Shadow Courts. Haley Sweetland Edwards
beginning in the 1990s, nearly every new trade agreement, from NAFTA and Central American Free Trade Agreement to the Energy Charter, included a chapter on investment, complete with ISDS. In 1989, there were just a few hundred agreements that included ISDS. As of 2015, there were more than 3,000.
Another reason for the explosion of new claims is that the definition of what it means for a sovereign nation to seize or destroy a foreign company’s property, or otherwise violate an investor’s property rights under the terms of an investment treaty, has become much more expansive. Investors now regularly file claims if their host government passes a new law or regulation that results in even a partial loss of a company’s property or impinges in some way on its future profits. For example, in TransCanada’s ISDS claim against the U.S., it argues that President Obama’s decision to cancel the Keystone XL pipeline violated NAFTA by expropriating the company’s expected future profits.
That modern interpretation has only cropped up in the last 20 years, but it has opened up a vast new gray area. Where ISDS claims were once about seized oil fields and bulldozed factories, now they are about tax increases and environmental regulations. Where is the line between a government’s right to regulate in the public interest and a foreign corporation’s claim to its own property?
Meanwhile, the directionality of ISDS claims has also changed. In the 1960s and ’70s, the idea was that investors would use ISDS as a means to get compensation from a developing country with corrupt or rickety rule of law, where there were no other avenues of receiving justice. But nowadays, investors regularly use it to challenge well-developed countries with robust court systems, including the U.S., Canada, Australia, and Germany, where there are very clearly other avenues of receiving justice. That reality has made this supposedly apolitical tool of dispute resolution a hot button issue. Why should some rich Canadian investor get to do an end-run around the U.S. court system? Why should powerful, multinational corporations get access to a special, supranational judicial system that no one else can use? Why is there no way to appeal an ISDS award?
U.S. trade negotiators are now working to include ISDS in as many new treaties as possible, including both of the massive new free trade deals coming down the pike. The Trans-Pacific Partnership, which President Obama signed in February 2016 and which Congress will likely ratify before he leaves office, already includes ISDS. Whether the mechanism will be inserted into the Transatlantic Trade and Investment Partnership, linking the U.S. and Europe, is a subject of controversy. The question has already catalyzed something of an intellectual civil war in Europe, with the European Parliament recently rejecting, across party lines, any treaty that includes ISDS. Protesters opposed to it have swamped the streets in Berlin, Paris, and Brussels and written hundreds of letters in opposition to what they see as the imposition of shadowy “corporate courts” that can be used to undermine laws and regulations and compromise national sovereignty.
U.S. trade negotiators say such rhetoric is overblown. They point out that the U.S. is already a signatory to 50 agreements that include ISDS, and that foreign corporations have only ever used it to challenge Washington 18 times. The U.S. hasn’t yet lost a case. But experts on both sides of the debate argue those stats undersell the importance of ISDS. Including the mechanism in the TPP and TTIP would forever alter the global legal landscape for investors. The U.S.’s 50 existing treaties are relatively tiny, representing just 10 percent of the U.S.’s foreign direct investment; including ISDS in the TPP would increase that ratio significantly. If ISDS is included in both those trade deals, it would mean that any corporation headquartered in any of the nations that are signatories to either treaty—that includes the vast majority of companies listed under the Global Fortune 500—could use the mechanism to challenge U.S. laws and regulations outside of U.S. courts, in the same way that TransCanada is today.
“I don’t think the question is whether U.S. laws will get challenged by foreign corporations under the TPP,” Simon Lester, a trade expert at the libertarian Cato Institute, told me recently. “It’s pretty clear the U.S. will be challenged and it will lose some of those challenges and the U.S. taxpayers will have to pay.”
ISDS has yet to become a big news item in the U.S. Aside from a few op-eds and a proliferation of mostly error-riddled “explainers” on the subject, it has remained largely the purview of trade wonks. One reason is that ISDS does not follow the normal contours of the free trade debate. You can be 100 percent in favor of free trade and still be against ISDS.
Take libertarians, for example. They are the staunchest intellectual defenders of free trade deals, and yet have been among the loudest critics of ISDS, which they see not as a liberalizing tool, but as the opposite: ISDS gives certain economic players an advantage over everyone else. Only foreign investors can use the mechanism; domestic investors can’t. In a globalized economy, how does that make sense? Why should Toyota, which is technically a foreign company, despite its vast manufacturing operation in the U.S., be afforded a special judicial privilege that allows it to challenge U.S. laws outside of U.S. courts, when GM and Ford do not have access to that same perk?
Libertarians also point out that ISDS allows foreign corporations to target laws and regulations that threaten their economic dominance. Just recently, for example, the U.S. pharmaceutical giant Eli Lilly filed an ISDS claim against Canada after the country passed a law limiting the lifespan of drug patents. The law was designed to create a freer market—to reduce pharmaceutical companies’ monopoly control and to allow more generic competition in the drug industry—but Eli Lilly says it violates NAFTA by expropriating its future profits.
Many dyed-in-the-wool conservatives, a group that has also traditionally backed free trade, object to ISDS too, but for different reasons. Joined by a growing number of state and local legislators, they worry that the mechanism will be used to undermine state and local laws. The National Conference of State Legislatures has promised it will not support any trade deal that includes ISDS. Conservatives also see ISDS as an unbearable imposition on American sovereignty, and reject it on the same grounds that they have long refused to confirm the U.S. as a member of the International Criminal Court or other binding international treaties, like the Convention on the Elimination of All Forms of Discrimination Against Women.
Constitutional scholars on both sides of the ideological aisle, from top Reagan administration lawyer Bruce Fein to President Obama’s former judicial advisor, Lawrence Tribe, raise related concerns. Namely, that ISDS tribunals have the power to review U.S. laws, regulations, executive actions, and judicial decisions. If the three arbitrators on an ISDS tribunal were to determine, say, that a U.S. Supreme Court decision was in violation of NAFTA, those three private citizens would have the power to demand that U.S. taxpayers pay compensation for that decision. It’s a point that U.S. Supreme Court Chief Justice John Roberts raised in 2014, when he expressed surprise about how ISDS works. In our highly globalized world, we have become accustomed to foreign companies suing the U.S. through U.S. courts, Roberts wrote, “[b]ut even where a sovereign nation has subjected itself to suit in its own courts, it is quite another thing for it to subject itself to international arbitration.” By signing a treaty that includes ISDS, he went on, a sovereign nation “permits private adjudicators to review its public policies and effectively annul the authoritative acts of its legislature, executive, and judiciary.”
Liberal Democrats, meanwhile, who have been among the most vocal critics of ISDS, worry that foreign corporations will use the tool to challenge U.S. laws and regulations designed to serve the public interest—particularly financial regulations, environmental rules, and health laws. In 2013, for example, an American oil and gas company filed an ISDS claim challenging an environmental regulation in Quebec that put a moratorium on fracking in rock underneath the St. Lawrence River. The oil and gas company claimed the regulation violated NAFTA by expropriating the company’s future profits.
President Obama, who has broken with much of his liberal base to defend ISDS, dismisses criticism of the tool—including a few barbs from his usually staunch ally, Massachusetts Senator Elizabeth Warren—as hyperbolic “bunk” and “totally wrong.” In interviews, he has repeatedly insisted that foreign corporations cannot under any circumstances use ISDS to challenge laws and regulations in the U.S. and that those who say otherwise are just “making this stuff up.” (Obama made those statements nine months before TransCanada used the ISDS provisions in NAFTA to