Philip Morris v. Uruguay, Award, 8 July 2016

FREQUENTLY USED ABBREVIATIONS AND ACRONYMS
80/80 Regulation	Adopted through Presidential Decree 287/009 dated 15 June 2009
Advisory Commission	National Advisory Commission for Tobacco Control of the Ministry of Public Health of Uruguay
Arbitration Rules	ICSID Rules of Procedure for Arbitration Proceedings dated 10 April 2006
BIT or Treaty	Agreement between the Swiss Confederation and the Oriental Republic of Uruguay on the Reciprocal Promotion and Protection of Investments dated 7 October 1988
c - [X]	Claimants' Exhibit
Challenged Measures	The 80/80 Regulations and the SPR
CLA - [X]	Claimants' Legal Authority
CM	Claimants' Memorial on the Merits dated 3 March 2014
CR	Claimants' Reply on the Merits dated 17 April 2015
Dec. Jur.	Decision on Jurisdiction dated 2 July 2013
FCTC	WHO Framework Convention on Tobacco Control dated 21 May 2003
Hearing	Hearing held in Washington, D.C., on 19-29 October 2015
ICSID Convention	Convention on the Settlement of Investment Disputes Between States and Nationals of Other States dated 18 March 1965
ICSID or the Centre	International Centre for Settlement of Investment Disputes
MPH	Ministry of Public Health of Uruguay
PAHO	Pan-American Health Organization
R - [X]	Respondent's Exhibit
RCM	Respondent's Counter Memorial on the Merits dated 13 October 2014
RfA	Request for Arbitration dated 19 February 2010
RLA - [X]	Respondent's Legal Authority
RR	Respondent's Rejoinder on the Merits dated 20 September 2015
SCJ	Supreme Court of Justice of Uruguay
SPR	Single Presentation Regulation adopted through Ordinance 514 dated 18 August 2008
TCA	Tribunal de lo Contencioso Administrativo
Tobacco Control Program	National Program for Tobacco Control of the Ministry of Public Health of Uruguay
Tr Day [x] [p.] [line]	Transcript of the hearing on the merits held in Washington D.C., on 19-29 October 2015
VCLT	Vienna Convention on the Law of Treaties
WHO	World Health Organization

1.

This case concerns a dispute submitted to the International Centre for Settlement of Investment Disputes (" ICSID " or the " Centre ") on the basis of Article 10 of the Agreement between the Swiss Confederation and the Oriental Republic of Uruguay on the Reciprocal Promotion and Protection of Investments (including Ad Article 10 of the Protocol thereto) dated 7 October 1988 (the " Switzerland-Uruguay BIT " or the " BIT " or the " Treaty "), which entered into force on 22 April 1991, and Article 36 of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, dated 18 March 1965, which entered into force on 14 October 1966 (the " ICSID Convention ").

2.

The Claimants are Philip Morris Brand Sàrl (Switzerland) ("PMB"), Philip Morris Products S.A. (Switzerland) ("PMP") and Abal Hermanos S.A. ("Abal"), jointly referred to as " Philip Morris " or the " Claimants."

3.

PMB is a société à responsibilité limitée organized under the laws of Switzerland, with a registered office in Neuchâtel, Switzerland. PMB is the direct owner of 100% of Abal.¹ PMB substituted and replaced FTR Holding S.A., one of the original Claimants in this case.²

4.

PMP is a société anonyme organized under the laws of Switzerland on 22 December 1988, with a registered office in Neuchâtel, Switzerland.

5.

Abal is a sociedad anónima organized under the laws of Uruguay and has its registered office in Montevideo, Uruguay.³

6.

The Claimants' ultimate parent company,⁴ Philip Morris International Inc. (" PMI "), is incorporated and headquartered in the United States.⁵

7.

The Respondent is the Oriental Republic of Uruguay and is hereinafter referred to as " Uruguay " or the " Respondent." Uruguay is a constitutional democracy with a population of over 3.4 million people.

8.

The Claimants and the Respondent are hereinafter collectively referred to as the " Parties." The Parties' respective representatives and their addresses are listed above on page (i).

9.

At its core, the dispute concerns allegations by the Claimants that, through several tobacco-control measures regulating the tobacco industry, the Respondent violated the BIT in its treatment of the trademarks associated with cigarettes brands in which the Claimants had invested. These measures included the Government's adoption of a single presentation requirement precluding tobacco manufacturers from marketing more than one variant of cigarette per brand family (the " Single Presentation Requirement " or " SPR "), and the increase in the size of graphic health warnings appearing on cigarette packages (the " 80/80 Regulation "), jointly referred to as the " Challenged Measures. "

10.

The Single Presentation Requirement was implemented through Ordinance 514 dated 18 August 2008 (" Ordinance 514 ") of the Uruguayan Ministry of Public Health (the " MPH "). Article 3 of Ordinance 514 requires each cigarette brand to have a "single presentation" and prohibits different packaging or "variants" for cigarettes sold under a given brand. Until the enactment of the SPR, Abal sold multiple product varieties under each of its brands (for example, " Marlboro Red, " " Marlboro Gold, " " Marlboro Blue " and " Marlboro Green (Fresh Mint) "). As a result of Ordinance 514, Abal ceased selling all but one of the product variants of each brand that it owns or holds licenses to (e.g. only Marlboro Red). The Claimants allege that the measure and lack of variant sales have substantially impacted the value of the company.

11.

The 80/80 Regulation was implemented through the enactment of Presidential Decree No. 287/009 dated 15 June 2009 (" Decree 287 "). Decree 287 imposes an increase in the size of prescribed health warnings of the surface of the front and back of the cigarette packages from 50% to 80%, leaving only 20% of the cigarette pack for trademarks, logos and other information. According to the Claimants, this wrongfully limits Abal's right to use its legally protected trademarks and prevents Abal from displaying them in their proper form. This, in the Claimants' view, caused a deprivation of PMP's and Abal's intellectual property rights, further reducing the value of their investment.

12.

According to the Claimants, the Challenged Measures constitute breaches of the Respondent's obligations under BIT Articles 3(1) (impairment of use and enjoyment of investments), 3(2) (fair and equitable treatment and denial of justice), 5 (expropriation) and 11 (observance of commitments), entitling the Claimants to compensation under the Treaty and international law. They further claim damages arising from these alleged breaches. On this basis, the Claimants request that this Tribunal:

Either:

■ Order that Respondent withdraw the challenged regulations or refrain from applying them against Claimants' investments, and award damages incurred through the date of such withdrawal; or, in the alternative

■ Award Claimants damages of at least US$ 22,267 million, * plus compound interest running from the date of breach to the date of Respondent's payment of the award; and

Award Claimants all of their fees and expenses, including attorney's fees, incurred in connection with this arbitration; and

Award such other relief as the Tribunal deems just and appropriate.⁶

13.

Uruguay in turn holds that the Challenged Measures were adopted in compliance with Uruguay's international obligations, including the BIT, for the single purpose of protecting public health. According to Uruguay, both regulations were applied in a nondiscriminatory manner to all tobacco companies, and they amounted to a reasonable, good faith exercise of Uruguay's sovereign prerogatives. The SPR was adopted to mitigate the ongoing adverse effects of tobacco promotion, including the Claimants' false marketing that certain brand variants are safer than others, even after misleading descriptors such as "light," "mild," "ultra-light" were banned. The 80/80 Regulation was adopted to increase consumer awareness of the health risks of tobacco consumption and to encourage people, including younger people, to quit or not to take up smoking, while still leaving room on packages for brand names and logos. Thus for the Respondent, this case is "about protection of public health, not interference with foreign investment."⁷

14.

On this basis the Oriental Republic of Uruguay, submits that:

1. Claimants' claims should be dismissed in their entirety; and

2. Uruguay should be awarded compensation for all the expenses and costs associated with defending against these claims.⁸

15.

On 22 February 2010, ICSID received the request for arbitration dated 19 February 2010 (the " RfA ").

16.

On 26 March 2010, the Secretary-General of ICSID registered the RfA in accordance with Article 36(3) of the ICSID Convention and notified the Parties accordingly. In the Notice of Registration, the Secretary-General invited the Parties to proceed to constitute an Arbitral Tribunal as soon as possible in accordance with Rule 7(d) of the Centre's Rules of Procedure for the Institution of Conciliation and Arbitration Proceedings.

17.

The Parties agreed to constitute the Arbitral Tribunal in accordance with Article 37(2)(a) of the ICSID Convention and to a Tribunal consisting of three arbitrators, one to be appointed by each party and the third arbitrator and President of the Tribunal to be appointed by agreement of the two co-arbitrators. In the absence of an agreement between the two Party-appointed arbitrators, the Secretary-General would appoint the third and presiding arbitrator.

18.

On 1 September 2010, the Claimants appointed Mr. Gary Born, a U.S. national, as arbitrator. Mr. Born accepted his appointment on 3 September 2010. On 24 September 2010, the Respondent appointed Prof. James R. Crawford AC, SC, an Australian national, as arbitrator. Prof. Crawford accepted his appointment on 1 October 2010. Mr. Born and Prof. Crawford could not reach an agreement as to the third presiding arbitrator. Accordingly, it fell to ICSID's Secretary-General to appoint the President of the Tribunal. On 9 March 2011, the Secretary-General appointed Prof. Piero Bernardini, an Italian national, as President of the Tribunal. Professor Bernardini accepted his appointment on 15 March 2011.

19.

On 15 March 2011, the Secretary-General, in accordance with Rule 6(1) of the ICSID Rules of Procedure for Arbitration Proceedings (" Arbitration Rules ") notified the Parties that all three arbitrators had accepted their appointments and that the Tribunal was therefore deemed to have been constituted on that date. Ms. Anneliese Fleckenstein, ICSID Legal Counsel, was designated to serve as Secretary of the Tribunal.

20.

The Tribunal held a first session with the Parties on 25 May 2011. The Parties confirmed that the Members of the Tribunal had been validly appointed. It was agreed inter alia that the applicable Arbitration Rules would be those in effect from 10 April 2006 and that the procedural languages would be English and Spanish. The Parties also agreed on a schedule for the jurisdictional phase of the proceedings, including for the production of documents. The agreement of the Parties was embodied in the Minutes of the First Session signed by the President and the Secretary of the Tribunal and circulated to the Parties on 1 June 2011.

21.

On 31 August 2011, as agreed by the Parties, the Tribunal issued Procedural Order No. 1 for the Protection of Confidential Information.

22.

Pursuant to the agreed upon schedule of pleadings on jurisdiction, the Respondent filed the Memorial on 24 September 2011, the Claimants filed the Counter-memorial on 23 January 2012, the Respondent filed the Reply on 20 April 2012, and the Claimants filed the Rejoinder on 20 July 2012.

23.

The hearing on jurisdiction was held on 5 and 6 February 2013, at the International Chamber of Commerce in Paris. Information regarding those present at the hearing and additional details are included in the Tribunal's Decision on Jurisdiction.

24.

On 2 July 2013, the Tribunal issued a Decision on Jurisdiction affirming its jurisdiction over the claims presented by the Claimants. This decision constitutes an integral part of this Award and is appended hereto as Annex A.

25.

The Tribunal ruled that it had jurisdiction over the dispute. It held that its jurisdiction over the denial of justice claim, which had not been included in the RfA, was established under Article 46 of the ICSID Convention, and that it had jurisdiction over all other claims insofar as they were based on alleged violations of the BIT. Specifically it ruled as follows:

a. That it has jurisdiction over the claims presented by Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. as far as they are based on alleged breaches of the Agreement on the Reciprocal Promotion and Protection of Investments concluded on 7 October 1988 between the Swiss Confederation and the Oriental Republic of Uruguay;

b. That it has jurisdiction under Article 46 of the ICSID Convention over the Claimants' claim for denial of justice;

c. To make the necessary order for the continuation of the procedure pursuant to Arbitration Rule 41(4); and

d. To reserve all questions concerning the costs and expenses of the arbitral proceedings for subsequent determination.⁹

26.

On 7 August 2013, the Parties filed a proposed procedural schedule for the submission of pleadings on the merits, which was approved by the Tribunal on 19 August 2013.

27.

Pursuant to the agreed upon schedule of pleadings, the Claimants filed a Memorial on the Merits on 3 March 2014.

28.

On 22 September 2014, the Parties filed a revised procedural schedule for the submission of the remaining pleadings on the merits, which was approved by the Tribunal on 23 September 2014.

29.

On 13 October 2014, the Respondent filed a Counter-Memorial on the Merits pursuant to the agreed upon schedule of pleadings.

30.

On 28 November 2014, the Claimants filed a request with the Tribunal for an order adjusting the schedule for the production of documents phase. On 3 December 2014, the Respondent filed a response to the different issues stated by the Claimants in their letter and asked the Tribunal to approve the new schedule for production of documents agreed by the Parties.

31.

On 4 December 2014, the Tribunal approved the revised schedule for production of documents agreed by the Parties.

32.

On 17 December 2014, both Parties submitted their response to the exchanged request for documents, pursuant to the approved schedule for production of documents. On 30 and 31 December 2014, the Parties submitted their replies to the responses for the document request submitted by each Party.

33.

On 8 and 9 of January 2015, the Respondent and the Claimants submitted observations in connection with the replies to the responses for the document production requests that had been transmitted to the Tribunal on 30 and 31 December 2014.

34.

On 13 January 2015, the Tribunal issued Procedural Order No. 2 concerning the production of documents.

35.

On 30 January 2015, the World Health Organization (the " WHO ") and the WHO Framework Convention on Tobacco Control Secretariat (the " FCTC Secretariat ") submitted a request to file a written submission as a non-disputing party, pursuant to ICSID Arbitration Rule 37(2).

36.

On 9 February 2015, each Party filed observations on the non-disputing party's application, as instructed by the Tribunal.

37.

On 12 February 2015, the Tribunal granted leave to the WHO and the FCTC Secretariat to file a written submission pursuant to ICSID Arbitration Rule 37(2) and informed the Parties that it would subsequently issue a reasoned decision.

38.

On that same date, the WHO and the FCTC Secretariat's amicus curiae brief dated 28 January 2015 (the " WHO Amicus Brief ") was transmitted to the Parties and the Tribunal. In their amicus brief, the WHO and the FCTC Secretariat concluded that:

The action taken by Uruguay was taken in light of a substantial body of evidence that large graphic health warnings are an effective means of informing consumers of the risks associated with tobacco consumption and ofdiscouraging tobacco consumption. There is also a substantial body of evidence [sic] that prohibiting brand variants is an effective means of preventing misleading branding of tobacco products. These bodies of evidence, which are consistent with state practice , support the conclusion that the Uruguayan measures in question are effective means of protecting public health.¹⁰

39.

The Tribunal's reasoning for its 12 February 2015 decision was provided in Procedural Order No. 3 on 17 February 2015. In this Order, the Tribunal stated, among others that:

[T]he Submission may be beneficial to its decision-making process in this case considering the contribution of the particular knowledge and expertise of two qualified entities [the WHO and the FCTC Secretariat] regarding the matters in dispute. It considers that in view of the public interest involved in this case, granting the Request would support the transparency of the proceeding and its acceptability by users at large.

In the light of all the foregoing considerations, the Tribunal decides to allow the filing by the Petitioners of the Submission in this proceeding pursuant to Rule 37(2). (¶¶ 28, 29).

40.

On 6 March 2015, the Pan American Health Organization (the " PAHO") submitted a request to file a written submission as a non-disputing party, pursuant to ICSID Arbitration Rule 37(2).

41.

As instructed by the Tribunal, on 16 March 2015 each Party filed observations on the PAHO's request to file a written submission as a non-disputing party.

42.

On 18 March 2015, the Tribunal decided to grant the PAHO leave to file a written submission pursuant to ICSID Arbitration Rule 37(2) and informed the Parties that it would subsequently issue a reasoned decision.

43.

On that same date PAHO's amicus curiae brief dated 6 March 2015 (the " PAHO Amicus Brief ") was transmitted to the Parties and the Tribunal. In its submission, PAHO concluded that:

PAHO and its Member States publicly recognize and fully support Uruguay's efforts to protect its citizens from the harmful effects of tobacco consumption, including through its implementation of the 80% Rule and the Single Presentation Rule measures and have expressed their deep concern about misinformation campaigns and legal actions instituted by the tobacco industry against tobacco contro1.

PAHO supports Uruguay's defense of the 80% Rule and the SPR, which are aimed at saving lives, and recognizes it as a role model for the Region and the world.

Uruguay's tobacco control measures are a reasonable and responsible response to the deceptive advertising, marketing and promotion strategies employed by the tobacco industry, they are evidence based, and they have proven effective in reducing tobacco consumption. For this simple reason, the tobacco industry is compelled to challenge them. (footnotes omitted).¹¹

44.

On 19 March 2015, each Party filed observations on the WHO Amicus Brief.

45.

The Tribunal's reasoning for its 18 March 2015 decision was provided in Procedural Order No. 4 on 20 March 2015.

46.

On 24 March 2015, the Tribunal issued a revised version of Procedural Order No. 4, as agreed by the Parties. In this Order, the Tribunal followed the same reasoning as in its order granting access to the WHO and FCTC Secretariat and stated that:

[T]he Submission may be beneficial to its decision-making process in this case considering the contribution of the particular knowledge and expertise of a qualified entity, such as PAHO, regarding the matters in dispute. It considers that in view of the public interest involved in this case, granting the Request would support the transparency of the proceeding and its acceptability by users at large.

In the light of all the foregoing considerations, the Tribunal has decided to allow the filing by the Petitioner of the Submission in this proceeding pursuant to Rule 37(2). (¶¶ 30-31)

47.

On 18 April 2015, the Claimants submitted their Reply on the Merits.

48.

On 18 May 2015, each Party filed observations on the PAHO's Amicus Brief.

49.

On 22 July 2015, the Avaaz Foundation (" Avaaz ") submitted a request to file a written submission as a non-disputing party, pursuant to ICSID Arbitration Rule 37(2).

50.

As instructed by the Tribunal, each party filed observations on 6 August 2015 concerning Avaaz' request to file a written submission as a non-disputing party.

51.

On 4 August 2015, the Centre informed the Parties and the Tribunal that Ms. Mairée Uran Bidegain, ICSID Legal Counsel, would act as Secretary of the Tribunal for the remainder of the case.

52.

On 7 August 2015, the Tribunal issued a decision denying the petition by Avaaz to file a written submission as a non-disputing party. Having considered the petition and the Parties' respective arguments, the Tribunal concluded that:

The alleged "unique composition of its membership," the only argument

provided by the Petitioner, is not a sufficient basis to consider that the Avaaz Foundation may offer a perspective, particular knowledge or insight that is different from that of the disputing parties nor one that is relevant to this arbitration.

The Tribunal further notes that, as recognized by the Petitioner, the Petition is

submitted late in the proceedings, when one of the Parties' has presented all of

its scheduled written pleadings to the Tribunal. The intervention of a nondisputing party therefore may disrupt the proceeding and unfairly prejudice one of the Parties. (p. 2)

53.

On 14 September 2015, the Inter-American Association of Intellectual Property (in Spanish, Asociación Interamericana de la Propiedad Intelectual, ("ASIPI") submitted a request to file a written submission as a non-disputing party, pursuant to ICSID Arbitration Rule 37 (2).

54.

On 22 September 2015, each Party submitted observations on ASIPI's request to file a written submission as a non-disputing party, as instructed by the Tribunal.

55.

