Up-in-smoke tour – the olive revolution reaches Ireland

Delusive exactness is a source of fallacy throughout the law. By calling a business ‘property’ you make it seem like land, and lead up to the conclusion that a statute cannot substantially cut down the advantages of ownership existing before the statute was passed. An established business no doubt may have pecuniary value and is commonly protected by law against various unjustified injuries. But you cannot give it definiteness of contour by calling it a thing – Judge Holmes in Truax v Corrigan (257 US 312 (1921))

This quotation sets the tone for an examination of the IP issues surrounding plain packaging legislation introduced by Australia and, more recently, Ireland. Similar legislation is due to be implemented in the United Kingdom (May 2016), Scotland and New Zealand, while France, Norway and Sweden are all gearing up to follow suit.

The tobacco companies (also known as the ‘Big Four’ – British American Tobacco (BAT), Imperial Tobacco Group, Japan Tobacco International (JTI) and Philip Morris International (PMI)) claim that the measures included in plain packaging legislation infringe their trademarks. So far, they have lost a constitutional challenge in Australia. A case was also taken to the World Trade Organisation (WTO) by a number of countries over the enactment of the Tobacco Plain Packaging Act in Australia. BAT and PMI have had judicial review cases referred by the English High Court to the European Court of Justice (ECJ). Japan Tobacco Ireland (JTI) has a challenge before the Commercial Court in Ireland, while PMI is using an investment trade treaty between Australia and Hong Kong as a means of attacking plain packaging legislation enacted in Australia. In addition to examining the Australian and Irish legislation, this article considers the tobacco companies’ argument that plain packaging will result in a growth in the illicit cigarette trade.

Plain packaging prohibits the use of figurative trademarks (although the brand name, business name or company name may still be printed on the packet together with any variant names). The plain packaging movement in Australia has been christened the ‘olive revolution’ due to the drab, unattractive colour prescribed by standardised packaging provisions. Proponents of standardised packaging allege that tobacco companies use branding which attracts young people and deceives the public into thinking that some brands are healthier than others. The public policy objectives of standardised packaging are to curtail smoking through restrictions on tobacco product packaging and thus:

• to reduce the appeal of branding and increase the effectiveness of health warnings printed on the retail packaging;
• to reduce the ability of the retail packaging of tobacco products to mislead members of the public about the harmful effects of smoking;
• to reduce relapse rates; and
• to prevent the public and younger people from starting smoking.

Plain packaging and constitutional challenges in Australia

The Tobacco Plain Packaging Act regulates the appearance of cigarettes, including the size and colour of the packaging. It provides that the outer surfaces of the packaging should have no decorative elements, such as ridges or embossing, and prescribes that the outer packaging be dark brown with a matt finish. The regulations restrict what may be included on tobacco packets to origin marks, calibration marks, measurement marks, a trade description, barcode, fire risk statement, name and address.

In the High Court case the plaintiff did not dispute these regulations. Instead, it challenged the use of the remaining space where its trademarks ought to be displayed.

In order to determine whether the act was contrary to Section 51 (xxxi) of the Constitution, the court examined whether the act led to an acquisition of the plaintiff’s property rights. Section 51 (xxxi) incorporates a constitutional guarantee of just terms in relation to the protection of property. In order to trigger this provision, there must be an acquisition whereby the acquiring party acquires an interest in the property. Although the court confirmed that the definition of ‘property’ may be construed liberally, it noted that intellectual property is artificial and does not possess the same permanent nature as goods in property. The court explained that intellectual property relies on negative rights, not affirmative rights, and held that for there to be an acquisition of property in accordance with Section 51, some benefit or advantage must arise relating to the ownership or use of the property, and that ownership of the marks remained with the plaintiff, subject to the act’s provisions. This judgment appeared to extinguish any hopes that the tobacco companies might have of successfully relying on similar constitutional provisions in other jurisdictions.

Impact of plain packaging

One of the mantras of the Big Four is that plain packaging will not have the desired results of preventing the take-up of smoking and quashing recidivism. Earlier this year, online journal Tobacco Control published over a dozen papers dealing with the impact on smokers and the take-up of smoking both before and after the legislation’s implementation in Australia. The studies showed a fall in tobacco consumption of 12.2% from December 2013 to December 2014, and an increase in the number of smokers attempting to quit and those thinking about doing so. There was no evidence of an increase in the sale of illicit cigarettes. Evidence from surveys of schoolchildren demonstrated an increase in negative feelings towards packets now – mere warnings have not had the same effect. The Australian Bureau of Statistics has also recorded a fall in cigarette consumption and the lowest-ever recorded sales. Of course, these figures do not account for the trade in illicit cigarettes and the 12.5% increase in excise duty added to tobacco products annually by the Australian government.

