A Perplexing Paradox: "de-statification" of "investor-state" Dispute Settlement?

• Publication year: 2015

A Perplexing Paradox: "De-Statification" of "Investor-State" Dispute Settlement?

Becky L. Jacobs

A PERPLEXING PARADOX: "DE-STATIFICATION"^† OF "INVESTOR-STATE" DISPUTE SETTLEMENT?

Becky L. Jacobs^*

Abstract

This Essay considers the perplexingly paradoxical demand that states be virtually removed from investor-state dispute settlement (ISDS). It also briefly considers the various critiques of, and possible reforms or adjustments to, existing ISDS systems, particularly those related to the right of state parties to pursue legitimate public policy objectives, such as the protection of public health, safety, the environment or public morals; social or consumer protection; or the promotion and protection of cultural diversity. Also considered are data and details of the involvement of African states in ISDS. The apparent "diversity deficit" pertaining to the participation of African nationals as arbitrators and counsel in investment arbitrations is discussed as are proposals for the inclusion, integration, and utilization of more African nationals into ISDS systems.

Introduction

If you think that conferences are boring, you clearly did not attend the Atlanta International Arbitration Society's (AtlAS) Third Annual Conference, Enhancing Business Opportunities in Africa: The Role, Reality and Future of Africa-Related Arbitration. The subject of the conference implicated some of the most important and controversial aspects of international arbitration, and the dialogue among attendees reflected that debate. It was, to put it mildly, spirited.

My panel focused on arbitrating with the state—a complicated topic, facets of which were the subject of several panels at the AtlAS conference and which also are being debated in political and academic circles, in the press, and on

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television as the United States (U.S.) negotiates the Transatlantic Trade and Investment Partnership (TTIP)¹ and the Trans-Pacific Partnership (TPP).² Many critics of international investment agreements, or IIAs, such as these, including U.S. Senator Elizabeth Warren, have focused on their investor-state dispute settlement (ISDS) provisions:

Agreeing to ISDS in th[ese] enormous new treat[ies] would tilt the playing field in the United States further in favor of big multinational corporations. Worse, it would undermine U.S. sovereignty.

ISDS would allow foreign companies to challenge U.S. laws—and potentially to pick up huge payouts from taxpayers—without ever stepping foot in a U.S. court. Here's how it would work. Imagine that the United States bans a toxic chemical that is often added to gasoline because of its health and environmental consequences. If a foreign company that makes the toxic chemical opposes the law, it would normally have to challenge it in a U.S. court. But with ISDS, the company could skip the U.S. courts and go before an international panel of arbitrators. If the company won, the ruling couldn't be challenged in U.S. courts, and the arbitration panel could require American taxpayers to cough up millions—and even billions—of dollars in damages.

If that seems shocking, buckle your seat belt. ISDS could lead to gigantic fines, but it wouldn't employ independent judges. Instead, highly paid corporate lawyers would go back and forth between representing corporations one day and sitting in judgment the next. Maybe that makes sense in an arbitration between two corporations, but not in cases between corporations and governments. If you're a lawyer looking to maintain or attract high-paying corporate clients,

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how likely are you to rule against those corporations when it's your turn in the judge's seat?³

This Essay will briefly ponder the rather perplexingly paradoxical demand by proponents that states be virtually removed from investor-state arbitration, with a few thoughts on the impact of this perspective on African States. Caveat: this Essay does not focus on any one aspect of arbitration; it is rather a hodgepodge of reflections and data that pertain to this one particular conundrum that continues to puzzle me.⁴

I. Background

As a starting point for my thoughts, I will recount one of the very lively exchanges at the AtlAS conference. After the panel in which I participated concluded, the panel moderator, University of Georgia School of Law's Dean Bo Rutledge, asked, and I paraphrase, how we, the panelists, would advise African States to preserve their ability to pursue public policy objectives when negotiating or renegotiating IIAs such as Bilateral Investment Treaties (BITs)⁵

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or investor-state contracts and/or are drafting domestic investment statutes. My response, which was to suggest that states make explicit exceptions for domestic priorities and/or provide policy-related limitations on investor protections, provoked quite an impassioned and colorful response from several attendees. I will try to reconstruct the gist of some of the relevant dialogue:

