[Intl-tobacco] text version of PM Submission to Canada on NAFTA's Chapter 11 Provision]

[Robert Weissman]

The ever-amazing Gene Borio has prepared a text version of the PDF file
of the Philip Morris submission arguing Canada's proposed packaging
regulations violate various international trade and investment rules. It
follows below.

Philip Morris Submission to Canada on NAFTA's Chapter 11
Provision
Original item, as graphic PDF is at:
http://www.essentialaction.org/tobacco/pmresponsetonoi.pdf
by 
Source: Tobacco BBS, 2002-03-01, via tobacco.org
Region:CANADA
Category: Smuggling/Crime/Cross-Border Issues
URL: http://www.tobacco.org/Documents/0203pmnafta.html

KEY QUOTES:


Philip Morris believes that these comments will assist Canada in
developing effective and sensible tobacco control policies that
protect and inform
consumers without violating the trade and investment rights of
tobacco companies attendant to the manufacture and sale of a legal
product. We firmly believe that the best approach is to provide
consumers with more information, and not with less information, as
Canada proposes.



SUBMISSION BY

PHILIP MORRIS INTERNATIONAL INC.

IN RESPONSE TO

THE NATIONAL CENTER FOR STANDARDS AND CERTIFICATION INFORMATION

FOREIGN TRADE NOTIFICATION NO. G/TBTIN/CAN/22

113

I. Introduction

Philip Morris International Inc. ("Philip Morris") submits these
comments on the regulations proposed by the Government of Canada to
"prohibit the display of 'light' and 'mild' descriptors on tobacco
packaging." Canada Gazette, December 1, 2001 (the "Notice") at
4299.'

Philip Morris supports the public health community's goal of
ensuring that consumers do not believe that descriptors mean that
low tar yield brands of cigarettes have been proven to be less
harmful than other brands. As a matter of law and policy, however,
we do not agree that banning the use of descriptors is an
appropriate or necessary step. Manufacturers should be permitted to
continue to use descriptors such as "light,' and "ultra light'.
These are legitimate terms that are useful guides to describe brand
styles with differing taste characteristics and reported tar and
nicotine yield. Instead of a ban, which as discussed below would
violate applicable trade and investment protections, public health
goals can be achieved by regulating the use of descriptors. As the
Canadian manufacturers have already stated, the government should
consider regulatory alternatives rather than summarily issue a ban
stripping manufacturers of their property rights.

_____

l Philip Morris is interested in this issue because certain of its
subsidiaries are investors with protectable interests in Rothmans,
Benson & Hedges Inc., including its intellectual property, and a
potential exporter and licensor of low-yield brands in Canada.

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II. Summary

Philip Morris believes that banning descriptive terms on tobacco
packaging would violate Canada's obligations under the North
American Free Trade Agreement ("NAFTA"), the World Trade
Organization's Agreement on Technical Barriers to Trade ("TBT") and
the Agreement on Trade Related Aspects of Intellectual Property
("TRIPS"). The descriptive terms Canada seeks to ban are contained
in lawfully-registered Canadian trademarks. Consumers understand
these trademarks to designate distinct brands of low yield
cigarettes with characteristic tastes and corresponding tar and
nicotine yields. Prohibiting the use of these descriptive terms
would effectively ban the display of trademarks containing them. If
enacted, the proposed ban would therefore expropriate and destroy
the affected trademarks and brands in Canada as well as the
substantial goodwill that accompanies them in violation of both
NAFTA and TRIPS.

A ban also would be unfair and inequitable and a violation of NAFTA.
For decades beginning in the 1960's, the Government of Canada urged
tobacco companies to develop and market low tar cigarettes. The
companies did so, adopting and registering trademarks containing
descriptive terms to identify these brands for the public. The
companies also invested substantial sums in developing brand
identity and loyalty among consumers for products sold under these
marks.

