Sovereign Borders, not so Sovereign Nation II: a Nice Little Constitutional Conundrum

In my last post on Troppo I raised this question:

…who’s actually running ¹ foreign policy these days? Is it Julie Bishop, as Minister for Foreign Affairs, is it Scott Morrison as Minister for Immigration or is it some other bugger?

The answer, it turns out, is ‘some other bugger’: specifically Trade Minister, Andrew Robb. While Foreign Affairs Minister Julie Bishop has been given the busy work of dealing with issues that really don’t matter to the Abbott government – such as patching up diplomatic relations with Indonesia and taking on the Herculean task of placating the Chinese while defending Australia’s right to give them the finger, Robb has been dealing with the one issue that does matter – securing trade agreements to open and extend markets for Australia’s primary product exports.

On Tuesday 5 December, the ABC – and other news outlets – reported that Australia has concluded another bi-lateral free trade agreement, this time with South Korea. It was a great photo opportunity for Robb and his Korean counterpart Yoon Sang-jick and great news for Australian producers of beef, sugar, wheat, dairy products and wine.

And with Robb currently busy working towards reaching another free trade deal – the multi-lateral Trans-Pacific Partnership between the US, Australia and a few other nations, there’s more photo opps and good news to come. For primary producers that is. How things will pan out for the rest of us is open to question.

Media comment on the South Korean free trade agreement has been predictably divided along News Ltd vs Fairfax and everyone else lines.  On December 5th Rupert’s Daily Dirtsheet ] played up the trade benefits to Australian industry – including the car industry:

² said wine and automotive producers would gain immediate tariff-free status, while new opportunities would be created for exporters of education, telecommunications, financial and legal ser³ices.

On the other side of the commercial and ideological divide, the Fairfax dailies have focussed more on the inclusion of investor state dispute settlement (ISDS) provisions in the agreement as, for example, in this report which drew this response from Robb:

Considering the enormous benefits a free trade agreement with Korea will bring, it was curious that your coverage focused on one small component around investor state dispute settlement provisions (The Age, 6/12). The agreement will bring major wins in terms of supporting growth, prosperity and job creation. Modelling shows our agriculture exports will increase by 73 per cent, manufacturing by 53 per cent and mining by 17 per cent.

ISDS provisions are nothing new. They are contained in four free trade agreements and 21 other investment agreements that Australia is party to. Labor senator Penny Wong ignores the fact that Labor included ISDS in two free trade agreements it signed, including with Chile, on the basis they ”create greater certainty for Australian investors”. The provisions in the Korea agreement include very strong safeguards to preserve our ability to govern in the public interest in important areas such as public welfare, health and the environment.

I suspect that the second agreement that Labor signed which includes ISDS  – the one that isn’t with Chile – is the 1993 Agreement between the Government of Australia and the Government of Hong Kong for the Promotion and Protection of Investments. That’s the agreement under which Philip Morris Asia (PM Asia) is suing Australia through a panel of arbitrators in Singapore. The PM Asia action is one elephant you wouldn’t want lumbering into the room if you’re trying to play down ISDS as ‘one small component’ of a trade agreement; it shows that ISDS is ‘one small component’ that can become a big headache for government.

The stakes in the arbitration are very high: according to PM Asia’s Statement of Claim (15 July 2011) tobacco plain packaging infringes its intellectual property rights in several ways so that:

…PM Asia will be entitled to orders from an arbitral tribunal for the cessation and discontinuance of plain packaging legislation and the GHW ⁴ regulation, and/or an award of damages, which may potentially amount to billions of dollars. (PM Asia Statement of Claim, 11)

Section 10(a) states in the baldest terms possible PM Asia’s core objection to the plain packaging legislation and its effects on their business model:

Plain packaging legislation will effectively prohibit Philip Morris from using ⁵ intellectual property on or in relation to its tobacco products and packaging. Without the use of the intellectual property, Philip Morris’ products will not be readily distinguishable form the products of its competitors; consequently, competition will be based primarily on price. PML will be reduced to a manufacturer of an effectively undifferentiated commodity, an entirely different enterprise and business model to that currently pursued by PML ⁶.

