How Likely are Investor Suits Under the TPP?

Yves here. This post is written from the perspective of Australia, and assesses the risk of Investor-State Dispute Settlement litigation. And one has to wonder how well those cheery assurances of “Nah, the US is never a target of these investor suits” will hold up in practice.

By Kyla Tienhaara, Research Fellow Regulatory Institutions Network (RegNet), Australian National University. Originally published at The Conversation

Australia and Canada have a great deal in common – a British colonial past; large and sparsely populated territories; and resource-intensive economies.

Two other similarities also bear mentioning: the economies of both countries are dominated by US investors (27% of foreign investment in Australia and nearly half in Canada); and both countries were involved in the negotiations in the Trans-Pacific Partnership (TPP) finalised on Monday.

But there is a one major difference: up until now, Australia has never agreed to provide American investors with access to Investor-State Dispute Settlement (ISDS), whereas Canada has. Why is this significant? Trade minister Andrew Robb likes to point out that Australia already has ISDS in 29 existing treaties and “the sun has still come up”.

But comparing investment treaties with countries like Papua New Guinea (PNG) and one with the US is comparing apples and oranges. Aside from the obvious differences in levels of investment (PNG investors that don’t exist can’t sue the government), there is the fact that American corporations are more litigious than investors from any other country.

It is true that creative lawyers can already find ways to bring suits against Australia on behalf of their American clients (such as tobacco giant, Philip Morris). But in providing direct access to ISDS the TPP will make it much easier for American investors to launch cases and possibly also to win them. For example, Philip Morris might very well lose its ISDS case in the jurisdictional stage for technical reasons related to the timing of its investment restructuring (which was done to access an Australia-Hong Kong investment treaty).

So how has this difference between Australia and Canada played out? In In total Canada has faced 35 challenges, 23 of these in the last ten years. Australia has been subjected to only one ISDS case.

Canada has been sued more times than Mexico under the North American Free Trade Agreement (NAFTA) and at a global level it has been involved in more ISDS cases (35 in total) than any other developed country. Canada has already lost or settled seven claims, paid out damages totalling over CA$170 million and incurred untold millions more in legal costs.

At the same time, Canadian companies have been rather unsuccessful in ISDS. In general, the claim that ISDS will primarily benefit the “little guy” isn’t borne out by the statistics. According to an extensive (as yet unpublished) study by Gus Van Harten, the largest multinationals (those with over US$10 billion in annual revenue) have the highest level of success in ISDS (89% at the jurisdictional stage, 83% on the merits, and 71% overall). Small and medium-sized enterprises, on the other hand, don’t fare as well.

Nevertheless, Van Harten’s data indicates that investors on the whole have a high degree of success with the system (80% on jurisdiction, 64% on the merits and 49% overall). Others have come to similar conclusions. When lower success rates are reported there is often a clear methodological error (for example, erroneously counting pending cases as “losses” for investors).

What kinds of policies are being challenged in ISDS? While much attention in Australia has rightly been given to Philip Morris’ challenge of the plain packaging legislation, many cases around the world actually focus on environmental protection and resource management.

Such cases account for 63% of disputes involving Canada. So carving out tobacco from ISDS, as has reportedly been done in the TPP, is like putting a Band-Aid on a bullet wound. If anything, it signals that the “safeguards” in place in the agreement are, on their own, insufficient to protect public policy.

Australia is opening a can of (really expensive) worms with the TPP. And significantly, it isn’t a can that can easily be closed again. Agreeing to the TPP means locking Australia into the current flawed system of ISDS long into the future, at the very time when countries (including France, Germany, South Africa and India) are considering abandoning it or at least introducing more significant reforms than those expected to be found in the TPP.

The bilateral investment treaties that Australia is already party to are relatively easy to get rid of – most have provisions allowing for unilateral termination after an initial period of around ten years. Its bilateral trade deals (like the recent ones signed with Korea and China) are a lot more difficult to amend because there are other issues covered that Australia might not want to open up for renegotiation. Pluri-lateral trade deals like the TPP are all the more complex and nearly impossible to change once ratified.