If enacted, the proposed ban would be unfair and inequitable because
an effective and less restrictive alternative to a ban exists, for
example, a communication that would reaffirm for consumers that low
yield cigarettes have not been established to be safer than other
tobacco products. Finally, a ban would create a barrier to the
possible sale or licensing in Canada of popular low yield brands
sold elsewhere under trademarks containing descriptive terms.
Because a ban is unnecessary, and because an effective and less
restrictive alternative exists to a ban on descriptive terms, the
ban would violate the TBT Agreement.

115

Ill. The Development of Low Yield Brands and Brand Equity

Philip Morris recognizes that today many public health officials
have concluded that there is no overall health benefit to low-yield
cigarettes. Nonetheless, Government health officials and members of
the public health community in the United States and Canada long
encouraged tobacco companies to develop and market cigarette brands
with lower tar yields and encouraged smokers who wished to continue
smoking to choose low yield brands. As the National Cancer Institute
recognized in its recently published monograph, "independent
scientists and public health authorities recommended that cigarettes
which reduced tobacco smoke delivery to the smoker be developed and
marketed by tobacco companies." 2

In its notice of proposed regulations, Canada acknowledges that, as
early as the 1960's, the "U.S. National Cancer Institute embarked on
the 'low tar' cigarette program which influenced public policy in
many countries, including Canada. In the 1970's, the Canadian
government and the tobacco industry made efforts to collaborate to
reduce the 'tar' yields." As former Canadian Health Minister Monique
Begin explained in 1978: "in response to our efforts, the
manufacturers are now providing cigarettes which produce smoke
containing substantially lower levels of tar and nicotine.'

_____

2 National Cancer Institute, Risks Associated with Smoking
Cigarettes with Low Machine-Measured Yields of Tar and Nicotine,
Smoking and Tobacco Control Monograph No. 13, NIH Pub. No. 02-5074
(October 2001) ("NCI Monograph") at 69. Although the monograph
concludes that "[t]here is no convincing evidence" that tar and
nicotine reductions "have resulted in an important decrease in the
disease burden," it also acknowledges that the available evidence
"provide[s} somewhat inconsistent findings" id. at 145 -146.

3 Notice at 4300.

4 Letter from Health Minister Begin to 3. C. Douglas dated October
10, 1978.

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Indeed, tobacco companies began to manufacture and market "low
yield" cigarettes in the 1970's and used terms such as "light" and
"ultra light" to identify these products for consumers. These terms
identified and continue to identify cigarettes with different taste
characteristics and with lower tar and nicotine yields compared to
regular, full flavor cigarettes and to other lowyield products in
the same brand family. For example, Benson & Hedges 100's, Benson &
Hedges 100's Lights, and Benson & Hedges 100's Deluxe Ultra Lights
each have different tastes as well as different tar and nicotine
yields.

To safeguard their investments, tobacco companies registered
separate trademarks for their low yield products. For example, the
Canadian Registrar of Trade-marks (the "Registrar") granted a
registration for the mark Benson & Hedges Lights in 1982 (based on
use since March 1977) and granted a registration for Rothmans Extra
Light in 1991 (based on use since at least October 1980).
Descriptive terms such as "lights" are an integral part of these
registered trademarks.

Descriptors enable consumers to distinguish among brands and to
identify their favorite brand. As the NCI monograph reports, the
vast majority of consumers identify descriptors such as "light" with
taste characteristics. Specifically, based on a U.S. telephone
study, the NCI reports that 81% of daily smokers interviewed stated
that they chose to smoke light cigarettes because they "prefer the
taste."5

IV. The Proposed Ban Is Unjustified, But Reasonable Regulatory
Alternatives Exist

Philip Morris agrees that consumers should not be given the message
that descriptors mean that any brand of cigarettes has been shown to
be less harmful than other brands.