On 24 September 2015, the Tribunal issued a decision denying the petition by ASIPI to file a written submission. After carefully reviewing the petition and the Parties' respective arguments, the Tribunal stated among others the following:

Pursuant to [Arbitration Rule 37(2)], the Tribunal must not only consider whether the person or organization that seeks to intervene has the required expertise or experience, but also whether it is sufficiently independent from the disputing parties to be of assistance to the Tribunal. Prior ICSID tribunals have already recognized the importance of the lack of connection between the petitioner and the disputing parties for the tribunal's determination to accept or deny non-disputing parties' submissions.

The Respondent has brought to the Tribunal's attention, the "close relationship between ASIPI and Claimants," by identifying the participation of Claimants' lawyers on the management board and on specific thematic committees of ASIPI. The Tribunal cannot ignore this detailed information.

In addition, the Tribunal highlights that the Petition has been submitted little over one month before the start of the hearing for the merits phase of these proceedings

Consistent with its prior determinations on this question, the Tribunal considers that this belated intervention will disrupt the proceeding and has the potential to unduly burden and unfairly prejudice the Parties, including in connection with their current preparation of the forthcoming hearing. [...] (p. 2)

56.

The hearing on the merits was held from 19 to 29 October 2015, at the Centre's seat in Washington, D.C. In addition to the Members of the Tribunal and the Secretary of the Tribunal, present at the hearing were:

For the Claimants:

Party Representative:

Mr. Marc Firestone

Ms. María del Carmen Ordóñez López

Mr. Diego Cibils

Ms. Tiffany Steckler

Ms. Luisa Menezes

Mr. John Bails Simko

Mr. Steve Reissman

Mr. Marco Mariotti

Party Counsel: Ms. Avery Archambo

Mr. Stanimir A. Alexandrov Mr. Hisham El-Ajluni

Mr. James E. Mendenhall Mr. Carlos Brandes

Ms. Jennifer Haworth McCandless Mr. Ken Reilly

Ms. Marinn Carlson Ms. Madeleine McDonough

Mr. Patrick Childress Mr. Bill Crampton

Ms. Courtney Hikawa Ms. Catherine Holtkamp

Ms. María Carolina Durán Mr. Leland Smith

Mr. Andrew Blandford Mr. Stuart Dekker

Mr. Michael Krantz Mr. Dushyant Ailani

Ms. Samantha Taylor

For the Respondent:

Party Representative:

Dr. Miguel Toma

Dr. Jorge Basso

Ambassador Carlos Gianelli

Dr. Carlos Mata Prates

Dr. Inés Da Rosa

Dr. Verónica Duarte

Ms. Marianela Bruno

Party Counsel: Ms. Christina Beharry

Mr. Paul S. Reichler Mr. Yuri Parkhomenko

Mr. Lawrence H. Martin Dr. Constantinos Salonidis

Ms. Clara E. Brillembourg Ms. Analía González

Professor Harold Hongju Koh Mr. Eduardo Jiménez de Aréchega

Mr. Andrew B. Loewenstein Ms. Francheska Loza

Ms. Melinda Kuritzky Ms. Gabriela Guillén

Mr. Nicholas Renzler Ms. Nancy López

Mr. José Rebolledo Mr. Oscar Norsworthy

Ms. Anna Aviles-Alfaro

The following persons were examined:

On behalf of the Claimants :

Witnesses

Mr. Chris Dilley Mr. Diego Cibils

Mr. Nicolás Herrera

Experts

Professor Julián Villanueva Professor Jan Paulsson

Professor Alexander Chernev Mr. Brent Kaczmarek

Professor Jacob Jacoby Mr. Kiran P. Sequeira

Professor Gustavo Fischer

Professor Christopher Gibson Professor Alejandro Abal Oliú

On behalf of the Respondent :

Witnesses:

Dr. Jorge Basso, Minister of Public Health Dr. Eduardo Bianco, Uruguayan Medical

Dr. Winston Abascal, Ministry of Public Union/Tobacco Epidemic Research Cente

Health (CIET Uruguay)

Dr. Ana Lorenzo, Ministry of Public Health

Experts:

Dr. Andrea Barrios Kübler Dr. Joel B. Cohen

Dr. Nuno Pires de Carvalho Dr. Timothy Dewhirst

Professor Nicolas Jan Schrijver Dr. David Hammond

Dr. Santiago Pereira Mr. Jeffrey A. Cohen

57.

On 2 November 2015, the Tribunal issued Procedural Order No. 5, providing the procedural steps for the remainder of the proceeding.

58.

The Parties filed their submissions on costs on 19 January 2016, updating the same on 8 April 2016 as instructed by the Tribunal.

59.

The proceeding was closed on 27 May 2016.

60.

The Tribunal provides below a general overview of the factual background that has led to this dispute, to the extent it is substantiated and is material for the determinations and decisions in this Award. In doing so, it will adopt a chronological timeline when possible, referring to the evidence presented by the Parties and describing the Parties' positions with regard to disputed facts.

61.

This section is not intended to be an exhaustive description of all facts underlying this dispute. Some facts will also be addressed, to the extent relevant or useful, in the context of the Tribunal's legal analysis of the issues in dispute, and will be supplemented by relevant factual information including that provided by witnesses and experts in their written statements and reports, and in the course of oral examination at the hearing.

62.

Below, the Tribunal describes: (A) the Claimants' operations and investments in Uruguay; (B) Uruguay's tobacco control policy and the applicable regulatory framework; (C) the use of tobacco in Uruguay before and after the Challenged Measures; (D) the domestic court proceedings relating to the Challenged Measures, and (E) the regulatory framework for trademarks in Uruguay.

63.

Abal was formally established in its present form in 1945, although in an earlier incarnation it had manufactured and marketed tobacco products in Uruguay since 1877.¹² Its main business after 1945 continued to be manufacturing cigarettes for export and sale in the local market.¹³

64.

Abal was acquired by PMI in 1979.¹⁴ Twenty years later, in 1999, it became a wholly owned subsidiary of FTR Holding S.A (" FTR ").¹⁵ On or before 5 October 2010, PMB, as FTR's successor, became Abal's 100% direct owner.¹⁶

65.

Abal concluded license agreements to manufacture and sell cigarettes under various Philip Morris brands. PMP was the owner of the Marlboro, Fiesta, L&M and Philip Morris trademarks which it licensed to Abal.¹⁷ Abal also used a number of Uruguayan trademarks registered in its own name to sell tobacco products.¹⁸ In particular, Abal sold the Marlboro, Fiesta, L&M, Philip Morris, Casino, and Premier brands of cigarettes in Uruguay; and it owns the Casino, Premier and associated trademarks.¹⁹

66.

On 14 March 2002, the then President of Uruguay issued a "Declaration of Promoted Activity for Investment Project of Abal Hnos. S.A.," which included a package of tax exemptions and credits to Abal with the objective of increasing Abal's production capacity in order to "supply the Paraguayan market with Philip Morris products . "²⁰

67.

As described further below, from 2005 onward, Uruguay initiated a tobacco control campaign and issued several decrees to regulate the tobacco industry.

68.

Between 2008 and 2011 the factory generated revenues of more than US $30 million and employed about 100 people.²¹ In October 2011, Abal closed its factory in Uruguay.²² Since that time, Abal's main activity has been the importation of cigarettes from its Argentine affiliate, Massalin Particulares S.A., for sale in Uruguay and for re-exportation.²³

69.

At the jurisdictional stage of the proceedings, the Claimants' investments in Uruguay were considered to include the local manufacturing facility (now closed), shares in Abal, rights to royalty payments and trademarks.²⁴

70.

At the merits stage, the Claimants submit that their investments in this arbitration are composed by three main elements: (i) Abal itself, (ii) "brand assets," including the associated intellectual property rights owned by or licensed to the Claimants, and (iii) the goodwill associated with the Claimants' brands.²⁵

71.

Concerning the first element, since PMB directly owns 100% of the shares of Abal, the Claimants consider Abal itself (and the Abal shares held by PMB) to be an investment of PMB.²⁶

72.

Concerning the second element, the Claimants consider that they possess a direct or indirect interest in the "brand assets" that they developed and used in Uruguay. The Claimants' alleged brand assets include (a) the Claimants' brands and brand families; (b) the Claimants' variants; and (c) the intellectual property rights associated with the Claimants' brands, brand families, and variants. Each of these brand assets can be summarized as follows:

- Brands, brand families. Until 2009, Abal sold cigarettes under the following six brands: Marlboro, Fiesta, Philip Morris, Premier, Galaxy, and Casino. The bundle of variants sold under a particular brand is known as a "brand family."²⁷

- Variants. Before 2009, Abal sold thirteen variants within its six brand families. Variants within a given brand family share certain characteristics such as quality, brand heritage, or taste but may also exhibits slightly different characteristics. Marlboro was Abal's most important brand family. The Marlboro brand family consisted of four variants— Marlboro Fresh Mint, Marlboro Red, Marlboro Blue, and Marlboro Gold.²⁸

- Associated intellectual property rights. These intellectual property rights consist of the trademarks associated with the brand markings on the products that Abal sold before 2009. Abal owns the trademarks associated with the Premier and Casino brand families, while the Claimants PMP and PMB own and license to Abal the trademarks for all of the other products that Abal currently markets in Uruguay or previously marketed in Uruguay before the SPR.²⁹

73.

Finally, concerning the third element, the Claimants contend that they possessed valuable goodwill that was associated with their brand assets and business as a whole in Uruguay. In the Claimants' view, the awareness of their brands was valuable in that consumers were willing to pay more for products that carried the Claimants' well-known brands. That goodwill is also alleged to be an asset that is a protected investment under the BIT.³⁰

74.

It is not in dispute between the Parties that smoking cigarettes and other tobacco products represents a serious health risk.³¹ Cigarettes are a legal consumer product that is highly addictive and cause the deaths of up to half of long-term consumers when used as intended.³² According to the WHO "approximately 5.1 million adults aged 30 years and over die from direct tobacco use each year. In addition, some 603,000 people die from exposure to second-hand smoke every year."³³

75.

Uruguay has one of Latin America's highest rate of smokers, being in third place in the region after Chile and Bolivia.³⁴ As of 2009, more than 5,000 Uruguayans died each year from diseases linked to tobacco consumption, mainly due to cardiovascular diseases and cancer.³⁵ Consumption of tobacco and exposure to tobacco smoke are responsible for 15% of all deaths of Uruguayans over 30 years of age, which is higher than the world average of 12%.³⁶

76.

Smoking also has an economic impact. Uruguayan smokers spent an average of 20% of the national minimum wage to sustain their habit and the health costs linked to smoking in Uruguay are estimated to amount to US$150 million per year.³⁷

77.

Against this background, Uruguay has positioned itself in the forefront of States in terms of anti-smoking policy and legislation, with an important push from its current President, Tabaré Ramón Vázquez Rosas, who in his earlier career was an oncologist, and whose first presidential term was between 2005 and 2010.

78.

Uruguay has taken a range of increasingly stringent regulatory measures of tobacco control, including restrictions on advertising, mandatory health warnings, increased taxation, and prohibition of smoking in enclosed spaces.³⁸ These are discussed in detail below. In addition, starting in the year 2000, it implemented a number of policies that translated into the creation of a series of governmental and non-governmental expert groups and agencies focusing on the study and prevention of tobacco use. The paragraphs below summarize the most important agencies in light of the issues in dispute.

79.

In 2000, Uruguay's Dirección General de Salud (General Directorate of Health), of the MPH, participated in the creation of the National Alliance for Tobacco Control, an interdisciplinary non-governmental organization, with members drawn from various sectors of the public health community, including governmental, parastatal, local and international, and academics which promoted Uruguay's participation in the Framework Convention on Tobacco Control.³⁹ It operated until 2006.

80.

In 2004, the MPH created the National Advisory Commission for Tobacco Control (the " Advisory Commission "), a governmental entity made up of experts from the public sector, civil society, and representatives of medical associations, to advise the Ministry of Public Health.⁴⁰ "The Advisory Commission provides technical support to the Ministry of Public Health, evaluating the efficacy of current smoking-related policies, and monitoring and discussing the implementation of the law."⁴¹ Historically, the Advisory Commission has met approximately twice a month to discuss issues regarding tobacco control.⁴²

81.

Tobacco companies also participate in tobacco control policy by submitting recommendations. In that same year, 2004, Abal submitted a detailed recommendation to the Government proposing alternative regulatory action.⁴³

82.

In 2005, the MPH created the National Program for Tobacco Control (Programa Nacional para el Control del Tabaco) (the " Tobacco Control Program "). The Tobacco Control Program is the focal point responsible for planning, developing, and implementing national-level tobacco control policies in Uruguay: it reports to the General Directorate of Health and the Minister of Public Health. The Tobacco Control Program is also charged with ensuring compliance with applicable regulations. It deploys trained inspectors throughout the country to carry out this task.⁴⁴

83.

At the national level, the Tobacco Control Program serves as the representative of the MPH on the Advisory Commission. Relevant proposals of the Advisory Commission are submitted to the Government through the Tobacco Control Program. Similarly, if a tobacco measure originates in the MPH, the Tobacco Control Program may refer them to the Advisory Commission for consideration.⁴⁵

84.

The regulation of the tobacco industry has increased world-wide over the years. Uruguay has been a strong supporter of anti-smoking policies at the international level, notably those described in section (a). At least partly in pursuance of these policies, it has enacted its own legislation, described in section (b) below.

85.

On 21 May 2003, the World Health Organization concluded the Framework Convention on Tobacco Control (" FCTC ").⁴⁶ Uruguay signed the FCTC on 19 June 2003 and ratified it on 9 September 2004, being the first Latin-American State to do so.⁴⁷ Switzerland is a signatory but not a party to the FCTC.

86.

The FCTC entered into force on 27 February 2005. Its current membership includes 180 State parties.⁴⁸ Some of the background elements that drove many countries to consider adopting the FCTC are explained in its preamble as follows:

Determined to give priority to their right to protect public health,

Recognizing that the spread of the tobacco epidemic is a global problem with serious consequences for public health that calls for the widest possible international cooperation and the participation of all countries in an effective, appropriate and comprehensive international response,

Reflecting the concern of the international community about the devastating worldwide health, social, economic and environmental consequences of tobacco consumption and exposure to tobacco smoke,

Seriously concerned about the increase in the worldwide consumption and production of cigarettes and other tobacco products, particularly in developing countries, as well as about the burden this places on families, on the poor, and on national health systems,

Recognizing that scientific evidence has unequivocally established that tobacco consumption and exposure to tobacco smoke cause death, disease and disability, and that there is a time lag between the exposure to smoking and the other uses of tobacco products and the onset of tobacco-related diseases,

Recognizing also that cigarettes and some other products containing tobacco are highly engineered so as to create and maintain dependence, and that many of the compounds they contain and the smoke they produce are pharmacologically active, toxic, mutagenic and carcinogenic, and that tobacco dependence is separately classified as a disorder in major international classifications of diseases,

87.

The FCTC is said to be an "evidence-based treaty,"⁴⁹ one that "provides a framework for tobacco control measures to be implemented by the Parties at the national, regional and international levels in order to reduce continually and substantially the prevalence of tobacco use and exposure to tobacco smoke."⁵⁰ No reservations may be made to the FCTC.⁵¹

88.

Relevant provisions of the FCTC include the following:

Article 2

Relationship between this Convention and other agreements and legal instruments

1. In order to better protect human health, Parties are encouraged to implement measures beyond those required by this Convention and its protocols, and nothing in these instruments shall prevent a Party from imposing stricter requirements that are consistent with their provisions and are in accordance with international law.[...]

Article 4

Guiding principles

To achieve the objective of this Convention and its protocols and to implement its provisions, the Parties shall be guided, inter alia, by the principles set out below:

1. Every person should be informed of the health consequences, addictive nature and mortal threat posed by tobacco consumption and exposure to tobacco smoke and effective legislative, executive, administrative or other measures should be contemplated at the appropriate governmental level to protect all persons from exposure to tobacco smoke.

Article 11

Packaging and labelling of tobacco products

1. Each Party shall, within a period of three years after entry into force of this Convention for that Party, adopt and implement, in accordance with its national law, effective measures to ensure that:

(a) tobacco product packaging and labelling do not promote a tobacco product by any means that are false, misleading, deceptive or likely to create an erroneous impression about its characteristics, health effects, hazards or emissions, including any term, descriptor, trademark, figurative or any other sign that directly or indirectly creates the false impression that a particular tobacco product is less harmful than other tobacco products. These may include terms such as "low tar", "light", "ultra-light", or "mild"; and

(b) each unit packet and package of tobacco products and any outside packaging and labelling of such products also carry health warnings describing the harmful effects of tobacco use, and may include other appropriate messages. These warnings and messages:

(i) shall be approved by the competent national authority,

(ii) shall be rotating,

(iii) shall be large, clear, visible and legible,

(iv) should be 50% or more of the principal display areas but shall be no less than 30% of the principal display areas,

(v) may be in the form of or include pictures or pictograms.

2. Each unit packet and package of tobacco products and any outside packaging and labelling of such products shall, in addition to the warnings specified in paragraph 1(b) of this Article, contain information on relevant constituents and emissions of tobacco products as defined by national authorities.

[…]

Article 13

1. Parties recognize that a comprehensive ban on advertising, promotion and sponsorship would reduce the consumption of tobacco products.

[…]

4. As a minimum, and in accordance with its constitution or constitutional principles, each Party shall:

(a) prohibit all forms of tobacco advertising, promotion and sponsorship that promote a tobacco product by any means that are false, misleading or deceptive or likely to create an erroneous impression about its characteristics, health effects, hazards or emissions;(…)

5. Parties are encouraged to implement measures beyond the obligations set out in paragraph 4.

89.

The WHO established a strategy called "MPOWER" to implement the FCTC. This was composed of six steps:

■ M onitor tobacco use and prevention policies,

■ P rotect people from tobacco smoke,

■ O ffer help to quit tobacco use,

■ W arn about the dangers of tobacco,

■ E nforce bans on tobacco advertising, promotion and sponsorship,

■ R aise taxes on tobacco.

90.

In addition, in November 2008, the State Parties to the FCTC established Guidelines for the implementation of a number of provisions, including Articles 11 and 13 of the FCTC (the " Guidelines ").⁵²

91.

According to the WHO and FCTC Secretariat, the Guidelines, which are evidence-based, "are intended to assist Parties in... increasing the effectiveness of measures adopted and play a particularly important role in settings where resource constraints may otherwise impede domestic policy development."⁵³

92.

The Article 11 Guidelines call on States to consider enlarging health warnings above 50% to the maximum size possible. Paragraph 12 of the Guidelines provides:

Article 11.1(b)(iv) of the Convention specifies that health warnings and messages on tobacco product packaging and labelling should be 50% or more, but no less than 30%, of the principal display areas. Given the evidence that the effectiveness of health warnings and messages increases with their size, Parties should consider using health warnings and messages that cover more than 50% of the principal display areas and aim to cover as much of the principal display areas as possible. The text of health warnings and messages should be in bold print in an easily legible font size and in a specified style and colour(s) that enhance overall visibility and legibility.⁵⁴

93.

The Guidelines also urge State Parties to "prevent packaging and labelling that is misleading or deceptive" and to adopt plain packaging or "restrict as many packaging design features as possible" as follows:

43. Article 11.1(a) of the Convention specifies that Parties shall adopt and implement, in accordance with their national law, effective measures to ensure that tobacco product packaging and labelling do not promote a tobacco product by any means that are false, misleading, deceptive or likely to create an erroneous impression about the product's characteristics, health effects, hazards or emissions, including any term, descriptor, trademark or figurative or other sign that directly or indirectly creates the false impression that a particular tobacco product is less harmful than others. These may include terms such as "low tar", "light", "ultra-light" or "mild", this list being indicative but not exhaustive. In implementing the obligations pursuant to Article 11.1(a), Parties are not limited to prohibiting the terms specified but should also prohibit terms such as "extra", "ultra" and similar terms in any language that might mislead consumers.

