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September 10th, 2014:

Cigarettes, Unbranded

Lisa Shuchman, Corporate Counsel

September 8, 2014

The products are virtually indistinguishable from one another, yet they retain more loyalty than Mac computers. And an expensive international legal battle is raging over them. Why? Because the products—cigarettes—are a recognized public health hazard, and governments around the world are trying to do whatever it takes to stop their citizens from lighting up.

Many countries now require cigarette manufacturers to display on their packages huge warning labels with graphic photos depicting the effects of smoking. But the boldest move yet takes this a step further: It denies cigarette and cigar manufactures the ability to market their goods with any distinguishable colors, logos or other marks, requiring instead that all tobacco products be sold in “plain packaging.”

Tobacco companies have spent years perfecting their marketing strategies with the likes of a macho Marlboro Man and a kid-friendly Joe Camel. And their strategies have worked. The major way that consumers distinguish one brand from another is through branding—the packaging of the box and the image the cigarettes project for the smoker. Take away the brand image, cigarette makers say, and you take away their very identity.

Australia is the only country so far to enact a plain packaging law. But Ireland is brashly promising to be next. And other countries are also talking about adopting plain packaging for tobacco products—including the United Kingdom, New Zealand and even France, where smoking rates are still high and images of Pablo Picasso, Jean-Paul Sartre and Albert Camus smoking unfiltered Gauloises are practically ingrained in the national consciousness.

So Big Tobacco is fighting back. Its principal weapon is intellectual property law. And in many ways it’s winning, with the threat of legal action acting as an impediment to cash-strapped nations.

“The tobacco industry believes that intellectual property laws give them the right to use their trademarks, and any law that limits that use constitutes infringement,” says Robert Stumberg, a law professor and director of the Harrison Institute for Public Law at Georgetown University Law, who has followed international tobacco litigation and regulation.

It’s important to understand that when people discuss plain packaging of tobacco products, the “plain” refers to the fact that all logos, distinctive fonts, colors and anything else that makes a cigarette brand appear distinctive in its box are stripped away. Beyond that, there is nothing “plain” about the packaging.

In fact, in Australia the boxes display huge warning labels depicting graphic photographs of the harmful effects of cigarette smoking: diseased lungs, a cancer-riddled mouth, a 34-year-old emaciated man dying of lung cancer. The warnings cover 75 percent of the front and 90 percent of the back of a cigarette pack, which is a uniform drab olive brown color. And the brand name, whether it be Marlboro, Camel, Lucky Strike or anything else, appears in a small, uniform font.

“The name of the brand is there, but you can only use the word mark in a prescribed way—using a specified size, font and color,” says Alistair Payne, an intellectual property attorney with the Dublin-based law firm Matheson who is an active member of the International Trademark Association (INTA) and has advised Philip Morris International on trademark issue arising from plain packaging proposals in Ireland. “There’s no special lettering permitted, no other word or logo. And from a trademark perspective, that is a taking of intellectual property.”

The tobacco industry tried to use that argument to stop Australia from implementing its plain packaging legislation. Philip Morris International, British American Tobacco and Imperial Tobacco sued, alleging that the law violated Australia’s constitution. The government would effectively be stealing their intellectual property, they said.

The High Court of Australia disagreed. The Australian constitution requires that there be an acquisition of property in order for there to be a taking, the judges ruled in 2012. But the Australian government did not acquire property, they ruled. The plain packaging law merely deprived tobacco companies from using their marks in any way they wished. And the country’s Trademark Act does not confer “a liberty to use registered trade marks free from restraints found in other statutes,” the judges wrote.

Big Tobacco lost that battle, but it was not ready to surrender. There is too much at stake. Australia’s win prompted other countries to start expressing interest in plain packaging. And for an industry already subject to strict advertising regulations, the possibility of losing individual brand logos, fonts and other distinctive marks on packaging could severely damage tobacco sales and the bottom line.

“What is at stake in these international cases is the very nature of trademarks in the global economy,” says Tyler Mace, assistant general counsel for Philip Morris International in Lausanne, Switzerland. “Is an owner of a trademark entitled to compensation when deprived of valuable property?”

Even before the loss in Australia’s domestic courts, Philip Morris had already found another venue to contest the law. In November 2011—on the same day Australia’s Parliament passed the plain packaging legislation—the tobacco company used its Hong Kong-based Asia subsidiary to file an investor-state claim against Australia. It alleged that the plain packaging law violated a bilateral investment treaty (BIT) between Hong Kong and Australia.

Philip Morris Asia charged that Australia’s plain packaging rules breached its obligations under the bilateral treaty. It deprived the company of the real value of its investments in Australia, it said, including “its brands, branding and intellectual property.” Investor-state disputes allow foreign corporations based in countries that are signatories to investment treaties to directly sue the countries in which they invest if they believe a government decision has unfairly affected their investment.

