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Who really won the legal battle between Philip Morris and Uruguay?

The tobacco giant has to pay $7m to the small South American nation in a dispute over cigarette adverts. But the case could still set a worrying precedent

This month, campaigners celebrated the legal defeat of tobacco giant Philip Morris by Uruguay at the World Bank-hosted international centre for the settlement of investment disputes.

Philip Morris filed its controversial $25m (£19m) claim for damages at the World Bank arbitration court six years ago, saying it had “no choice but to litigate” due to Uruguay’s introduction of graphic warnings on cigarette packets. On 8 July, two of the three arbitrators ruled that Uruguay had the right to continue its anti-cigarette campaign, and that Philip Morris should reimburse $7m (£5.3m) in legal costs.

The David-Goliath battle between Uruguay and Philip Morris is an iconic case because it so clearly illustrates the way corporations can use international investment treaties to attack regulations made in the public interest.

So does Big Tobacco’s defeat by Uruguay mean that the growing public opposition to these investment treaties is mistaken? The corporate arbitration lawyers that take up many of the cases – and their supportive political allies – are keen to say that it proves the system can work fairly.

The question however is for whom is the system working? In investment arbitration cases, states never win. States can never file lawsuits against investors, so the best-case scenario for them is if the tribunal dismisses the investor’s accusations.

In this case, although Philip Morris was required to contribute $7m for legal costs, Uruguay will still have to pay a further $2.6m in financial costs and much more in terms of the non-material resources it has taken to fight this.

And this is a case that should never have been heard as it contradicted both the terms of the bilateral investment treaty between Switzerland and Uruguay (used as the basis for the claim) as well as the framework convention on tobacco control – the only binding multilateral convention on public health.

The arbitration panel’s decision to hear the case put a brake on the adoption of similar tobacco control measures in Costa Rica, Paraguay and New Zealand, among others.

Moreover, the lawsuit may have encouraged legal threats and actions by other corporations, hopeful that they could secure either revision of government policies or financial compensation.

In the past few years, Katoen Natie (logistics), Botnia (pulp/paper) and Farmashop (pharmacy) have threatened Uruguay with lawsuits. In March, a US-based telecommunications corporation, Italba, filed a lawsuit against the country.

The real winners in this proliferation of investor-state cases – which have surged globally from six in 1996 to 696 now – have been the corporate law firms that work on these long and complex cases. Typical arbitration lawyers, employed by either the state or a corporation, earn up to $1,000 an hour.

Philip Morris hired three international law firms (Sidley Austin, Lalive, and Shook, Hardy & Bacon), whereas Uruguay was represented by Foley Hoag. The three arbitrators that decided the case also received wages: nearly $1m between the three of them.

But more disturbing than the profits lawyers make is the power that they are given. Juan Fernández-Armesto, a Spanish lawyer and expert on investment arbitrators, said (paywall):

It never ceases to amaze me that sovereign states have agreed to investment arbitration at all […] Three private individuals are entrusted with the power to review, without any restriction or appeal procedure, all actions of the government, all decisions of the courts, and all laws and regulations emanating from parliament.

The German association of judges said in February (pdf) that these arbitration systems not only fail to meet international requirements for technical and financial independence, but are also unnecessary as disputes can be resolved through national courts.

So while Uruguay can celebrate this particular win over a corporate Goliath, perhaps the victory’s most useful contribution would be to raise awareness among states of the dangers of signing up to a privatised court system that leaves decisions on public policies in the hands of corporate lawyers. Failure to do so will mean the arrival of many more transnational Goliaths, armed not with spears but legal papers.

Cecilia Olivet is a researcher at the Transnational Institute and Alberto Villareal coordinates the trade and investment programme of Redes-Friends of the Earth Uruguay

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