[..]

46. Parties should consider adopting measures to restrict or prohibit the use of logos, colours, brand images or promotional information on packaging other than brand names and product names displayed in a standard colour and font style (plain packaging). This 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.⁵⁵

94.

Guidelines to Article 13 read in relevant part:

Parties should prohibit the use of any term, descriptor, trademark, emblem, marketing image, logo, colour and figurative or any other sign that promotes a tobacco product or tobacco use, whether directly or indirectly, by any means that are false, misleading or deceptive or likely to create an erroneous impression about the characteristics, health effects, hazards or emissions of any tobacco product or tobacco products, or about the health effects or hazards of tobacco use. Such a prohibition should cover, inter alia, use of the terms "low tar", "light", "ultra-light", "mild", "extra", "ultra" and other terms in any language that may be misleading or create an erroneous impression.⁵⁶

95.

As a Party to the WHO FCTC, Uruguay participated in adopting the Punta del Este Declaration on the Implementation of the WHO FCTC ⁵⁷ and the Seoul Declaration,⁵⁸ which reflect the FCTC Parties commitment to implement the FCTC.

96.

This Section is divided into two parts. First, it contains a non-exhaustive list of tobacco regulatory measures adopted by the Uruguayan Government prior to the enactment of the Challenged Measures. Second, it describes in more detail the Challenged Measures: (i) the SPR and (ii) the 80/80 Regulation.

97.

Article 44 of the Uruguayan Constitution provides that it is the Government's duty to legislate public health and hygiene issues, with the purpose of attaining the physical, moral and social improvement of Uruguay's citizens.

98.

On 12 January 1934, Law No. 9,202, the Organic Law of the Ministry of Public Health, was enacted.

99.

On 24 December 1982, Law 15,361 was enacted, which, inter alia, required the inclusion of specific warning texts on the side of tobacco packages, prohibited the sale of cigarettes to minors, and mandated quarterly publications by tobacco manufacturers of the maximum percentages of tar and nicotine levels for each cigarette contained in the packages of the brands sold.⁵⁹ The latter requirement was modified on 25 October 1984 by Law 15,656, requiring annual publication (instead of quarterly) of average percentages of tar and nicotine levels contained in tobacco packages.⁶⁰

100.

In May 1996, Decree 203/996 banned smoking in offices, public buildings and establishments destined for public or common use, in particular where food is provided.⁶¹

101.

In 1998, Decree 142/98 prohibited promotional efforts that involved tobacco product giveaways.⁶²

102.

Between January and October of 2005, the Respondent issued an important number of decrees on tobacco control, including:

■ Presidential Decree No. 36/005 ("Decree 36"), requiring the inclusion of the warning texts described in paragraph 99 above, to cover 50% of the front and back of tobacco packaging instead of the side of the package.⁶³

■ Decree 169/005, regulating smoking areas within restaurants, bars and recreation areas, and prohibiting the advertisement of tobacco products and/or brands on television channels during so-called "safe harbor" hours for the protection of minors.⁶⁴

■ Decree 170/005, prohibiting the sponsorship, through advertising and promotion of tobacco-derived products, in sporting events in Uruguay.⁶⁵

■ Decree 171/005 ("Decree 171"), " extending" what was mandated by Decree 36, insofar as the health warnings in the packages of tobacco products should not only occupy 50% of the total display areas, but that they shall also be periodically rotated, and include images and/or pictograms. Decree 171 further prohibited the use of terms such as "low tar," "light," or "mild" on tobacco products, and gave the MPH the discretion to define the type, legend, images and pictograms to be included thereon.⁶⁶

■ Presidential Decree 214/005, providing that public offices were considered "100% tobacco smoke-free environments."⁶⁷

■ Presidential Decree 268/005, providing that "all enclosed premises for public use and any work area, whether public or private, intended for common use by people" had to be 100% tobacco smoke-free environments.⁶⁸

■ Presidential Decree 415/005, confirming that all pictograms must be approved by the MPH, further defining the eight types of images to be printed on the lower 50% of the principal display areas of all packs of cigarettes and tobacco products (as set forth in Decree 171/005), and providing that one of the two sides of the packs of cigarettes should be occupied entirely by the text health warning.⁶⁹

103.

Uruguay enacted additional relevant regulations in 2007:

■ Presidential Decree 202/007, attaching three images combined with six legends to be printed on 50% of the display areas of all packs of cigarettes and tobacco products, further to Decree 171/005.⁷⁰

■ Decree of July 2007, imposing a 22% Value Added Tax on tobacco products. Tobacco products were previously exempt from VAT.⁷¹

104.

The Claimants did not, nor do they, challenge any of the measures described in the precedent paragraphs.⁷²

105.

On 6 March 2008, the Uruguayan Parliament adopted Law 18,256 ⁷³ The law reaffirmed and reinforced many of the measures adopted under the Decrees referred to in paragraphs 102 and 103 above, including the prohibitions of smoking in public or private enclosed places (Art. 3), the limitation of retail advertising to point-of sale and the prohibition of all other forms of advertising, promotion and sponsorship of tobacco products including at sporting events (Art. 7), and the prohibition of the free distribution of tobacco products (Art. 11). Law 18,256 also authorized the MPH to "adopt guidelines regarding analysis and measurements of the contents and emissions of tobacco products and regulation thereof," including the disclosure of information on toxic components, additives and emissions of tobacco products based on Article 9 of the FCTC (Arts. 5 and 6). In addition, Articles 1, 2, 8 and 9 of Law 18,256 provided in relevant part:

Article 1. (General principle). All persons are entitled to the enjoyment of the highest possible level of health, improvement of all labor and environmental health issues, as well as prevention, treatment and rehabilitation from diseases, pursuant to several international agreements, pacts, statements, protocols and conventions which have been ratified by law.

Article 2 . (Subject-matter). This law pertains to public order and its objective is to protect the inhabitants of the country against the sanitary, social, environmental and economic consequences of tobacco consumption and exposure to tobacco smoke.

In such sense, measures aiming at the control of tobacco are established, in order to reduce in a continuous and substantial manner the prevalence of tobacco consumption and exposure to tobacco smoke, pursuant to the World Health Organization Framework Agreement for Tobacco Control, which was ratified by Law No. 17,793 of 16 July 2004.

Article 8. (Packaging and labeling of tobacco products). - It is forbidden for packages and labels of tobacco products to promote such products in a false, wrong or misleading way which may lead to a mistake regarding their features, health effects, risks or emissions.

It is likewise forbidden to use terms, descriptive features, trademarks or brands, figurative signs or any other kind, which have the direct or indirect effect of creating a false impression that a certain tobacco product is less harmful than others. (emphasis added)

Article 9. (Health warnings in tobacco products’ packaging and packets).-All packaging and packets of tobacco products and all external labeling and packaging thereof must contain health warnings and images or pictograms describing the harmful effects of tobacco consumption or other appropriate messages. Such warnings and messages must be approved by the Ministry of Public Health, as well as large, clear, visible and legible, and shall occupy at least 50% (fifty percent) of the total main exposed areas. These warnings must be periodically modified in accordance to the implementation regulation.

All packaging and labeling of tobacco products and all external labeling and packaging of the same, as well as the warnings specified in the above paragraph shall contain information regarding the main [all] [sic] components of tobacco smoke and emissions thereof, pursuant to the instructions furnished by the Ministry of Public Health.

106.

On 9 June 2008, President Vazquez signed Decree 284/008, which implemented Law 18,256 (" Decree 284 ").⁷⁴ Article 6 and 12 of Decree 284 provide, in relevant part:

Article 6. Manufacturing companies or importers shall quarterly submit to the Ministry of Public Health an affidavit, addressed to the National Program for Tobacco Control of such Ministry, in which they will report the presence of the toxic substances to be established by the Ministry of Public Health. The information mentioned above shall be published in two newspapers of the capital city.

Article 12 . It is herein established that health warnings shall be rotated every 12 (twelve) months; such warnings shall be approved by the Ministry of Public Health.

The use of descriptive terms and elements, trademarks or brands, figurative signs or signs of any other nature, such as colors or combination of colors, numbers or letters, that have the direct or indirect effect of creating the misleading impression that a certain product is less harmful than others is forbidden.

107.

Neither Law 18,256 nor Decree 284 are challenged in this arbitration, nor have they been challenged before the Uruguayan courts.⁷⁵

108.

On 18 August 2008, taking into account the provisions of Article 44 of the Constitution, the FCTC, Law No. 18,256 and Decree 284, the MPH issued Ordinance 514 adopting the SPR,⁷⁶ which entered into force in February 2009.

109.

Ordinance 514 required the use of pictograms consisting of five images combined with five statements to be printed on 50% of the display areas (lower half) of all packs of cigarettes and tobacco products.⁷⁷ Articles 2 of the Ordinance required a legend on the side of the package:

2. One of the two lateral display areas on cigarette packs and tobacco product containers shall be taken up in full by the following statement: ‘This product contains nicotine, tar and carbon monoxide,' with no specification as to the amount thereof. […]

110.

Article 3 of the Ordinance required each brand of tobacco products to have a single presentation, thus prohibiting the use of multiple presentations (i.e. variants) of any cigarette brand. It provided as follows:

3. Each brand of tobacco products shall have a single presentation, such that it is forbidden to use terms, descriptive features, trademarks, figurative signs or signs of any other kind such as colors or combinations of colors, numbers or letters, which may have the direct or indirect effect of creating a false impression that a certain tobacco product is less harmful than another, varying only the pictograms and the warning according to article 1 of the present Ordinance .⁷⁸

111.

Based on Ordinance 514, tobacco companies could only market one variant for each family brand. The tobacco companies had the discretion to pick which variant would remain on the market. For example, for the Marlboro family brand, Philip Morris chose Marlboro Red. Correspondingly, Marlboro Light, Blue and Fresh Mint were taken off the market.

112.

On 1 September 2009, the Ministry of Public Health issued Ordinance 466, which, inter alia, restated and modified the requirement of Ordinance 514 that each brand of tobacco products have a single presentation, as follows:⁷⁹

113.

The Parties are in dispute as to the process that led to the adoption of the SPR. According to the Claimants, with little preparation and specifically without any thorough and meaningful studies, the Respondent devised the SPR simply because Dr. Abascal, the Director of the MPH's Tobacco Control Program, had witnessed customers in a store receiving Marlboro Gold packs when they asked for Marlboro " light " cigarettes, and he then, single-handedly, drafted the regulation.⁸⁰ The Respondent argues that the SPR was adopted pursuant to the same deliberative process as other tobacco control measures, and rejects the Claimants' contention that its adoption was based on a single public health official's "visit to a store"⁸¹ or that it was unilaterally adopted by a single government official without any meaningful deliberation.⁸²

114.

According to Dr. Abascal's account, after the implementation of Law 18,254, the Tobacco Control Program in consultation with the Advisory Commission considered both plain packaging and single presentation requirements as a way to (a) further implement the mandate of Article 11 of the FCTC; and (b) counteract tobacco companies' desire to circumvent the 2005 ban on descriptors such as "light" through the use of brand variants to maintain the perception that one brand variant was less harmful than another.⁸³ The Advisory Commission decided that "Uruguay was not ready to adopt plain packaging" and "opted for single presentation."⁸⁴ Mr. Jorge Basso, the then-director of the Dirección Nacional de Salud, asked Dr. Abascal to submit a draft proposal to this effect for the next regulation on tobacco product packaging.⁸⁵

115.

On 8 July 2008, Abal's representatives met with Dr. Abascal to "discuss the details regarding Decree 284." According to Abal's account, during the meeting, Dr. Abascal explained "his general interpretation on [the] implementing regulation, including what he considers to be a relation between descriptors and colors,"⁸⁶ but he did not mention the possibility of requiring a single presentation for all brands.⁸⁷

116.

On 25 July 2008, Attorney R. Becerra of the Dirección General de Salud (General Directorate of Health) of the MPH sent a draft ordinance to the Tobacco Control Program, telling the latter to add the pictograms and descriptions to be incorporated in cigarette packages in accordance with Article 1 of the Ordinance.⁸⁸ The draft did not contain the single presentation requirement.⁸⁹

117.

On 28 July 2008, the draft Ordinance was sent from the Tobacco Control Program to the División de Salud de la Población (Division of Population Health). The new draft expressly referred to Article 8 of Law 18,256 (addressing the ban on the use of terms, descriptive elements, etc., that have the effect of creating the false impression that a particular tobacco product is less harmful than others), and contained a new Article 3 providing for the SPR.⁹⁰ The draft also contained the requested pictograms.

118.

On 30 July 2008, the División de Salud de la Población sent the draft to the Dirección General de Salud. On 31 July 2008, attorney Rodolfo Becerra, of the General Directorate, submitted the new version of the proposal "to the consideration of the Dirección."⁹¹

119.

On 1 August 2008, Dr. Jorge Basso, Director of the Dirección Nacional de Salud, sent the draft back to the Departamento de Secretaría y Acuerdos de la División Jurídico Notarial containing a hand-written note to be added to Article 3 in order to prohibit descriptive elements or signs "such as colors, combinations of colors, numbers or letters."⁹²

120.

Uruguay adopted Ordinance 514 on 18 August 2008, with the approval of the Minister of Public Health (Ms. María Julia Muñoz), and the signature of the Director of the Departamento de Secretaría y Acuerdos.⁹³

121.

On 15 June 2009, Presidential Decree 287/009 was enacted. It entered into force on 22 December 2009. Article 1 mandated an increase in the size of health warnings on cigarette packages from 50 to 80 per cent of the lower part of each of the main sides of every cigarette package, as follows:

It is ordered that the health warnings to be included on packages of tobacco products, including images and/or pictograms and messages, shall cover 80% (eighty per cent) of the lower part of each of the main sides of every cigarette package and in general of every packet and container of tobacco products and of any similar packaging and labelling.⁹⁴

122.

As a result of the measure, tobacco companies had to limit their branding in the remaining 20% of the front and back of the packaging.

123.

On 1 September 2009, Ordinance 466 of the MPH restated in its Section 1 the requirement that tobacco packages should have an 80% health warning as follows:⁹⁵

It is herein ordered that the pictograms to be used in the packages of tobacco products are defined in six (6) images combined with the corresponding legends (back and front), which shall be printed in the 80% lower area of both main panels of any unit packet of cigarettes and in general in any packet and package of tobacco products[…]..

124.

As with the SPR, the Parties provide different accounts of the process leading to the adoption of the 80/80 Regulation.

125.

The Claimants argue that the 80/80 Regulation was the result of a decision to penalise Mailhos for its evasion of the SPR through the introduction of the so-called "alibi brands." Before the introduction of the SPR, Mailhos, Abal's main competitor, marketed its brands under the "Coronado" label. After the adoption of the SPR, Mailhos adopted boxes with the colors and designs of the former "Coronado" range, but ostensibly under different brands, namely "Madison" (silver) and "Ocean" (blue). It was clear that they all pertained to the same family of products and as such were "alibis."⁹⁶ For its part, the Respondent alleges that the 80/80 Regulation originated in the Office of the President of the Republic, in the wake of Uruguay's decision to adopt additional control measures to implement its obligations under the FCTC and its guidelines.⁹⁷

126.

On 3 April 2009, Dr. Abascal of the Tobacco Control Program sent a letter to the Dirección General de Salud expressing concerns about the use of alibi brands by Mailhos:

Since May 31st of the year 2005, when the decree was enacted that prohibited deceptive terms, which was later also adopted in Law 18,256, attempts have been made time and again to avoid compliance with the legal provisions. Every time measures have been taken in an endeavor to correct the situation, there is an attempt once again to avoid compliance with those provisions. Therefore, it is this Program’s understanding that consideration should be given to expanding the pictograms and legends to 90% of both main faces, as is expressly authorized by Article 9 of Law 18,256 when it states ‘[s]aid warnings and messages must be approved by the Ministry of Public Health, must be clear, visible, and legible, and must occupy at least 50% (fifty percent) of the total principal exposed surfaces.’⁹⁸

127.

On 16 April 2009, Attorney Becerra addressed an advisory opinion to the Dirección General de Salud, informing the Directorate of the Tobacco Control Program's proposed 90% increase of the health warnings and referring to Mailhos' alleged lack of compliance with the SPR. He also suggested plain packaging as an alternative.⁹⁹

128.

On 15 April 2009, Mr. Eduardo Bianco, a member of the Advisory Commission, met with President Vázquez to discuss Uruguay's next steps in terms of tobacco control measures. Based on Dr. Bianco's contemporaneous account of the meeting, the President approved his suggestion of increasing the health warning to the extent legally practicable. This was to be implemented by the MPH by 2010.¹⁰⁰ The relevant documentation does not contain any reference to Mailhos' alleged violation of the SPR.

129.

The Respondent's witnesses state that sometime thereafter, the President encouraged and authorized the MPH to increase the size of the warning labels. The Tobacco Control Program then requested an opinion from the Advisory Commission regarding the appropriate size of the warnings. The Advisory Commission concluded that warnings covering 80% of both faces were appropriate and submitted its recommendation to the MPH through the Tobacco Control Program.¹⁰¹ After being submitted to the necessary consultation levels at the MPH, the Decree was sent back to the President's office for review and approval. The Decree was signed by the President and the Cabinet of Ministers on 15 July 2009.¹⁰²

130.

In May 2009, representatives of PMI met with representatives of the Tobacco Control Program and the Advisory Commission. According to a contemporaneous account by PMI's representatives, during the meeting Dr. Abascal suggested that the President's measure "might have been motivated on punishing Mailhos."¹⁰³ Both Dr. Abascal and Dr. Lorenzo, who were also present at the meeting, reject that characterization of the conversation.¹⁰⁴

131.

On 30 June 2009, the Director of the Dirección General de Salud archived the letter referred to in paragraph 126 above, with a note explaining that the health warnings had already been increased by Decree.¹⁰⁵ Dr. Abascal declares that "neither my Memorandum nor its recommendation, nor my own statements affected the decision to increase the health warnings."¹⁰⁶

132.

Documentary evidence submitted by both Parties indicates that the decision to increase the size of the health warning levels was an initiative implemented on the instructions of the President's Office.¹⁰⁷

133.

The adverse health effects of tobacco consumption are not in dispute before the Tribunal.¹⁰⁸ Rather, the Parties disagree as to whether tobacco use and/or smoking prevalence has increased, remained constant, or decreased in Uruguay as a result of the SPR and/or the 80/80 Regulation.¹⁰⁹ The Parties further disagree on whether the Challenged Measures have created incentives for consumers to turn to the illicit/irregular market.¹¹⁰

134.

This Section accordingly summarizes the Tribunal's understanding of the status of tobacco consumption, the illegal trade, and market competition in the tobacco industry in the relevant period, based on the documentary evidence available in the case record.

135.

The Parties are in agreement on two issues relating to the evaluation of tobacco consumption. First, they agree that any correlation between one individual tobacco control measure and overall consumer behaviour is difficult to establish.¹¹¹ Particular control policies cannot be taken in isolation from other strategies which form the basis of a State's control program, or from general socio-economic conditions. Second, the impact of tobacco control policies takes time before they are clearly visible.

136.