But the move by Philip Morris raised eyebrows. It wasn’t until the Australian government announced its intention to introduce a plain packaging law that the company did some corporate restructuring and had its Hong Kong-based subsidiary purchase its Australia-based counterpart—a move that positioned it to bring an investor-state case against Australia.

“Philip Morris went treaty shopping,” says Leonid Shmatenko, who has written about the tobacco disputes and is currently a Ph.D. candidate in public and international law at the University of Düsseldorf. “It had to do something, because Philip Morris International is based in Switzerland, a country that doesn’t have an investment treaty with Australia.”

Australia, in fact, is challenging Philip Morris’ right to bring the case, saying that the claim is an abuse of legal right and that the company does not have jurisdiction. It asked the three-judge tribunal hearing the case to first consider the question of Philip Morris’ jurisdiction. The company objected, but in April the international tribunal agreed to Australia’s request. It will first decide the jurisdiction question, and only if the judges determine that the court has jurisdiction will they hear arguments on the merits.

Meanwhile, five tobacco-producing countries have brought another intellectual property legal challenge to plain packaging laws—this one through the World Trade Organization. With financial assistance from the tobacco industry, the five—Honduras, Cuba, the Dominican Republic, Ukraine and Indonesia—have challenged Australia’s law, saying it violates the Agreement on Trade-Related Aspects of Intellectual Property Rights, commonly known as TRIPS.

“This is the case everyone is watching now,” says Benn McGrady, a law professor and director of the O’Neill Institute Initiative on Trade, Investment and Health at Georgetown University Law. “There is a strong possibility that if Australia is successful at the WTO, a number of other countries will go down this path.”

TRIPS has been signed by more than 150 countries and sets minimum standards for intellectual property regulation. The WTO ruling would set a precedent, determining the extent to which a government can deny a company the right to use its own trademark and distinguish its product from others. Tobacco companies say they have a right to use their trademarks. Their opponents say trade agreements do not give companies that right. Instead, they argue, trademarks provide a negative right: They simply prevent others from using the same mark.

TRIPS is silent on this question, legal analysts say, and it will be up to the tribunal to interpret the treaty on this point. But the main argument, they say, will hinge on the judges’ interpretation of Article 20 of the TRIPS agreement, which states that the use of a trademark “shall not be unjustifiably encumbered” in the course of trade.

“The question is whether Australia’s actions are justifiable,” says McGrady, whose research has focused on the intersection of public health and international trade and investment law.

Australia and its supporters argue that evidence will show that it is justifiable. Data published in June indicates that smoking rates in Australia fell at their fastest pace in more than two decades following the introduction of plain packaging. Big Tobacco quickly disputed those statistics, but Australia’s Treasury, which collects data on sales in order to levy a tobacco excise tax, then published data showing that 3.4 percent fewer cigarettes were sold last year than in 2012. The graphic health warnings and plain packaging became mandatory on Dec. 1, 2012.

But beyond the data, Australia says its case is supported by Article 8 of the TRIPS agreement, which says countries may “adopt measures necessary to protect public health.” In addition, in 2001 the WTO issued the Doha Declaration on the TRIPS Agreement and Public Health—a document that reaffirmed flexibility of TRIPS member states in circumventing intellectual property rights in the name of public health. The TRIPS Agreement, the declaration states, “does not and should not prevent members from taking measures to protect public health.”

Moreover, the World Health Organization Framework Convention on Tobacco Control, a United Nations treaty that is legally binding in almost 180 countries and was created “to protect present and future generations from the devastating health, social, environmental and economic consequences of tobacco consumption and exposure to tobacco smoke,” recommends most of the tobacco controls instituted by Australia. WHO also stated publicly that it supports Australia’s plain packaging legislation.

“It’s difficult to argue that what Australia has done is unjustifiable,” McGrady says.

But that’s exactly what Big Tobacco intends to do.

“This will be the first time that the full scope of Article 20 will be interpreted,” Philip Morris’ Mace says. “In the WTO, the issue is not whether tobacco is harmful. Instead, in the context of a treaty meant to protect intellectual property, can a government destroy the value and function of a registered trademark of a legal product?”

Groups such as the International Trademark Association and The U.S. Chamber of Commerce have issued statements in support of tobacco’s position. Plain packaging breaches intellectual property rights and infringes international trade agreements, they say. They add that it also will lead to smuggling and counterfeiting.

And since trademarks are dependent on “use” under common law, plain packaging laws will lead to the revocation of trademarks in many countries, notes Payne, the Dublin-based IP attorney. “If you don’t use it, you lose it—and any value attributable to the mark will go away,” he says.