WTO

These plain packaging acts build on pre-existing anti-smoking measures in the respective jurisdictions, as well as guidelines from the WTO and EU directives. In 2005 the WTO introduced the Framework Convention on Tobacco Controls guidelines to combat what it calls the “tobacco epidemic”. The convention includes “core demand reduction provisions” such as price and tax measures to reduce demand for tobacco and non-price measures to reduce demand.

Honduras, the Dominican Republic, Cuba and Indonesia have a case pending with the WTO dispute body arising out of the enactment of the Tobacco Plain Packaging Act (Ukraine, which was initially party to the proceedings, has subsequently dropped out and is reported to have reached a resolution with Australia). The parties complain that the Australian act breaches the General Agreement on Tariffs and Trade and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) by infringing trademarks and acting as an illegal barrier to trade.

The proceedings (cited from the submissions by Honduras dated April 2012) rely on the following provisions of TRIPs:

1. Article 20, because the use of a trademark is unjustifiably encumbered by special requirements, such as (i) use in a special form, for example, the specific font size and colour of the brand, business or company name, and, (ii) use in a manner detrimental to the trademark’s capability to distinguish tobacco products of one undertaking from tobacco products of other undertakings;

2. Article 16.1, because the measures prevent owners of registered trademarks from enjoying the rights conferred by a trademark;

3. Article 15.4, because the nature of the goods to which a trademark is to be applied forms an obstacle to the registration of the trademark;

4. Article 2.1 incorporating the provisions of the Paris Convention, in particular, (i) Article 6quinquies, because trademarks registered in a country of origin outside Australia are not protected “as is”, and, (ii) Article 10bis, because Australia does not provide effective protection against unfair competition to nationals of other countries of the Union and creates confusion between goods of competitors;

5. Article 24.3t, because Australia is diminishing its level of protection for geographical indications below the level that existed prior to 1 January 1995;

6. Article 22.2(b), because Australia does not provide effective protection against acts of unfair competition with respect to geographical indications and creates confusion among consumers related to the origin of the good;

7. Article 3.1, because Australia accords to nationals of other Members’ treatment less favourable than it accords to its own nationals with respect to the protection of intellectual property.

The panel elected to hear this dispute sat in June 2015, but will not publish a decision until 2016.

Tobacco Product Directive

Turning to Europe, the first EU Tobacco Directive (2001/37/EC) was introduced in 2003 to regulate the manufacture, presentation and retail of tobacco products within member states. Ten years after its introduction, legislative proposals were introduced to review it. In April 2014 the presidents of the European Parliament and Council signed the second EU Tobacco Product Directive (2014/40/EC), which seeks the uniform application of the laws in relation to the sale and manufacture of tobacco products within the 28 EU member states to meet obligations under the Framework Convention on Tobacco Controls. The directive must be transposed into national law by May 20 2019.

The directive provides examples of health warnings and images to be placed on packaging. It also regulates ingredients – namely, that there should be no characteristic flavours allowed in these products – and outlaws lipstick-style packs. In addition, it introduces a pan-European tracking and tracing system for the legal supply chain, and both visible and invisible security features (eg, holograms) which will assist in the detection of illegal products.

The validity of Article 24(2) of the directive is being challenged in the United Kingdom and Ireland. This provision allows member states to implement further measures relating to tobacco products justified on grounds of public health, provided that they are proportionate and not arbitrary.

The Tobacco Plain Packaging Act regulates the appearance of cigarettes including the size of the packaging and the colour of same, and prescribes that the outer packaging must be dark brown with a matt finish

UK situation

In the United Kingdom, the government’s strategy to reduce smoking through the public health system was outlined in Healthy Lives, Healthy People: a tobacco control plan for England, published in 2011.

The United Kingdom’s impact assessment was published on July 25 2014 and the UK government was granted the power to introduce standardised packaging in the Children and Families Act 2014. In January 2015 the government announced that it would proceed with legislation, which was subsequently passed in the House of Commons: the Standardised Packaging of Tobacco Products Regulations will come into effect on May 20 2016, at the same time as the second Tobacco Products Directive.