From 1998 to 2006, smoking prevalence in adults remained at around 32%.¹¹² The documentary evidence suggests, however, that tobacco use in Uruguay has been in decline for the last decade.¹¹³ According to the 2014 International Tobacco Control Policy Evaluation Project (" ITC "), the smoking prevalence rate decreased to 25% in 2009,¹¹⁴ and then further to 23.5% by 2011.¹¹⁵ Official data from the Centro de Investigación de la Epidemia del Tabaquistmo (" CIET "), indicated that smoking prevalence in Uruguay had dropped to levels below 20% in 2012¹¹⁶ and got closer to the 19% mark in 2013.¹¹⁷

137.

Other studies have found that the proportion of pregnant Uruguayan women who quit smoking in their third trimester increased markedly from 15% to 42% between 2007 and 2012.¹¹⁸ The studies posited that "the tobacco control campaign, taken as a whole, was in fact responsible for the marked increase in quit rates."¹¹⁹

138.

With regard to young smokers, in 2007, 23.2% of adolescents aged 13 to 15 years used tobacco products.¹²⁰ As of 2009, most young smokers began their tobacco consumption at age 16.¹²¹ Among young smokers, female consumption appears to be surpassing male consumption.¹²² In 2009, 18.4% of secondary school students were current smokers, including 21.1% of females and 15.5% of males. In 2011, the prevalence had decreased to 14.1% of female and 11.9% of male secondary school students.¹²³

139.

The parties are also in dispute as to whether the proper way of determining the effect of the Challenged Measures on Uruguayans' health is tobacco prevalence (i.e. the percentage of the population that smokes) or tobacco consumption (the number of cigarettes consumed).¹²⁴

140.

The Tribunal notes that Euromonitor, the market research firm heavily relied on by the Claimants,¹²⁵ refers to the figures of "tobacco prevalence" and not to the general volume of sales to assess the state of tobacco use in Uruguay.¹²⁶ These reports, which were submitted into the record from the years 2008 to 2015 by both Claimants and the Respondent, confirm the decline of tobacco prevalence in Uruguay.¹²⁷ In particular the 2014 report states:

According to the [...] CIET the smoking prevalence in Uruguay keeps declining and in 2013 it fell towards the 19% mark. Restrictive measures that put increasing pressure on the industry and smokers since the first bans were put in force in 2005 resulted in a significant reduction in the total number of smokers, especially between 2008 and 2012. However, this fall in prevalence shows significantly faster rates than the decline of volume sales during the review period, which means that those still smoking are doing it more intensively, or at least purchase more cigarettes.¹²⁸

141.

The record also shows that Uruguay has received considerable support from the international public health community for the Challenged Measures, including from the WHO,¹²⁹ PAHO,¹³⁰ the Mercosur Member States,¹³¹ and the private sector.¹³² PAHO for example explains:

[A]n assessment of the impact of national tobacco control policies on three dimensions of tobacco use in Uruguay (per person consumption, adolescent prevalence, and adult prevalence) demonstrates consistent decreases in smoking in Uruguay since the country initiated a comprehensive control program in 2005.¹³³

142.

The International Tobacco Control Policy Evaluation Project assesses the impact of the SPR and 80/80 Regulation as follows:

The percentage of smokers who reported that warning labels on cigarette packs were a reason to think about quitting increased from 25% in 2008-09 (when the warnings were symbolic and covered only 50% of the front and back of the pack) to 31% in 2010-11 and 30% in 2012 (when the images were more graphic and covered 80% of the front and back of the pack). In addition, gaps in smokers' awareness of stroke and impotence as smoking-related health effects were reduced after the introduction of pictorial health warnings specifically addressing these health effects.

The ITC Uruguay Survey provides modest evidence of a positive impact of the single presentation policy. The percentage of smokers who had false beliefs that light cigarettes are less harmful than regular cigarettes decreased from 29% before the single presentation policy to 15% after the policy. However, in 2012, 29% of smokers stated that their current brand is a "light", "mild", or "low tar" brand and the majority (91%) of smokers believe that although Uruguay has implemented a single presentation policy, the same cigarettes are being sold under different names.¹³⁴

143.

The 2012 ITC Survey Report says that:

[W]arning effectiveness remained unchanged or decreased slightly[...], after the warnings changed to smaller set of more symbolic images in 2008, covering 50% of the packages. At Wave 3, after implementation of larger, more graphic warning covering 80% of the package, warning effectiveness increased to levels higher than Wave 1, demonstrating that large, graphic images with clear health messages are more effective than smaller, more abstracts warnings.¹³⁵

144.

It is undisputed that after the entry into force of the SPR, Abal eliminated seven of its thirteen variants (namely Marlboro Gold, Marlboro Blue, Marlboro Fresh Mint, Fiesta Blue, Fiesta 50/50, Phillip Morris Blue, and Premier).

145.

The graph below produced by the Claimants in their pleadings shows the number of family brands pertaining to the Claimants originally sold in Uruguay, and the variants that were taken off the market.¹³⁶

146.

The eliminated variants accounted for roughly 20% of Abal's domestic sales.¹³⁷

the Department of Sociology at the University of the Republic of Uruguay, the Research Centre for Tobacco Epidemic (CIET), and the National Institute of Public Health of Mexico - University of South Carolina in collaboration with the ITC Uruguay Project team centered at the University of Waterloo in Canada. ITC 2014 (R-313), p. 16.

147.

In late 2009, after the SPR had entered into force and after the 80/80 Regulation had been adopted but before it entered into force on 22 December 2009, the Claimants withdrew Premier Extra and Galaxy from the market.¹³⁸ Four of Abal's thirteen variants remain in the market: Marlboro Red, Casino, Fiesta and Phillip Morris.¹³⁹

148.

The Claimants contend that the Challenged Measures have also dramatically shifted the competitive landscape and that they have created incentives for consumers to turn to the illicit/irregular market.

149.

Claimants' expert, Mr. B. Kazmarek, indicated that by 2008, Abal's market share of the Uruguayan market was 13.5%;¹⁴⁰ it rose to 20.4% by 2010, allegedly after Abal had implemented price reductions for some of its variants, and then decreased again to similar levels as in 2008, with 13.9% by 2013.¹⁴¹ This is not disputed by the Respondent.¹⁴²

150.

Besides Abal, there are two tobacco companies that legally sell their products in Uruguay:

■ Compañía Industrial de Tabacos Monte Paz S.A. (" Monte Paz " or " Mailhos "), a domestically owned company, which held a market share somewhere between 75% and 85% between 2007 and 2013.¹⁴³ Monte Paz is Abal's main competitor.

■ British American Tobacco (South America) Limited Sucursal Uruguay (" BAT "), another multinational company, which closed its Uruguayan factory in 2003, and began importing the brands it commercialized from Argentina and Chile. In 2007, it held 7% of the Market, which decreased to less than a 2% market share as of 2012.¹⁴⁴ According to Euromonitor, BAT "finally withdrew from the Uruguayan market in mid-2010."¹⁴⁵ BAT continued nevertheless to have a presence in the Uruguayan market, by selling cigarettes in the Department of Maldonado through a distributor.¹⁴⁶

151.

With regard to illicit trade, Euromonitor explained already in its 2008 report, that "[a]n unwanted if not unexpected result from all government measures, and especially from the price increases of 2005 and 2007, was the growth of illicit trade."¹⁴⁷ Euromonitor further considered that "[i]llicit trade, which had remained relatively stable at around 17% of total sales, with small fluctuations tied to price variation of legitimate brands, started to grow in 2008 and reached almost 23% in 2010."¹⁴⁸ In particular, it held:

Illicit trade which had continued fluctuating between 17% and 21% of the total sales (estimated at 20.9% in 2012), with small variations is usually tied to price increases of legitimate brands. Despite an apparently stronger pressure from the customs authority and the Ministerio de Economía y Finanzas, there is a steady flow of illegal brands from Paraguay, Brazil and to a lesser degree, Argentina.¹⁴⁹

152.

There is apparently no official data available on illicit trade of tobacco in Uruguay. Estimates of the current illicit share of the total cigarette market, according to the evidence in the record, were in 2011 and 2012 between 17% to 25% of all sales.¹⁵⁰

153.

Section D summarizes the proceedings lodged by Claimants before the Uruguayan courts in connection with the Challenged Measures, in particular: (1) before the Tribunal de lo Contencioso Administrativo (" TCA ") seeking to declare invalid Ordinance 514 and its single presentation requirement; and (2) before the TCA and the Supreme Court of Justice (" SCJ ") relating to the 80/80 Regulation. The decisions rendered in these cases are the basis of the Claimants' denial of justice claims, which are dealt with in Section V (F) below.

154.

On 18 September 2008, Abal presented an administrative challenge to the SPR before the MPH.¹⁵¹ On 13 April 2009, the challenge was rejected by operation of law when the Ministry did not rule on it within 120 days.¹⁵²

155.

On 9 June 2009, Abal filed an accion de nulidad before Uruguay's TCA to annul Article 3 of Ordinance 514, which imposed the SPR.¹⁵³ Abal set out three separate bases for its application. First, the SPR was "manifestly illegal because it exceeds and contradicts the legal provisions it is intended to implement" (Law 18,256 and the Decree 284) as those norms did not impose any prohibition on multiple presentations but only against "misleading packages."¹⁵⁴Second, the Ordinance is "manifestly illegal because it imposes an entirely new prohibition on variants" that the MPH has no authority to impose.¹⁵⁵Third, it considered Ordinance 514 to be "manifestly illegal because it violates the principle of ‘ reserva de la ley ' by restricting Abal's constitutional rights in a manner that may only be accomplished, if at all, [...] by a formal law enacted by Parliament."¹⁵⁶

156.

On 30 July 2010, the Procurador del Estado de lo Contencioso Administrativo (State Attorney) submitted an opinion to the TCA supporting Abal's challenge.¹⁵⁷ It concluded that Ordinance 514 should be annulled as "neither the […] Law nor its Decree limit the number of products that may be sold under one brand and, therefore, the limitation imposed exceeds the norms it regulates."¹⁵⁸

157.

British American Tobacco (" BAT "), one of Abal's competitors as described above, also filed an annulment application challenging the legality of Ordinance 514 before the TCA. In its application, BAT also alleged that the Ordinance violated the principle of " reserva de ley."¹⁵⁹

158.

On 14 June 2011, before rendering its decision on BAT's case, the TCA rejected Abal's challenge.

159.

In its decision, the Court referred three times to BAT.¹⁶⁰ The TCA also discussed a statement by Dr. Abascal that was not part of Abal's submission before the TCA.¹⁶¹

160.

On 24 August 2011, Abal filed a motion for clarification and expansion of the TCA's decision.¹⁶² Abal argued that the TCA had erroneously rejected Abal's application by considering "another company" with "other tobacco products," and on the basis of "other arguments" and "other evidence," different to that presented by Abal.¹⁶³ Abal alleged, in short, that the TCA's Decision had been made on the basis of evidence and arguments submitted by BAT, and not Abal, including a statement by Dr. Abascal not included in Abal's file.¹⁶⁴

161.

On 29 September 2011, the TCA rejected Abal's motion for clarification and expansion in a one-page document, considering, inter alia, that there was no omission regarding "some essential point of the case," and that a revision was not justified, as the decision took into account and considered the " ratio " of the relevant legal provision.¹⁶⁵

162.

On 11 September 2009, Abal filed a constitutional challenge to Articles 9 and 24 of Law 18,256 before the Supreme Court of Justice (" SCJ ").¹⁶⁶ In its unconstitutionality action, it considered that the Law impermissibly delegated authority to the Executive.

163.

The Legislature and the Fiscal de Corte y Procurador General intervened during the proceedings before the Supreme Court. In their respective submissions to the Court, they submitted that Law 18,256 did not contain an impermissible delegation of authority to the Executive Power.¹⁶⁷

164.

The basis for this conclusion, according to the Legislature, was that the term "at least" in Article 9 should be understood in the sense of imposing an obligation on tobacco companies to incorporate health warning that may occupy more space -- if the company so desires -- but never less than the fixed minimum of 50%. Law 18,256 also imposed an obligation on the MPH not to approve smaller warnings. Since the Law did not allow the regulation to set a higher percentage of the package to be covered by health warnings, there was no impermissible delegation of authority.¹⁶⁸ Likewise, the State Attorney General also considered that there was "no indication that the Executive Power could establish a higher percentage."¹⁶⁹

165.

On 22 March 2010, Abal filed an acción de nulidad before the TCA seeking annulment of the 80/80 Regulation. The TCA suspended its proceedings pending the Supreme Court's decision.

166.

On 10 November 2010, the SCJ unanimously dismissed Abal's unconstitutionality action, declaring that Law 18,256 did not grant the Executive Power "the unlimited power to restrict individual rights," and therefore there was no impermissible delegation of authority.¹⁷⁰

167.

On 28 August 2012, the TCA rejected Abal's acción de nulidad against Decree 287.¹⁷¹

168.

This section provides a general overview of the legal framework relevant to trademarks in Uruguay. The parties disagree as to whether this regulatory framework confers on trademark owners only the right to prevent others from using the trademarks, or also the right to use the trademarks in commerce. The Claimants maintain it does the latter,¹⁷² while the Respondent states that there is no provision in the law that creates a right to use.¹⁷³

169.

The legal framework for trademarks in Uruguay was established by Law No. 17,011, enacted on 25 September 1998 (the " Trademark Law "), which was implemented by Decree No. 34/99.¹⁷⁴ Trademark protection is based on Article 33 of Uruguay's Constitution which requires the legislature to recognize and protect the rights of creators and inventors.¹⁷⁵

170.

Article 1 of the Trademark Law defines a trademark as "any sign capable of distinguishing goods and services of one natural or legal person from those of other natural or legal persons."¹⁷⁶

171.

Relevant provisions of the Trademark Law include the following:

Article 9

The right to a trademark is acquired by registration carried out in accordance with this Law.

Registration of a trademark shall imply the natural or legal person under whose name the trademark is registered in the rightful owner.

Article 11

The exclusive property of a trademark is acquired only over products and services for which registration has been requested.

In the case of a trademark that includes the name of a product or service, the trademark shall be registered exclusively for the product or service included in the trademark.

Article 14

The right to oppose the use of any trademark that could lead to confusion between goods or services shall belong to the person that meets all the requirements of the present law.

172.

Both Parties agree that Uruguay's Trademark Law is based on a number of intellectual property conventions to which Uruguay is a Party.¹⁷⁷ These include among others the following:

■ The Montevideo Treaty of 1892, providing in its Article 2 that "ownership of a trademark or a trade name includes the right to use it.";¹⁷⁸

■ The 1979 Paris Convention for the Protection of Intellectual Property (" Paris Convention ");¹⁷⁹

■ The 1994 the Agreement on Trade-Related Aspects of Intellectual Property Rights (" TRIPS Agreement ").¹⁸⁰

173.

In addition, Uruguay is a party to the 1998 Protocol on Harmonization of Intellectual Property Norms in MERCOSUR in the Field of Trademarks, Indications of Source and Appellations of Origin (the " MERCOSUR Protocol ").¹⁸¹ Article 11 of the Mercosur Protocol reads in relevant part: "[t]he registration of a trademark shall grant the owner an exclusive right of use." (" El registro de marca conferirá a su titular el derecho de uso exclusivo").

174.

In the Claimants' view, the MERCOSUR Protocol has been incorporated into domestic law through Law 17,052 of 14 December 1998 and so is applicable to all owners of trademarks registered in Uruguay.¹⁸² In the Respondent's view, the MERCOSUR Protocol only applies between State Parties that have ratified it; that is, Uruguay and Paraguay.¹⁸³

175.

The Claimants assert that the Respondent has violated each of Articles 3(1), 3(2), 5 and 11 of the BIT. The Tribunal examines in turn, each of the Claimants' claims. To do so, it will first examine the applicable standard for each of the substantive protections allegedly infringed by the Respondent's measures, before examining the merits of each claim.

176.

Article 42 of the ICSID Convention provides:

Article 42

The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.

The Tribunal may not bring in a finding of non liquet on the ground of silence or obscurity of the law.

The provisions of paragraphs (1) and (2) shall not prejudice the power of the Tribunal to decide a dispute ex aequo et bono if the parties so agree.

177.

The governing law in this case is the BIT, supplemented by such rules of international law as may be applicable. The Tribunal has been tasked with determining whether the Respondent has breached its obligations under the BIT. The role of Uruguayan law is important in two respects. On the one hand, it informs the content of the Claimants' rights and obligations within the Uruguayan legal framework, as in the field of trademarks. On the other hand, Uruguayan law also informs the content of commitments made by the Respondent to the Claimants that the latter alleges have been violated.

178.

Uruguayan law may be relevant for establishing the rights the State recognizes as belonging to the Claimants. The legality of a modification or cancellation of rights under Uruguayan law, while relevant, would not determine whether such an act may constitute a violation of a BIT obligation.

179.

Rather, whether a violation has in fact occurred is a matter to be decided on the basis of the BIT itself and other applicable rules of international law, taking into account every pertinent element, including the rules of Uruguayan law applicable to both Parties.

180.

It is the Claimants' position that by imposing the SPR and 80/80 Regulation, the Respondent expropriated their investment in violation of Article 5(1) of the BIT.¹⁸⁴ In particular, the Claimants allege that by effectively banning seven of Abal's thirteen variants and substantially diminishing the value of the remaining ones, the Respondent expropriated the Claimants' brand assets, including the intellectual property and goodwill associated with each of the Claimants' brand variants, in violation of Article 5 of the BIT.¹⁸⁵

181.

According to the Respondent, the SPR and 80/80 Regulation cannot be considered expropriatory since they were legitimate exercise of the State's sovereign police power to protect public health.¹⁸⁶ It contends that, in any case, the Claimants' expropriation claim fails on the merits for at least three different reasons.¹⁸⁷ First, after the adoption of the measures, Abal continued to be profitable. In other words, the Challenged Measures have not had such a severe economic impact on the Claimants' business that it has been rendered virtually without value. Second, the Claimants as an investor had no rights capable of being expropriated under the law creating them since, under Uruguayan law, trademark registrants are conferred only a negative right, the right to exclude others from their use, and not an affirmative right to use them. Third, the Claimants had no valid title to trademarks since they failed to register the modifications made in the descriptive characteristics of those variants the use of which was affected by the Challenged Measures.¹⁸⁸

182.

Article 5(1) of the BIT, under the rubric "Dispossession, Compensation," provides:

(1) Neither of the Contracting Parties shall take, either directly or indirectly, measures of expropriation, nationalization or any other measure having the same nature or the same effect against investments belonging to investors of the other Contracting Party, unless the measures are taken for the public benefit as established by law, on a non-discriminatory basis, and under due process of law, and provided that provisions be made for effective and adequate compensation.

The amount of compensation, interest included, shall be settled in the currency of the country of origin of the investment and paid without delay to the person entitled thereto.

183.

According to the Claimants, to assess their expropriation claim under Article 5, the Tribunal must examine whether the investor was deprived, wholly or partially, of the use, enjoyment, or benefit of the investment.¹⁸⁹ For the Claimants, to find a violation of Article 5, the Tribunal need not reach the conclusion that the Claimants were deprived entirely of the economic benefit of the investment. Rather, the threshold is whether the Challenged Measures have "substantially deprived" the investments of their value.¹⁹⁰

184.

The Claimants also contend that under Article 5, all lawful expropriations must be accompanied by effective and adequate compensation, even when actions are carried out for a public purpose.¹⁹¹ "Public benefit" is not an exception from expropriation but instead one of several prerequisites for an expropriation to be considered consistent with the BIT.¹⁹² The latter, according to the Claimants, is further emphasized by the lack of any provision in the BIT providing for "carve-outs, exceptions or saving presumptions for public health or other regulatory actions," in clear contrast with other BITs such as the Uruguay-U.S. BIT, which contain such provisions.¹⁹³

185.