In other words, take away our fancy packaging features and our product is revealed for what it actually is – a manufactured commodity like underarm deodorants. PM Asia’s objection to the ‘expropriation’ of its intellectual property is restated in its notice of arbitration to the Commonwealth Government of 21 November, 2011:

1.4 Intellectual property is the core of Philip Morris’ entire business because it underpins Philip Morris’ branded products. Philip Morris’ business in Australia (and elsewhere) is built on the recognition of its brands and the consequent commercial advantage that recognition brings, such as denoting the origin of its products, differentiating between its own products, and differentiating its products from those of its competitors and from illicit products. Brands such as Marlboro, Longbeach and Peter Jackson have reached iconic status among consumer brands.

1.5 As detailed below, Australia’s plain packaging legislation virtually eliminates Philip Morris’ branded business by expropriating its valuable intellectual property ⁷.

Although this issue remains the subject of arbitration between the Commonwealth government and Philip Morris Asia, it has already been decided, in Australian law, before the High Court (HCA). In December 2011, British American Tobacco Australia (BATA)

and JT International SA (manufacturers of Camel cigarettes and Old Holborn rollie tobacco) filed writs to challenge the constitutionality of the plain packaging legislation. PM Asia’s wholly owned Australian subsidiary, Philip Morris Limited (PML) was a party to the dispute and represented at the High Court hearings.

On 28 February five questions – agreed between BATA and the Commonwealth – were reserved for determination by the Full Court of the HCA. They were:

Question 1: Apart from s 15 of the Tobacco Plain Packaging Act 2011 (Cth) ⁸, would all or some of the provisions of the TPP Act 2011 result in an acquisition of any, and if so what, property of the plaintiffs or any of them otherwise than on just terms, of a kind to which s 51(xxxi) of the Constitution applies?

Question 2: Does the resolution of Question 1 require the judicial determination of any and if so what disputed facts at trial?

Question 3: If the answer to Question 1 is ‘Yes’ are all or some, and if so which, provisions of the TPP Act 2011 in whole or in part beyond the legislative competence of the Parliament by reason of s 51 (xxxi) of the Constitution?

Question 4: Are all or some, and if so which, provisions of the TPP Act 2011 in whole or in part beyond the legislative competence of the Parliament by reason of matters raised … in the statement of claim?

Question 5: What order should be made in relation to costs of the questions reserved?

The High Court handed down its judgement on 5 October 2012. It included the following terse answers to the five reserved questions:

Question 1:  No.

Question 2: No.

Question 3: Does not arise.

Question 4: No.

Question 5: The plaintiffs pay the defendants costs.

The upshot of the judgement is that, in Australian law, there has been no acquisition otherwise than on just terms of Philip Morris’ intellectual property by the Commonwealth. In short, no expropriation as claimed in PM Asia’s notice of arbitration. And here we reach the Constitutional conundrum of the title.

S73 of the Australian Constitution is quite clear on the powers of the High Court; on matters in which it has jurisdiction the judgement of the High Court ‘shall be final and conclusive’. That will create a bit of a Constitutional headache should it win its case before the ‘arbitral tribunal’ in Singapore. If the Abbott government complies with the orders of the arbitrators it will be a de facto acceptance that arbitration between foreign investors and the Commonwealth may overturn decisions of the High Court, contra s73 of the Constitution.

The integrity of Australia’s legal system and the independence of its courts from both domestic interference under the doctrine of the separation of powers and external interference through ‘arbitral tribunals’ convened under ISDS provisions in trade agreements is a much a part of Australia’s sovereignty as its borders. And a much more significant part. The Abbott government’s willingness – perhaps eagerness – to offer ISDS provisions to secure FTAs is trading sovereignty for export sales. So its worth asking some questions that might come before the High Court when the ISDS chickens finally come home to roost:

1. Is the negotiation of Free Trade Agreements with provision for Investor State Dispute Settlement through international arbitral tribunals within the competence of the executive under the Australian Constitution?
2. Is the enactment of legislation to ratify such agreements within the legislative competence of the Parliament under the Australian Constitution?

The answers, I suggest, are ‘No’ and ‘No’.

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