Trade detractors have been using a well-worn line of attack as the U.S. considers huge trade deals with Asia and Europe: that they subvert democracy by letting big companies sue governments outside national courts.
It’s true that what’s known as investor-state dispute settlement (or ISDS) gives companies the ability to challenge policies deemed unfair to their business.
The pro-ISDS argument is that it’s already common in bilateral investment treaties and gives companies confidence to establish operations in countries with less-developed legal systems. Detractors say it helps big corporations take advantage of developing nations.
Either way, the public outcry against these proceedings needs a bit of fact-checking, according to the lawyers engaged in the type of arbitration between companies and governments that people like Sen. Elizabeth Warren (D-Mass.) say results in “rigged, pseudo-courts.”
“I’m not sure whether HillaryClinton.com addresses all of these,” said Thomas Snider, a shareholder in Greenberg Traurig LLP’s Washington office, a tongue-in-cheek reference to a fact-checker set up on the Democratic presidential nominee’s website to challenge the debate claims of her Republican opponent, Donald J. Trump.
Ms. Clinton, who once favored the 12-nation Trans-Pacific Partnership, has opposed it since being pulled leftward by Vermont Sen. Bernie Sanders during the Democratic primaries. Her running mate, Sen. Tim Kaine of Virginia, has also performed an about-face on the deal amid heated rhetoric around trade.
But it’s important that politics not obscure facts about ISDS, arbitrators said during the Atlanta International Arbitration Society’s annual conference, which this year focused on the “less-flat world” that has emerged as anti-globalization forces have gained steam.
Thanks to comments like Ms. Warren’s, arbitration has gone from obscure to an occasional whipping boy for all trade’s ills, said Glenn Hendrix, chair of Arnall Golden Gregory LLP and the moderator of a panel on the TPP and other trade deals.
“It’s gone from being an esoteric topic to a front-page-of-the-newspaper type of topic,” Mr. Hendrix said.
The TPP, as it’s known, ironically has already taken such criticisms into account, creating a dispute-resolution mechanism with more transparency in the arbitration process than provided by the investment treaties that countries commonly use, Mr. Snider said.
In other words, TPP is a move toward less secrecy than is standard in such deals, more than 3,200 of which are already in force around the world, the Washington Post reported late last year.
Mr. Snider says the transparency provisions in the TPP allow third parties to participate in the hearings and file amicus (“friend of the court”) briefs. The hearings are to be open to the public in most cases, though they allow for companies and governments to keep competitive or classified information out of public view.
There’s even been talk of hearings being live-streamed using technology similar to Skype. This level of openness is inconceivable in arbitration cases between companies, which are truly closed off to the prying eyes of news reporters.
“I would submit that it’s not a secret court at all,” Mr. Snider said of the TPP mechanism.
One other objection to ISDS has been that it would have a chilling effect on TPP countries, making them less likely to pass stringent regulation on issues like the environment, labor and public health for fear of being sued by companies later. The lawyers conceded that defending even a frivolous case can be costly, especially for a developing country.
But TPP negotiators heard that criticism as well, building in an annex to the investment chapter that seeks to protect countries’ right to regulate. On public health grounds, the TPP also excludes tobacco companies from the dispute-resolution mechanism in direct response to lawsuit Philip Morris filed through its Hong Kong subsidiary to protest Australian cigarette-packaging guidelines.
The TPP’s language isn’t bulletproof, but it’s narrow enough to put a hurdle in front of companies that seek damages for what acts they consider expropriation or violations of “fair-and-equitable treatment” standards by foreign governments, provisions that basically say they should be treated as if they’re a local company.
“It doesn’t go far enough, but it makes it very difficult for investors to be very creative in this regard,” Mr. Snider said during the panel discussion.
Still, there are some challenges to the way ISDS has been set up in most trade deals and investment treaties. For one, companies can sue governments, but not the other way around, and there is no appellate mechanism, meaning the decision of the arbitrators is final.