In the Claimants' view, other considerations such as whether (a) the host State acquired a benefit of a proprietary character after the expropriatory measure;¹⁹⁴ (b) the State intended to expropriate the investment;¹⁹⁵ or (c) the Claimants' business stopped being an ongoing matter as a result of the expropriation,¹⁹⁶ are irrelevant for a valid expropriation claim to exist.

186.

The Claimants also contend that the standard outlined above is applicable to both direct and indirect or de facto expropriations,¹⁹⁷ and that it serves to protect not only tangible property but also intangible assets, including intellectual property, from uncompensated expropriation.¹⁹⁸

187.

According to the Respondent, before determining whether the conditions for a lawful expropriation under Article 5 have been met, the Tribunal must determine whether the Challenged Measures were expropriatory in character.¹⁹⁹ In other words, if an act is not an "expropriation," as a matter of law Article 5 does not apply.²⁰⁰ Article 5 specifies the conditions that render an expropriation lawful, but has no bearing on the question of whether an expropriation, or a measure having the same effect, actually took place.²⁰¹

188.

That question depends on the nature of the State's action.²⁰² Interference with foreign property in the valid exercise of police power is not considered expropriation and does not give rise to compensation.²⁰³

189.

Moreover, even if the governmental measures here at stake could be considered as falling under Article 5, the Claimants' claim is for indirect expropriation, and such a claim requires showing that the measures have had such a severe economic impact on the Claimants' business that it has rendered it virtually without value. A mere negative impact is not sufficient.²⁰⁴ The interference must be "sufficiently restrictive to support a conclusion that the property has been ‘taken' from the owner" so as "to render almost without value the rights remaining with the investor."²⁰⁵

190.

The primary consideration is how much value remains after the expropriation, not how much was taken. The Respondent relies on the finding of the Archer Daniels, LG&E, CMS, and Encana tribunals, to submit that if "sufficiently positive" value remains, there is no expropriation.²⁰⁶ The reasons for this threshold, are, according to Uruguay, clear: "if States were held liable for expropriation every time a regulation had an adverse impact, effective governance would be rendered impossible."²⁰⁷

191.

The Tribunal notes that the legal title to the property representing the Claimants' investment was not affected by the Challenged Measures. Abal remained the registered owner or licensee of the relevant trademarks and continued to be entitled to protect them by an action for infringement. Clearly, the Claimants' claim relates to indirect or de facto expropriation, as shown by the reference to this kind of expropriation in their pleadings.²⁰⁸ As shown above, the Parties diverge as to the threshold for finding indirect expropriation, the Claimants contending that the interference with the investor's rights, whether regulatory or not, should be such as to substantially deprive the investment of its value,²⁰⁹ the Respondent holding that such interference must have "rendered almost without value the rights remaining with the investor."²¹⁰

192.

Article 5(1) of the BIT refers to "any other measure having the same nature or the same effect" as an expropriation or a nationalization. Thus, indirect expropriation under the Treaty is defined in a different and apparently stricter way than in other treaties that make reference to measures, the effect of which, would be "tantamount" or "equivalent" to nationalization or expropriation.²¹¹ Be that as it may, in order to be considered an indirect expropriation, the government's measures interference with the investor's rights must have a major adverse impact on the Claimants' investments. As mentioned by other investment treaty decisions, the State's measures should amount to a "substantial deprivation" of its value, use or enjoyment, "determinative factors" to that effect being "the intensity and duration of the economic deprivation suffered by the investor as a result of such measures."²¹²

193.

According to the Claimants, the Respondent expropriated seven of Abal's thirteen variants, including the goodwill and the legal rights deriving from the associated intellectual property, when it enacted the SPR.²¹³

194.

Thereafter, the Respondent's 80/80 Regulation destroyed the brand equity of the six remaining variants, with two immediate alleged effects: first, the discontinuance of two other brands from the market (the Galaxy and Premier brands) in 2009, and second, the erosion of the Claimants' brand equity and pricing power. In particular, the Claimants say that as a result of the "corrupted presentation" of the Claimants' packaging, Abal has been forced to choose between maintaining its market share or maintaining its historical price premium.²¹⁴ This, in turn, has substantially affected the Claimants' profits and revenues as smokers are less willing to pay premium prices for the Claimants' products.

195.

The Claimants do not dispute that Abal remained a profitable business. They contend, however, that each brand asset—including each variant and each brand—is an individual investment in its own right.²¹⁵ Thus, the discontinuance of each of the brand variants, or the interference with each of the remaining brands, constitutes an expropriation.²¹⁶

196.

Finally, the Claimants address two defenses raised by the Respondent: the police powers doctrine and the Claimants' alleged lack of property rights—intellectual or other—that could be the object of an expropriation.

197.

First, the Claimants consider that the police powers doctrine does not excuse the Respondent from liability for expropriating the Claimants' investment. According to the Claimants, "under customary international law, the scope of the implicit exception for police powers is limited to State powers related to protection and security such as enforcement of the law, maintenance of the public order, and defense of the State."²¹⁷ State police power does not constitute a defense against expropriation.²¹⁸

198.

Furthermore, a State cannot remove a measure from the scope of the BIT's expropriation provision by invoking its general authority under domestic law to adopt regulatory measures.²¹⁹ A State's regulatory measure must be subject to limitations. But, in any event, the Challenged Measures were expropriatory, even if enacted in pursuit of public health, because they were unreasonable.²²⁰

199.

Claimants further consider that in any case the SPR and 80/80 Regulation do not fall within the police powers doctrine on the basis that:

■ The government actions were not in fact "designed and applied to achieve" reduced tobacco consumption.²²¹

■ Even the tribunals that would recognize an implied expropriation exception for regulatory actions would find that the exception is inapplicable where the government's actions conflict with specific commitments to investors.²²²

■ In contrast with the facts in the Chemtura and Methanex cases, in this case Respondent has not conducted a "serious, objective and scientific" assessment of whether the Challenged Measures are justified. Moreover, the measures have been ineffective in practice and are "not proportional to the public interest the Respondent alleges they serve given the severe harm they inflict."²²³

200.

The Claimants also reject the Respondent's allegations that Claimants lack intellectual property rights that could be the subject of an expropriation. First, they assert that the Claimants' trademarks are validly registered before Uruguay's National Directorate of Industrial Property (" DNPI ") and thus benefit from legal protection.

201.

The Claimants consider that the disputed marks maintained "the distinctive characteristic" of the registered trademarks, and were therefore covered by the same original registration, even if the two were not identical in all respects. For example, the Marlboro Gold and Marlboro Light trademarks as used and as registered are covered by the same registration, because they both "contain the word ‘Marlboro' written in the same distinctive typeface, the classic chevron or ‘rooftop' symbol, and the distinctive Philip Morris coat of arms placed above the word Marlboro," even though the former removes the word "light."²²⁴ According to the Claimants, the use of descriptors such as "light," "mild flavour," or "milds" are not distinctive, but instead are common in the tobacco industry and are non-essential elements.²²⁵ Thus, their absence on the branded packaging is without effect.²²⁶

202.

The Claimants note the conclusions of their intellectual property experts that the marks associated with the branded packaging Abal used for its variants, maintained the distinctive character of the registered trademarks and, therefore, were protected as trademarks.²²⁷

203.

Finally, the Claimants address the Respondent's contention that they do not own trademark rights for Marlboro Fresh Mint because the trademark was registered on September of 2008 and introduced to the Uruguayan market on 3 December 2008, shortly before the SPR entered into force (on 18 February 2009), but after it was enacted on 18 August 2008.²²⁸ In the Claimants' view, since the MPH and the SPR do not regulate trademark registrations, compliance or lack of compliance with MPH's regulations has no bearing. Moreover, even if it did, the SPR did not prohibit the registration of variants. The SPR, the Claimants submit, governs the number of presentations that may be used in trade, not the number of trademarks that may be registered.²²⁹ The Claimants could have chosen at any time to trade Marlboro Fresh Mint as its variant for the Marlboro family brand after registration.²³⁰

204.

The Claimants cite the BIT, which recognises trademarks and trade names as industrial property rights for the purposes of defining the investment, as did the Tribunal in finding jurisdiction in this case. The Claimants explain: "[a] trademark is an asset because it creates value by distinguishing goods in commerce. A trademark can only serve that function if it is used."²³¹

205.

Further, in connection with their Article 11 claim, the Claimants submit that they had a right to use their trademarks in commerce under Uruguayan law for two main reasons. First, Uruguayan trademark law, incorporating international law, protects the right to use trademarks.²³² Second, Uruguayan property law applies to intellectual property and protects the right to use intellectual property.²³³

206.

First, the Claimants rely on Article 11 of the MERCOSUR Protocol, which provides that "[t]he registration of a trademark shall grant the owner an exclusive right of use."²³⁴ In the Claimants' view, the MERCOSUR Protocol has been incorporated into domestic law and so is applicable to all owners of trademarks registered in Uruguay. Thus it is irrelevant that that Switzerland is not a party to the MERCOSUR Protocol.²³⁵

207.

The Claimants then refer to several provisions of the TRIPS Agreement which in their view also recognize at least a qualified right to use a trademark in connection with goods or services that are lawfully available for sale within a WTO Member State.²³⁶ The Claimants further rely on Article 2 of the Montevideo Treaty which provides that "[o]wnership of a trademark or a trade name includes the right to use it."²³⁷ Moreover, they refer to a decision by the Tribunal de lo Contencioso Administrativo in which the TCA allegedly recognized that trademark holders have the right to the exclusive and effective use of their trademarks.²³⁸ Finally, the Claimants evoke an alleged reference to the "effective use of trademarks" made by Uruguay's Legislature to the Supreme Court in the context of the Claimants' litigation challenging the 80/80 Regulation.²³⁹

208.

Second, the Claimants submit that under Uruguayan law, trademark rights are a form of property and that all property owners have the right to use their property. This is recognized by Articles 7 and 32 of Uruguay's Constitution referring to property as "an inviolable right," and to the "right to be protected in the enjoyment of... property," respectively. In the Claimants' view, in order to "enjoy" property, one must be allowed to use that property.²⁴⁰

209.

The Claimants further rely on the literal wording and interpretations of Articles 486, 487, and 491 of the Civil Code, and Article 16 of the Trademark Law.²⁴¹ They submit that, contrary to the Respondent's assertion, trademark rights—like all other property rights—are protected under Uruguayan law despite the fact that those rights are not absolute; in fact, no property rights are absolute.²⁴² Also, in Claimants' view, the fact that separate provisions in the Constitution and Civil Code exist for intellectual property does not mean that intellectual property is not protected under these instruments.²⁴³

210.

According to Uruguay, even if the Challenged Measures could be considered expropriatory - something it denies - the effect of the SPR and the 80/80 Regulation are not tantamount to an expropriation because the "value of the business has not been so reduced as to effectively deprive it of its character of an investment."²⁴⁴

211.

Uruguay points to the factual evidence showing that the Claimants' business retains significant commercial value.²⁴⁵ Referring to Abal's market share data, the Respondent notes that Abal retained and retains its commercial value. It also refers to the Claimants' damages expert report, which exhibited positive cash flows in perpetuity for Abal, notwithstanding the SPR and 80/80 Regulation.²⁴⁶

212.

Uruguay stresses that Abal's net operating income actually increased between 2005 and 2012. It highlights that in 2012, three years after the implementation of the SPR and the 80/80 Regulation, it was higher than at any point since 2004, as shown by the graph below.²⁴⁷

213.

Uruguay likewise refers to Abal's total gross profits between 2005 and 2013. It notes that except for 2010 (when Abal sold cigarettes below production cost for a period of time), its total gross profit was higher every year after 2008, when the regulations were implemented. This is depicted in the graph below:²⁴⁸

(1) Gross Profit is calculated in the Audited Financial Statements as Net Operating Income less Cost of Sales for both Local and Export Sales.

(2) Values are taken from the Audited Financial Statements as reported, then adjusted for inflation and reported in 2014 Pesos.

(3) Factory Closure Savings are calculated as UYUS 0,074 per stick multiplied by volume for each year after 2010. UYUS 0,074 is the per-stick savings Navigant calculates in its Appendix L adjusted for inflation and reported in 2014 Pesos.

Sources:

(1) Abal Hermanos Financial Statements. December 31. 2004-December 31. 2013 (C-297, C-298. C-299. C-300. C-301. C-302. C-122. C-303. C-123. C-4121 .

(2) Inflation Data - International Monetary Fund (AG-441 .

(3) Second Navigant Report, ¶ 51 and Appendices L and M .

(4) Abal Historical Sales Volume and Revenue. 1999-2014 (C-3721 .

214.

Finally, Uruguay underscores that in 2012, Abal's profits were approximately US$3.5 million.²⁴⁹

215.

The Respondent also rejects the Claimants' argument that each of its brand assets should be considered as independently affected by the Challenged Measures.²⁵⁰ To the contrary, the Respondent submits, in the context of indirect expropriation claims, that the analysis must focus on the investment as a whole, globally, not on its discrete parts.²⁵¹ Moreover, it disagrees with the Claimants re-characterizing of the activities that fall within the concept of "investments" under Article 1(2) in order to include brand-assets.

216.

It is Uruguay's submission that preserving and protecting public health is a quintessential manifestation of police power,²⁵² which is in turn an essential element of a State's permanent sovereignty.²⁵³ Uruguay has the right to exercise its inherent sovereign power to protect public health without incurring international responsibility generally (either for alleged expropriation or breach of other standards of treatment).

217.

The Respondent alleges that a bona fide, non-discriminatory exercise of a State's sovereign police power to protect health or welfare does not constitute an expropriation as a matter of law.²⁵⁴ Nor is the State liable to pay compensation for any damages arising from its exercise of such a power.²⁵⁵ The Respondent relies inter alia on Chemtura for this proposition.²⁵⁶

218.

Uruguay sees no merit on the Claimant's assertion that the BIT does not contain a particular carve-out or exception. For the Respondent, the police powers doctrine is a fundamental rule of customary international law and as such, it must be applied to interpret Article 5, in accordance with Article 31 of the Vienna Convention on the Law of Treaties (" VCLT ").²⁵⁷ Moreover, Article 2(1) of the BIT explicitly recognizes the special plane on which police power exists by allowing the contracting States to refuse to admit investments "for reasons of public security and order, public health or morality."²⁵⁸ This power cannot be limited to the point of admission of investments but must be considered a permanent part of the State's regulatory authority.

219.

Uruguay does not suggest that the police powers of the State are absolute.²⁵⁹ To the contrary, they are limited to governmental action that is not discriminatory or taken in bad faith, but is taken in exercise of "the inherent and plenary power of a sovereign to make all laws necessary and proper to preserve the public security, order, health, morality and justice."²⁶⁰ Other categories of State action, even when taken for some public purpose, are not covered.²⁶¹

220.

The Respondent considers that the authorities on which the Claimants rely are inapposite. In both the Norwegian Shipowners and the Santa Elena cases, the tribunals were not called upon to determine if there was an expropriation but only the amount of compensation due for such an expropriation.²⁶²

221.

Accordingly, Uruguay's alleged interference with the Claimants' property in the exercise of police power does not constitute expropriation.²⁶³

222.

The Respondent claims that it has no commitments in relation to the trademarks at issue in these proceedings because they are not owned by the Claimants. The Respondent goes through each of the seven variants allegedly affected by the SPR and the 80/80 Regulation: Marlboro Gold, Marlboro Blue, Marlboro Fresh Mint, Fiesta Blue, Fiesta 50 50, Philip Morris Blue and Premier.²⁶⁴ It concludes that in each case, they were not the same as any of the trademarks originally registered.²⁶⁵ Thus, at the time the Challenged Measures were adopted, these variants were not registered before the DNPI, and "the necessary predicate for legal protection... under Uruguayan law" did not exist.²⁶⁶ Since all of the Claimants' brands as registered contained the prohibited descriptors, this invalidated their trademarks. Accordingly, the Claimants have no viable expropriation claim since they "never bothered to perfect those alleged rights."²⁶⁷

223.

The Respondent says that under Uruguayan law in order for a trademark in use to be entitled to protection, it must cover the marks " exactly as registered" and that " [a]ny change made to the original mark as registered, either to its name or its graphic elements, logos, figures, colors, etc., constitutes a different unregistered trademark and as such its holder will not acquire exclusive rights to the new mark nor can it claim rights to it based on the registration of the original trademark."²⁶⁸

224.

The operative provisions of Uruguayan trademark law confirm, in the Respondent's view, that negative protection is limited to the mark precisely as it was registered. The Respondent cites, inter alia,

■ Article 31 of the Trademark Law, which provides that "[o]nce the registration application is submitted, no modifications will be allowed to the representation of the mark. All requests for modification shall be cause for a new registration."²⁶⁹

■ Article 13 of the Trademark Law, providing that when registration of a mark is granted, the holder cannot request a new registration for an identical mark for the same classes unless it first abandons the first registration.²⁷⁰

■ DNPI Resolution No. 21/2001, a technical Resolution, confirming that "modifications to the sign shall be grounds for a new registration request" and "only the modification of owners' names and domiciles due to typographical errors and limitation of protection shall be allowed."²⁷¹

225.

In the Respondent's view, the Claimants seek to get around the applicable Uruguayan law by invoking Article 5(C)(2) of the Paris Convention. However, Article 5(C)(2) has nothing to do with a Member State's registration requirements. It applies only to the question of the protection afforded in other countries to marks that have already been registered.

226.

In any event, the marks in dispute did not have the same "distinctive character" as the marks the Claimants originally registered, and therefore they should have been separately registered, even under the Claimants' alleged misreading of the Paris Convention.²⁷² Uruguay explains, inter alia, that if the variants the Claimants invoke changed the distinctive character of the original trademark (i.e., if Marlboro Gold is protected by the registration of Marlboro Light), then it would be unnecessary to register any other Marlboro trademark sharing the same characteristics and it would extend to all, not only Gold, but also to Red, Blue, Black, and Fresh Mint, so long as the central characteristics remain the same.²⁷³

227.

The Respondent posits that the Claimants do not have a legally protected right amenable to being expropriated. Like the international law on which it is based, Uruguayan intellectual property law does not afford trademark registrants an affirmative right to use their marks in commerce. Instead, it confers on them only the negative right to prevent others from doing so.²⁷⁴ The argument is three-fold.

228.

First, the Respondent alleges that the Claimants' expert Professor Gustavo Fischer, outside the context of this arbitration, specifically noted in his capacity as President of the Uruguayan Association of Industrial Property Experts that under Uruguayan law, the registration of a trademark "does not in any way imply an authorization or qualification for the performance of the specific activity for which the registration is requested. This is because the National Directorate of Industrial Property has not been assigned such task."²⁷⁵ The Respondent also notes that the Claimants failed to raise a claim to a guaranteed right to use under Uruguayan trademark law in their challenges to either the SPR or the 80/80 Regulation before the national courts.²⁷⁶

229.

Second, the Respondent submits that the Claimants have been unable to point to any provision in the Trademark Law or find any basis under Uruguayan law for their proposition that a trademark confers the registrant anything other than the right to prevent others from using it.²⁷⁷

230.

In particular, the Respondent further argues that the position and practice of the DNPI has always been that a registered trademark does not confer on its owner a right to use, but rather a right to exclude third parties from using it.²⁷⁸ This is confirmed by the jurisprudence.²⁷⁹

231.

