On 3 December 2013, the Dutch Parliament requested the government to investigate the potential social and environmental risks and the consequences of investor-to-state dispute settlement (ISDS) and the consequences of ISDS for the Netherlands and the financial risks for the Dutch government.
On 17 April 2014 companies and civil society organisations met at the Ministry of Foreign Affairs to discuss the ongoing “ISDS – TTIP study”. The ministry invited participants to send in further comments. The Foundation for a Free Information Infrastructure (FFII) submitted the note “ISDS threatens privacy and reform of copyright and patent law”.
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This note concludes that the EU commission’s timid reform proposals would create an ISDS system that is wide open for abuse and fundamentally incompatible with Europe’s human rights system. Given ISDS’s inherent design flaws which threaten democracy and human rights and can only be solved by abolishing the system, there are imperative reasons for the EU to exclude ISDS from its trade and investment agreements. In doing so, the EU would give direction to the debate and create room to strengthen alternatives. As a next step states should withdraw from ISDS agreements, mutual withdrawal is preferable. As the birthplace of democracy Europe has to take its responsibility.
ISDS gives multinationals the right to sue states before special tribunals if changes in law may lead to lower profits than expected. Multinationals can challenge reform of copyright and patent law, challenge environmental and health policies. For an introduction see Stiglitz (2013) or Vrijschrift (2014).
This note is divided into three sections. The first section analyses the system’s design flaws. It argues that ISDS has four inherent design flaws which can only be solved by abolishing the system: ISDS gives companies equal standing to states, unequal standing creates pressure on human rights, ISDS places specialised investment panels above general supreme courts, and the system lacks a legislative feedback loop.
Further, the section notes that the inherent design flaws are aggravated by non-inherent design flaws: the tribunals are not courts, the arbitrators are not judges, there is no tenure, there is a lack of openness and there is a strong perverse incentive. It concludes that the 2013 UNCTAD investment report shows that these flaws can be solved but that this would require a complete overhaul of the current regime through the coordinated action of a large number of states, an overhaul which is not foreseeable. The section also notes that ISDS is vulnerable to outside pressure. An argument for inclusion of ISDS in TTIP is that if ISDS is not in TTIP, China may object to having ISDS in its trade agreement with the EU. But the vulnerability to outside pressure defeats the sense of including it in trade agreements. The section raises the question whether China will be able to pressure arbitrators.
The second section discusses the EU commission’s reform proposals, which it presents in its consultation. The commission reforms both substantive investment protection provisions and procedural (ISDS) rules. Regarding substantive investment protection provisions, it concludes that the commission’s proposal contains a very broad definition of investment. Contrary to commission statements, the known Most Favoured Nation loophole still exists. Companies will not only be able to use the substantive investment protection provisions in TTIP, but they can cherry-pick from any other investment agreement the EU or EU member state signed. The text creates supreme investors rights which trump human rights. There is no general exception that safeguards the right to regulate. Specific limitations to safeguard the right to regulate are limited and do not solve the kind of uncertainty the EU is trying to avoid.
ISDS tribunals would apply these substantive investment protection provisions. The section concludes that the commission fails to identify the ISDS system’s inherent design flaws, noted in the first section. Non-inherent design flaws could be solved but this would require a complete overhaul of the current regime through the coordinated action of a large number of states. The commission limits itself to some minor adjustments: better transparency, limitation to post establishment and avoidance of multiple parallel proceedings. The commission can not solve the inherent design flaws and additionally does not solve these issues: ISDS tribunals are not courts, the arbitrators are not judges, there is no tenure, the strong perverse incentive, frivolous claims, the growing number of ISDS claims, lack of independence and impartiality of arbitrators, arbitrary decisions and the vulnerability of the system to outside pressure. The section concludes that the commission’s timid reform proposals would create a system that is wide open for abuse.
The third section argues that the commission’s ISDS proposals are fundamentally incompatible with Europe’s human rights system. It concludes that ISDS threatens our privacy and reform of copyright and patent law. It further argues that ISDS creates a higher chance on compromising the stability and integrity of the financial system. The filter mechanism proposed by the commission has a very limited scope, is dependent on other parties, doesn’t help against the chilling effect of threats and even creates a perverse incentive. This section also argues there is a lack of necessity for ISDS.