November 5, 2015

TPP: rigged ISDS

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New Zealand has published the text of the Trans-Pacific Partnership (TPP).

Ongoing analysis, subject to updates:

ISDS

Investor-to-state dispute settlement (ISDS) places investment tribunals above states, above democracies. This places the development of law beyond democratic scrutiny. At a national level, parliaments can change laws that do not work out well. This is not possible at the supranational level. The transfer of power is as good as definitive: it is practically impossible to withdraw from (deep integration) trade agreements.

TPP’s investment chapter, which includes investor-to-state dispute settlement, contains
– perverse incentives,
– unfair procedural advantages for the US,
– a most favoured nation (MFN) loophole,
– limited, broken safeguards regarding intellectual property (IP) rights.

Perverse incentives

The arbitrators will be paid for each day worked (under ICSID rules at least 3000 US dollars a day). This creates perverse incentives to accept frivolous cases, let cases drag on, let the only party that can initiate cases (foreign investors) win to stimulate more cases, and to please the officials who can appoint arbitrators.

Rigged

The International Centre for Settlement of Investment Disputes (ICSID) is part of the World Bank; it is the most used ISDS forum. Under TPP, investors can choose this forum (article 9.18 (4)). The president of the World Bank has always been the candidate of the US. This president

– is ex officio chairman of the ICSID Administrative Council (article 5 ICSID),
– nominates the ICSID secretary-general (article 10 ICSID),
– appoints all three the arbitrators in annulment cases under ICSID rules (the only possible appeal, article 52 (3) ICSID); the TPP text mentions the possibility to request ICSID annulment in article 9.28 (9).

Already in 80 cases the president of the World Bank appointed all three the arbitrators. (press the search button) That is more than 10% of all known ISDS cases.

The secretary-general of ICSID
– appoints arbitrator(s) if parties fail to appoint one (TPP articles 9.18 (7) (b), 9.21 (2), 9.21 (3), 9.21 (5)),
– decides whether a request for consolidation is manifestly unfounded (TPP article 9.27 (3)),
– appoints the presiding arbitrator in consolidation (TPP article 9.27 (4)).

Executive officials who have a link with the U.S. would take important decisions. This gives the U.S. an unfair procedural advantage.

Exerting pressure

The U.S. could have lost the Loewen ISDS case. However, the U.S. won the Loewen ISDS case on a technicality.

After the Loewen ISDS case one of the tribunal members publicly conceded having met with officials of the U.S. Department of Justice (DoJ) prior to accepting his appointment. The DoJ put pressure on him.

Statistical data

A study finds that claimants from the US were 91% more likely to benefit from an expansive resolution than claimants from all other states combined. (Van Harten, 2012) The US never lost an ISDS case.

Most Favoured Nation loophole

The investment chapter contains a most favoured nation clause (article 9.5). MFN allows ISDS tribunals to import clauses from other investment treaties. Improvements in TPP would be lost through importation of clauses from older, very investor friendly treaties. The article makes an exception.

Article 9.5 (3) reads:

“For greater certainty, the treatment referred to in this Article does not encompass international dispute resolution procedures or mechanisms, such as those included in Section B.”

Article 9.5 (3) excludes procedural rules, but not substantive investment rules. Claimants will be able to import substantive rules from older, even more investor friendly investment treaties, if TPP countries ratified such treaties.

IP: limited, broken safeguards

Copyright and patent law need reform. International agreements, like the TRIPS agreement and the TPP, limit policy space. Expansive interpretation of international treaties would further limit our policy space.

The TPP investment chapter article 9.1 contains a broad definition of investment which includes (f) intellectual property rights.

The safeguards regarding IP are limited and broken. We saw above that the most favoured nation clause contains a loophole; this may undo any safeguard regarding IP.

Furthermore, safeguards regarding IP in the TPP investment chapter do not extend to the fair and equitable treatment (FET) clause (article 9.6). Foreign investors can try to use the FET clause to bypass safeguards. Other safeguards give for-profit supranational arbitrators discretion to interpret, and decide on compliance with, the TRIPS agreement.

Expropriation

Under TPP, states have to compensate not only direct expropriation, but also indirect expropriation (regulatory takings)(article 9.7). The exception comes in an annex.

Annex 9-B Expropriation gives arbitrators discretion regarding “reasonable investment-backed expectations”, “nature and extent of governmental regulation or the potential for government regulation in the relevant sector”, “non-discriminatory”, “designed and applied to protect legitimate public welfare objectives”, and “rare circumstances”. Annex 9-B Expropriation is an exception with many conditions.

Article 9.7 (5) reads:

“This Article shall not apply to the issuance of compulsory licences granted in relation to intellectual property rights in accordance with the TRIPS Agreement, or to the revocation, limitation or creation of intellectual property rights, to the extent that the issuance, revocation, limitation or creation is consistent with Chapter 18 (Intellectual Property) and the TRIPS Agreement.”

The formulation of the exception gives ISDS arbitrators discretion to interpret, and decide on compliance with, the TRIPS agreement, even though the WTO has its own (state-state) dispute settlement mechanism. This changes the dynamic, as private complainants have less restraint than states regarding policy space. And there is a difference between seeing intellectual property rights as innovation stimulants or seeing them as assets.

Other safeguards regarding IP

Other examples giving discretion to ISDS arbitrators:
– article 9.9, Performance Requirements, paragraph 3(b)(i) contains “in accordance with Article 31 of the TRIPS Agreement” and “fall within the scope of, and are consistent with, Article 39 of the TRIPS Agreement”.

Article 9.11: Non-Conforming Measures, paragraph 5 (a)(ii) refers to TRIPS article 3. Article 9.11 (5)(b) refers to articles 4 and 5 of the TRIPS agreement.

James Love: “The inclusion of intellectual property as a covered asset in the TPP investment chapter is potentially more consequential than anything in the TPP IP Chapter itself.”