The Respondent submits that the Claimants are reduced to arguing that such a right can be inferred from Property Law precisely because Uruguay's trademark law does not grant a "right to use."²⁸⁰ The Respondent notes, inter alia, that Article 491 of Uruguay's Civil Code expressly establishes separate provisions for tangible property, on the one hand, and intellectual property, on the other.²⁸¹ Moreover, the special rules of trademark law that only recognize a negative use, would trump the special rules of the Civil Code even if the Code were in principle to govern trademark rights.²⁸²

232.

In conclusion, the Respondent considers that the mere act of registering a trademark cannot be used as a shield against government regulatory action that restricts the use of such marks, or the products with which they are associated.²⁸³

233.

Third, the Respondent submits that none of the international intellectual property conventions cited by Claimants recognizes a right to use:²⁸⁴

■ As to the MERCOSUR Protocol, it only uses affirmative language to describe a negative right.²⁸⁵ Its Preamble notes that it is intended to conform to the Paris Convention and the TRIPS Agreements, neither of which create a right to use.²⁸⁶ In any event, the MERCOSUR Protocol only applies between State Parties that have ratified it; that is, Uruguay and Paraguay.²⁸⁷ Even if were incorporated in Uruguayan law, something that the Respondent denies, it would not constitute a free-standing provision of universal application, but would apply along with its limitation and conditions (i.e. as only applicable to Paraguay). The Most Favored Nation clause of the TRIPS Agreement does not apply as the Mercosur Contracting Parties notified the TRIPS Council that they would avail themselves of the exception under Art. 4(d) of the TRIPS Agreement.

■ As to the Paris Convention and the TRIPS Agreement, the Respondent argues that the Claimants' Reply does not address the Paris Convention,²⁸⁸ and notes that a WTO panel has ruled that TRIPS Agreement only recognizes a negative right not a "positive right to exploit or use."²⁸⁹

■ As to the Montevideo Treaty, the Respondent alleges that it applies only as between the State Parties (Uruguay, Argentina, Bolivia, Paraguay, Peru),²⁹⁰ and Article 2, which Claimants cite for their proposition, in fact refers to the "right to use exclusively," which does not constitute an affirmative right to use in the sense the Claimants contend.²⁹¹

234.

According to the Respondent, since such a right does not exist, the Claimants had no trademark right capable of being expropriated. "The essential precondition to a valid expropriation claim—extant legal rights with which governmental regulation interferes — is therefore absent."²⁹² The Claimants have kept their right to prohibit third-parties from using their registered trademarks. Thus, there is no expropriation.

235.

It is undisputed that trademarks and goodwill associated with the use of trademarks are protected investments under Article 1(2)(d) of the BIT.²⁹³ In order to establish whether the Claimants' investments have been expropriated, the Tribunal will deal in turn with the following questions:

a. Did the Claimants own the banned trademarks?

b. Does a trademark confer a right to use or only a right to protect against use by others?

c. Have the Challenged Measures expropriated the Claimants' investment?

236.

The Respondent claims that it has no commitments in relation to the trademarks at issue in these proceedings because they are not owned by the Claimants.²⁹⁴ The Respondent relies on Uruguayan Trademark Law which states that "[o]nce the application is submitted, no modifications will be allowed to the representation of the mark."²⁹⁵ A Technical Resolution by the DNPI confirms that "modifications of the sign shall be the basis for a new registration request."²⁹⁶

237.

The argument is that it was necessary for the Claimants to re-apply for trademarks that had been modified, including those regarding which the 2005 Decree had prohibited the use of certain misleading descriptors on cigarette packets, such as "lights," "low in tar," "ultra-light" or "mild."²⁹⁷

238.

The Claimants argue that the Respondent is barred from challenging the ownership of their trademarks at the merits stage since this objection should have been raised during the jurisdictional phase, the Claimants' trademark registrations being publicly available long before the start of this arbitration.²⁹⁸ The Claimants also contend that the Respondent is precluded from contesting their ownership of the trademarks since the Tribunal already found in its Decision on Jurisdiction that "the Respondent has not objected to the Claimants' description of their investments."²⁹⁹

239.

The Tribunal notes that in asserting that the Respondent is barred from challenging only at this stage their trademarks ownership, the Claimants do not invoke any legal ground in support of their position. It further notes that this objection was not developed at the Hearing. Regarding the other objection, the Claimants did not set out during the jurisdictional phase their precise trademarks, instead simply stating in general terms that their investment included certain trademarks.³⁰⁰ The Tribunal was only concerned during that phase with establishing that there was an "investment" for the purposes of Article 25(1) of the ICSID Convention, not with creating an inventory of that investment. Therefore, the question remains properly before the Tribunal.

240.

The Claimants have contended further that under Uruguay's Trademark Law, which is based on intellectual property conventions such as the Paris Convention, the marks they used in commerce "are not deprived of trademark protection merely because they are not identical in all respects to Claimants' registered trademarks."³⁰¹

241.

As previously mentioned, following the 2005 Decree, the Claimants removed the prohibited descriptors from their cigarette packets and renamed many of their brands to comply with the legislation. But they did not apply for new trademarks, continuing to use cigarette packets with substantially the same logo, colour and branding. They say that, for instance, Marlboro Lights became Marlboro Gold with a gold package, retaining "the same distinctive typeface, the classic chevron or ‘rooftop' symbol and the distinctive Philip Morris coat of arms, placed just above the word ‘Marlboro'."³⁰² They make reference to Professor Barrios' indication that "the presentation adopted by the Marlboro Gold trademark is similar to that claimed in the trademark title corresponding to the Marlboro Lights trademark."³⁰³

242.

The Claimants' experts compared the registered trademarks with the mark in use for each banned variant and concluded that the marks maintained the distinctive character of the registered trademarks and were therefore protected.³⁰⁴ On this basis, the Claimants argue that since "the differing elements do not alter the distinctive character of the mark" they retained ownership over their trademarks as registered even if the word "lights" was removed from the mark Abal used in commerce.³⁰⁵ They note that the word "lights" was a generic term commonly used within the industry before it was banned; it was not a distinctive element of the registered trademark.³⁰⁶ The Claimants add that they "did not obtain a new trademark because they did not need to -- the Marlboro Gold trademark was already protected."³⁰⁷

243.

The question of ownership of the trademarks is one to be determined under Uruguayan law governing intellectual property since the trademarks here in issue are registered in Uruguay and exist, if they exist at all, under Uruguayan law. The Tribunal is confronted with the difficult task of applying Uruguayan trademark regulation in the presence of discordant opinions of the Parties' experts regarding its interpretation.

244.

The Claimants' expert, Professor Fischer, has opined that "[t]he product variants as used in the market fall within the scope of protection of Claimants' registered trademark rights, because they maintain the essential distinctive features of the trademark families and only differ slightly from the registered trademarks with respect to non-essential elements."³⁰⁸ He has further held that "variations in secondary, non-essential elements of trademarks neither invalidate the registration nor diminish the protection granted to the trademarks."³⁰⁹

245.

The Respondent's expert, Professor Barrios, has stated:

The analysis of Claimants' Memorial seems to show that the Claimants are attempting to base their trademark rights to some of these marks on the fact that they form a part of a "trademark family" or that they are "derivative marks" derived from other trademarks that are indeed registered. Unlike other legal systems, the Uruguayan system does not provide protection for derivative trademarks (or trademark variants) or for trademark families, and therefore a claim based on the protection of a family of trademarks or their variants has no legal basis in Uruguayan Trademark Law, and consequently does not enjoy protection.³¹⁰

246.

In addition to the experts' opinions, the Tribunal notes that, as contended by the Respondent and attested by the DNPI website, when the Challenged Measures were adopted there were no registered trademarks for many of the variants at issue that Abal sold in Uruguay.³¹¹ This is not dispositive of the question whether a re-registration of said variants would have been required, depending on the kind of changes made to the trademarks as registered.

247.

It has also taken note that Professor Barrios, although supporting the Respondent's conclusions on ownership, admitted that whether a modified brand is covered by the trademark is not a literal exercise, since... trademarks must be taken as a whole, and not dismembering them into component parts for the purposes of analysis.... In other words we must bear in mind that the trademark is indivisible. It is the impression of the whole that must be taken into account for all intents and purposes."³¹²

248.

This position, taken from a decision of the TCA, accords with the views of the experts called by the Claimants, who stated that the question is whether the trademark retains its distinctive character. This is also the position under the Paris Convention for the Protection of Industrial Property under which use of a mark "in a form differing in elements which do not alter the distinctive character of the mark in the form in which it was registered […] shall not entail invalidation of the registration and shall not diminish the protection granted to the mark."³¹³ This provision, however, has to be reconciled with Article 6(1) of the same Convention, according to which "the conditions for the filing and registration of trademarks shall be determined in each country of the Union by the domestic legislation."

249.

Even accepting that, based on Article 5(C)(2) of the Paris Convention, only a change in the "distinctive character" of the mark would entail its invalidation also under Uruguayan trademark law, it remains to be determined whether the changes made to each of the Claimants' trademarks at issue have affected their "distinctive character," an issue as to which the Parties' experts diverge.

250.

According to Dr. Carvalho, the Respondent's expert, the question "is whether MARLBORO GOLD is an alteration of the distinctive character (in Paris Convention terms) or a material alteration (in US legal terms) of MARLBORO LIGHT. The answer is yes. Both the term "light" and the gold colour have significant strength and meaning for consumers." He concludes that a new registration would have been required, since the previous registration of MARLBORO Light does not encompass "such a significantly material alteration."³¹⁴

251.

According to Professor Fischer, the Claimants' expert, "the Marlboro Gold variant of the Marlboro trademark family is substantially identical to the registered Marlboro Lights trademark (Reg. No. 335,632)." He adds that the "core distinctive elements of the Marlboro brand family are present both in the Marlboro Gold variant and in Reg. No. 335,632, including the characteristic chevron or ‘rooftop' design, the coat of arms, and the word Marlboro written in a distinctive typeface" and that "the term ‘light' is not distinctive. It is common in the tobacco industry and constitutes a non-essential element." He concludes that Marlboro Gold variant is protected by the Marlboro lights trademark registration Reg. No. 335,632, noting that "the registration covers the mark without claim to colors, thus providing protection for any color variant under which the distinctive elements of the trademark may be presented."³¹⁵

252.

This discussion deals with all of the variants at issue since the legal argument is the same in each case. The only exception is Marlboro Fresh Mint, for which the Respondent advances a different argument. It alleges that it was introduced to the Uruguayan market shortly before the SPR entered into force but after it was enacted; therefore Abal knew that this brand variant would have to be removed from the market.³¹⁶ The Tribunal believes that the Claimants must be correct when they argue that the existence of the SPR regulation did not prevent the registration of the trademark and did not affect their ownership.³¹⁷ However, the timing of the registration of this trademark may be relevant to damages, if any, given potential causation problems.

253.

According to the Respondent, no claim may be raised regarding two other variants, Premier Extra and Galaxy, which the Claimants chose to withdraw from the market in late 2009, allegedly as a result of the 80/80 Regulation,³¹⁸ since nothing would have prevented their use in commerce.³¹⁹ The Tribunal concurs.

254.

The Tribunal has taken note that according to Dr. Carvalho, even if Article 13 of the Trademark Law requires that any alterations to a mark be subject to new registration, the Law "does not deny protection to alterations based on the first registration."³²⁰ It believes that in light of its other findings regarding the claim of expropriation, it is not necessary to reach a definitive conclusion on the question of the Claimants' ownership of the banned trademarks. It will assume, without deciding, that the trademarks continued to be protected under the Uruguay Trademark Law.

255.

The central issue over the trademarks is what rights a registered trademark accords its owner under Uruguayan law. Abal says that it was required to withdraw seven variants as a result of SPR and that it had to distort and truncate its trademarks in order to fit them within the limited space available on the package under the 80/80 Regulation. It says that under Uruguayan law, and consequently the BIT, it had a right to use those trademarks unconstrained by such regulations.³²¹

256.

The key provision is Law 17,011, the Trademark Law. The Respondent says that there is no provision in the Law creating the "right to use" as asserted by the Claimants,³²² the Law granting only an "exclusionary right," but not an absolute right to use: "once registered, the holder of a trademark has the right to challenge the use of any trademark that could result in confusion between goods or services for which the trademark was registered […] and also the right to challenge the registration of identical or similar signs."³²³

257.

The Respondent cites Article 14 of Law 17,011, which provides that "[t]he right to oppose the use or registration of any trademark that could lead to confusion between goods or services shall belong to the person that meets all the requirements of the present law."³²⁴ That is, a trademark gives to the holder an exclusive right to challenge a third party attempting to register or use the same trademark "such that only the trademark holder (and no one else) has the possibility to use the trademarks in commerce."³²⁵ The Respondent argues that Professor Barrios' opinion has been confirmed by the TCA, which has made clear that there is a distinction between the registration of a trademark and the use of that trademark in commerce, ruling that the mere registration does not give rise to a right to use the trademark.³²⁶

258.

The Respondent relies on an exchange in 1994 between the tobacco companies and WIPO, where WIPO states clearly its view that the registration of a trademark is a separate question from the use of that trademark: "the Paris Convention obliges its member States to register a mark even where the sale of the goods to which such mark is to be applied is prohibited, limited or subject to approval by the competent authorities of such states."³²⁷ However, it is not clear on the face of the Paris Convention that this is so, and it is unclear what legal weight is to be given to a statement from the WIPO Secretariat on such a matter.

259.

Certainly this is the rule in the case of patents, for which there is a specific provision in the Paris Convention.³²⁸ But it seems difficult to draw the conclusion that the same rule applies in the case of trademarks where none is provided. In fact, the text of the Convention points in the other direction, stating, as already mentioned, that "the conditions for the filing and registration of trademarks shall be determined in each country of the Union by its domestic legislation."³²⁹ The exception to this is where a trademark is already registered in its country of origin, in which case a second country, which is also party to the Convention, must accept the filing for trademark purposes, subject to certain reservations.³³⁰

260.

The Tribunal notes that there is nothing in the Paris Convention that states expressly that a mark gives a positive right to use,³³¹ although it is clear that a trademark can be cancelled where it has not been used for a reasonable period.³³²

261.

The Claimants rely on Article 20 of the TRIPS Agreement which seems to imply "a right to use" a trademark by prohibiting WTO Member States from unjustifiably imposing "special requirements" on trademarks used in the course of trade. They rely on Professor Gibson's Opinion holding that "if there is no right or legitimate interest in use, there is no need... for Article 20."³³³

262.

However, to imply a right to use from a provision that prohibits WTO Member States to encumber the use of trademarks would elevate to a "right to use" a provision that does no more than simply acknowledging that trademarks have some form of use in the course of trade which should not be "unjustifiably" encumbered by special requirements. In any case, nowhere does the TRIPS Agreement, assuming its applicability, provide for a right to use. Its Article 16, dealing with "Rights Conferred," provides only for the exclusive right of the owner of a registered trademark to prevent third parties from using the same mark in the course of trade.³³⁴

263.

The Claimants rely also on Article 11 of the MERCOSUR Protocol, which provides: "[t]he registration of a trademark shall grant the owner an exclusive right of use, and the right to prevent any person from performing, without the [trademark owner's] consent, the following acts."³³⁵ They say that this shows that there are two separate rights granted by a trademark, an exclusive right of use and a right of prevention.

264.

However, as the Respondent has pointed out, the better interpretation is that the exclusive right to use is simply the other side of the coin of the "right to prevent any person from performing," and does not thereby mean that a trademark gives rise to an absolute right of use.³³⁶ This is confirmed by the Spanish original of Article 11 which refers to "the right of exclusive use" (" el derecho de uso exclusivo ").³³⁷ Based on the clear language of the Spanish text, the Tribunal considers it unnecessary to deal with the further arguments raised between the Parties regarding the effects of the incorporation of the MERCOSUR Protocol into Uruguayan domestic law, and in particular whether benefits granted by the Protocol should extend to trademark holders of third countries by virtue of the MFN provision of Article 4 of the TRIPS Agreement.

265.

In their Reply, the Claimants made reference for the first time to the Montevideo Treaty.³³⁸ Whatever its import in the present dispute, it is clear from its definition of "use" in Article 1 as being "right to use exclusively" (" el derecho de usar exclusivamente ") that it also intends to establish only an exclusive right of use, not an absolute right.³³⁹

266.

The Claimants also argue that a trademark is a property right under Uruguayan law which thus accords a right to use. Again, nothing in their argument supports the conclusion that a trademark grants an inalienable right to use the mark. As the Respondent rightly points out, the scope of the property right is determined by Uruguayan IP laws, such that, in order to work out the legal scope of the property right, it is necessary to refer back to the sui generis industrial property regime in Uruguay.³⁴⁰ Professor Fischer, one of the Claimants' experts, confirms in a paper prepared not for the purposes of this dispute that a trademark confers on its owner only "the right to prevent others from using a trademark or trademarks that may be confused with their own."³⁴¹

267.

In the Tribunal's view, both Parties have focused on a dichotomy between a right to use and a right to protect. However, it may be more fruitful to view the case as a question of an absolute versus exclusive right to use. Ownership of a trademark does, in certain circumstances, grant a right to use it. It is a right of use that exists vis-à-vis other persons, an exclusive right, but a relative one. It is not an absolute right to use that can be asserted against the State qua regulator.

268.

As explained by Professor Barrios with reference to Professor Bugallo's work on Intellectual Property, it is the "right to exclude third parties from the market (called the negative facet) [that] renders the exclusive use of the registered trademark in the marketplace possible."³⁴² Nothing in any of the legal sources cited by the Claimants supports the conclusion that a trademark amounts to an absolute, inalienable right to use that is somehow protected or guaranteed against any regulation that might limit or restrict its use. Moreover, as the Respondent has pointed out, this is not the first time that the tobacco industry has been regulated in such a way as to impinge on the use of trademarks.³⁴³

269.

Most countries, including Uruguay, place restrictions on the use of trademarks, for example in advertising. Particularly in an industry like tobacco, but also more generally, there must be a reasonable expectation of regulation such that no absolute right to use the trademarks can exist. Otherwise "the mere fact of registering a trademark would guarantee the sale of any trademarked product, without regard to other considerations."³⁴⁴ If a food additive is, subsequent to the grant of a trademark, shown to cause cancer, it must be possible for the government to legislate so as to prevent or control its sale notwithstanding the trademark. The Respondent relies on another publication of the Claimants' expert, Professor Fischer, to this effect, where he noted that registering a trademark "does not in any way imply an authorization or qualification for the performance of the specific activity for which the registration is requested."³⁴⁵

270.

The objection might be to regulations that target and modify or ban use of their trademarks as such without otherwise changing the conditions of sale, whereas in the example of the harmful food additive, sale of the product is prohibited entirely. But there may be products (of which tobacco is currently one) whose presentation to the market needs to be stringently controlled without being prohibited entirely, and whether this is so must be a matter for governmental decision in each case. There is nothing in the relevant legal materials to support a carve-out of trademarks from the legitimate realms of regulation. Uruguayan trademark law (like trademark law in other countries following the Paris Convention system) provides no such guarantee against regulation that impinges on the use of trademarks.

271.

The Tribunal concludes that under Uruguayan law or international conventions to which Uruguay is a party the trademark holder does not enjoy an absolute right of use, free of regulation, but only an exclusive right to exclude third parties from the market so that only the trademark holder has the possibility to use the trademark in commerce, subject to the State's regulatory power.³⁴⁶

272.