_____

5 NC! Monograph at 195 (reporting on 1999 Kozlowski study.)

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Accordingly, Philip Morris fully supports additional regulations
that reaffirm to consumers that (I) "light" cigarettes have not been
shown to be safer than other cigarettes and (2) there are
limitations to the standard tar and nicotine yield measurements to
which descriptors relate. Philip Moms does not agree, however, that
the wholesale prohibition of all descriptors is justified.

All tobacco products sold in Canada contain the same prominent
health warning messages regardless of whether the brand is low yield
or full flavor. Beyond that, on its website, Philip Morris makes
clear that smokers "should not assume that low-yield cigarettes are
safe or safer than full-flavor brands."

It is important to remember that, as of today, there is no cigarette
on the market which the public health community endorses as offering
"reduced risk," and it continues to be the case that, if smokers are
concerned about the risks of smoking, quitting is by far their best
alternative for reducing those risk s. 6

Philip Morris also advises the public on its website of the
potential for "compensation" and provides links to public health
community websites addressing the issue:

No two smokers smoke cigarettes exactly the same way. The tar and
nicotine yield numbers that are reported for cigarette brands are
not meant (and were never intended) to communicate the precise
amount of tar or nicotine inhaled by any individual smoker from any
particular cigarette ....

It is claimed that smokers "compensate" for the reduced tar and
nicotine yields of some brands by smoking them differently than
smokers of higher yield brands. For example, they may take more or
larger puffs, smoke more of the cigarette or block ventilation holes
that contribute to the lower reported yields of some brands.
Generally speaking, the more intensely a smoker smokes a

_____

6 See www.prnintl.com/obaccoissues/issues6.h1ml.

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cigarette, the more tar and nicotine he or she will inhale from that
cigarette.

In addition to these communications already in place, Philip Morris
supports regulatory measures designed to address public health
issues about the use of descriptors. For instance, Philip Morris
supports regulations that would require a statement to consumers (in
addition to the already-required health warnings) for "light"
cigarettes, such as "Light cigarettes not established to be less
harmful than other cigarettes." Philip Morris also supports measures
that would require manufacturers to apply descriptors in a uniform
manner, so that a specific descriptor consistently signifies
specific ranges of reported tar and nicotine yields.

In short, Philip Mom's believes regulatory measures can strike an
appropriate balance between public health objectives and the
manufacturers' and consumers' interest in the continued use of
established trademarks and descriptors to differentiate among
brands. Further, these measures can meet the stated objective of
eliminating possible consumer confusion concerning the meaning of
descriptors without erecting unnecessary barriers to trade or
otherwise violating the protections afforded by NAFTA, TRIPS and
TBT.8

V. A Ban Would Violate NAFTA

The proposed ban on descriptive terms in trademarks would, if
enacted, violate NAFTA. First, the ban would be tantamount to an
expropriation of tobacco trademarks containing descriptive terms as
well as of the substantial investment in and goodwill associated
with those marks and the brands they represent. See NAFTA Article
1110. Second, given the years of

_____

7See www.pminll .cornltobaccoissues/issues6.html.

8 In enacting national regulations, Canada is required to honor its
obligations under NAFTA, TRIPS and TBT. See Government of Canada
Regulatory Policy, Privy Council Office, Appendix A, November
1999.

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official encouragement to produce and market low yield brands and
the fact that descriptors are associated with distinct taste
characteristics, the proposed ban would be unfair and inequitable
under any measure. See NAFTA Article 1105.

