IP
Where there’s smoke…
Australia has decided to introduce plain packaging for tobacco, Jonathan Aumonier-Ward and Stacey Wood consider the implications of that decision for Australia and New Zealand

Australia’s world-first tobacco plain-packaging law has been welcomed with a number of legal challenges – and New Zealand has a vested interest in who comes out on top.

Associate Health Minister Tariana Turia has said our government will pass similar laws here if Australia is successful in removing all tobacco company logos from cigarette packs. Prime Minister John Key says New Zealand has not signed any trade agreements that will stop plans to implement plain packaging – but will such a law tarnish New Zealand’s reputation for fair trade?

A world first in Australia
The Australian Tobacco Plain Packaging Act 2011, which comes into force over the next six months, requires all cigarettes to be sold in plain olive packs, with 80 per cent covered in graphic health warnings, and labels printed in the same simple font. It prohibits “inserts and onserts” in cigarette packages, except as required by law. It specifically prohibits any trade marks from appearing anywhere on tobacco packaging, except as allowed by the associated regulations.

Australia is not the first country to draft legislation like this, but it is the first country to pass it into law. A similar bill in Canada failed in 1995 following a Supreme Court fight and pressure from affected companies. The four largest tobacco companies selling in Australia – Philip Morris, British American Tobacco, Imperial Tobacco, and Japan Tobacco – joined forces when the Australian legislation was proposed, forming the Alliance of Australian Retailers.

The companies argue that the Australian government is acting unconstitutionally and in violation of international agreements. They argue the government is trying to take ownership of the companies’ intellectual property by preventing them from using it in the country.

The Australian government has responded to tobacco companies, saying it does not intend to acquire or expropriate any of their property rights – merely curtail those rights.

The tobacco companies’ arguments
The tobacco companies suing the Australian government are relying on a number of arguments to challenge the plain-packaging law, beginning with a challenge to its validity under the Australian Constitution. In Australia, the Constitution is supreme law, and both the High Court and Federal Court have the power to determine its interpretation and application. The Court does have the power to strike down legislation that it deems unconstitutional.

Two constitutional challenges to the plain-packaging legislation were heard by the High Court of Australia on 17-19 April this year: British American Tobacco Australasia Limited and Ors v Commonwealth of Australia and J T International SA v Commonwealth of Australia. These challenges both rely on section 51(xxxi) of the Australian Constitution, which was invoked in the popular Australian movie The Castle. It states that the Australian Parliament has the power to make laws with respect to: “the acquisition of property on just terms from any State or person for any purpose in respect of which the Parliament has power to make laws”. The argument, both in The Castle, and in the current legal challenges, is that the terms of the acquisition are not “just”.

According to the tobacco companies’ submission, it does not matter that the trade marks, copyright, registered design, patent, get-up, goodwill, and rights in their packaging have not been transferred to the Commonwealth or any other person. It is enough that “the Commonwealth and other persons will receive a substantial part of the benefit that inured to the plaintiffs as the owner of that property, amounting to, “some identifiable benefit or advantage relating to the ownership or use of property”.

There is a chance the High Court will reject the argument that the government is unjustly acquiring the tobacco companies’ IP, since ownership is arguably not actually changing hands, but the outcome is not certain. At the same time, the affected parties are also challenging the legislation under international trade law. They have cited provisions of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), the Technical Barriers to Trade Agreement (TBT), and the General Agreement on Tariffs and Trade (GATT).

The complaining companies argue plain packaging falls foul of TRIPS Article 20, which states the use of trade marks shall not be “unjustifiably encumbered by special requirements”, including use that would make it less distinguishable from another trader’s. Preventing companies from using their trade marks is arguably a significant encumbrance, especially where a company’s mark is substantially or wholly image-based.

As a counter to that restriction, TRIPS Article 8 allows States to take measures “necessary for public health”. This provision is reflected in TBT Article 2.2 which requires “technical regulations shall not be more trade-restrictive than necessary to fulfil a legitimate objective, taking account of the risks non-fulfilment would create”. Technical barriers to trade explicitly include “packaging, marking or labelling requirements” – however, one of the “legitimate objectives” mentioned in Article 2.2 is public health. The question raised by both TRIPS and TBT is – what is “necessary”?

At a 15-16 June meeting of the World Trade Organization (WTO) Technical Barriers to Trade Committee last year, 14 countries raised concerns arguing “that such regulations could create an unnecessary barrier to trade” and that plain packaging is “more trade restrictive than necessary”.

Although the concerned members recognised Australia’s public health objective – to reduce tobacco use – they felt that the measures went beyond what was necessary to achieve that goal. Some argued there was insufficient evidence showing a link between plain packaging and reduced tobacco consumption. In response, Australia argued that its leading public health experts had recommended plain packaging, and that it was the “next logical step”.

Philip Morris Asia has also challenged the Australian Government for hurting its investments under the Hong Kong-Australia Bilateral Investment Treaty. The matter must go to arbitration under the terms of the treaty, and some legal commentators have expressed concern that the mere fact of arbitration may have a chilling factor in other jurisdictions.

