THE BLOG

No Fast Track for Unfair Trade Deals

06/11/2015 12:42 pm ET | Updated Jun 11, 2016
STR via Getty Images

This week, the House of Representatives faces a critical question: Should it endorse "fast track" approval of trade deals negotiated by the president? A massive new trade agreement -- the Trans-Pacific Partnership ("TPP") -- hangs in the balance. The agreement is shrouded in secrecy because under national security provisions, its text is classified. We do know that the agreement will be between the US and eleven other countries. From draft chapters released on WikiLeaks, we also know enough to want to slow down -- not to speed up -- deliberation on the treaty.

According to the leaks, a key aspect of the TPP will be the provision of "investor-state dispute settlement" (ISDS). The name sounds innocuous, but its content puts at risk core elements of the American legal system -- America's commitment to open courts and equal treatment.

Domestic investors, along with ordinary people, bring claims to court when they believe that they have been harmed by government action. But under the ISDS provisions, thousands of foreign companies would gain the right to opt-out of the public court system and instead to use private, ad hoc arbitral tribunals to challenge any number of US laws that the companies argue harms their profitability.

The current proposed TPP did not invent the ISDS system. Based on the track record so far, it appears that when foreign investors use the alternative ISDS process rather than regular courts, taxpayers and government regulation are often the losers. There are several reasons to object to the extension of ISDS into this new proposed trade agreement -- which, if approved, would give an even larger pool of foreign investors the right to opt out of normal courts.

Thus far, several companies have succeeded through ISDS processes in winning multi-million dollar claims against countries and in pressuring governments to cut back on health and environmental regulations. Under the international agreements to which the US is a party, governments have reportedly been forced to pay $440 million to foreign investors in ISDS proceedings. Equally problematic is the pressure that such decisions put on domestic laws, regulations and policies. For example, in 1997 a chemical company brought a claim against Canada over its ban on trade in a toxic gasoline additive known as "MMT." After negative preliminary decisions in an investor-state proceeding, Canada settled by paying the company $13 million and then withdrew its ban on MMT.

Companies have attacked not only environmental regulations, but also health laws through the ISDS process. In 2011, Australia enacted one of the world's toughest tobacco labeling laws. The "plain packaging" law -- celebrated by the World Health Organization as a model for other countries -- requires graphic public health warnings to cover most of cigarette packaging, and requires that the brand name be in a plain print at the bottom. The multinational tobacco company Phillip Morris rapidly filed claims in two venues -- in the Australian courts and in an investor-state tribunal under a Hong Kong-Australia investment agreement. Australian courts rejected the company's argument that the country's law appropriated its intellectual property in an unconstitutional manner. But the ISDS proceeding continues, causing the Australian government to have to pay the costs of defending the claim in an investor-state dispute system, and if it loses, subjecting it to substantial damages. Phillip Morris continues to press its argument that its property has been illegally expropriated and also claims that the Australian labeling law undermines its right to "fair and equitable treatment" under the investment treaty.

As more claims are filed, a wider range of companies -- and their lawyers -- have begun to see the possibilities of using the investor-state process to challenge laws and decisions they do not like. For example, in 2010 and 2011 Canadian courts invalidated two patents held by Eli Lilly, a major multinational drug company. Patent law has three major requirements: inventions must be new, useful and non-obvious. The Canadian courts held that the company had not proved the utility of the inventions claimed and therefore Lilly lost. In 2013, after the company's appeals were denied by higher courts, Eli Lilly launched an investor-state claim against Canada. The company is seeking some $500 million in damages, and it is now arguing that Canadian courts' interpretation of their own law amounts to "expropriation" of the company's property, and is "arbitrary, unjust, and discriminatory."

In short, ISDS offers a way for foreign corporate investors to try to undercut a country's laws and regulations by triggering a private dispute system. The results can be taxpayer dollars lost to foreign investors and government regulations limited, even though those very laws protecting health, the environment and safety have been duly enacted by legislatures and their applications upheld by domestic courts.

There are many reasons for concern here, but a critical one is the way that ISDS proceedings undermine domestic court systems, and the precept of "equal justice under law" for all. Americans are justifiably proud of our judicial system. Both state and federal constitutions insist that courts be "open" -- both to those bringing claims and to any of us wanting to watch judges and disputants as claims are pursued and decided. Everyone is entitled to those rights, regardless of wealth or influence.

Further, state and federal constitutions require that judges be independent and not beholden to the parties. If judges own stock in a company or have special relationships with a litigant, they have to step aside ("recuse" themselves) or be disqualified by law from judging the case.

But ISDS proceedings do not protect the values of openness, equal treatment and judicial independence. Investor-state dispute arbitrations are available only to a select and powerful group: foreign investors. Only they -- and no one else affected by trade treaties that include these provisions -- can bring a private suit challenging governments for allegedly failing to live up to their agreements. Moreover, foreign investors get to help pick the decision-makers. Many of these arbitrators also act as lawyers (often, for companies) in these same tribunals, and so these legal insiders have a stake in the expansion of the kinds of claims that can be brought to these tribunals.

Courts are also required by constitutions to keep their doors open so strangers can observe. ISDS proceedings have long been criticized for being far less transparent. The leaked TPP draft does include some new obligations concerning transparency, but the meaning of these obligations will be decided by the same insiders. Further -- as in the practice of arbitration more generally -- these ad hoc arbitration tribunals are not bound by precedent. Nor are they subject to meaningful oversight through appellate review. Arbitration of the sort envisioned in the TPP, as far as we are aware, has no real review at all -- only an "annulment" proceeding, which cannot even set aside a decision on the grounds that it is based on an incorrect statement of the law.

The justification for granting foreign investors different and special rights to opt out of local courts goes back decades, to eras when court systems in many places were fragile and the goal was to attract foreign investment to fledgling nations. Investors had understandable concerns about weak domestic court systems that did not guarantee independent judges and equal treatment. Further, investors worried that governments might decide to seize foreign assets and that local judges would be vulnerable and would fail to hold their own governments responsible.

But these are not the characteristics of court systems in Canada, Australia, the United States and many other countries where ISDS is now becoming entrenched. In fact, the court systems that have recently been bypassed through ISDS set the global standard for their commitments to fair and independent process and the rule of law. Furthermore, where court systems are troubled, they need to be fixed rather than bypassed by foreign companies, while domestic investors and regular citizens are left to use those very courts.

This issue is not a partisan one: Elizabeth Warren and the Cato Institute are not regular bedfellows. But they both have come out strongly against ISDS. It is time to slow down these negotiations, and have a public discussion about the nature of the ISDS commitments being contemplated in the TPP. Instead of a fast track out of U.S. courts, we need a careful deliberation about what role ISDS should play in our system of justice.

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Pictured at top: US Trade Representative Michael Froman (L) and his Japanese counterpart Akira Amari (R) at TPP negotiations at Amari's office in Tokyo on April 19, 2015. (Photo credit: STR/AFP/Getty Images)

The authors are professors at the Yale Law School.