This Article examines the "right to regulate" as the power of a sovereign state to adopt and maintain government measures for public welfare objectives. It explores how claims by foreign investors in investor-state dispute settlement (ISDS) may interfere with the state's ability to regulate, and how the state can protect its right in international investment agreements. The Article first explains the structure of modern international investment law and dispute resolution. It next turns to the right to regulate and explores why regulatory disputes represent a major challenge for ISDS. It continues by analyzing how exceptions, exclusions, and other safeguard provisions can be used in investment treaties to protect the right to regulate. It then critically examines the tobacco carve-out and other safeguard provisions of the Trans-Pacific Partnership (TPP) Agreement as to their ability to protect the right to regulate. Finally, the Article explores alternative solutions to the challenges of ISDS. It concludes by arguing that regulatory disputes are best resolved through a hybrid system of dispute resolution that is amenable to both private interests and public policy considerations.
TABLE OF CONTENTS I. INTRODUCTION II. MODERN INTERNATIONAL INVESTMENT LAW AND DISPUTE RESOLUTION A. The Network of International Investment Agreements B. The Nature and Criticism of the ISDS Regime III. REGULATORY DISPUTES IN INVESTOR-STATE ARBITRATION A. The Right to Regulate in International Investment Law B. Regulatory Disputes as the Challenge for ISDS IV. RESPONDING TO ISDS CHALLENGES A. Procedural and Structural Initiatives B. Safeguards to Preserve the Right to Regulate 1. Exceptions 2. Exclusions 3. Non-Precluded Measures C. The TPP Tobacco Carve-Out 1. Analyzing the Treaty Provisions 2. The Tobacco Carve-Out as Part of the Global Reform of ISDS D. Seeking Alternative Solutions V. CONCLUSION I. INTRODUCTION
The reputation of investor-state dispute settlement (ISDS) has suffered a heavy blow in recent years. Ever since Australia and Uruguay had to defend their tobacco plain-packaging legislation in investor-state arbitrations against multinational tobacco company Philip Morris International, Inc., (1) it became clear that foreign investors can use ISDS to challenge government measures adopted for legitimate public welfare objectives. Outraged over the dispute with Philip Morris, the Australian government vowed that it would no longer include ISDS in its international investment agreements (IIAs). (2) And with Australia present at the negotiating table of the Trans-Pacific Partnership (TPP) (3) Agreement, the inclusion of ISDS in the TPP was first called into question. (4) However, by February 2016, with a new federal government in power, Australia consented to ISDS and signed the TPP together with eleven other Asia-Pacific nations. (5) Yet, outside of the Asia-Pacific Region, the debate about the costs and benefits of investor-state arbitration continued with renewed vigor as part of the Transatlantic Trade and Investment Partnership (TTIP) (6) negotiations. This time ISDS threatened to undermine the treaty as a whole, as partners across the Atlantic are sharply divided on the merits of the ISDS regime. (7)
The critics of ISDS have long pointed to the lack of transparency, consistency, and overall legitimacy in the ISDS process, where private arbitrators are called upon to decide multi-million dollar claims against sovereign states. The opponents of investment treaty arbitration further allege that, through ISDS, foreign investors--most commonly multinational corporations--interfere with a government's ability to regulate in the public interest. (8) This includes protection of public health, public policy, safety, and the environment. The crusade against ISDS is now supported by evidence from recent investor-state arbitrations challenging government regulation, notably, in the nuclear energy sector in Germany, as part of the nuclear power phase-out program, (9) and in the renewable energy sector in Bulgaria, the Czech Republic, Italy, and Spain as a response to regulatory changes in their solar energy incentive programs. (10)
The supporters of ISDS defend the system by arguing that the ability to submit a claim directly to investor-state arbitration under an investment treaty remains an important factor for private investors seeking to invest abroad. (11) And so, while the debate on the future of investor-state arbitration continues, it is clear that, for ISDS to survive, it has to respond to the most vocal objections regarding the lack of transparency, legitimacy, public accountability, and consistency in investment arbitration awards.