There is a high level of debate surrounding the benefits of plain packaging and, balanced against the fact that this is a serious encumbrance on companies’ property rights, the legislation may fall short of the mark. We will know more when the outcomes of Australia’s challenges in the High Court and under the WTO Disputes Resolution Body are made public.

What could happen in New Zealand
New Zealand’s economy, being far from a global economic centre, necessarily has to rely strongly on intellectual property protection and the exploitation of such property rights. We should be worried about anything that dilutes our intellectual property rights.

New Zealand does not have a supreme written constitution, and it is not possible for citizens or corporations to challenge the validity of legislation that has been passed by the Government. The Attorney-General can warn Parliament that a piece of proposed legislation contravenes the New Zealand Bill of Rights Act 1990, but New Zealand Courts cannot strike out a bill that has passed into law. Tobacco companies would need to come up with a more creative argument to challenge plain-packaging legislation under domestic New Zealand law. Of more concern are the potential ramifications under our free trade agreements.

New Zealand’s bilateral agreements with Malaysia, Hong Kong, and China, and under the Association of Southeast Asian Nations (ASEAN), all contain clauses governing technical barriers to trade, including an undertaking to base technical barriers to trade on international standards.

New Zealand is a party to the World Health Organization’s (WHO) Framework Convention on Tobacco Control (FCTC), which recommends moving towards plain packaging because it “may” increase the noticeability and effectiveness of health warnings and messages, prevent the package from detracting attention from them, and address industry package-design techniques that may suggest that some products are less harmful than others. The FCTC has been ratified by 174 countries: is this enough to qualify as an “international standard”? The next question is: is it the objective of a regulation that determines whether it is reasonably necessary for protecting public health – or its actual effect?

New Zealand is also involved in negotiating a new Trans-Pacific Strategic and Economic Partnership (TPP). The goal of the negotiations is to expand a 2005 trade agreement between New Zealand, Brunei, Chile, and Singapore into a major international partnership set to include Australia, Malaysia, Peru, Japan, the United States, and Vietnam.

Critics of the TPP say the agreement’s proposed investor-state clauses will see a flood of lawsuits brought against our government by corporations who feel their interests are being threatened – including tobacco companies. Investor-state clauses can allow investors and corporations to initiate dispute resolution proceedings against a foreign government, without the backing or involvement of the government in their own State. There is a significant level of opposition to such clauses being included in the new TPP; an open letter signed by more than 100 people from various legal backgrounds, including 61 New Zealanders, was circulated in May, calling for these clauses to be excluded from the agreement.

It is important to note that our trade treaties with China, Malaysia, and under ASEAN already contain investor-state clauses, and that, as yet, no investors have brought proceedings against our government.

Last year, as the plain-packaging debate heated up, Australian Prime Minister Julia Gillard said she would no longer seek the inclusion of investor-state dispute resolution clauses in trade agreements with developing countries. Accordingly, Australia also opposes the inclusion of these clauses in the TPP.

There is no deadline yet for the TPP to be ratified, so it is possible exemptions and safeguards will be built into the agreement. But if and when the agreement is ratified, the New Zealand government may have further obligations to protect and promote foreign IP interests within our borders.

Is plain packaging “necessary”?
As discussed, Article 2.2 of the TBT says that technical regulations should not be more trade restrictive than necessary to “fulfil” a legitimate objective, and that international standards should be adopted except where they would be ineffective or inappropriate for achieving those goals. To minimise trade barriers, only the part of the standard that is necessary should be adopted.

Studies on whether plain packaging of tobacco products is effective in reducing smoking rates have shown mixed results. Evidence does show that plain packs are less attractive to smokers than branded packs, that plain packaging has negative connotations, and that health warnings become more noticeable in the absence of other marks. But does this mean it will result in fewer people smoking? The studies show smokers would be more likely to choose a branded pack than a plain pack, but is there evidence they would choose no pack over a plain pack?

A comprehensive review of 37 leading plain-packaging studies showed plain packaging reduced the appeal and attractiveness of cigarettes, and that consumers viewing plain packages were more likely to think about quitting (Moodie et al, Plain tobacco packaging: A systematic review, Public Health Research Consortium, 2012). However, the evidence as to whether that would lead to smokers actually quitting was not conclusive. As the authors noted, because plain packaging has not yet been introduced in any country, it has not been possible to evaluate the impact of the policy in practice.

Intellectual property or privilege?
The Australian case has significant implications for intellectual property in general, if the Court finds that plain packaging is not an unreasonable limitation on intellectual property rights. These implications extend not only to tobacco, but to all goods and services. Intellectual property rights are at risk in ways we have not previously considered.

Philip Morris Asia, in bringing the High Court case against the Australian government, has argued that the government seeks to deprive tobacco companies of their very lucrative investments in trade marks and other intellectual property.

In New Zealand, our Trade Marks Act of 2002 incorporates our obligations under TRIPS. It is framed around “rights”, and section 9 identifies trade marks as personal property. Section 10(1)(a) gives the owner of a registered trade mark the exclusive right to use that mark.

