Shock EU Court Decision Strikes Blow Against Investment Arbitration

With all the dreary news we've seen this week, could you stand some good news? The battle against investor-state dispute settlement (ISDS) got a huge boost in March when the Court of Justice of the European Union (CJEU) ruled in Slovak Republic v. Achmea B.V. ("Achmea") that ISDS is contrary to EU law. The decision was something of a surprise because the preliminary analysis ("opinion," in EU-speak) of Advocate General* Melchior Wathelet had suggested that the CJEU rule that ISDS is consistent with EU law.

As you may recall from the Trans-Pacific Partnership negotiations, ISDS is private arbitration of investment disputes between governments and foreign investors. Completely untethered from precedent and with no appeal, arbiters decide if a government has "expropriated" an investment, complied with its duties under a bilateral investment treaty (BIT) or "trade agreement" such as NAFTA, while these establishing mechanisms place no requirements on the investor. The imbalance of requirements under ISDS as well as its actual procedures present numerous opportunities for corporate abuse and, as Professor Susan Sell laid out in her guest post here in 2015, there is no shortage of examples of such abuse.

In Achmea, the Dutch insurer Achmea B.V. took the Slovak government to arbitration under the Dutch-Slovak bilateral investment treaty after the government decided to reverse liberalization of its health care system, ultimately deciding to create a single national health insurance program. The arbitrators ruled in favor of Achmea and awarded € 22.1 million to the company Three other cases were filed against the Slovak Republic's action, including a second case from Achmea B.V. (Achmea II), but their respective tribunals all ruled they did not have jurisdiction. In Achmea, the government sought annulment of the award first from the Higher Regional Court of Frankfurt, which ruled against it, and then from the German Federal Court of Justice, which referred the case to the CJEU for a ruling on the relevant EU law (this is standard procedure in EU law).


A number of EU Member States, as well as the European Commission, filed briefs in this case. According to Reuters, "The Czech Republic, Estonia, Greece, Spain, Italy, Cyprus, Latvia, Hungary, Poland, Romania and the European Commission submitted observations in support of Slovakia’s arguments.Germany, France, the Netherlands, Austria and Finland contended that such clauses were valid."

The CJEU ruled, contrary to the Advocate General's opinion, that ISDS tribunals are not part of the EU legal system, not national courts, and yet might be called on to apply EU law. Moreover, since no appeal is possible, there is nothing to ensure that EU law is applied properly by these tribunals. Given that EU law supersedes all national law, ISDS threatens to undermine the autonomy of EU law. Therefore, the Court ruled that ISDS is not compatible with EU law.

In the first instance, this ruling applies to bilateral investment treaties between two EU Member States. These BITs all involve former Communist states that started becoming EU members only in 2004. As Lucia Bizikova noted on the Kluwer Arbitration blog, all these new Member States signed BITs immediately after the fall of Communism, and the requirements placed on them were much more demanding than under EU investment law. As she puts it, Achmea is "finally bringing justice to the most recent members of the EU." There are at present 196 intra-EU BITs, and ISDS has now been knocked out of all of them.

Moreover, the ruling may well affect ISDS that was contemplated in treaties between the EU and other countries, such as the Comprehensive Economic and Trade Agreement with Canada. As the authors state, this fits with European Commission action against intra-EU BITs. As Bizikova points out, one prominent example of the Commission's view on this is the Micula case, in which the Commission essentially forbade Romania from paying the  arbitral award, by finding that to do so would be to give an illegal state aid.

In the wake of the ruling, the Dutch government (paywalled; I was able to read the first two sentences) announced in May that it would terminate its bilateral investment treaties with other EU Member States. Presumably, without an enforcement mechanism, there was no point to maintaining the agreements.

Of course, one swallow does not bring a spring and all that, but having a such a landmark decision in the world's second-largest economic entity after China is something to celebrate.

You hadn't heard this news, you say? Despite happening over three months ago, the reporting is restricted almost exclusively to legal and arbitration blogs, almost all European, with nary a peep from the mass media. According to my searches of their websites, there was nothing at the NYT, CNN, the Washington Post, the BBC (!), the Financial Times (!!), Associated Press, and other sources. The only major news source I am sure picked it up is Reuters (European, of course). Let's hope a few more people hear about it now.



* In the CJEU, one Advocate General may be assigned to a case to write a preliminary analysis after the Court concludes oral arguments. The CJEU has a total of 11 Advocates General as well as 28 Justices, one from each Member State. The Advocate General's Opinion is often adopted by the Court, but there is no requirement that it do so.

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.