Despite huge problems with NAFTA, and a great deal of rhetoric from US president Barack Obama and Hillary Clinton (who has, incidentally, just come out against the TPP) about amending it on the campaign trail in 2008, the treaty has not been touched in over 20 years. We should expect that the same will be true for the “NAFTA on steroids”.

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  1. Brooklin Bridge

    Understatement of the day,

    Such cases account for 63% of disputes involving Canada. So carving out tobacco from ISDS, as has reportedly been done in the TPP, is like putting a Band-Aid on a bullet wound. If anything, it signals that the “safeguards” in place in the agreement are, on their own, insufficient to protect public policy.

    The Band-Aid analogy is satisfyingly exaggerated, spot on. The two together make an interesting contrast.

  2. Peter Boardman

    Chewing gum manufacturers to contest Singapore’s ban on the stuff? Very interesting…!

  3. Arizona Roadrunner

    State and local governments can also be sued. Zoning and building codes could be challenged. How many have the resources to participate in this process? Therefore, just the threat of suits will prevent actions such as raising the minimum wages etc.

    1. Oregoncharles

      Again: that’s complicated. We were assured, here, that while state and local laws and regulations can be challenged, only the federal government can be sued (in principle, they can pay it with fiat dollars and ignore the cost -but they won’t, will they?). That means local governments don’t get to defend their law – but it also means they aren’t directly affected. They could just ignore the judgment and let those who made the mess (the feds) figure out what to do about it.

      I can imagine this being an important avenue for civil disobedience in the future, and also an important source of furor. In general, the feds can’t DIRECT state governments, they can only pre-empt or bribe them. Might get really interesting, though it hasn’t so far with NAFTA – apparently because the imperial power doesn’t get sued. As I said below, I think that’s a big giveaway.

  4. Vatch

    There’s a lot of valuable information here for use in letters to the editor. A lot of newspapers have published editorials in favor of the TPP, and people need to write in opposition. The editorials rarely mention the ominous implications of ISDS and the private kangaroo courts, so letter writers need to push this issue. A quick unscientific search shows editorials in favor of the TPP in:

    Washington Post
    New York Times
    Chicago Tribune
    Dallas Morning News
    Detroit News
    Chicago Sun Times

    1. Vatch

      I spent a few more minutes searching, and I found that these newspapers have editorialized in favor of the TPP. People need to write to them:

      Denver Post
      Richmond Times-Dispatch
      Vancouver Sun
      Toronto Sun

  5. TedWa

    The SCOTUS will have to confer with the ISDS to make sure few to none of their rulings can bring cases against the US. It may seem a little far-fetched but investors could bring thousands of cases swamping our court systems. Perfect way, BTW, for Monsanto and ilk to force countries to use GMO’s exclusively. Talk about opening up a can of worms or, more succinctly, opening Pandora’s box, this is it.

    1. Procopius

      I’m missing something here. What does ISDS have to do with SCOTUS? It’s a system completely outside the legal system. SCOTUS won’t be able to review ISDS decisions — companies that want to sue for loss of expected profits wouldn’t be able to bring suit within the American legal system. Their suits would be dismissed and their attorneys would be reprimanded for bringing frivolous suits. It would give a lot of money to the “arbitrators,” but wouldn’t increase the U.S. court case load at all.

  6. David

    Agreeing to the TPP means locking Australia into the current flawed system of ISDS long into the future

    According to Wikileaks and the Japanese Government Summary, ISDS “does not apply to Australia or an investor of Australia” in this treaty. Apparently, the other potential signatories are okay with this.

  7. Chauncey Gardiner

    The lawsuits mentioned here are of relatively modest amounts compared to risks that I believe could be embedded in this proposed agreement’s dispute resolution mechanism that could materially impair our national sovereignty.

    I have significant concerns about the specific language and terms contained in this secret agreement across a broad range of industry sectors, including those sections of the proposed agreement governing agriculture, telecommunications and e-commerce, environmental initiatives, and pharmaceuticals.

    However, my most material concerns center on our potential exposure under this proposed agreement relating to the massive financial derivatives speculations by large transnational banks, any changes to the monetary and financial system of the nation that we might elect to initiate and implement to address these issues, or new legislation and regulations that would curtail the speculative and predatory activities of these entities by forced separation of their traditional bank depository activities from their massive derivatives and capital markets speculations through a new Glass-Steagall Act, including breaking them up so they are not “Too Big To Fail” and criminal prosecutions of individual officers for control and securities frauds or other violations of criminal law.