Tobacco companies’ challenge

BAT and PMI separately launched claims for judicial review of the validity of the second Tobacco Products Directive in the English High Court (both cases were subsequently joined). These proceedings have been stayed pending the outcome of a preliminary ruling by the ECJ under Article 267 of the Treaty of the Functioning of the European Union. The reference seeks to establish whether the directive is invalid, as the claimants assert that there is no adequate legal basis for its adoption. The following questions were referred to the ECJ:

• whether there is an adequate legal basis within the treaty for the directive’s adoption;
• whether the directive complies with the principle of proportionality and the EU Charter of Fundamental Rights;
• whether the directive’s provisions are invalid by reason of infringement of the rules set out in the treaty governing the delegation of powers and the conference of powers on the commissions; and
• whether the directive is invalid for failure to comply with the principle of subsidiarity.

Further, the claimants have challenged the legislative powers granted by virtue of Article 290 of the treaty to implement the directive’s provisions concerning health warnings. It is believed that the case will be heard in October or November 2015.

Situation in Ireland

On March 9 2015 the Irish president signed the Public Health (Standardised Packaging Tobacco) Bill 2014 into law. The provisions restricting figurative trademarks and decorative elements in the act appear to be similar to those in Australia. The Irish act expressly states that nothing in it shall operate as grounds for revocation of the registration of a trademark under that act. Accordingly, pursuant to Section 51(1) (a) of the Trademark Act, 1996, the provisions of the 2015 act amount to a proper reason for non-use which can be used to ward off an application for a declaration of revocation.

At the hearings of the Joint Oireachtas (Parliament) Health Committee, stakeholders were clearly concerned about the negative impact that the legislation will have on their IP rights and on Ireland’s commercial reputation. JTI, for example, submitted that the legislation is “a deprivation and unjust attack on their most valuable assets”, and that the resulting inability to use their marks would make them “valueless” in Ireland.

The Intellectual Property Committee (IPC) of the Law Society of Ireland argued that the tobacco companies would have more chances than their antipodean counterparts of successfully invoking the Irish constitutional provision which protects property rights. First, there can be no doubt as to the fact that trademarks are property, as this is explicitly stated in Section 26 of the Trademark Act 1996. Further, any acquisition of property rights would be based on the principle of proportionality. According to the test developed by the Irish Supreme Court, the restriction of a right must adhere to the doctrine of proportionality. The test in Ireland (Heaney v Ireland (1994) 3 IR 593 @607) provides that a restriction on the exercise of rights must:

• be rationally connected to the objective and not arbitrary, unfair or based on irrational considerations;
• impair the right as little as possible; and
• be proportional to the objective.

Should such a claim come before the courts in Ireland, they will (or could) be asked to consider the available evidence regarding the effectiveness of plain packaging on smoking habits as opposed to other measures.

The IPC noted that the introduction of the legislation not only restricts trademarks, but also amounts to a complete eradication of trademark rights. Although a trademark may be revoked for non-use in accordance with Section 51 of the Trademark Act, Section 5 of the Public Health Act provides that revocation will not be triggered by the act. Nonetheless, it appeared to the IPC that this was removal disguised as a restriction. The IPC referred to Articles 15(4) and 20 of TRIPs, and also acknowledged Article 8 of TRIPs, which allows member states to amend legislation or adopt law to protect public health. However, it noted that it is necessary to prove that these measures are in fact required to protect public health.

IBEC was concerned about the effect that the law will have on branding rights which, it argued, are a central part of how businesses communicate with their customers. Further, it submitted that the legislation sends a message to countries and investors that the standard of IP protection in Ireland is not as strong as previously thought and suggested that the law will have “substantial negative consequences well beyond the sector directly concerned”.

The Irish Cancer Society, on the other hand, submitted that plain packaging “will restrict, not acquire or profit from, existing trademarks”. In the society’s view, the state does not acquire the intellectual property of the tobacco companies as the government has not proposed using their logos. It referred to Sir Richard Buxton’s opinion on the legality of requiring or enabling plain packaging in the United Kingdom. The argument regarding the nature of the right granted by a registration has often been made. Is it a positive or negative right? Buxton said that, on his understanding of the UK Trademark Act, “the grant of a trademark confers a right to stop others using the mark. It does not confer on a trademark holder a right to use the mark in all circumstances and irrespective of public policy considerations”. As per his opinion, the Irish Cancer Society noted that any challenge to plain packaging under the Trademark Act in the United Kingdom was thus “obsolete”.