The question is how far these positive rights extend, and how far the government can go in limiting an intellectual property owners’ use of their own trade marks. Do trade mark owners in New Zealand really have a positive “right to use”, or just a right to exclusivity? Our laws ostensibly treat trade marks just the same as any other personal property: they can be registered under the Personal Properties Securities Act 1999; they can be sold, licensed, and assigned just like property; and when another party infringes on our rights to that property, we typically have remedies against that party.

However, section 17(3) of the Trade Marks Act specifically states a trade mark may be accepted for registration even where its use is “restricted or prohibited” by the Smokefree Environments Act 1990. This seems to predict a future where the plain-packaging law, or something like it, is in effect, and goes against the existence of a positive right to use in New Zealand.

It is one thing for the Australian government to say that it does not intend to remove or appropriate tobacco companies’ intellectual property, but what is the end result? Companies buy and sell IP regularly – and a trade mark registration that cannot be used is worth a lot less than one unfettered by trade regulations. The value in branding is not to be confused with the value of advertising: brand equity is the idea that consumers will pay more for a product with a well-known brand, and that they will purchase more of the branded product. Plain packaging differs from advertising restrictions in that it goes beyond limiting the activities of a trade mark owner, and starts to diminish the value of the owner’s property. It is important to note that TRIPS and the Paris Convention seem to avoid conveying any positive right to use, and limit their language to rights around exclusivity and protection against infringement. If the argument that plain packaging is an “encumbrance” to intellectual property fails, then it is unlikely a complainant could fall back on a “right to use” argument.

The real issue for New Zealand here is the potentially fundamental shift signalled by the government. Intellectual property has long been a right not merely a privilege. Generally speaking, people have been allowed and encouraged to acquire and exploit their intellectual property. The government is now signalling this may no longer always be the case – could this open the floodgates into other areas?

What happens next?
We have already seen that these new laws in Australia have brought about a number of complaints both in the local courts and the WTO for breaches of TRIPS/Paris and other agreements prohibiting the ‘unjustifiable denial’ of a person’s right to use his or her own trade marks. It seems inevitable that if you are taking away someone’s right to do something that you will face complaints.

If the US or any other country brings a WTO dispute against New Zealand over plain packaging, we could face a lengthy disputes-resolution process, and the possibility that the Disputes Resolution Body (DSB) will decide the barrier is too restrictive.

The disputes-resolution process begins with a compulsory consultation period in which the parties must attempt to resolve the issues. This lasts for upwards of 60 days.

Currently, Australia is in the “consultation” process with Honduras and the Ukraine over those nations’ challenges to Australia’s plain-packaging laws. If consultation fails, Honduras or the Ukraine could instigate arbitration, with WTO arbitrators appointed to adjudicate the dispute. Arbitration panels are made up of three to five experts from different countries who examine the evidence and decide who is right and who is wrong. Appointing the panel members can take 45 days or more, and it can be upwards of six months before they issue their report to the DSB. Once the panel’s report is reviewed, it is circulated to all WTO members before the DSB adopts the report – unless there is an appeal, which can add another few months to the process.

Once the case has been decided, the losing nation is expected to bring the offending law or policy into line with the ruling or recommendations – there is a 30-day deadline to state its intention to do so, but a “reasonable period of time” may be granted if immediate compliance is impractical.

If the country fails to act within this period, it must go into compulsory negotiations with the complaining country (or countries) to agree on “mutually acceptable” compensation, which could include tariff reductions in other areas for the aggrieved party.

If, after another 20 days, the parties cannot agree on compensation, the complaining side may ask the DSB for permission to impose limited trade sanctions; the DSB must grant this authorisation unless there is a consensus against the request.

In principle, the sanctions should be imposed in the same sector as the dispute, but if this is impractical, the action could be taken under another agreement.

The DSB monitors how adopted rulings are implemented – and any unresolved cases stay on its agenda indefinitely.

Depending on who the aggrieved country is, the threat of retaliatory sanctions could be significant for New Zealand. Our top five export destinations after Australia are the United States, Japan, China, the United Kingdom, and South Korea. We have a global reputation for being a leader in free trade – the World Bank once put us at the top of the list of free trade-friendly states. Given the importance of our free trade networks to our economy, it is likely the Government would abide by any DSB decision that concluded plain-packaging laws contravened our international obligations.

It is expected to be at least October before the High Court in Australia decides the case, and could be much longer before Australia’s WTO disputes with Honduras and Ukraine are resolved. The New Zealand government may want to watch that scenario play out before committing itself to this particular anti-smoking measure.

Jonathan Aumonier-Ward is a senior associate and Stacey Wood is an executive with A J Park. Jonathan can be contacted on 04 498 3461 or jonathan.aumonier-ward@ajpark.com and Stacey can be contacted on 04 498 3464 or stacey.wood@ajpark.com.

NZLawyer \\ issue 186 \\ 15 June 2012