A. A Ban Would Be Expropriatory

Under NAFTA Article 1110, Canada must compensate foreign investors
when measures expropriate, or are tantamount to expropriation of,
investments in Canada. As one NAFTA arbitration tribunal recently
observed:

Thus, expropriation.. . includes not only open, deliberate and
acknowledged takings of property... but also covert or incidental
interference with the use of property which has the effect of
depriving the owner, in whole or in significant part, of the use or
reasonably-to-be-expected economic benefit of property, even if not
necessarily to the obvious benefit of the host state. 9

Here, tobacco companies developed and marketed low yield brands with
the express encouragement and approval of the Canadian government.
They obtained valid, registered trademarks containing terms
identifying these brands, and invested substantial sums to develop
brand identity and consumer loyalty for these low yield products.
Moreover, descriptors denote clear taste differences within brand
families and have, over the decades, become markers for those taste
differences. Indeed, brand styles with descriptors have their own
specific identity and loyal consumer following. Banning these terms
would destroy these valuable trademarks and the specific brands and
goodwill they represent. Following a ban, the affected trademarks
would simply disappear from the Canadian market. This measure would
be inconsistent with the

_____

9 Meta/clad V. United Mexican States (Aug. 30, 2000) at 1103, aff'd
in part and rev 'd in part on other grounds, 2001 BCSC 664 (Sup. Ct.
Brit. Colum. 2001).

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protections afforded intellectual property under Chapter 17 of
NAFTA' and would constitute an expropriation of that property and
the investments underlying it in violation of Article Il'IO.'

B. A Ban Would Be Unfair and Inequitable

Under NAFTA Article 1.105, the Government of Canada must afford
investors "treatment in accordance with international law, including
fair and equitable treatment arid full protection and security."
Canada's proposed ban on tobacco trademarks containing descriptive
terms that identify low yield products would violate Article 1105
under any reasonable definition of this standard. 12

As discussed above, government officials from Canada and the United
States (as well as other members of the public health community)
actively encouraged tobacco companies to develop and market low
yield cigarettes. The Canadian government registered trademarks
containing descriptive terms used to identify these products for
consumers. Although the public health community does not currently
endorse smoking low yield cigarettes as a less risky

_____

10 A ban on the use of descriptive terms in tobacco trademarks is
plainly a "special requirement" that "encumber[s] the use" of the
mark in violation of Article 1708(10),

11 That low-yield products could continue to be sold under new names
would not obviate the economic and competitive harm caused by the
wholesale destruction of long established and well-recognized
trademarks and brands.

12 NAFTA tribunals have found that measures enacted by the Canadian
government have violated the protections of Article 1105. See, e.g.,
S.D. Myers, Inc. v. Canada, Partial Award (Nov. 13, 2000); Pope &
Talbot, Inc. v. Canada (Apr. 10, 2001). On July 31, 2001, the NAFTA
Free Trade Commission issued an "interpretation" of Chapter 11 on
July 31, 2001 stating, among other things; "The concepts of 'fair
and equitable treatment' and 'full protection and security' do not
require treatment in addition to or beyond that which is required by
the customary international law minimum standard of treatment for
aliens." This "interpretation" notwithstanding, the proposed ban
violates Article 1105 as its protections are understood and have
developed in international law, particularly in the context of
foreign investment protection.

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alternative to smoking full-flaored brands, public health concerns
can be addressed through regulations that fall short of a ban.

Under these circumstances, banning the use of descriptive terms
would be unfair and inequitable. Prohibiting the use of descriptors
in trademarks long used to identify these products would destroy
existing trademarks, brands and goodwill. Destroying longstanding
investments and property rights would be egregious because an
effective and fair alternative in the form of regulations governing
the use of descriptors is readily available.

VI. A Ban Would Violate TRIPS

Article 20 of the TRIPS Agreement provides as follows:

The use of a trademark in the course of trade shall not be
unjustifiably encumbered by special requirements, such as use with
another trademark, use in a special form or use in a manner
detrimental to its capability to distinguish the goods or services
of one undertaking from those of other undertakings.

Prohibiting the use of descriptive terms in tobacco trademarks would
violate Article 20.13

The proposed ban unquestionably would constitute a "special
requirement" that would encumber the use and function of valuable,
well known tobacco trademarks. A ban would substantially impede the
ability of manufacturers to distinguish regular, full flavor brands
from their low yield counterparts. In addition, given the
increasingly generic appearance of tobacco packaging caused by the
recently mandated graphic warnings, and the universal ban on tobacco
product advertising in Canada, removing additional identifying
features from the pack face would further undermine the ability of
tobacco trademarks to distinguish the goods of different
manufacturers.