Another criticism is that settling these deals through arbitration impairs the development of local jurisprudence. In other words, cases tried outside national courts don’t contribute to a country’s body of legal research and precedents.
The European Response
That’s been a particularly strong argument in Europe, but it’s not what’s driving most of the opposition to the dispute-settlement mechanisms in the Trans-Atlantic Trade and Investment Partnership, a massive U.S.-EU trade deal.
Critics have targeted the deal because of their concerns that “secret courts” could undermine national sovereignty. A common refrain against TTIP in the United Kingdom (when its place in the EU was more secure) was that it would lead to the privatization of the National Health Service. Proponents say that’s an irresponsible myth propagated to fan opposition.
But as with TPP, public outcry precipitated changes in the way the trade agreement approaches the issue. Investor-state dispute settlement had evolved to the point of the commonplace in bilateral investment treaties in Europe, and thus it was assumed that it would be part of important trade agreements, but all that changed last year.
Andrea Carlevaris, secretary-general of arbitration court at the International Chamber of Commerce in Paris, one of the oldest and most widely respected institutions in arbitration, said European negotiators have changed their tune, setting up a new system they say provides more accountability.
The new Investment Court System, proposed by the European Commission in September, would be the bloc’s way of handling disputes with its trade-agreement partners. Canada, which is in talks with the EU on a trade deal, would likely be the first country to buy in. The eventual goal would be to create an International Investment Court that applies to dealings even outside trade agreements.
The ICS would have as its pool of arbitrators 15 publicly selected judges (five each from the U.S., Europe and other jurisdictions) who would hear cases publicly. It would also include an appeals mechanism and would “clearly enshrine the right to regulate.”
The problem, from companies’ perspective, is that they would have no say in appointing the arbitrators — in most cases now they appoint one of two, who work together to appoint the third. And arbitration experts are concerned that these sitting judges wouldn’t have the appropriate expertise in international law, while the best experts would shy away from the process.
Mr. Carlevaris believes scrapping ISDS would be the worst outcome, as it plays an important role assuring confidence in global commerce.
“I can think of jurisdictions where you can expect less-than-neutral hearing from a state court [in Europe],” Mr. Carlevaris said. “I think sometimes the European jurisdictions which may be more interesting and attractive for economic reasons for U.S. investors are not necessarily the ones that have the most solid legal systems.”
Not that he’s against transparency when the public interest is involved, but this is really about finding the best solution out of all imperfect systems, he said.
“We think that if we cancel the TTIP we will have no disputes between European investors and vice versa. Of course (disputes) exist. This is the economic reality. So it’s just about negotiating an acceptable framework,” he told Global Atlanta.
One approach that would go a long way: Better defining in trade agreements what merits a case, to cut down on frivolous suits and to give guidance to arbitrators.
The proposed investment court would be a next-best solution, but it has many shortcomings that will probably make it hard for American negotiators to swallow as it comes up in renewed trade talks, Mr. Carlevaris said.
Despite a round of negotiations held this month, TTIP is likely on life support at this point, as European politicians face backlash against globalization with elections approaching, not to mention the anti-trade rhetoric in the U.S. elections. An agreement that both sides sought to conclude by the end of this year could be delayed indefinitely.
“Once we go back seriously to the negotiating table, I can see this as a really big obstacle. This is one, but it’s not the only one. I honestly cannot see (TTIP) happening in the near future,” Mr. Carlevaris said.
As for TPP, the Asia deal that is further along, Mr. Snider of Greenberg Traurig believes there is still a chance for it to come to a vote in the lame-duck session or early in a potential Clinton administration with some “tweaks.”
The investment court, he said, will be a “stumbling block” for the U.S., given that it doesn’t want to set a precedent for future deals with developing nations.
“I think the U.S. will insist very strongly upon ISDS provisions in the TTIP because the U.S. is looking ahead at the U.S.-China bilateral investment treaty … and it wants to preclude China from pointing to an investment court.”