Argument

In Pro-Corporate Tribunals We Trust

Is Obama's signature trade deal giving away the United States' right to protect its citizens?

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In 2011, Australia passed a tobacco-control law to discourage smoking. It required cigarettes to be sold in plain packages with prominent warnings, with brand information relegated to the bottom of the box. Touted as “one of the most momentous public health measures in Australia’s history” by the country’s health minister, the law was meant to deter a habit that will ultimately kill 1.8 million current Australian smokers, according to a recent study. After the country’s highest court upheld the constitutionality of the anti-smoking law, tobacco giant Philip Morris claimed that it violated the company’s corporate rights and launched a suit using a little-known provision called investor-state dispute settlement (ISDS). The case is pending, as is a similar case against Uruguay. A similar tobacco-control measure in New Zealand is on hold pending the outcome of these cases.

How can this happen? In each case, Philip Morris is empowered to sue because of investment treaties. Many treaties and trade agreements enshrine the rights of corporations to claim that a country’s right to regulate public health interferes with profits and to sue states to protect them. And the cases, heard in special tribunals, often protect corporate profits at the expense of the health and welfare of citizens.

What’s happening in these cases should serve as a cautionary tale for Americans, as President Barack Obama’s administration pushes through the final stages of negotiating the Trans-Pacific Partnership (TPP). The signature trade deal would open the United States to more suits just like these. Although the deal is being sold as a trade equalizer that would benefit U.S. citizens and companies, it could instead make it more difficult and more costly for the United States to protect its own people.

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The ISDS system is not new — arbitration boards started appearing in the 1960s — but the tobacco cases represent a growing trend. More than 50 ISDS cases were brought each year between 2011 and 2013; this annual figure exceeds the total for the first three decades in which the mechanisms were available. Foreign investors — typically multinational corporations — that claim their investments were compromised by government policies have won massive sums. In pacts with ISDS language similar to that in the TPP, tribunals have collectively awarded $3.6 billion to foreign investors. Another $38 billion in claims are pending.

Currently, about 3,000 international agreements grant foreign investors the right to sue governments. Of these, 2,700 are bilateral investment treaties; the remainder are the free trade agreements that have proliferated in the last two decades.

Critics like Global Trade Watch, a division of Public Citizen, a consumer advocacy organization, say the ISDS system is anti-democratic. Sen. Elizabeth Warren (D-Mass.) called for the ISDS language to be stripped out of the deal, writing in the Washington Post in February, “If a final TPP agreement includes Investor-State Dispute Settlement, the only winners will be multinational corporations.” The problem is that the ISDS system lacks many procedural safeguards fundamental to the rule of law. The tribunals, run by the World Bank and the United Nations, are three-judge panels composed of highly paid private lawyers picked from a limited pool by states and corporations; individual lawyers can switch between serving as judges and advocates on behalf of corporations in different cases. And there is no comprehensive code of judicial conduct guiding the panelists on matters such as conflicts of interest.

Although the panels adjudicate disputes worth millions or even billions of dollars, they are not accountable to any elected body. Moreover, there is no system of precedent binding judges to an established body of decision-making, making it difficult for the parties to discern the applicable standards and their likelihood of success. And finally, there are no appeals, either within the ISDS system or externally, on the merits of decisions. An annulment is only possible for limited procedural errors, and those proceedings are heard before a different panel drawn from the same pool of professionals.

Under the system, states are deprived of the right to resolve these disputes since corporations can proceed directly to the tribunals without exhausting domestic remedies. But this privilege is not reciprocal: Corporations are not subject to suit in the tribunals by those harmed by their actions. Foreign companies are thus granted expanded rights without corresponding responsibilities.

The TPP, the first free trade agreement negotiated under the Obama administration, would dramatically expand the number of corporations empowered to bring suits against the United States. The global trade pact includes 11 Latin American and Asia-Pacific countries — Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam — that together with the United States account for 40 percent of global GDP. And though few ISDS cases have been filed against the United States — and so far none of the companies has prevailed — the TPP would expand potential U.S. liability to an additional 9,000 companies operating in the United States, many of which hail from developed countries and are more able to pursue claims because they command considerable resources, political will, and market share.

“[T]he TPP would give multinational corporations extraordinary new powers that undermine our sovereignty, expose U.S. taxpayers to billions in new liability and privilege foreign firms operating here with special rights not available to U.S. firms under U.S. law,” said Lori Wallach, director of Public Citizen’s Global Trade Watch, in a March press release. Although the TPP negotiations have been secret, in late March WikiLeaks and the New York Times leaked the investment chapter, which outlines the pact’s ISDS. (The document notes that it is not to be declassified until either four years after entry into force or the conclusion of negotiations.) If the TPP passes as written, it would allow foreign investors to circumvent domestic courts and challenge environmental, health, and safety laws and regulations before a tribunal of private lawyers. Unsurprisingly, the advisors invited to the table to help shape the TPP almost exclusively represent corporate interests.