Codentify allows consumers to verify that their tobacco products are legitimate. However, It looks unlikely from the wording of the Irish act that Codentify can be used on Irish cigarette or tobacco packs (picture courtesy of Philip Morris International)

Counterfeit effect

In his independent review of standardised packaging in the United Kingdom, Sir Cyril Chantler explained how the tobacco companies had argued that the implementation of plain packaging would facilitate the copying of packaging by counterfeiters with greater ease, leaving consumers unable to differentiate between brands, thus diminishing brand loyalty.

Under the Irish Trademark Act 1996, it is an offence to fraudulently apply or use a mark in relation to goods when that person is not entitled or authorised to use the mark in relation to the goods in question. Further to this, the minister for finance introduced regulations in 2005 which – together with the Commission Implementation Regulations of 2013 – afford Customs certain powers regarding counterfeit goods. Provision has also been made in casual trading legislation and in the Finance Acts (specifically, the Finance Act 2012, 2013 and the No 2 Act of 2013), which introduced various measures to strengthen the powers of the revenue commissioners to tackle the issue of the illegal tobacco trade.

The report on the Irish parlimentary committee’s hearing noted that €1.4 billion is collected annually in tobacco tax and VAT in Ireland and government estimates show that 20% of all tobacco consumed in Ireland is non-Irish duty paid, thus costing the exchequer over €250 million annually. At the hearings, the tobacco companies submitted that the criminals would only “have to produce one packaging design ever”. While the Office of the Revenue put an estimated annual loss of €240 million on this illicit trade, PJ Carroll & Co claims that this figure is €569 million.

The tenet of the submissions made by the powers that be was that there was nothing to suggest that the introduction of the legislation would affect the illicit tobacco trade.

According to the Irish police, there are three types of illicit tobacco:

• genuine tobacco which is smuggled or diverted due to price discrepancies in the jurisdiction;
• ‘cheap whites’ – non-counterfeit cigarettes often legitimately produced and then smuggled into the country to avoid tax; and
• counterfeit tobacco which is manufactured covertly and smuggled in.

The Irish police and revenue commissioners have said that they will wait to see how the criminal factions adapt to the new law before assessing what should be done. At the hearings, the police referred to the fact that Her Majesty’s Revenue and Customs in the United Kingdom and the European Anti-fraud Office gave evidence before the EU Select Committee of the European Union of the House of Lords to the effect that there was no evidence that plain packaging would increase the illicit tobacco trade. Both the police and the Office of the Revenue attended the health committee debates in Ireland and were adamant that there was no evidence to suggest that the introduction of plain packaging would cause an increase in the illicit trade in tobacco.

Although the Office of the Revenue submitted that the issue of illicit cigarette sales is particularly acute in EU countries with high tobacco taxes, such as Ireland, it was satisfied that plain packaging will not damage efforts to tackle the illicit cigarette market, predominantly due to the existence of a state-of-the art tax stamp which is highly resistant to counterfeiting and contains secret features identifiable by scanning technology.

Annual surveys are undertaken on behalf of the Office of the Revenue to ascertain the scale of the Irish illicit cigarette market. The most recent survey, from 2013, showed that 11% of the cigarettes consumed in the country were illicit, while a further 5% were legally brought into the country but had no Irish duty paid thereon. In excess of 53 million cigarettes were seized in 5,852 seizures, with a retail value of €25.2 million, in 2014. In relation to tobacco, some 9,836 kilograms were seized in 1,014 seizures with a value of €4.2 million.

Tracking, tracing and legality of anti-counterfeiting measures

One of the key proposals advanced when amendments to the second EU Tobacco Products Directive were announced in 2013 was a pan-European tracking and tracing system, which would use security features such as holograms. This system will first be applied to cigarettes and roll-your-own products before being extended to other tobacco products.

The National Federation of Retail and Newsagents Ireland told the hearings how it had suggested the use of an app, Codentify, which allows consumers to verify that their tobacco products are legitimate. It would also equip the authorities with a “simple and effective tool for determining whether tobacco is smuggled or counterfeit”. Arguments have been made in the United Kingdom that the regulations would remove Codentify from cigarette packs because the law does not provide for anything on the pack that is not “required by law”. Ian Paisley, quoted in The Grocer, termed this a “crazy oversight” by the United Kingdom as the track and trace provisions provided for in the second Tobacco Products Directive would not become mandatory until May 2019. According to Paisley, any use of Codentify on packs between May 2016 and May 2019 would be breaking the law. A Department of Health spokesperson in the United Kingdom said, in reply, that the security features required by law on existing packs will also be present on standardised packs, including covert anti-counterfeiting marks. With regard to anti-counterfeiting measures, others have suggested the use of an alphanumeric code on each pack and covert markings using taggant ink, identifiable through specialised equipment only.

