Will the U.S. keep winning indefinitely? ISDS, that is

Now that Congress has given the President fast-track Trade Promotion Authority, the first agreement to be considered under these rules (no amendments allowed, up or down vote in 90 days) will be the Trans-Pacific Partnership (TPP). As you know from previous columns, one of the most worrying aspects of the TPP is its expansion of investor-state dispute settlement (ISDS), wherein private firms can bring their disputes with governments not to courts, but to international arbitration (usually through units of the World Bank or the United Nations), where legal precedent doesn't matter and appeal is all but non-existent. Moreover, as the Consumers Union has long argued (recent example here), arbitration has a well-known pro-business bias. That's why so many of your agreements with cable TV providers, financial services companies, and many more have fine print requiring mandatory arbitration, keeping you from getting your day in court if something goes wrong.

The response from the U.S. Trade Representative's (USTR) office has been, "Not to worry! The United States has never lost an ISDS case." The linked document goes on to claim that worldwide, only 1/4 of corporate plaintiffs have won cases against governments. But a new analysis by the International Institute for Sustainable Development (IISD),* using the same data source the USTR cites, comes to a very different conclusion based on its most recent update, the 2015 World Investment Report from the United Nations Conference on Trade and Development (UNCTAD). Moreover, we can see that countries with even more trustworthy court systems than that in the U.S. have lost ISDS cases. The Rule of Law Project, an initiative of the American Bar Association, has ranked 102 countries on the administration of justice and freedom from corruption, and puts the United States at #19 with a score of 0.73. Yet #14 Canada (0.78) has already lost ISDS cases, and both Canada and #10 Australia (0.80) are currently on the hook for major new cases (Eli Lilly and Philip Morris, respectively), that would overrule decisions by the countries' respective Supreme Courts. So, even if governments have only lost 25% of ISDS cases, it's unlikely U.S. luck will hold out indefinitely, if countries with better court systems are losing.

But it's worse than that. UNCTAD's database of known ISDS cases and their outcomes shows that in all cases decided through the end of 2014, the investor won 27% of the cases compared to 36% won by the state (see Figure III.10, p. 116). But another 26% of the cases are listed as "settled," which often (but not always) means the respondent agrees to make some payment to the plaintiff to keep the case from going to arbitration. Public Citizen has a list of ISDS cases under prior U.S. trade agreements with examples of settlements that do and do not contain payments (see, for instance, NAFTA cases against Canada).

Moreover, as IISD attorney Howard Mann argues, if we separate out cases between jurisdictional determinations and determinations on the merits of the case, things look even worse for states. While only 71 of 255 cases (this excludes the "settled" cases) were concluded by a decision of the tribunal having no jurisdiction, Mann points out that all 255 cases effectively had decisions on jurisdiction, i.e., cases with final decisions had to have rulings that the arbitrators had jurisdiction. In that case, Mann says, "Investors, therefore, have won 72 per cent [184/255] of jurisdictional determinations." And of the decisions on the merits of the cases, investors won 111, or 60%, of the remaining 184 cases. This calculation suggests that states are losing ISDS disputes at a much higher rate than normally portrayed. As if that's not bad enough, the new World Investment Report finds that in 2014, of the 15 ISDS cases decided on their merits, states lost 10 (2/3) of them. In 2013, it was even worse for states, with investors winning 7 of the 8 cases decided that year (p. 126). If these higher proportions continue, obviously the proportion of investor victories will increase beyond the current 60% total.

Bottom line: The threat to regulation, democracy, and the rule of law posed by investor-state dispute settlement is very real. The U.S. Trade Rep's  reassurances that the U.S. has never lost in ISDS don't even make it likely that will continue into the future. We need to pressure Congress to vote down the TPP when negotiations conclude.


* Important disclosure: I have consulted for IISD several times since 2007 on investment incentive issues.

Cross-posted at Angry Bear.

TPP blocked, at least for now

Breaking news: The United States Senate failed to end a filibuster on giving the President fast-track negotiating authority for the Trans-Pacific Partnership (TPP), the Transatlantic Trade and Investment Partnership (TTIP), and any future deals for a six-year period.