_____

13 WTO members may adopt measures necessary to protect public
health, but only if those measures are "consistent with the
provisions of this [TRIPS] Agreement." TRIPS Art. S. Because the
proposed ban would violate Article 20, it plainly is not
"consistent" with TRIPS.

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This encumbrance also would be unjustifiable because reasonable
alternatives exist that would meet the asserted regulatory objective
without ruining valuable trademarks.

VII. A Ban Would Violate the TBT Agreement

The TBT Agreement is designed to assure that regulations and
standards adopted by members of the WTO do not create unnecessary
obstacles to trade. Under Article 2.2 of the TBT Agreement, Canada
must assure that national technical regulations, such as the
proposed ban on descriptors, do not have "the effect of creating
unnecessary obstacles to international trade" and are "not ... more
trade restrictive than necessary to fulfill a legitimate objective."
See also NAFTA An. 904(4). Article 2.2 effectuates the intent of the
TBT, expressed in its fifth recital, that "packaging, marking and
labelling requirements ... not create unnecessary obstacles to
trade."

A ban on descriptors in tobacco packaging, and hence in tobacco
trademarks, would erect a barrier to trade in violation of the TBT
Agreement. Canada could invoke the ban to bar the potential sale or
licensing for sale in Canada of popular brands sold in the United
States and elsewhere under trademarks containing descriptive terms
such as "light" and "ultra light." Moreover, because reasonable
regulatory alternatives to a ban exist, any such barrier would be
wholly unnecessary.

VIII. At a Minimum a Ban Would Nullify and Impair the Protections
Afforded by NAFTA, TRIPS and TBT

For the reasons set forth above, the proposed ban on descriptive
terms would violate key provisions of NAFTA, TRIPS, and TBT. Even if
the ban were interpreted not to violate these treaties expressly,
however, it would nonetheless nullify and impair the reasonably
expected benefits from those treaties concerning technical harriers
to trade (TBT and NAFTA) and the use and enjoyment of intellectual
property (NAFTA and TRIPS). See NAFTA Annex 2004; TRIPS

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Art. 64; Art, XXIII of GATT 1994. Simply put, the proposed measure
could inhibit trade in low yield tobacco products and related
investment by forcing manufacturers, without reasonable
justification, to stop using valuable trademarks containing
descriptive terms that have long identified low yield brands for
consumers. 14

IX. Conclusion

Philip Morris believes that these comments will assist Canada in
developing effective and sensible tobacco control policies that
protect and inform consumers without violating the trade and
investment rights of tobacco companies attendant to the manufacture
and sale of a legal product. We firmly believe that the best
approach is to provide consumers with more information, and not with
less information, as Canada proposes.

14 In this regard, Canada acknowledged in 1999 that its tobacco
control policies may nullify and impair the protections afforded by
TRIPS, stating:

The exercise of normal governmental powers often results in a change
in the conditions of doing business. Such changes may involve the
diminishment of the value of an intellectual property right. For
example, a requirement for plain packaging of cigarettes [a measure
previously considered and abandoned by Canada] could be seen as
"nullifying or impairing" the benefit which cigaretteexporting
countries expected their nationals to derive from their trademark
rights.

See Communication from Canada to Council for Trade Related Aspects
of Intellectual Property dated February 5, 1999 concerning
Non-Violation Nullification and Impairment Under TRIPS, p. 3. Like
plain packaging, a ban on the use of descriptive terms would
effectively prohibit tobacco manufacturers from using registered
trademarks containing these terms to identify low yield products for
consumers.

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PMCORPNY 25461v5

This document's URL is:
http://www.tobacco.org/Documents/0203pmnafta.html