Regulatory disputes bring an additional layer to the discussion of the long-overdue reform of ISDS. Disputes of this type involve challenges by foreign investors to government measures of general application, such as laws, regulations, or executive acts. (12) Regulatory disputes are particularly controversial because they allow foreign investors to challenge legitimate government measures in front of international arbitral tribunals. (13) The concern is that international investment agreements and the ISDS regime have empowered foreign corporations to interfere with a state's ability to regulate for the benefit of the public at large. (14) In doing so, they have also placed the defending state at the mercy of private arbitral tribunals that are often too far removed from such states to properly consider the public policy implications of the challenged government measure. (15) Furthermore, regulatory disputes may have a chilling effect on regulation worldwide, as the fear of ISDS may prompt governments to refrain from adopting a regulatory measure. (16) This growing dissatisfaction with ISDS has led some countries to cancel or revise their bilateral investment treaties (BITs); (17) Bolivia, Ecuador, and Venezuela even went so far as to denounce the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (18) that established the International Centre for Settlement of Investment Disputes (ICSID).
Responding to these concerns, governments and the international legal community introduced several procedural and structural changes to ISDS. In the last five years, through the United Nations Commission on International Trade Law (UNCITRAL), they developed the Rules on Transparency, (19) amended the UNCITRAL Arbitration Rules, (20) and adopted the United Nations Convention on Transparency (21)--all for treaty-based investor-state arbitration. In their IIAs, states also began incorporating provisions regarding arbitrators' qualifications and experience, (22) ethics rules, (23) and codes of conduct for arbitrators. (24) On a broader scale, to address the apparent legitimacy crisis in investment treaty arbitration. (25) the European Commission took the lead in proposing structural changes to ISDS. Most radically, it now proposes to replace ISDS with a permanent two-tier system of international investment courts. (26) The free trade agreements (FTAs) of the European Union with Canada (27) and Vietnam (28) are the first examples of treaties that contain provisions for such an investment court system instead of traditional ISDS.
In addition, to protect their regulatory space and limit exposure to regulatory disputes in ISDS, states have turned to more careful treaty drafting. First, they seek to limit potential ISDS claims by revoking or clarifying the scope of investor protection obligations under IIAs. Second, they seek to secure for themselves in the IIA regime the regulatory space for domestic policymaking. To do so, state parties increasingly incorporate into the treaty text a reference to the right to regulate as a rationale for various exceptions and exclusions, non-precluded measures, and deviations from investor protection obligations. In ISDS, these provisions give an arbitral tribunal a legal avenue to consider and weigh a state's regulatory interests against the rights of foreign investors. And third, sovereign states continue to look for new ways to limit the jurisdiction of arbitral tribunals over regulatory disputes. The tobacco carve-out of the TPP (29) provides the most innovative solution to the jurisdictional puzzle yet. This unique provision--a breakthrough by some accounts (30)--gives a state party to the TPP the option to revoke the benefits of ISDS with respect to claims challenging a state's tobacco control measures.
But can the tobacco carve-out strike the long-sought balance between the state's regulatory interests and investor protection rights, ensuring that a state can freely regulate? It is highly unlikely. The tobacco carve-out on its own does not reserve for the state the right to regulate the production, marketing, use, or consumption of tobacco. It only seeks to ensure that a state can avoid ISDS on a case-by-case basis with respect to claims challenging its tobacco control measures. Consequently, the tobacco carve-out does not remove substantive investor protection obligations, but simply eliminates one of the forums for investment treaty claims. To ensure that a state can freely regulate in view of its investor protection obligations, an alternative solution is needed.
At the heart of the regulatory disputes problem is the tension between the public and private interests and the question of setting priorities between the rights of sovereign states and those of foreign investors. The borderline between these priorities has shifted over the years. At the birth of trade liberalization and investment agreements in the second half of the twentieth century, governments were willing to compromise on their sovereignty in hopes of promoting trade, attracting foreign investments, and driving economic development. Once their economic and development priorities changed, however, states began revising and rebalancing their...