Applicability of anti-counterfeiting measures, such as Codentify, in Ireland

It looks unlikely from the wording of the Irish act that anti-counterfeiting measures such as Codentify can be used on Irish cigarette or tobacco packs. While the legislation expressly states that “nothing in the Act shall operate to affect the law in relation to tax stamps”, the provisions further state that packaging shall not “contain any inserted items or affixed items other than as provided for by law”.

Although health warnings and bar codes are permitted, it would seem that any additional measures, such as Codentify, would not be provided for by law, placing their legitimate use in doubt. Therefore, any use of anti-counterfeiting measures such as Codentify will need to be given a statutory leg-up if they are to comply with the new Irish law.

Irish legal challenge

JTI launched proceedings against the Irish state in March 2015. An application was made by the state in June 2015 to refer the matter to the ECJ under Article 267 of the treaty. Surprisingly, the main challenge does not focus on the constitutional right to property or the acquisition of IP rights by the state, as one might have expected. Rather, it relates to the validity of Article 24 (2) of the directive and the competency of the Irish state to enact the legislation.

JTI claims that the state lacks the competency to enact the legislative provisions as they are contrary to EU law and alleges that if Article 24 (2) is taken out of the equation, as being declared invalid, then the state has no competency because the directive has been exhaustively harmonised and, accordingly, there is no power to introduce domestic legislation.

The application for a reference was objected to by JTI on the grounds that the core substance of the state’s questions would be determined by the UK reference and reference by an Irish court may serve to delay the UK reference. JTI also claimed that the Irish reference was premature, which the state found extraordinary given that JTI’s sister company in the United Kingdom supported it in November 2014, at a time when no legislation existed there. In arguing for its own reference, the state submitted that a peculiar feature of the UK reference was that it was made in the absence of any legislation – it was therefore hypothetical and could well be deemed inadmissible. It was further submitted that the questions referred by the UK court were far broader in scope than those suggested in the Irish application for a reference, and that there was an overlap with only one of the questions referred by the United Kingdom.

Justice Cregan saw two broad challenges. First, the plaintiff has alleged that the directive is contrary to EU law because Article 24(2) is invalid, if one has regard to Article 114 of the treaty. Second, it has alleged that the Irish act is contrary to the second EU Tobacco Products Directive as it occupies the entire field so there is no competency to enact the Irish law. If the directive does not occupy the field, Irish law goes beyond it. As the judge saw it, if the plaintiff’s challenge to the directive falls away, so too does the challenge to the Irish act. The state said that if the plaintiff is correct about Article 24(2) such that it is invalid, there is nevertheless a residual competency within member states that saves the act, and that such competency derives from various treaties and, further, the directive is express as to partial harmonisation. The state suggested that three questions be referred, but on July 7 2015 the application was refused on the basis that the first question (concerning the validity of Article 24(2) of the directive in light of Article 114 of the treaty) was identical to that referred by the United Kingdom and a national court should not make preliminary references which are entirely duplicative. The second question fell away once certain matters had been clarified during the course of the hearing. The third question concerned the competence of member states to legislate, even if Article 24(2) were invalid. The court said that it should not refer hypothetical questions at this stage.

Conclusion

Notwithstanding the myriad concerns highlighted by numerous parties, the Irish act was passed. However, several unanswered questions remain. Will Irish rights holders with figurative trademark registrations only now be forced to rely on their unregistered trademark rights in word marks and mount passing-off challenges, where the evidential burden is notoriously greater than an infringement action under Section 14? How will the new provisions marry with groundless threats under Section 24, if at all? Should the option to convert a registration from a figurative to a word mark in Class 34 have been legislated for to protect rights holders and their filing dates?

What effect will the Irish act have on the principle of free movement of goods and the treatment of those tobacco products that enter Ireland as parallel imports? Will the exhaustion of trademark rights have any applicability if certain marks are no longer legitimate? And finally, is this the beginning of the end for trademarks as we know them – that is, will the state now consider implementing similar measures for unhealthy foods and alcohol?