The extraordinary legal action, if successful, will see the state of Uruguay hauled before the International Center for Settlement of Investment Disputes, a World Bank branch.
Anti-tobacco campaigners have hailed Uruguay's tough stand on tobacco. Analysts said Philip Morris chose a small Latin American for potentially precedent-setting litigation instead of taking on major countries in the West that all have legislated with varying degrees of enthusiasm to discourage tobacco use.
ICSID is an autonomous international institution established under the Convention on the Settlement of Investment Disputes between states and nationals of other states. ICSID is mandated to provide facilities for conciliation and arbitration of international investment disputes.
Governments until recently were reluctant to act against tobacco use because of lucrative taxation earnings but popular sentiment drove authorities to start getting tougher on smoking.
As legal curbs have targeted smoking in workplaces and public transport in most industrial countries in the Western Hemisphere, tobacco use has grown or continues at even levels in emerging markets in Asia, Africa and Latin America.
The Philip Morris claim against Uruguay argues the Latin American country's laws are damaging the company's commercial interests.
Uruguay began its campaign against tobacco use about four years ago and continued despite change of government. Former Uruguayan President Tabare Vazquez banned smoking in public buildings and later government curbs made the ban tougher. A total blackout of tobacco advertising was reinforced with a requirement for cigarette manufacturers to display prominent health warnings on cigarette packs.
The Uruguayan ban didn't spare smoking products designated as "light."
The legal first by Philip Morris was seen by officials as a potential test case in which the manufacturer appeared emboldened by the Latin American country's relative small size and perceived expectation it wouldn't have pockets deep enough to fight the case in an international forum. U.S. lawyer Paul Reichler, an expert on international public law, is expected to lead the defense team.
Uruguay says the government is within its rights to defend health of its citizens.
Reichler, quoted in the Uruguayan media and MercoPress, said the defense would question a Philip Morris argument that Montevideo was bound by agreement to protect investments.
To counter that argument, the defense would argue the government was fully within its rights not to allow economic activities that damage the public health.
"The treaty establishes that by sovereignty Uruguay has the right to prohibit unhealthy activities ... With its anti-tobacco laws the country does not attack the investments of Philip Morris, it only imposes limits to an activity that is to promote and to commercialize harmful products," said Reichler.
International health groups said they support Uruguay's decision not to bow to pressure from Philip Morris.
The groups include the American Cancer Society, Framework Convention Alliance, Campaign for Tobacco-Free Kids, Corporate Accountability International, InterAmerican Heart Foundation and International Union Against Tuberculosis and Lung Disease.
Uruguay's tobacco control laws are some of the toughest in the world, including graphic health warnings that cover 80 percent of cigarette packages and a policy of one package per brand, which was adopted to deter the tobacco industry's use of packages with colors and other symbols substituting brand descriptions such as "light" and "low tar."