    In this regard, the specific language of those sections of the agreement covering national treatment and market access, technical barriers to trade, investment, cross-border services trade, financial services, temporary business relationships, facilitation of competitiveness, regulatory consistency, and dispute resolution require broad and deep public scrutiny.

    Since a sufficient number of Democratic legislators approved this administration’s decision to “Fast Track” this secret agreement in an all-or-nothing approach to this agreement, with no modifications to be allowed, these are all potential deal killers IMO.

    Sections on state-owned enterprises and designated monopolies (could affect state regulation of public utilities), labor (could affect minimum wage and OSHA laws, etc.), the environment, and facilitation of competitiveness also need to be deeply scrutinized.

    To do so we need public access this secret agreement.

  8. Praedor

    Wait. I’m confused. Is NAFTA an actual treaty or an agreement? I thought the govt was avoiding the much more onerous task of getting treaties ratified and just going for simple “agreements” that only need a simple majority in the senate. Is that not the case? If TPP, NAFTA, etc are NOT treaties then they are actually quite easy to dispense with or amend. You just do it because they are not the “law of the land” as per actual treaties.

    Also: perhaps a better way to refer to lost ISDS cases, ie, with Canada, etc, is to say TAXPAYERS have shelled out this many millions or that many millions as result of losses. The governments “pay” for the losses only functionally, it is the taxpayer that actually foots the bill.

    1. Marsha

      How can the “fast track” process possibly result in a treaty? It is a backwards unconstitutional enabling of domestic legislation via the executive branch in collusion with a bunch of foreign entities impacting an unspecified and open ended range of largely domestic issues. Congress is presented with a giant pot of Mulligan stew with a little bit of everything thrown into it for an up or down vote, no changes, pass or fail simple majority. That amounts to the undermining of the entire constitutional lawmaking process because of the open ended factor plus ISDS factor. Would this make TPP, NAFTA, the Iran nuclear deal, etc. not treaties but executive orders that could simply be unplugged by any president?

        1. Praedor

          That’s what I thought but the word “treaty” was used in the above story in context of NAFTA and that had me wondering.

          So, NONE of these trade agreements are treaties, just laws, and laws can be changed or dropped with a mere majority vote in congress and a signature of the Prez, or changed with a simple amendment to a “must pass” bill, same as other laws. No lock-in, no “we’re stuck with it”. That is what TPTB WANT people to think, to internalize, when in fact we CAN change these agreements to any degree we want or even make them go away entirely. Treaties are a tougher nut IF they don’t have escape clauses (most usually do, like Test Ban).

  9. Susan the other

    The investor rights concept which refers only to the moneyed investor is a dangerous fantasy. Because we are all invested in this world. And states were not created to harm anyone – but to protect all our rights, not just money-rights. It would be a better thing to have all international trading entities set up a mutual insurance fund for their own profit protection because a lot of their “disputes” will not be won on merit at all, but the resources to bulldoze their way through. They already have derivatives – but those are just another extortion mechanism… if you don’t subsidize me I’ll crash the entire system. The big losers in ISDS will be labor and the environment and taxpayers. Everybody knows those are the risks. So logically something should be put in place to protect the vulnerable. If multinational investors do their own insurance fund, the other investors (labor, environment, social equity, etc.) should also be insured above and beyond state laws which can be over-ridden by trade treaties. This would not be necessary if social equity investors could actually bring a dispute and sue the crap out of money-investors. Just this discrepancy alone in the balance of rights at stake makes the TPP subject to nullification. It’s one sided to the extreme.

  10. Oregoncharles

    “Nah, the US is never a target of these investor suits”

    They actually SAY that? During negotiations, or the ratification process? Doesn’t that sort of give the game away?

    If the US is never the target, then the whole thing is a blatantly colonial apparatus and every other country would be a damn fool to sign on – as indeed they have been. A fool, or of course corrupt.

    This insight doesn’t help countersell it in the US; it only reconfirms our “exceptionality.” But it should make it impossible to get it ratified in any other country. Is there a way to publicize this claim in, say, Mexico, or Japan? Apparently Australia already knows.