According to The New York Times, the bill failed with only a 52-45 majority for it, when 60 votes were needed to end the filibuster. The biggest complaint among swing Democrats was that the TPP does not have enforceable provisions against currency manipulation -- such as practiced by China which, though not currently involved in the negotiations, would seem like a logical future party to the agreement. The Times reported that Japan and Malaysia are both opposed to this provision.

For the time being, then, we are spared an expansion of investor-state dispute settlement and further unnecessarily strong protections for intellectual property (patents, trademarks, copyright, etc.). Unfortunately, if the proponents of the measure can reach a compromise with a group of eight Democrats (including Ron Wyden of Oregon) on enforcement measures, then they would have the 60 votes they need.

Wikileaks Releases Trans-Pacific Partnership Investment Chapter

Via Daily Kos, we learn that Wikileaks has released the investment chapter of the Trans-Pacific Partnership (TPP). This is a critical chapter, as it was in the North American Free Trade Agreement (NAFTA), because it establishes investor-state dispute settlement (ISDS) mechanisms.

Despite its neutral-sounding name, ISDS is actually a radical concept. Instead of using the courts to settle disputes, which have appeals procedures and build up case law via precedent, ISDS allows companies to take governments to arbitration, where neither precedent nor appeals exist.

Susan Sell gave several examples of ISDS in her guest post in February, which illustrate the dangers well. Eli Lilly had two of its pharmaceutical patents invalidated in Canada; the company appealed both of these decisions to the Canadian Supreme Court, and lost both times. Then the company turned to investor-state dispute settlement under NAFTA to receive $500 million in compensation for the Supreme Court decisions. That case is still ongoing.

In an example also noted by Wikileaks, Sell points out that U.S. tobacco maker is using ISDS against Australia because the country mandated plain packaging on cigarettes to make them look less attractive. This should not be possible, because the U.S.-Australia Free Trade Agreement does not include investor-state dispute settlement provisions. Instead, the company is using a subsidiary in Hong Kong, which has a free trade agreement with Australia that does include ISDS, to bring the complaint. Indeed, the government alleges that Philip Morris Asia bought the Australian subsidiary, already owned by the parent company, so that it could bring this complaint.

Unsurprisingly, Australia is opposed to including ISDS in the TPP agreement, and in the current draft has excluded itself completely from ISDS. However, the draft also shows that Australia might end its objection "subject to certain conditions." Since the negotiation is being conducted in strict secrecy, there is no way to find out what those conditions might be, unless someone leaks them to the press.

The Obama administration continues to seek "fast track" negotiating authority from Congress for the TPP. This would allow the agreement to be voted on only as negotiated, with no amendments allowed. Note that this also means that the TPP would be incorporated as a U.S. law rather than as a treaty. As a law, it only needs a majority in both Houses of Congress. If it were to be offered for approval as a treaty, it would need a 2/3 majority in the Senate, with no House vote. Both NAFTA and the World Trade Organization agreements were passed as laws rather than treaties.

Don't forget that ISDS is also on the negotiating table in the Transatlantic Trade and Investment Partnership (TTIP) with the European Union. ISDS is also under fire in the European Union. In an ironic twist of events, the European Commission, a supporter of ISDS (h/t Washington Post) so far in the negotiations, has ruled in a state aid case involving Romania that paying an ISDS award (Micula v. Romania) to a company whose subsidies were terminated due to EU law, would itself be an illegal state aid! The Commission's effort to effectively nullify the decision (further irony: brought under the Sweden-Romania bilateral investment treaty, so both EU members) is not sitting well with proponents of ISDS. Too bad!

If we're lucky, the combined opposition of Germany, a large part of the EU public, some parts of the European Commission, and a growing portion of the U.S. public will kill off ISDS in the TTIP. We need to make sure it disappears from the TPP as well, even if that means rejecting the TPP. And we may well want to reject the TPP anyway over its provisions on medicines and other intellectual property issues.

Cross-posted at Angry Bear.

Secretive TPP threatens health, regulation, and democracy

I'm pleased today to have a guest post from Professor Susan K. Sell, one of the leading authorities on the incorporation of intellectual property rights into trade negotiations.

The Obama administration currently is pressing Congress for Trade Promotion Authority (“Fast Track”) to help it conclude the Trans-Pacific Partnership (TPP) negotiations. The President sees TPP as a central pillar in his “pivot to Asia”.  However, both the process and the substance of TPP are badly flawed and the office of the United States Trade Representative (USTR) needs to be more accountable to the American people.