Me: Let me start by saying that, while we all have heard the calls for radical reform of the investor-state dispute settlement system, even for its total elimination, I am not among those who believe that drastic measures are required. I also, however, am not among those who staunchly defend every aspect of the field, and there are a number of things I would recommend to African States. First, at a minimum, I would advise these States to more expansively apply the "national interest" principle; perhaps to include language similar to that found in Annex B(4)(b) of the 2012 U.S. Model BIT explicitly recognizing that non-discriminatory regulatory actions designed and applied to protect legitimate public policy objectives do not constitute indirect expropriations or, additively or alternatively, to exclude disputes related to such regulatory actions from arbitration or make them non-justiciable.⁶ States could also expressly provide that all investor protections must be "consistent with" other sovereign objectives and prerogatives, including sustainable development, human rights, environmental protection, etc.⁷ They also could limit the applicability of their agreements and statutes to investors with substantial business

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interests in both the host and its claimed home state⁸ or otherwise limit investor access to ISDS to specific agreements or protections.⁹

Attendees' Comments:

The claims regarding arbitral interference with state sovereignty are "propagandistic screed."¹⁰

The data are clear that generally applicable regulatory measures rarely if ever give rise to expropriation, except in situations where a state has failed to honor a commitment made to induce a particular investment.¹¹

Investor-state arbitration benefits developing states, is even-handed and transparent, and offers great deference to states on policy matters.¹²

These positions are espoused by many prominent international arbitrators, practitioners, and scholars. Yet, while these ISDS champions somewhat derisively refer to doubters as "leftist academics [and] anti-globalization groups,"¹³ it is not only members of fringe groups and liberal politicians who

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are raising questions about international investor-state arbitration. The U.S. has been further delineating its sovereign policy space in free trade agreements since 2004, and the European Commission has indicated that it will reserve the right of state parties to regulate "through measures necessary to achieve legitimate policy objectives, such as the protection of public health, safety, environment or public morals, social or consumer protection or promotion and protection of cultural diversity" in all current and future E.U. investment negotiations, including the TTIP.¹⁴

Distinguished scholars such as Erwin Chemerinsky, Barbara Black, Martha Field, David Luban, and more than eighty others have written to Congressional leaders to oppose the inclusion of investor-state dispute settlement provisions in the TPP and TTIP.¹⁵ Even the current, and first full-time, Secretary General of the International Centre for Settlement of Investment Disputes (ICSID), Meg Kinnear, has acknowledged that many of the criticisms of the Centre are "thoughtful" and that the ICSID should "listen carefully" and "consider concrete responses."¹⁶ Similarly, imminent ISDS arbitrators have publicly acknowledged that a vigorous response to criticism of existing models "does

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not mean that the present system could not be either improved or better adapted to what have turned out to be demands from its implementation in practice."¹⁷ ISDS has even become popular cultural fodder. The February 15, 2015 episode of Last Week Tonight with John Oliver had an eighteen-plus minute segment on Philip Morris's ISDS legal campaigns involving the tobacco plain packaging legislative efforts in Australia, Uruguay, and Togo.¹⁸

Critics and supporters alike have suggested various possible reforms or adjustments. While the most extreme demand would eliminate ISDS entirely,¹⁹ a plethora of others have been proposed, many of which would involve abrogating, renegotiating, or amending existing investment agreements and treaties; creating new ISDS institutions; reorganizing existing arbitral institutions and structures; or bolstering the independence of system arbitrators.²⁰

In this brief Essay, I will not even begin to restate in detail or even list all of the proposed reforms. However, as examples, some have urged that parties consider or be required to seek mediation or conciliation of their claims prior to submitting them to arbitration.²¹ Other proposals focus on procedural reforms of existing ISDS mechanisms, such as making processes more transparent, establishing statutes of limitations for the filing of claims,

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requiring referrals to state party-established panels for interpretive guidance,²² allowing non-disputing party and amicus interventions,²³ amending the rules or processes of arbitral institutions to require tribunals to consider...