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July 10th, 2017:

Philip Morris to pay millions to Australia on failed plain packaging case

Big tobacco battle: Final costs figure kept secret but reported as being up to €33.36m

Tobacco manufacturer Philip Morris will be forced to pay millions of dollars in legal fees to Australia after its failed case against plain packaging laws.

Big tobacco companies have fought vigorously against the Australian government’s plain packaging laws since they were introduced in 2011.

By banning logos and distinctive-coloured cigarette packaging, Australia’s laws went further than the advertising bans and graphic health warnings introduced in many other countries.

Philip Morris, Imperial Tobacco and Japan Tobacco quickly attempted to have the laws overturned through a constitutional challenge in the high court, which they lost in 2012.

Philip Morris Asia then took a case to the permanent court of arbitration in 2012. It tried to use the conditions of a 1993 trade agreement between Australia and Hong Kong to argue a ban on trademarks breached foreign investment provisions.

Corporate giant

The corporate giant not only lost but was criticised by the court, which found the case to be “an abuse of rights”.

The court published a decision on the payment of costs at the weekend, which it made in March. The decision, which brought five years of proceedings to a close, found Philip Morris Asia liable to pay Australia’s multimillion-dollar claim for legal costs.

The final costs figure was kept secret but Fairfax Media reported it as being up to AUS $50 million (€33.36 million).

Australia successfully argued Philip Morris must pay its court fees and expenses, the cost of expert witnesses, travel, and solicitors and counsel. It also claimed interest.

Australia had told the court its claim was modest and was a small proportion of what the tobacco giant had sought in damages.

Critical importance

It said Philip Morris had sought to challenge a public health measure of critical importance to Australia, making it important to “mount a robust and comprehensive response to all aspects of the claim”.

Philip Morris had tried to argue the government’s costs were unreasonable for a “legal team that consisted primarily of public servants”.

The company argued that two similar countries, Canada and the US, had never claimed more than US$4.5m and US$3m respectively in costs and fees. Australia’s claim was much more than that.

“The claimant emphasises that, even excluding the fees of four outside counsel, the respondent’s government lawyers claim over [REDACTED]in fees, even though Australia itself pays them ‘very modest government salaries’,” the court’s decision read.

But the court found Australia’s claim was reasonable, rejecting Philip Morris’s arguments.

“Taking into account the complexity of issues of domestic and international law relevant in this procedure, particularly for a government team usually not engaged in such disputes, the Tribunal does not consider that any of these costs claimed by the Respondent were unreasonable and should not have been incurred,” it found.

“In making this assessment, the Tribunal also takes into consideration the significant stakes involved in this dispute in respect of Australia’s economic, legal and political framework, and in particular the relevance of the outcome in respect of Australia’s policies in matters of public health.”

Earlier this year big tobacco failed in a separate bid to have the laws overturned by the World Trade Organisation. The decision was widely seen as a green light for more countries to follow Australia’s lead.

World’s tobacco firms are on a roll even as China market shrinks

Tobacco industry is bucking the declining consumption trend, although experts expect China to lead a new wave of volume decline as Beijing steps up its anti-smoking campaign amid increasing health concerns

Against the overall consumption slump, there are signs that the world’s tobacco giants stand a chance of returning to the heyday, after delivering a “stronger performance” in 2016, a recent study showed.

The study of the top 50 global consumer companies by OC&C Strategy Consultants found that active industry consolidation and a continued drive to increase margins have boosted profitability.

As such, global drives to discourage smoking and curb cigarette sales – from advertising bans to mandatory warnings on cigarette packaging featuring rotting lungs – have been inadequate to dent businesses of the big players like Philip Morris and British American.

“Tobacco prices have risen steeply in developed markets in the past 12 months,” said Will Hayllar, partner with OC&C Strategy Consultants.

“A continued drive to increase margins through pricing and cost cutting has boosted profitability.”

The industry sells 5.6 trillion cigarettes each year to the world’s one billion smokers, or triple the size of the US population.

The prevalent habit, or “epidemic,” as the World Health Organisation Director-General Margaret Chan called it, kills 6 million people through cancer and other preventable diseases every year and costs the world over US$1 trillion annually in health-care expenses and lost productivity.

The mounting casualties have prompted authorities to impose more stringent control over tobacco consumption.

In Britain, cigarettes were ordered to be sold in standardised packaging bearing graphic warnings of the harmful effects of smoking, while a 10 per cent tax hike in Japan on cigarettes has led to a substantial drop in smoking.

Shanghai is the latest city in China, a country with as many as 316 million smokers, that has implemented a smoking ban in public places earlier this year.

But multinational tobacco titans remain untouched by the headwinds.

Shares of New York-based Philip Morris have risen 29 per cent so far this year. Reynolds American, renowned for its Camel cigarettes, has enjoyed a 15 per cent rally this year, as it finished fiscal 2016 with a 31.6 per cent gain in adjusted net income.

Hayllar suggested the “addictive nature” of tobacco has made it easier for cigarette companies to lift prices without worrying about losing customers. A pack of cigarettes in the US costs an estimated US$6.42 in 2016, a 72 per cent surge from 2001, according to TMA, an industry group.

However, industry insiders expected China, where authorities have stepped up their anti-smoking campaign with a series of tax hikes and smoking bans in view of its ageing population and shrinking labour force, to lead a reversal of fortunes for the industry.

Beijing maintains a monopoly of China’s tobacco market through its state-owned China National Tobacco Corporation. The state firm contributes an astronomical 1.1 trillion yuan a year in tax revenue, an amount that exceeds the nation’s annual military budget.

While China accounts for about 20 per cent of the world’s population, it consumes 45 per cent of all cigarettes sold globally. Smoking, like drinking, is particularly common among mainland Chinese men, as offering and taking cigarettes are considered a routine in professional and personal encounters.

But 2015 was a turning point, when cigarette sales volume in China declined 2 per cent, the first drop in two decades, as a result of rising health consciousness and stricter anti-smoking regulations, according to a report by market researcher Euromonitor International.

“For once, perhaps in a generation, total worldwide cigarette volumes look more, not less, robust on the exclusion of the Chinese market,” said Shane MacGuill, head of tobacco with Euromomitor International, which projected the China market to further shrink in volume through 2020.

The lukewarm demand had already caused a wave of closures of tobacco retailers last year, China Tobacco noted in a recent report.

And it led the dominant cigarette behemoth to, for the first time, indicate that the volume of the world’s largest tobacco market had gone into a downward spiral.