The Respondent has asserted that the Claimants had no rights capable of being expropriated since "Uruguayan trademark law does not recognize an affirmative right for registrants to use their trademark in commerce".³⁴⁷ The Tribunal does not share the Respondent's position. Absence of a right to use does not mean that trademark rights are not property rights under Uruguayan law, as contended by the Claimants and as recognized by one of the Respondent's experts, Professor Carvalho,³⁴⁸ according to whom "the fact that trademarks are protected as private property does not mean that they convey the right to use."³⁴⁹ Professor Barrios, another expert for the Respondent, disagrees holding that "[i]ntellectual property is a sui generis regime, that is not assimilable to the right of ownership or property," the ownership or property rights and their limitations under the Constitution and the Civil Code being not attributable to trademark owners.³⁵⁰

273.

Trademarks being property, their use by the registered owner is protected. As intellectual property assets, trademarks are "inherently associated with trade for they imply a situation of intermediation between producers and consumers."³⁵¹ It must be assumed that trademarks have been registered to be put to use, even if a trademark registration may sometime only serve the purpose of excluding third parties from its use.³⁵²

274.

As a matter of fact, Abal made use of all of its thirteen trademark variants before SPR effectively banned seven of them,³⁵³ and the 80/80 Regulation limited "the space available for Claimants to display the visual elements of their remaining brands to only 20% of the front and back of the package."³⁵⁴ As to the Respondent's allegation regarding the Claimants' lack of valid title to the banned trademarks, the Tribunal refers to its ruling in that regard.³⁵⁵ The Tribunal concludes that the Claimants had property rights regarding their trademarks capable of being expropriated. It must now examine whether the Challenged Measures had an expropriatory character with regard to the Claimants' investment.

275.

Regarding the 80/80 Regulation, the Claimants argue that it reduced the brand equity of those products that survived the implementation of the SPR, "depriving Abal of its ability to charge a premium price."³⁵⁶

276.

In the Tribunal's view there is not even a prima facie case of indirect expropriation by the 80/80 Regulation. The Marlboro brand and other distinctive elements continued to appear on cigarette packs in Uruguay, recognizable as such. A limitation to 20% of the space available to such purpose could not have a substantial effect on the Claimants' business since it consisted only in a limitation imposed by the law on the modalities of use of the relevant trademarks. The claim that the 80/80 Regulation breached Article 5 of the BIT consequently fails.

277.

Regarding the SPR, at the time of its imposition in 2009, the Claimants manufactured and sold thirteen variants within its six brand families, as follows:³⁵⁷

- Marlboro (a family comprised of Marlboro Red, Marlboro Gold, Marlboro Blue, and Marlboro Fresh Mint);

- Fiesta (a family comprised of Fiesta, Fiesta Blue, and Fiesta 50 50);

- Philip Morris (a family comprised of Philip Morris and Philip Morris Blue);

- Premier (a family comprised of Premier and Premier Extra);

- Galaxy (which was comprised of only one product, Galaxy); and

- Casino (which was comprised of only one product, Casino).

278.

Before the SPR, Abal owned the trademarks associated with Premier and Casino and was licensee of the trademarks for all other products from PMP and PMB, which owned them, as shown by the list of the relevant Uruguayan trademarks, including their registration numbers, owners and licensees, provided by the Claimants.³⁵⁸ In the Claimants' view, each of such "brand assets"³⁵⁹ is an investment protected by the BIT.³⁶⁰ They contend that variants were vital to their business in Uruguay given the ability to utilize them to compete for market share and pricing power in the Uruguayan market³⁶¹ and the difficulty and costs to introduce new brands in such a highly regulated market.³⁶²

279.

According to the Claimants, the SPR banned seven of the thirteen variants manufactured and sold by Abal at the time, thus rendering them and the associated goodwill "valueless": these were Marlboro Gold, Marlboro Blue, Marlboro Fresh Mint, Fiesta Blue, Fiesta 50 50, Philip Morris Blue and Premier.³⁶³ They add that "[b]y destroying the value of those investments without compensation, Respondent violated Article 5 of the BIT."³⁶⁴ They reply to the Respondent's argument that the damage caused by the Challenged Measures on Claimants' business has not been so severe "as to render their activities so marginal or unprofitable as effectively to deprive them of their character as investment"³⁶⁵ by pointing to the fact that "each brand asset is an individual investment in its own right, and each has been expropriated."³⁶⁶

280.

The question whether indirect expropriation may relate to identifiable distinct assets comprising the investment or, rather, is to be determined considering the investment as a whole is disputed, with a number of investment treaty cases supporting one³⁶⁷ or the other³⁶⁸ position. The Tribunal is of the view that the answer largely depends on the facts of the individual case.

281.

The starting consideration in the present case is the value that each brand asset had in the context of Abal's overall business. Abal produced and sold cigarettes in the Uruguayan market using different trademarks, each of which was associated by consumers with specific quality cigarettes. Marlboro brand was associated with the highest quality being sold which, before the SPR, was sold at a premium over Mailhos' highest priced cigarettes, accounting for more than 45% of Abal's profits in the Uruguay market.³⁶⁹Marlboro Gold alone accounted for over 10% of Abal's sales in Uruguay.³⁷⁰ Based on these assumptions, the Claimants' accounting experts have separately calculated for each variant the loss resulting from its elimination by the SPR.³⁷¹

282.

Whether the above specificities of Abal's business are decisive to conclude that each of the Claimants' trademarks was an individual investment and that, accordingly, seven of them were indirectly expropriated as a result of the SPR remains to be seen. The Respondent gives in that regard the example of an investor owning 13 buildings, arguing that if just one of them were directly taken this would constitute an expropriation but that the case would be different if "a generally applicable regulation prohibits the use of seven of the same buildings due to high levels of asbestos." In the latter case, the Respondent adds, whether such "regulation constitutes an indirect expropriation has to be assessed by reference to its effect on the value of the investor's investment as a whole."³⁷² Since "Claimants continue to reap significant returns on their investment in Uruguay," there was no expropriation as a result of the SPR and 80/80 Regulation.³⁷³

283.

The Tribunal believes that in order to determine whether the SPR had an expropriatory character in this case, Abal's business is to be considered as a whole since the measure affected its activities in their entirety. This is confirmed by the fact that in order to mitigate its effects, Abal resorted to countermeasures involving its business as a whole. Prices were increased initially and then, when its products lost market share, they were lowered in December of 2009, with Abal suffering losses vis-à-vis its competitor Mailhos across its entire portfolio. Prices were then increased again beginning February 2011 with resulting market share decline "across its portfolio."³⁷⁴

284.

In any case, the effects of the SPR were far from depriving Abal of the value of its business or even causing a "substantial deprivation" of the value, use or enjoyment of the Claimants' investments, according to the standard that has been adopted for a measure to be considered expropriatory.³⁷⁵ The Claimants admit not to have suffered such substantial deprivation when mentioning that "while Abal has grown more profitable since 2011, Abal would have been even more profitable if Respondent had not adopted the challenged measures."³⁷⁶

285.

As indicated by the Claimants' accounting expert, Navigant, their investment shows positive cash flows in perpetuity, as evidenced by Abal's payment of royalties to PMP every year between 2009 and 2013, and having paid more than it did in 2008 or any prior year (before the measures) and by Abal's gross profit which, except in 2010, was greater between 2009 and 2013 that it was before 2008.³⁷⁷ According to Navigant, "Abal would have been economically better off, But-For the Regulations. While Abal is currently profitable because of the cost reductions realized from the factory closure, it could have been significantly more profitable in a scenario where the Regulations had not been introduced."³⁷⁸

286.

In the Tribunal's view, in respect of a claim based on indirect expropriation, as long as sufficient value remains after the Challenged Measures are implemented, there is no expropriation. As confirmed by investment treaty decisions, a partial loss of the profits that the investment would have yielded absent the measure does not confer an expropriatory character on the measure. In LG&E v. Argentina, for example, the tribunal held:

Interference with the investment's ability to carry on its business is not satisfied where the investment continues to operate, even if profits are diminished. The impact must be substantial in order that compensation may be claimed for expropriation.³⁷⁹

287.

The Tribunal's analysis might end here, leading to the dismissal of the Claimants' claim of expropriation for the above reasons. There is however an additional reason in support of the same conclusion that should also be addressed in view of the Parties' extensive debate in that regard. In the Tribunal's view, the adoption of the Challenged Measures by Uruguay was a valid exercise of the State's police powers, with the consequence of defeating the claim for expropriation under Article 5(1) of the BIT.

288.

In its Decision on Jurisdiction, the Tribunal noted that the BIT "does not prevent Uruguay, in the exercise of its sovereign powers, from regulating harmful products in order to protect public health after investments in the field have been admitted."³⁸⁰ At that stage, no conclusion had been drawn from the exercise of such powers regarding the present dispute.

289.

It is the Claimants' contention that Article 5(1) of the BIT prohibits any expropriation unless it is carried out in accordance with the conditions established by said Article and that the existence of a public purpose, one of such conditions, does not exempt the State from the obligation to pay compensation.³⁸¹ In the Claimants' view, the State's exercise of police powers does not constitute a defense against expropriation, or exclude the requirement of compensation.³⁸² The Claimants add that there is no room under Article 5(1) or otherwise in the BIT for carving out an exemption based on the police powers of the State.³⁸³

290.

The Tribunal disagrees. As pointed out by the Respondent, Article 5(1) of the BIT must be interpreted in accordance with Article 31(3)(c) of the VCLT requiring that treaty provisions be interpreted in the light of "[a]ny relevant rules of international law applicable to the relations between the parties," a reference "which includes... customary international law."³⁸⁴ This directs the Tribunal to refer to the rules of customary international law as they have evolved.³⁸⁵

291.

Protecting public health has since long been recognized as an essential manifestation of the State's police power, as indicated also by Article 2(1) of the BIT which permits contracting States to refuse to admit investments "for reasons of public security and order, public health and morality."

292.

The police powers doctrine was propounded much earlier than its recognition by investment treaty decisions. The 1961 Harvard Draft Convention on the International Responsibility of States for Injury to Aliens already provided in Article 10(5) as follows:

An uncompensated taking of property of an alien or a deprivation of the use or enjoyment of property of an alien which results from... the action of the competent authorities of the State in the maintenance of public order, health, or morality... shall not be considered wrongful, provided

(a) it is not a clear and discriminatory violation of the law of the State concerned;

(b) it is not the result of a violation of any provision of Article 6 to 8 of this Convention [denial of justice];

(c) it is not an unreasonable departure from the principles of justice recognized by the principal legal systems of the world; and

(d) it is not an abuse of the powers specified in this paragraph for the purpose of depriving an alien of his property.³⁸⁶

293.

The doctrine was endorsed in the Third Restatement of the Foreign Relations Law of the United States of 1987 in the following terms:

A State is not responsible for loss of property or for other economic disadvantage resulting from bona fide general taxation, regulation, forfeiture for crime, or other action of the kind that is commonly accepted as within the police powers of states, if it is not discriminatory.³⁸⁷

294.

According to the OECD, "[i]t is an accepted principle of customary international law that where economic injury results from a bona fide non-discriminatory regulation within the police power of the State, compensation is not required."³⁸⁸

295.

The principle that the State's reasonable bona fide exercise of police powers in such matters as the maintenance of public order, health or morality, excludes compensation even when it causes economic damage to an investor and that the measures taken for that purpose should not be considered as expropriatory did not find immediate recognition in investment treaty decisions. But a consistent trend in favor of differentiating the exercise of police powers from indirect expropriation emerged after 2000. During this latter period, a range of investment decisions have contributed to develop the scope, content and conditions of the State's police powers doctrine, anchoring it in international law. According to a principle recognized by these decisions, whether a measure may be characterized as expropriatory depends on the nature and purpose of the State's action.³⁸⁹ Some decisions have relied on the jurisprudence of the European Court of Human Rights, based on Article 1 of Protocol 1 of the Convention.³⁹⁰

296.

In Tecmed v. Mexico the tribunal stated:

The principle that the State's exercise of its sovereign power within the framework of its police power may cause economic damage to those subject to its powers as administrator without entitling them to any compensation whatsoever is undisputable.³⁹¹

297.

In Saluka v. Czech Republic, the tribunal recorded the scope, conditions and effects of the police powers doctrine, stating:

It is now established in international law that States are not liable to pay compensation to a foreign investor when, in the normal exercise of their regulatory powers, they adopt in a non-discriminatory manner bona fide regulations that are aimed to the general welfare.

The tribunal added:

[T]he principle that the State adopts general regulations that are ‘commonly accepted as within the police power of States' forms part of customary international law today.³⁹²

298.

The police powers doctrine has been applied in several cases to reject claims challenging regulatory measures designed specifically to protect public health. As early as 1903, the Claims Commission in the Bischoff Case, in dismissing a claim for damages, held: "[c]ertainly during an epidemic of an infectious disease there can be no liability for the reasonable exercise of police powers."³⁹³ In Methanex v. United States, the claimant had contended that its rights had been expropriated by measures adopted by the U.S. state of California banning MTBE, a fuel additive harmful to public health. In rejecting the claim, the tribunal stated:

[A]s a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory..³⁹⁴

299.

In Chemtura v. Canada, a U.S. manufacturer of lindane, an agricultural insecticide said to be harmful to human health and the environment, claimed a breach of the NAFTA by Canada's prohibition of its sale. The tribunal rejected the claim, stating:

Irrespective of the existence of a contractual deprivation, the Tribunal considers in any event that the measures challenged by the Claimant constituted a valid exercise of the Respondent's police powers. As discussed in detail in connection with Article 1105 of NAFTA, the PMRA took measures within its mandate, in a non-discriminatory manner, motivated by the increasing awareness of the dangers presented by lindane for human health and the environment. A measure adopted under such circumstances is a valid exercise of the State 's police powers and, as a result, does not constitute an expropriation.³⁹⁵

300.

As evidence of the evolution of the principles in the field, the police powers doctrine has found confirmation in recent trade and investment treaties. The 2004 and 2012 U.S. Model BITs provide in the section dealing with "Expropriation": "Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriation." Similar provision is made by the 2004 and 2012 Canada Model BITs. The EU-Canada Comprehensive Economic and Trade Agreement contains a similar provision:

For greater certainty, except in the rare circumstance when the impact of a measure or series of measures is so severe in light of its purpose that it appears manifestly excessive, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objective, such as health, safety and the environment, do not constitute indirect expropriations.³⁹⁶

The same provision is now to be found in the EU-Singapore FTA.³⁹⁷

301.

In the Tribunal's view, these provisions, whether or not introduced ex abundanti cautela, reflect the position under general international law.

302.

It should be stressed that the SPR and the 80/80 Regulation have been adopted in fulfilment of Uruguay's national and international legal obligations for the protection of public health. Article 44 of the Uruguayan Constitution³⁹⁸ states: "The State shall legislate in all matters appertaining to public health and hygiene, to secure the physical, moral and well-being of all the inhabitants of the country." As held by Professor Barrios, one of the Respondent's experts, "it is in this framework of the essential duty to protect public health that the State has the authority to prevent, limit or condition the commercialization of a product or service, and this will consequently prevent, limit or condition the use of the trademark that identifies it."³⁹⁹ Article 7 states the principle of protection pursuant to which "[t]he inhabitants of the Republic have the right to be protected in the enjoyment of their life" and Article 46 directs the State to "combat social vices by means of the law and International Convention."

303.

The 1934 Organic Law⁴⁰⁰ provides in Article 2(1) that the MPH must adopt "all measures deemed necessary to maintain collective health." and in Article 23 that it must also take "preventive action in regards to... social vices... that decrease the capacity of individuals or threaten health."

304.

Law 18,256 on Tobacco Control⁴⁰¹ directs the MPH in Article 1-2 to protect the country's inhabitants against the health, social, environmental and economic consequences of tobacco use and exposure to tobacco smoke. Articles 8 and 9 of the Law set forth rules in fulfillment of the obligations undertaken by Uruguay under Articles 11 and 13 of the FCTC.⁴⁰² It is based on these obligations that the SPR and the 80/80 Regulation have been adopted. The FCTC is one of the international conventions to which Uruguay is a party guaranteeing the human rights to health; it is of particular relevance in the present case, being specifically concerned to regulate tobacco control.⁴⁰³

305.

As indicated by earlier investment treaty decisions, in order for a State's action in exercise of regulatory powers not to constitute indirect expropriation, the action has to comply with certain conditions. Among those most commonly mentioned are that the action must be taken bona fide for the purpose of protecting the public welfare, must be non-discriminatory and proportionate.⁴⁰⁴ In the Tribunal's view, the SPR and the 80/80 Regulation satisfy these conditions.

306.

The Challenged Measures were taken by Uruguay with a view to protect public health in fulfilment of its national and international obligations. For reasons which will be explored in detail in relation to claims under Article 3(2) of the BIT, in the Tribunal's view the Challenged Measures were both adopted in good faith and were nondiscriminatory. They were proportionate to the objective they meant to achieve, quite apart from their limited adverse impact on Abal's business.⁴⁰⁵ Contrary to the Claimants' contention,⁴⁰⁶ the Challenged Measures were not "arbitrary and unnecessary" but rather were potentially "effective means to protecting public health," a conclusion endorsed also by the WHO/PAHO submissions.⁴⁰⁷ It is true that it is difficult and may be impossible to demonstrate the individual impact of measures such as the SPR and the 80/80 Regulation in isolation. Motivational research in relation to tobacco consumption is difficult to carry out (as recognized by the expert witnesses on both sides). Moreover, the Challenged Measures were introduced as part of a larger scheme of tobacco control, the different components of which it is difficult to disentangle. But the fact remains that the incidence of smoking in Uruguay has declined, notably among young smokers,⁴⁰⁸ and that these were public health measures which were directed to this end and were capable of contributing to its achievement. In the Tribunal's view, that is sufficient for the purposes of defeating a claim under Article 5(1) of the BIT.

307.

In light of the foregoing, the Tribunal concludes that the Challenged Measures were a valid exercise by Uruguay of its police powers for the protection of public health. As such, they cannot constitute an expropriation of the Claimants' investment. For this reason also, the Claimants' claim regarding the expropriation of their investment must be rejected.

308.

Article 3(2) under the rubric "Protection and Treatment of Investments" provides, insofar as relevant:

Each Contracting Party shall ensure fair and equitable treatment within its territory of the investments of the investors of the other Contracting Party.

309.

The Claimants allege that by enacting the Challenged Measures, the Respondent has subjected their investments to unfair and inequitable treatment in violation of Article 3(2) of the BIT for the following reasons: (i) the regulations are arbitrary because they "fail to serve a public purpose and yet at the same time they cause substantial harm to the Claimants;" (ii) the measures undermine the Claimants' legitimate expectations with respect to the use and enjoyment of their investments, including the Claimants' expectation that they would be permitted to use their valuable brand assets; and (iii) the regulations "destroy the legal stability that Uruguay pledged in the BIT and on which Abal has relied on when developing and deploying its brand assets."⁴⁰⁹

310.

The Respondent considers that far from being "egregious," "shocking," or "reflecting bad faith" or "wilful neglect," the SPR and 80/80 Regulation were adopted in good faith, and in a non-discriminatory manner to protect public health.⁴¹⁰ Moreover, even if the Tribunal were to adopt the Claimants' autonomous legal standard when examining Claimants Article 3(2) claim, something the Respondent rejects, the Claimants' claim would fail, as the measure is a reasonable regulatory measure that is "logically connected" with the State's public health objectives. The Respondent further alleges that the Claimants should be precluded from bringing an FET claim when their own fraudulent actions created the need to take the measures they now challenge.⁴¹¹

311.