To get around the “use” issue, Australia passed a law saying the nonuse of trademarks on tobacco products would not be grounds for revocation. But plain packaging still deprives a brand owner of a mark’s value, he says.

In addition, INTA is concerned that plain packaging will spread to other products—that tobacco is only the beginning. “Where will it end?” Payne asks. “This will set a precedent for other industries, and pretty soon we’ll be talking about restricting a brand owners’ trademark rights on fast food, sugary drinks and alcohol.”

While a domino effect is not imminent, legal analysts agree that there is sufficient vagueness in the treaties, and the WTO tribunal’s interpretation and ruling will set a new standard. “In the end, it will come down to finding a balance, says Shmatenko. “They’re going to have to weigh economic interests and property rights against the public good.”

While the legal battles continue, however, some tobacco critics say Big Tobacco has already won.

“Whenever a country goes beyond the WHO tobacco control recommendations, tobacco companies sue,” says Chris Bostic, policy director for the nonprofit group Action on Smoking and Health (ASH). “They do this not so much for a legal win, but to send a legal chill.”

Uruguay, for example, has been battling Philip Morris since 2010, with the tobacco giant alleging that the country is in violation of a bilateral investment treaty with Switzerland—home to Philip Morris International’s headquarters.

In 2009 Uruguay passed what was then the world’s most stringent tobacco control law, requiring that 80 percent of cigarette packs be covered by health warnings that include graphic photos of the health effects of smoking and restricting—but not eliminating—tobacco company branding. In its investor-state case, Philip Morris is demanding $25 million in compensation for damage to its brands.

The case is expected to cost Uruguay at least $8 million, an amount the country can ill afford. In fact, Uruguay was about to give up the fight because of the expense, according to Stumberg. But philanthropies owned by former New York City Mayor Michael Bloomberg, who founded the Bloomberg Initiative to Reduce Tobacco Use, pledged money to assist with Uruguay’s legal expenses.

“Philip Morris International’s annual global revenue is bigger than Uruguay’s GDP, and the tobacco industry is well aware of that,” says Bostic. “Tobacco will use whatever means it can to kill attempts at tobacco control, because it knows if one country succeeds, others may follow.”

Big Tobacco is also attacking countries in the European Union because they, too, have increased tobacco control measures. The countries, which already display graphic warnings on their cigarette packaging, adopted a revised EU Tobacco Products Directive in March. The new directive calls for an increase in the size of picture health warnings so they dominate each cigarette pack. In addition, flavored tobacco products, such as menthol cigarettes, are banned. And while the directive stops short of establishing plain packaging, it does allow each EU country to decide whether it wants its laws to go further.

In June, Philip Morris challenged the legislation, saying that it violates EU treaties governing competition and consumer rights.

Finally, the tobacco industry’s legal challenges have stalled moves by other countries considering the adoption of plain packaging, legal analysts say. New Zealand was one of the first countries to say it would follow Australia’s lead, but it is now waiting to see what happens in Australia’s bilateral treaty and WTO disputes.

The United Kingdom has also expressed interest in adopting plain packaging but is now concerned about the legal risk and is waiting to see what happens at the WTO. France, too, has vacillated about how far it will go in light of all the pending litigation.

Only Ireland appears to be pushing ahead, despite heavy lobbying from U.S. and European business, trade and intellectual property associations. Pressure has also come from U.S. elected officials, mostly from tobacco-growing states. And there have been legal threats from the tobacco industry. But in June, the country introduced its own plain packaging legislation. James Reilly, the country’s former health minister and a licensed medical doctor, has vowed to make Ireland smoke-free by 2025. The tobacco industry has said it will bring a legal challenge and demand compensation for the loss of its intellectual property if the legislation passes.

Some countries are growing increasingly concerned about the tobacco industry’s use of international treaties to squelch tobacco control efforts in the name of intellectual property. Malaysia has even suggested that a carve-out be created for tobacco so it is not included in the Trans-Pacific Partnership trade agreement currently being negotiated.

Stumberg and other legal analysts say that in time, the tribunals may rule that trade agreements do not give companies an inherent right to use their trademarks, and they may issue a finding that governments have regulatory authority for tobacco products.

But, he says, they could also rule the other way.

“In the meantime, these cases cost governments huge amounts of time and money, and that creates a chilling effect, he says. “Win, lose or draw, the tobacco companies have already slowed momentum and the move toward plain packaging around the world.”

Customs detects case of suspected evasion of tobacco duty

Hong Kong (HKSAR) – Hong Kong Customs detected earlier this week a case involving suspected evasion of tobacco duty by a company holding an Import and Export Licence for Cigarettes. The company was suspected to have mixed duty-not-paid cigarettes with duty-paid ones for sale, intending to evade tobacco duty of about $4.1 million.