    1. Oregoncharles

      Especially considering the statement, above, that Australia is to be exempt from ISDS. Evidently that government is smarter than we thought.

        1. David

          From the Australian Department of Foreign Affairs and Trade,

          The Investor-State Dispute Settlement (ISDS) mechanism will provide Australian investors with the ability to enforce these protections in many of Australia’s key capital export markets, as well as many of the rapidly growing economies in the Asia‑Pacific region.

          Includes the following safeguards,

          • there is explicit recognition that TPP Parties have an inherent right to regulate to protect public welfare, including in the areas of health and the environment;
          • Australia’s tobacco control measures cannot be challenged;
          • certain ISDS claims in specific policy areas in Australia cannot be challenged, including:
          ◦ social services established or maintained for a public purpose, such as social welfare, public education, health and public utilities
          ◦ measures with respect to creative arts, Indigenous traditional cultural expressions and other cultural heritage
          ◦ Australia’s foreign investment policy, including decisions of the Foreign Investment Review Board.
          • non-discriminatory regulatory actions to safeguard public welfare objectives, such as public health, safety or the environment, do not constitute indirect expropriation, except in rare circumstances;
          • the fact that a subsidy or grant has not been issued or renewed, or has been reduced, does not breach the Minimum Standard of Treatment obligation, even if it results in loss or damage to the investment.  This includes subsidies issued under Australia’s Pharmaceutical Benefits Scheme;
          • government action which may be inconsistent with an investor’s expectations does not constitute a breach of the Minimum Standard of Treatment obligation, even if it results in loss or damage to the investment.

          and procedural safeguards,

          • a requirement that hearings will be open to the public, and that documents filed in the arbitration, as well as the tribunal’s decision, will be made public;
          • a right for any TPP Party that is not involved in an ISDS case to make oral and written submissions; 
          • the ability to permit submissions from interested individuals, including from civil society and non-governmental organisations;
          • a requirement that the burden of proof rests with the claimant to establish its claim against a government, which similarly directs tribunals to decide cases in accordance with established interpretations of investment commitments;  
          • rules preventing a claimant pursuing a claim in parallel proceedings, such as before an Australian court;
          • expedited review of claims that are baseless, or manifestly without legal merit;
          • TPP Parties are able to issue interpretations of the Agreement, which must be followed by ISDS tribunals;
          • there are mechanisms to disincentivise unmeritorious claims, such as through the award of costs against a claimant and the ability for a respondent government to recoup costs;
          • interim review and award challenges;
          • time limits on bringing a claim;
          • a requirement for arbitrators to comply with rules on independence and impartiality, including on conflicts of interests.

          Sorry if that’s a bit long.

    2. Yves Smith Post author

      Actually I did overstate it. What the USTR has said is the US has never lost an ISDS suit. BUt my impression is hardly any have been filed v. the US.

      1. David

        A quick search of the ICSID database of 547 cases shows 6 cases where the US is the respondent, 6 cases where Canada is the respondent, and 16 cases where Mexico is the respondent. On the flip side, there are 116 cases where US Companies are claimants.

        They also publish annual reports on their activity. The latest shows, for FY2015,

        Twelve Eastern European and Central Asian States were named as respondent in 17 cases. Eleven cases were brought against two States in Western Europe. States from Sub-Saharan Africa were involved in ten cases, and four cases were instituted against three States in the Middle East and North Africa region. Two cases involved two States in South America. Three further cases were brought against two States in the Central America and Caribbean region. One case was brought against a State in North America (Canada), and four cases were brought against four States in the South and East Asia and the Pacific region.

        The two states in W. Europe were Spain (10 cases) and Greece (1 case). The North American case was Canada.

        The US state department shows 17 cases, although some of those haven’t been resolved and others have been consolidated.

  11. R.P.

    Wasn’t there just recently a ISDS type suit that we lost? this was about labelling the country of origin on meat. It was i believe filed by Canada and we lost. I saw several reports that the law was overturned. sorry no links i suffer from CRS ( can’t remember shit). it seems to me that if we could lose on something like that…. there will be more with a new improved ISDS. this may even become a new growth industry . just my 2cents

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