The TPP negotiations are five years old yet the only substantive information citizens have gotten about them has come from Wikileaks.  Provisions in the TPP will have far reaching effects on public health, labor, the environment, data privacy, and Internet use.  Congress and the public have been shut out, and the USTR has relied on its 600 or so “cleared advisors” that represent global corporations.  The USTR has insisted upon utmost secrecy, and a look at the chapters on intellectual property and investor-state dispute settlement raise alarm bells that the public needs to be aware of.   It is likely that the USTR knows that if it released the texts that the public would reject the agreement. If TPP is so good for Americans why not let them know what is in it?

The USTR touts the TPP as a trade agreement for the 21^st century, but it is less about trade and more about regulatory harmonization.  The chapter on intellectual property aims to increase intellectual property protection far beyond what is required in the Agreement on Trade-Related Intellectual Property (TRIPs) in the World Trade Organization. The plurilateral forum is the US’s way of getting what it knows it would be unable to achieve in a more transparent multilateral venue.  Ironically, Obama’s signature legacy – the Affordable Care Act to reduce the costs of medical care – directly will be threatened by the TPP. Health care costs will sharply increase if the intellectual property provisions of TPP go through. Big Pharma and medical device makers have played a significant role of crafting the provisions which include: making surgical and diagnostic procedures patentable; requiring states to get patent owners’ consent before approving generic drugs for market; limiting parallel importation; requiring that pharmaceutical companies be involved in domestic drug pricing decisions; limiting compulsory licensing; incorporating 12 year terms of data exclusivity for biologic drugs; and seizing trans-shipments of drugs. Other provisions would permit patentability for second uses of known drugs, and for reformulations of drugs that do not enhance therapeutic efficacy (e.g., tablet to a gel cap).  The end result will be to increase the costs of medical care and reduce access to a more affordable alternative. USTR’s “cleared advisors” will gain the rents that they seek.

While the intellectual property chapter aims for upward regulatory harmonization (at the expense of public health), the Investor-State Dispute settlement provisions aim for downward regulatory harmonization. Investor-State Dispute Settlement provisions give private investors the right to sue governments directly for regulatory changes that reduce the expected value of the investment. ISDS bypasses domestic courts and a tribunal of three private lawyers decides cases. There is no right to appeal ISDS rulings.

Several well known ISDS cases highlight the dangers these provisions pose to sovereignty, democracy, and public health. Under ISDS in NAFTA, pharmaceutical giant Eli Lilly is suing the Canadian government for $500 million. Canadian law features a policy of post-grant opposition under which a party can challenge a patent that the state has granted. Under this mechanism the Federal Court of Canada invalidated patents on two Eli Lilly drugs, ruling that they did not meet the criterion of patentability. Eli Lilly appealed this ruling all the way up to the Supreme Court of Canada and lost on both appeals. Now the company is using the ISDS channel to override the Canadian Supreme Court and secure a taxpayer payout of $500 million.

This important case is a bellwether; if Eli Lilly is successful then it will spread and embolden foreign investors aggressively to challenge and trump domestic public health laws. Under ISDS clauses in bilateral agreements, Philip Morris is suing Uruguay and Australia for their public policy efforts to curb tobacco use such as plain packaging of cigarettes. The firm is demanding compensation for these countries’ efforts to regulate its lethal products. Under ISDS foreign investors can sue over labor policies such as increasing minimum wages, and environmental policies such as fracking bans if such regulatory changes reduce the expected value of their investments.

President Obama will need Trade Promotion Authority to finalize the TPP. Some in Congress oppose it. Populist politicians like Senator Elizabeth Warren decry the special access that members of Wall Street and global corporations have had to the process while democratically elected representatives, citizens, and consumers have been shut out. On the right, Tea Party conservatives object to Obama’s Executive branch overreach.  Congress should reject Trade Promotion Authority and make USTR accountable to citizens and elected representatives through good transparency policies. USTR must not be allowed to negotiate in secrecy and appear to be thoroughly captured by the so-called 1%. Congress should not trade away our democracy.

Susan K. Sell is Professor of Political Science and International Affairs at George Washington University.  She is author of Private Power, Public Law: the Globalization of Intellectual Property Rights, and co-editor of Who Governs the Globe?