The Parties agree that the fair and equitable treatment standard has its roots in the minimum standard of treatment long required by international law.⁴¹² They further agree that the standard of State responsibility for failure to protect rights of aliens under customary international was first articulated in the Neer case.⁴¹³

312.

The Parties disagree however on the content of the applicable legal standard under the Treaty. According to the Claimants, the Treaty provides for an autonomous treaty standard, whereas the Respondent maintains that Article 3(2) of the BIT refers to the minimum standard of treatment owed to aliens under customary international law. They further disagree on the content and interpretation of the minimum standard of treatment under customary international law.

313.

According to the Claimants, the Respondent's interpretation of BIT Article 3(2) as providing for the customary international law minimum standard of treatment is inapposite for the following reasons:

■ It has no basis in the Treaty and it would be contrary to Article 31 of the VCLT, as the ordinary meaning of the terms "fair" and "equitable" does not refer to the minimum standard of treatment under customary international law. Similarly, the context, object and purpose of the Treaty do not support the Respondent's interpretation either.⁴¹⁴

■ It has no basis on the relevant case law. The case-law cited by the Respondent either refers to Article 1105 of NAFTA, which is not an issue in this arbitration, or does not support the argument that the FET clause provides for the minimum standard of treatment.⁴¹⁵

■ The statement of the Swiss Foreign Office of 1979 relied on by the Respondent to support its position, even if one were to consider it to be relevant (something that the Claimants deny), confirms that the fair and equitable treatment standard under the BIT is broader than the minimum standard of treatment under customary international law.⁴¹⁶

■ Even if the fair and equitable treatment standard could be equated to the standard under customary international law, the standard has continued to evolve today through state practice and the jurisprudence of arbitral tribunals. International tribunals have consistently rejected the Neer standard as a statement of the current customary international law. Thus to establish a violation of Article 3(2), the Tribunal shall not assess whether Uruguay's treatment is "egregious," "shocking," or indicative of "willful neglect" or "bad faith."⁴¹⁷

■ Instead, the Claimants allege that the Tribunal must assess "in light of all circumstances" whether Uruguay "ensure[d] that foreign investors are treated reasonably and objectively and are permitted to realize a reasonable return on their investments, free from unfair or unjust interference by the State."⁴¹⁸

314.

According to the Respondent, FET is a "legal term of art" that refers to the minimum standard of treatment accorded to aliens under customary international law.⁴¹⁹ It is not an autonomous standard.⁴²⁰ Even if the standard has evolved from Neer, the level of scrutiny is in principle the same as in Neer, and the burden of proof is on the Claimants.⁴²¹ Relying, inter alia, on the Glamis v. United States case, the Respondent maintains that even if the Neer standard is not reproduced verbatim by subsequent tribunals, the "same heightened standard for a breach of the minimum standard... continues to exist."⁴²²

315.

The Respondent also invokes the commentary to the 1967 OECD Draft Convention on the Protection of Foreign Property and the 1979 Swiss Foreign Office Statement to argue that under the principle of contemporaneity, the phrase "fair and equitable treatment" was considered at the time of the conclusion of the BIT to refer to the minimum standard of treatment.⁴²³

316.

At the outset, the Tribunal notes that the absence of any reference in Article 3(2) of the BIT to "treatment in accordance with international law" or "to customary international law or a minimum standard of treatment," as provided by some other investment treaties with regard to the FET standard, does not mean that the BIT creates an "autonomous" FET standard, as contended by the Claimants⁴²⁴ and disputed by the Respondent.⁴²⁵ In the absence of any additional qualifying language, the reference to FET in Article 3(2) cannot be read as "treatment required by the minimum standard of treatment under international law."⁴²⁶

317.

As any other treaty provisions, the text of Article 3(2) of the BIT must be interpreted according to the normal canons of treaty interpretation as contained in Articles 31 and 32 of the VCLT. This includes interpretation in accordance with general international law, as stated in Article 31(3)(c) which requires that a treaty be interpreted in the light of "[a]ny relevant rules of international law applicable to the relations between the parties." The scope and content of FET under Article 3(2) must therefore be determined by reference to the rules of international law, customary international law being part of such rules.

318.

As held by Chemtura v. Canada, "such determination cannot overlook the evolution of customary international law, nor the impact of BITs on this evolution."⁴²⁷ The tribunal in that case relied on Mondev v. United States which held as follows:

[B]oth the substantive and procedural rights of the individual in international law have undergone considerable development. In the light of these developments it is unconvincing to confine the meaning of ‘fair and equitable treatment ' and ‘full protection and security ' of foreign investments to what those terms - had they been current at the time -- might have meant in 1920s when applied to the physical security of an alien. To the modern eye, what is unfair or inequitable need not equate with the outrageous or the egregious. In particular, a State may treat foreign investment unfairly and inequitably without necessarily acting in bad faith [...] '⁴²⁸

319.

In line with the evolution of customary international law, the FET standard has evolved since the time, in 1926, when the Neer case, on which the Respondent relies,⁴²⁹ was decided. The standard is today broader than it was defined in the Neer case although its precise content is far from being settled.

320.

As held by investment tribunals, whether a particular treatment is fair and equitable depends on the circumstances of the particular case.⁴³⁰ Based on investment tribunals' decisions, typical fact situations have led a leading commentator to identify the following principles as covered by the FET standard: transparency and the protection of the investor's legitimate expectations; freedom from coercion and harassment; procedural propriety and due process, and good faith.⁴³¹ In a number of investment cases tribunals have tried to give a more definite meaning to the FET standard by identifying forms of State conduct that are contrary to fairness and equity.

321.

In Genin v. Estonia, the tribunal indicated that a conduct in breach of the standard would include

[A]cts showing a wilful neglect of duty, an insufficiency of action falling far below international standards, or even subjective bad faith.⁴³²

322.

In Saluka v. Czech Republic, the tribunal held that:

A foreign investor whose interests are protected under the Treaty is entitled to expect that the [host State] will not act in a way that is manifestly inconsistent, non-transparent, unreasonable (i.e. unrelated to some rational policy), or discriminatory (i.e. based on unjustifiable distinctions).⁴³³

323.

In other cases it has been found that the relevant standard is breached by State conduct that is "arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice."⁴³⁴

324.

The Tribunal agrees that the various aspects of State conduct mentioned above are indicative of a breach of the FET standard. It will deal with "legitimate expectations" and "stability of the Uruguay legal system" as components of the FET standard in the context of the Claimants' claim in that regard.⁴³⁵

325.

According to the Claimants, many Tribunals, including those adopting a narrow fair and equitable treatment standard, consider that "a measure that inflicts damage on the investor without serving any apparent legitimate purpose" is "arbitrary" (or "unreasonable") and violates the standard.⁴³⁶

326.

The Claimants consider that to assess whether a challenged measure is arbitrary, "tribunals have examined the rationality of the measure and of the decision-making process that led to it, the existence of a genuine public purpose, and whether there was a reasonable connection between the objectives pursued by the state and the utility of the chosen measures."⁴³⁷ Referring to this standard, they consider that the Challenged Measures are arbitrary, as examined further below.⁴³⁸

327.

The SPR prohibits tobacco manufacturers from marketing more than one variant of cigarette per brand family. According to the Claimants, there is no connection between the Respondent's purported rationale for adopting the measure (i.e., avoid misleading the consumers) and the actual regulatory measure at issue (i.e., a prohibition against the marketing of multiple variants within a single brand family).⁴³⁹ Thus, the measures "damage Claimants' investment and are not reasonably related to the Respondent's stated objectives."⁴⁴⁰

328.

The Claimants challenge Ordinance 514 and Ordinance 466, the ordinances that impose the Single Presentation Requirement, on three main bases: (i) the Respondent adopted the SPR without any scientific evidence of its effectiveness; (ii) the SPR was adopted without due consideration by public officials; (iii) the SPR did not further its stated objective.

329.

First, the Claimants submit that the Respondent has failed to provide empirical evidence or scientific research in support of the proposition that the existence of various variants and different packaging were per se misleading to consumers.⁴⁴¹ For example, while the Respondent portrays the SPR as a regulation restricting the use of misleading colors on tobacco packaging, it does not in fact regulate or prohibit any colors at all (e.g. gold packaging).⁴⁴² Accordingly, there is no "logical connection" between the regulation and the stated objective of ensuring that consumers are not mislead into believing that one variant within a brand family presents fewer health risks than another.⁴⁴³

330.

Second, the Respondent has failed to provide any evidence showing that the Government engaged in meaningful deliberations before adopting the SPR.⁴⁴⁴ Relying on one of their witnesses, the Claimants affirm that, instead, the SPR was devised after the Director of the MPH's Tobacco Control Program, Dr. Abascal, witnessed customers in a store receiving Marlboro Gold packs when they asked for Marlboro "light" cigarettes.⁴⁴⁵ The Claimants also consider that the evidence presented by the MPH indicates that the SPR was drafted by one individual on his own initiative, without input or consultation from others.⁴⁴⁶

331.

Third, the Claimants argue, relying on the conclusion of their marketing experts, that the tobacco consumption did not decrease in Uruguay as a result of the SPR. Thus the SPR substantially damaged the Claimants' investments without advancing the public interest to any degree.⁴⁴⁷

332.

The Claimants challenge the Respondent's justification for the SPR—that consumers necessarily perceive one variant of a cigarette brand as less harmful than another variant of the same brand, and will begin or continue smoking due to that misperception— alleging that before the Respondent adopted the SPR, the vast majority of Uruguayans already believed that smoking caused cancer and coronary heart disease and knew that cigarettes are harmful.⁴⁴⁸

333.

In addition, they consider that the SPR is at odds with Uruguayan law's requirement that tobacco manufacturers publish in local newspapers the tar and nicotine levels of each of their cigarette brands. According to the Claimants, that publication is much more likely to lead consumers to the same misperceptions that the SPR purportedly was intended to eradicate, and this highlights the irrationality of the Respondent's SPR policy.⁴⁴⁹

334.

Finally, the Claimants highlight that neither FCTC nor the Guidelines call for parties to consider single presentation requirements or 80/80 requirements. Since no other country had adopted such regulations, it cannot be that they are required by the FCTC.⁴⁵⁰

335.

According to the Claimants, the 80/80 Regulation is arbitrary as there is no evidence that the government deliberated in a meaningful way about the measure, or that the measure was necessary to increase awareness of the health effects of smoking and thereby further the alleged objective of reducing tobacco consumption.

336.

The 80/80 Regulation was, it is said, not adopted for public safety or public health reasons. According to the Claimants, there are no records indicating that the Respondent deliberated in any meaningful way as to whether health warning labels covering 50 percent of the front and back surface of the cigarette packages were insufficient to inform consumers about the health effects of smoking.⁴⁵¹ Instead, the Claimants contend, it was adopted to punish one of its competitors (Mailhos) that was circumventing the SRP by using the same logo across different brand names through the use of so-called " alibi brands. "⁴⁵² The Claimants allege that, while there is no contemporaneous documentation indicating that the desire to raise awareness of the health risks of smoking motivated the MPH to adopt the 80/80 regulation, the desire to punish Mailhos is confirmed by MPH's internal documents.⁴⁵³

337.

Moreover, the Claimants cite to the findings of two of their expert reports noting that most of the sources the Respondent cites as a basis for the 80/80 Regulation, did not, and could not, establish that larger health warnings would either increase awareness of smoking risks or reduce tobacco consumption.⁴⁵⁴

338.

The Claimants also assert that the 80/80 Regulation was arbitrary as it "sought to address a non-existent problem." The Claimants recognize that there is a public health interest in graphic images.⁴⁵⁵ They consider, nevertheless, that before the adoption of the 80/80 Regulation there was already "near universal awareness" of the health risks of smoking. Therefore, "the impact on the trademarks is out of proportion to the need and justification for 80% warnings."⁴⁵⁶ Relying on the GATS Study, they assert that 98% of Uruguayans already believed that smoking caused cancer and 97% of them believed that smoking caused coronary heart disease. Enlarging the warnings, therefore, could not and did not increase public awareness.⁴⁵⁷ There is also no proof that it has reduced or will reduce consumption.⁴⁵⁸ Instead, the Claimants allege, the regulations limit space for and distort the trade dress, including the trademarked images.⁴⁵⁹

339.

According to the Claimants "the fact that a regulation simultaneously fails to meet its supposed purpose while substantially damaging investments protected by the BIT is the model of an arbitrary measure."⁴⁶⁰

340.

The Claimants also assert that the BIT's fair and equitable treatment standard requires that Contracting Parties provide a treatment that does not affect the "basic expectations" that were taken into account by the foreign investor when making its investment.⁴⁶¹

341.

The Claimants contend that they made substantial investments based on, inter alia, their justifiable expectations that the Uruguayan Government would: (a) allow the Claimants to continue to deploy and capitalize on their brand assets; (b) refrain from imposing restrictive regulations without a well-reasoned, legitimate purpose; (c) respect the Claimants' intellectual property rights; and (d) ensure that the Claimants had access to a just, unbiased, and effective domestic court system.⁴⁶² All these expectations, the Claimants continue, were "eviscerated."

342.

For the Claimants, those legitimate expectations may arise from general statements, the legal framework, legislation, treaties, licenses, and contracts, and even from a general expectation that the State will only implement regulations that are "reasonably justifiable by public policies."⁴⁶³ Specific, explicit promises to an investor in a particular form are not necessary.

343.

In this case, their expectation arose out of both general statements and specific assurances. As to the general statements, the Claimants assert that they are constituted by Articles 1 and 4 of Uruguay's Investment Promotion Law by which Uruguay sought to attract investment.⁴⁶⁴

344.

As to the Claimants' specific expectations, they are said to have arisen out of the following facts: (a) the Claimants own the intellectual property rights, including the trademarks, that form the core components of the branding on their cigarette packages; (b) those intellectual property rights are property rights protected under Uruguayan law; (c) the Claimants have a right to use their intellectual property rights under Uruguayan law; (d) the Claimants had used their intellectual property and brand assets without disruption over many decades, and in the process have created substantial brand value; (e) the production and sale of tobacco products have at all times been legal in Uruguay; and (f) the Respondent encouraged further investment in Abal's production and marketing of cigarettes.⁴⁶⁵

345.

The Claimants conclude that through the SPR Uruguay thwarted these expectations "by stripping the Claimants of the ability to market profitable variants and to capitalize on the intellectual property and associated goodwill tied to these products. The 80/80 Regulation frustrated this expectation further, by weakening the value of the Claimants' residual products and preventing the Claimants from leveraging their iconic branding to introduce new products."⁴⁶⁶

346.

Relying inter alia on the Occidental v. Ecuador Award, the Claimants allege that the Respondent's fair and equitable treatment obligations under the Treaty require Uruguay to provide a reasonably stable and predictable legal system.⁴⁶⁷ The Claimants accept that it is a State's prerogative to exercise its regulatory and legislative powers, but they consider that those must not be "outside of the acceptable margin of change."⁴⁶⁸

347.

The Claimants submit that the Respondent's arbitrary actions altered the business circumstances in which Claimants' operated and undermined decades of legal stability during which time the Claimant had developed and used their trademarks through careful brand-building in Uruguay, by launching new variants and products.⁴⁶⁹

348.

The Respondent alleges that the Claimants' FET claim should be barred under the principle of ex dolo malo non oritus actio (a right of action cannot be raised out of fraud) or the "unclean hands doctrine." The Claimants allege that the Respondent lacks any basis for its defence, either in fact or in law.

349.

First, the doctrine of unclean hands is premised on the assumption that the complaining party engaged in wrongdoing. The Claimants have never been convicted of fraud or of any illegal activity in Uruguay.⁴⁷⁰ The Respondent's allegations regarding "industry deception" and the history of wrongfully marketing "light cigarettes" related to conduct in the United States by parties other than the Claimants. The decisions of the United States Department of Justice and the U.S. Courts cannot be considered to have definitively adjudicated any facts relevant to the present dispute.⁴⁷¹ Moreover, the tobacco companies begin selling low-tar and low-nicotine cigarettes at the urging of the international public health community, and the public authorities were the ones that communicated those messages to consumers.⁴⁷²

350.

Second, according to the Claimants, the "unclean hands" doctrine is not a general principle of international investment law or general international law, and only applies in limited circumstances not present in this case.⁴⁷³

351.

The Respondent asserts that even if the Tribunal adopts an autonomous treaty standard requiring that measures not be (a) arbitrary, (b) inconsistent with legitimate expectations, or (c) such as to deprive investors of legal stability, the Claimants' case would still fail.

Gary B. Born	Appointed by the investor
James R. Crawford	Appointed by the State
Piero Bernardini	President

Philip Morris v. Uruguay

Documents of the case

Lawyers, other representatives, expert(s), tribunal’s secretary

Award

I. INTRODUCTION AND PARTIES

II. OVERVIEW OF THE DISPUTE AND THE PARTIES' REQUEST FOR RELIEF

IIl. PROCEDURAL HISTORY

IV. FACTUAL BACKGROUND

A. The Claimants' Operations and Investments in Uruguay

B. Uruguay's Tobacco Control Policy and the Applicable Regulatory Framework

a. The International Regulatory Framework

b. The Domestic Regulatory Framework

1. The Regulatory Framework up to the Enactment of the Challenged Measures

2. The Challenged Measures

(i) The Single Presentation Regulation

1. The Regulation

2. The Process to Adopt the Single Presentation Regulation

(ii) The 80/80 Regulation

1. The Regulation

2. The Process of Adoption of the 80/80 Regulation

C. The alleged effects of the Challenged Measures

a. Tobacco Use in Uruguay Before and After the Challenged Measures

b. Claimants' Investments and Market Competition Before and After the Challenged Measures

D. The Challenges to the Regulations before the Uruguayan Courts

a. Proceedings Before the Tribunal de lo Contencioso Administrativo (TCA) Relating to the SPR

b. The Proceedings Before the TCA and the Supreme Court of Justice Relating to the 80/80 Regulation

E. The Regulatory Framework of Trademarks in Uruguay

V. LIABILITY

A. Applicable Law

B. Expropriation under Article 5 of the Treaty

a. The Legal Standard

1. The Claimants' Position

2. The Respondent's Position

3. The Tribunal's Analysis

b. The Claim

1. The Claimants' Position

(i) Uruguay's Police Powers

(ii) The Claimants' Intellectual Property Rights are Capable of Being Expropriated

(iii) Uruguay's Trademark Law Confers Registrants a Right to Use and a Right to Protect

2. The Respondent's Position

(i) Uruguay's Sovereign Police Powers

(ii) The Claimants Had No Trademark Rights Capable of Being Expropriated

(iii) Uruguayan Law Confers Trademark Registrants only a Right to Protect against use by others

3. The Tribunal's Analysis

(a) Whether the Claimants Owned the Banned Trademarks

(b) Whether a Trademark Confers a Right to Use or only a Right to Protect Against Use by Others

(c) Whether the Challenged Measures Have Expropriated the Claimants' Investment

C. Denial of Fair and Equitable Treatment under Article 3(2) of the Treaty

a. The Legal Standard

1. The Claimants' Position

2. The Respondent's position

3. The Tribunal's Analysis

b. The Claim

1. The Claimants' Position

(a) The Challenged Measures are Arbitrary

(i) SPR

(ii) The 80/80 Regulation

(b) The Claimants' Legitimate Expectations

(c) Uruguay's Legal Stability

(d) The Doctrine of Unclean Hands, Raised by Respondent, is Inapplicable.

2. The Respondent's Position

(a) The Challenged Measures are Not Arbitrary