Even if a measure does substantially deprive an investor of its investment, this does not on its own mean that it constitutes an expropriation. This is because international law recognises the sovereign right of states to regulate for public interest or public welfare purposes, which includes regulation for public health and regulatory powers to tax.

States have a sovereign right to regulate in the public interest

A number of tribunals have held that good faith, non-discriminatory legislation/regulation or other government action implemented for public policy reasons will not amount to an expropriation. This is sometimes referred to as the ‘police powers’ doctrine, a customary international law concept recognising a state’s sovereign right to regulate in the public interest. Note that the term ‘police powers’ in this context does not refer to action by the police force, but to a state’s legislative or regulatory activity, including its regulatory powers to tax.

Some investment treaties explicitly state that measures taken within the sovereign right to regulate are not expropriations. However, many tribunals have recognised that the sovereign right to regulate is part of the test for expropriation even if it is not specifically mentioned in the relevant treaty text. This is because the concept of ‘expropriation’ in a treaty must be interpreted in light of any relevant rules of customary international law, including the customary international law doctrine of police powers (Philip Morris v Uruguay, paras 290-305).

Demonstrating that a measure is part of the sovereign right to regulate

In assessing whether a measure is an exercise of the right to regulate, tribunals will examine whether the state is pursuing a legitimate public policy objective (such as public health), whether the measure is non-discriminatory, and the connection between the measure and the fulfilment of its objective.

In Philip Morris v Uruguay, the Tribunal found that both Uruguay’s graphic health warnings law and its single presentation requirement (a requirement that each brand family of cigarettes, e.g. Marlboro, contain only a single brand variant, e.g. Marlboro Red, so as to prevent comparative pack design within the brand family from suggesting that certain variants are ‘healthier’ than others) were valid exercises of Uruguay’s sovereign right to regulate. It found that the measures were good faith, non-discriminatory, and proportionate, and in particular that they:

• Had been adopted in fulfilment of Uruguay’s national and international legal obligations for the protection of public health, including the WHO FCTC, which provided an evidentiary basis for Uruguay’s measures.
• Were directed to decreasing the incidence of smoking and were capable of contributing to its achievement, in a context where smoking had declined overall during the time the measures were in place. There was no need for Uruguay to demonstrate the individual impact of either of its measures, given the complexities of doing so.

Other tribunals have taken a similar approach, with slight variations in the approach to determining whether a measure is proportionate. Some have taken an approach broadly similar to the Philip Morris v Uruguay Tribunal, in that where there is a rational connection between a measure and a public policy objective, the measure will not constitute an expropriation (e.g. Saluka v Czech Republic paras 254-265, 275-276). Other tribunals have examined the reasonableness of the measure in light of its objective (Feldman v Mexico paras 103-105; Gemplus v Mexico paras 4.114, 4.118-4.120, 4.146-4.161) or have weighed the importance of achieving the objective against the degree of interference with the investment (Tecmed v Mexico para 122; LG&E v Argentina para 195; Total v Argentina para 197). For example:

• In Chemtura v Canada, the Tribunal held that a ban on the use of a toxic pesticide was not expropriatory because the measure was adopted for important public health and environmental reasons and was aligned with the practice of other states
• In Methanex v US, the Tribunal held that a ban on a gasoline additive for health and environmental reasons would not constitute an expropriation unless specific commitments had been given by the government to the prospective investor contemplating investment that the government would refrain from enacting such a measure.
• In Feldman v Mexico, the Tribunal held that whether an expropriation had occurred would depend on the reasonableness of the measure, and remarked that if all regulatory changes affecting foreign investors were held to be expropriatory, governments would be prevented from regulating in the public interest.
• In Tecmed v Mexico, the Tribunal undertook a proportionality test to determine whether an expropriation had occurred. It held that the impact of the state's actions in denying an operating permit for a toxic waste facility on the investor was so serious as to outweigh the government's objective of responding to community pressure in relation to the proximity of the facility to the urban environment.

In sum, non-discriminatory, good faith measures implementing the WHO FCTC are unlikely to be found to be an expropriation.