Strapping Down Regulatory Space With Investment Arbitration: a New Breed of International Slapps

STRAPPING DOWN REGULATORY SPACE WITH

INVESTMENT ARBITRATION: A NEW BREED OF

INTERNATIONAL SLAPPS

DAVID CHRIKI*

ABSTRACT

Litigation cost asymmetries among governments and investors could hinder

the ability of governments to exercise their legitimate rights to regulate and

enforce their laws. A foreign investor facing government measures that

adversely affect the investor’s business interests might submit an arbitration

claim, arguing that the host country violated provisions of an international

investment agreement (IIA). If the investor enjoys litigation cost advantages

over the host country, that country will be inclined to settle regardless of the mer-

its of the claim. Investors, realizing that they enjoy such cost advantages, could

choose to weaponize their right to arbitration and bargain over the contested

measure in the shadow of investment arbitration. In these cases, investment

arbitration imposes an unwarranted regulatory chill on countries, which

exceeds the substantial obligations derived from their IIAs. These arbitration

claims, referred to here as Strategic Arbitrations Against Public Policies

(STRAPPs), resemble so-called “SLAPPs”—Strategic Lawsuits Against Public

Participation—which are usually f‌iled by large corporations against social acti-

vists who call for regulations that adversely affect the corporations’ interests.

The use of international investment arbitration to “STRAPP down” various

measures is examined here in three different contexts: criminal investigations;

health policies against tobacco products; and tax and antitrust policies.

Drawing from the experience with SLAPPs, the deleterious effects of STRAPPs

could be avoided by dismissing arbitration claims against well-def‌ined types of

measures unless the claimant can show evidence of damages and arbitrary or

discriminatory treatment, while awarding governments punitive damages

caused by the arbitration in such cases.

I. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416

II. INTERNATIONAL INVESTMENT ARBITRATION AND ITS POSSIBLE

IMPLICATIONS ON GOVERNMENTS’ REGULATORY SPACE . . . . . . . . . 422

* LL.B, LL.M, Hebrew University of Jerusalem. I am grateful to Ari Af‌ilalo, Tomer Broude,

Alex Stein, Ifat Taraboulos, Nir Deuitch, Katya Zakharov-Assaf and Ari Pomson for their valuable

comments. This research enjoyed the kind support of the Feinberg Fund for International Law at

the Law Faculty of the Hebrew University of Jerusalem. V

C 2020, David Chriki.

415

III. WEAPONIZING THE RIGHT TO ARBITRATION: THEORETICAL

FRAMEWORK AND EXAMPLES . . . . . . . . . . . . . . . . . . . . . . . . . . . 425

IV. EVIDENCE OF STRAPPS: A NEW BREED OF INTERNATIONAL

SLAPPS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429

A. Avoiding Criminal Proceedings: The Case of Foreign Bribery. 431

B. Health Regulations: Investment Arbitration Against Tobacco

Packaging. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 434

C. Tax and Antitrust Regulations: Noble Energy and the

Regulatory Framework of Natural Resources in Israel . . . . . . 439

V. PROPOSED SOLUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 441

A. Preventing SLAPPs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442

B. Anti-SLAPP Solutions as Possible Mechanisms for Preventing

STRAPPs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443

VI. CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447

I. INTRODUCTION

Investment arbitration could be used to deter countries from exer-

cising their regulatory powers, even when they are entitled to do in

accordance with their obligations under international investment

law. Once foreign investors face measures that adversely affect their

business interests, they might submit arbitration claims against the

country they invested in, arguing that the measures violated one or

more provisions of an international investment agreement (IIA)

between the regulating country and the respective countries of the

investors. Notably, in many of these cases, the likelihood that the in-

vestor will prevail in arbitration is not high. However, I contend that

governments are likely to settle, and cancel or alter the contested

measure if the litigation costs they face are higher than those of the

threatening investor, regardless of the scope of protection provided

to investors in the countries’ IIAs and of the countries’ likelihood of

prevailing in arbitration.

1

When an investor enjoys a cost advantage compared to the respond-

ent country, that investor might “weaponize” its right to arbitration and

cause the respondent country to cancel challenged measures, even if

1. See generally Gideon Parchomovsky & Alex Stein, The Relational Contingency of Rights, 98 VA. L.

REV. 1313 (2012) (arguing that “whether a right — indeed, any legal entitlement — is realizable

will always critically depend on the relationship between two variables: [1] the cost a rightsholder

would need to incur to vindicate the right; and [2] the cost faced by a challenger who wishes to

attack and ultimately eliminate the right”).

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416 [Vol. 51

the IIA does not provide the investor protection from such measures.

2

These arbitration claims, referred to here as Strategic Arbitrations

against Public Policies (STRAPPs), raise concerns that investment arbi-

tration imposes an unwarranted regulatory chill on countries which

extends beyond the scope of the substantial obligations derived from

their IIAs.

Consider the following hypothetical example. GoldCo, a Ruritania-

based mining company, obtained mining concessions in a gold mine in

Utopia, an emerging country with only one gold mine which is

expected to increase the country’s revenues. It came to light that

GoldCo had obtained its mining rights by bribing Utopian government

off‌icials. The Utopian government withdraws GoldCo’s mining license

and prosecutes GoldCo’s off‌icials. In response, GoldCo submits an arbi-

tration claim against Utopia based on the investment-state dispute set-

tlement (ISDS) provision in the IIA concluded between Utopia and

Ruritania. GoldCo argues that Utopia initiated arbitrary measures

against it, and thereby unlawfully expropriated GoldCo’s mining rights

and violated Utopia’s obligation to provide foreign investors fair and

equitable treatment. Utopia has a strong case against GoldCo off‌icials,

and is conf‌ident it will prevail in arbitration. However, it soon realizes

that litigation costs are onerous: legal fees could reach millions of dol-

lars; the gold mine would be left undeveloped during the course of the

legal proceedings; and other foreign investors would quickly become

uneasy about the reliability of law enforcement authorities in Utopia,

and then refrain from investing in the country. In contrast, GoldCo’s

legal fees would be somewhat lower than those of Utopia, and it would

not bear any other litigation costs. Under such circumstances, if

Utopian off‌icials value the economic advantages of developing the gold

mine more than they do the rule of law, they will be inclined to settle

with GoldCo and drop the bribery allegations in order to avoid litiga-

tion costs and facilitate the development of the gold mine.

This example demonstrates that when a threatened government esti-

mates that litigation costs will exceed the value it attaches to its right to

carry out the challenged measure, it would be inclined to settle and

avoid these litigation costs, regardless of its anticipated chances of

2. Brad A. Greenberg, Copyright Trolls and Presumptively Fair Uses, 85 U. COLO. L. REV. 53, 84

(2014) (demonstrating how “copyright trolls” who enjoy legal cost advantages weaponize their

copyrights against infringers “[e]ven if the infringer has a strong fair use defense”); see also David

Orozco, Strategic Legal Bullying, 13 N.Y.U. J.L. & BUS. 137, 143 (2016) (examining methods of

“strategic legal bullying” which “asserts or frivolously defends a baseless legal position to derive

advantage by exploiting the high cost of the legal system as a barrier to seeking a remedy”).

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