In effect, corporations would have the same rights as states to challenge the laws of other countries. Under the current language, corporations would be granted broad powers to sue. For example, foreign investors could bring a suit if nations “expropriate or nationalize a covered investment either directly or indirectly.” Indirect appropriation could occur if states engaged in conduct that “interfere[d] with distinct, reasonable investment-backed expectations.” That could preclude governments from changing any policies once companies have invested under a prior set of regulatory expectations. So the United States could be brought before the tribunals when corporations claim that new laws intended to protect the health, environment, and welfare of citizens infringe on their future profits.

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Trade agreements promote the notion of “national treatment” — the principle that foreign and domestic investors will be treated equally. But under the ISDS system, foreign companies are granted not merely equal but in fact greater rights. Domestic and foreign companies have the same access to the U.S. legal system, but only the latter have access to the tribunal.

Developing countries, such as El Salvador, have often been the targets of ISDS cases. In 2009, Pacific Rim, a mining company, sued El Salvador when the country refused to issue an extraction license that the entity claimed it was entitled to after it invested in exploration for the El Dorado mine in Cabañas. With broad community opposition to the mine, El Salvador defended its refusal, claiming it was necessary to protect the country’s already fragile water supply. (El Salvador has been described as “the most water-stressed country in Central America.”) The government further argued that Pacific Rim did not satisfy the requirements for issuance of a permit because it lacked title to much of the land on which it proposed to mine, had not secured the required environmental authorizations, and had failed to submit a final feasibility study. Pacific Rim, later bought by the Canadian-Australian firm OceanaGold in November 2013, is now seeking more than $300 million in damages from an ISDS tribunal — almost 2 percent of El Salvador’s GDP.

But it is not just developing countries that are at risk. In the late 1990s, Canada settled with the Ethyl Corporation after the company sued the government for banning a gasoline additive that state officials feared would damage public health. Canada reversed the ban and paid $13 million in damages to the company.

The ISDS protections originated in part to encourage investment in countries with weak democratic institutions by minimizing the risk that states would appropriate corporations’ property without fair compensation. But the current iteration of investor protections is far broader than the protection of land and physical property. The categories of covered investments can include, as stated in the draft TPP chapter, “every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment,” such as intellectual property rights, stocks and derivatives, licenses, authorizations, and permits. Multinational corporations do not need this enhanced protection — they are quite capable of assessing and absorbing the risks that typically accompany profit-seeking abroad.

Despite how it is being billed, the TPP wouldn’t be confined to countries that are parties to the treaty, as companies from non-participant states could circumvent the pact’s jurisdictional limitations by using subsidiary companies to sue. Although the “denial of benefits” provision, which would allow governments to deny investor rights to parties from non-signatory countries, is intended to protect against this, similar clauses in other pacts have not closed this loophole. In the Philip Morris case, Australia alleges that the Hong Kong subsidiary purchased shares in an Australian holding company just as the packaging restrictions were made public, evincing the clear intent to bypass jurisdictional restrictions.

The Obama administration claims it has corrected flaws contained in previous ISDS mechanisms, including by inserting provisions in the TPP text ensuring greater transparency: Tribunals would be open to the public, for instance; documents would be available online; and outside parties could file amicus briefs. But these modest measures hardly remedy the structural flaws inherent in ISDS systems. And rather than holding its ground on safeguards, the administration has apparently retreated from some protections included in a leaked 2012 draft.

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As Wallach argues, “By definition, only multinational corporations could benefit from this parallel legal system, which empowers them to skirt domestic courts and laws.” The ISDS system enhances corporate power at a time when corporate accountability is increasingly elusive in the United States. The U.S. Supreme Court’s 2013 Kiobel decision limited the extraterritorial application of the Alien Tort Statute — a key law for victims of human rights abuses — and narrowed opportunities for those harmed by corporate misconduct abroad to bring suit. There are currently no enforceable mechanisms at the international level for those harmed by multinational corporations to seek redress. Efforts to implement a treaty on business and human rights are underway, but they are hotly contested.

As Obama himself said when he was campaigning for president in 2007, “Our trade agreements should not just be good for Wall Street. It should also be good for Main Street.” But Main Street is better off when its elected representatives are free to set policies to protect the well-being of citizens and communities — without the threat of corporate meddling.

Photo credit: Joe Raedle/Getty Images

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