In the operation, Customs seized about 2.2 million sticks of suspected illicit cigarettes, with a market value of about $4.7 million and a duty potential of about $4.1 million, from a company in Mong Kok and a store in Kwai Chung. Five men and two women aged between 25 and 54, including a company director, three company staff, two drivers and a conveyor, were arrested.

Customs has been monitoring the cigarette sales in the market.

It was found recently that there were discrepancies in the company’s stocks of duty-paid cigarettes and its business records. After several months’ follow-up investigations, it was suspected that someone had mixed the smuggled duty-not-paid cigarettes with duty-paid ones for sale in an attempt to evade tobacco duty.

Customs took enforcement action on August 25 to search the company’s office in Mong Kok and seized 600 000 sticks of suspected illicit cigarettes from 60 carton boxes. Customs further seized 1.6 million sticks of suspected illicit cigarettes from 131 carton boxes in a store at an industrial building in Kwai Chung.

The licensee of the company and six other persons involved in the case were arrested.

A Customs spokesman said today (August 28) that Customs has put in place an effective system on the control of import and export of cigarettes and tobacco products. A person who imports and exports cigarettes must possess a valid Import and Export Licence. A company holding an Import and Export Licence must also obtain the relevant permits from Customs prior to removal of cigarettes.

A licensee must comply with the relevant licensing and permit conditions. Customs will continue to closely monitor the market situation and strengthen intelligence gathering. Target enforcement action will be taken against any suspected illicit cigarette activities.

Under the Import and Export Ordinance, smuggling is a serious offence.

The maximum penalty is a fine of $2 million and imprisonment for seven years.

Under the Dutiable Commodities Ordinance, anyone involved in buying, selling or dealing with illicit cigarettes commits an offence. The maximum penalty is a fine of $1 million and imprisonment for two years. For cases of intentional evasion of duty, a magistrate may additionally impose a fine not exceeding 10 times the amount of duty payable on the dutiable goods.

Under the Crimes Ordinance, a person convicted of the offence at common law of conspiracy to defraud shall be liable to imprisonment for 14 years.

Illicit cigarette study is blowing smoke, says council on smoking and health

Wednesday, 10 September, 2014

Chris Lau

One out of three cigarettes smoked in Hong Kong last year was illicit, costing the government more than HK$3.2 billion in lost tax revenue, a study by two overseas think tanks says.

But the Hong Kong Council on Smoking and Health (COSH) says the results are “dubious”.

The Illicit Tobacco Indicator study – conducted by UK-based Oxford Economics and the International Tax and Investment Center (ITIC) in the US – suggests that the city’s illicit cigarette consumption rate stood as high as 33.6 per cent of 1.8 billion cigarettes smoked in 2013, causing a loss of HK$3.2 billion in taxes.

Of the 14 countries studied, Hong Kong had the third highest consumption rate, after Brunei and Malaysia, which ranked first and second, respectively.

The findings were contested by COSH. A study done by the council and the University of Hong Kong showed the consumption rate in 2012 was between 8.3 per cent and 14 per cent. The report by ITIC and Oxford Economics for the same year, however, suggested 35.9 per cent.

Yesterday, at the Canadian Chamber of Commerce, ITIC president Daniel Witt said the high rate was caused by substantial tax increases for cigarettes which force smokers to seek a cheaper alternative – illicit cigarettes. He cited a 50 per cent rise in cigarette tax between 2008 and 2009.

He shrugged off suggestions that the study could be biased as it was partly funded by Philip Morris International, an American tobacco company.

But COSH chairwoman Lisa Lau Man-man said: “The tobacco industry and its supporters always express strong opposition to tobacco tax increases under the pretext it will lead to a surge in cigarette smuggling.”

The best way to combat illicit smoking, Lau said, was through education and law enforcement.

The Standard: SAR hotspot for smuggled cigs

Wednesday, September 10, 2014

Illicit cigarettes make up nearly 34 percent of consumption locally, placing Hong Kong third in the list of cigarette-smuggling places in Asia, according to a study.

The study “Asia-14: 2013 Illicit Tobacco Indicator” notes that nearly 16,600 cases of cigarette- smuggling were handled by the Customs and Excise Department last year, with illicit cigarettes seized worth HK$222 million, up 15.6 percent over 2012.

Illicit cigarettes make up 33.6 percent of the total purchased in the SAR, according to the study, placing Hong Kong behind only Malaysia and Brunei.

The study was conducted by UK-based Oxford Economics in partnership with the US-based International Tax and Investment Center and funded by Phillip Morris International.

ITIC president Daniel Witt said that excessive tax rises are the main cause of the increase.

Planned and gradual tax increases were preferable to radical tax shocks, he said, adding that criminal syndicates could make huge profits if there was a sudden large increase in the price of cigarettes. BRYAN WONG