASH), the oldest anti-tobacco organization in the United States, applauded Uruguay for winning the case, but said Phillip Morris “accomplished its primary goal.”

Phillip Morris “will no doubt shed some public crocodile tears, but their main goal in launching the suit has been realized, six years and millions of dollars have been spent defending a nondiscriminatory law that was intended purely to protect public health,” said Laurent Huber, executive director for ASH.

“This has already resulted in regulatory chill in other countries, preventing tobacco legislation that would have saved lives,” Huber said.

Editorial: Tobacco tax increase in California is long overdue

Proposition 56, increasing the tobacco tax in California by $2 a pack, is the most important health care measure on the November ballot. By passing it, voters can save thousands of lives, substantially reduce the state’s health care costs and increase its atrociously low reimbursement rates for doctors who treat poor patients.

California spends $9 billion a year on tobacco-related medical care, and taxpayers pay about one-third of it. Most of the $1.6 billion the tax will generate will go to anti-smoking programs and to increase the Medi-Cal reimbursement rates. The rates now are so low that many doctors can’t afford to accept the thousands of new patients suddenly insured under Covered California, making health insurance a false promise.

Smoking kills 40,000 Californians every year. It’s the state’s No. 1 cause of preventable death.

Polls show voters strongly support a tobacco tax increase — but don’t underestimate the tobacco industry’s influence. A 2006 measure to raise the tax by $2.60 a pack went down by a 52 to 48 percent tally after Big Tobacco spent $66 million to defeat it.

For a state that purports to value health, California has an abysmally low tobacco tax: just 87 cents a pack, the 33rd highest in the country, and it hasn’t been raised since 1993. The national average is $1.63 a pack. New York charges $4.35. Even Texas charges $1.41.

The industry fights tax increases so aggressively for a simple reason. Taxes and the programs they fund are amazingly effective at reducing smoking.

When California increased the cigarette tax in 1988 by 25 cents a pack to pay for a smoking prevention program, the smoking rate for adults was 23 percent. In 2011 it was 12 percent. This has saved tens of thousands of lives and reduced health care costs by billions.

Virtually every major medical organization supports Proposition 56, including the California Medical Association, American Heart Association, American Cancer Society, American Lung Association and California Dental Association.

The need is urgent: e-cigarettes have increased teen smoking at an alarming rate. The Centers for Disease Control reported last year that vaping by middle- and high-school students tripled from 4.5 percent in 2013 to 13.4 percent in 2014. It’s an easy slip from there to tobacco, and the harm is similar.

The proposition raises the tax on e-cigarettes, as well as on other tobacco products, at levels equivalent to the per-pack cigarette hike.

It’s way past time for California to do this. Voters should resoundingly approve Proposition 56.

Uruguay: The little country that changed tobacco laws

Uruguay won a major case against Philip Morris in a World Bank ruling that could embolden other small countries that want to deter tobacco use.

The Latin American nation of Uruguay, with a GDP of $50 billion, went up against a tobacco company that takes in $80 billion annually – and won, ruled an international court on Friday.

Uruguay is a small country that impacts world politics only rarely. But that is precisely the point, say its allies in the fight against tobacco.

“The lesson here is that when a small country like Uruguay gets attacked, the public health community around the world will rally behind them so that these countries don’t have to fight these cases alone,” Matthew L. Myers, president of the Washington, D.C.-based Campaign for Tobacco-Free Kids, tells The Christian Science Monitor.

That Uruguay triumphed so completely in its litigation against Philip Morris International – the court even ordered Philip Morris to pay Uruguay’s court costs – suggests packaging laws for tobacco have friends in high places.

“What the tobacco companies do in these cases is just hunker down and look ugly and say, ‘We’re going to spend more money than you’ve got,’ ” Stanton Glantz of the Center for Tobacco Control Research and Education told the Monitor in May. “So the train of losses will embolden other countries to not be so frightened.”

The case was a risky one for Uruguay, Mr. Myers says. Some suggested Philip Morris would bankrupt the country if the government refused to settle a lawsuit over cigarette packaging regulation out of court, but Michael Bloomberg, three-term New York City mayor and founder of Bloomberg Philanthropies, promised the country financial support for court fees.

In 2015, a fund was established through the Campaign for Tobacco-Free Kids to help smaller countries fight for their anti-tobacco laws in court. Bloomberg Philanthropies and the Bill & Melinda Gates Foundation contributed money, meaning future efforts by tobacco companies to litigate restrictive packaging laws could become cases of billionaires fighting billionaires.

“It shows countries everywhere that they can stand up to tobacco companies and win,” Mr. Bloomberg said in a press release. “No country should ever be intimidated by the threat of a tobacco company lawsuit, and this case will help embolden more nations to take actions that will save lives.”

With this decision, the court upheld two strict laws on cigarette packaging. Throughout the seven years of litigation, Uruguay has required graphic warnings about the health dangers of tobacco to cover 80 percent of the cigarette pack, both front and back. It also limits each company to a single pack design, undercutting color-coded brands and use of words such as “light,” and forcing the company to pull seven of its twelve brands off Uruguay’s shelves, the Financial Times reported.

“We’ve never questioned Uruguay’s authority to protect public health,” Marc Firestone, general counsel at Philip Morris, told the Associated Press. “The arbitration concerned an important, but unusual, set of facts that called for clarification under international law, which the parties have now received.”

The debate around tobacco marketing has moved into the judicial sphere, where governments and tobacco companies are fighting cases around both domestic trademark laws and international trade agreements. This marks the second case this summer in which a government has won the right to restrict tobacco packaging in court. The first nation to win such a case was Australia, and then in May a British court upheld the government’s right to require plain, green packaging on cigarette cartons, the Monitor has reported previously.

“Because Australia was successful, the UK was successful, and because the UK was successful the EU can be successful, and because of this whole cascading impact, you see a lot of countries going above and beyond,” Timothy Mackey, a professor specializing in health law at the University of California San Diego, told the Monitor at the time.

The most immediate impact could come from Latin America itself, Meyers says, where governments in Uruguay and Chile have been weighing the implications of even stricter laws to require unadorned, uniform packaging plain on cigarette cartons. The court’s decision could embolden these countries to further regulate the tobacco industry inside their borders.