Is the Investor-State Dispute Settlement (ISDS) Procedure in Proposed Trade Agreements an End-Run Around US Courts?

Posted By Cliff Tuttle | May 10, 2015

No. 1,152

Image: Bloomberg.com

Elizabeth Warren, Senator from Massachusetts, has been campaigning against the Trans-Pacific Partnership, a free trade agreement involving 12 countries, including the US, with borders on both sides of the Pacific Ocean.

Warren says that the proposed agreement includes an international trade dispute resolution mechanism, “Investor-State Dispute Settlement” (ISDS), that would enable multinational corporations to bypass American Courts an “undermine US Sovereignty.”

In essence, Warren argues that this provision, which exists in other trade agreements, will enable the these multinationals to obtain rulings from arbitrators who, she argues, will be lawyers with loyalty to large corporate clients.

Recently, Warren stated that such international dispute resolution mechanisms will enable Wall Street to by-pass certain types of regulation under the Dodd-Frank Act. She noted that big bank lobbyists were supporting a similar measure in a Trans-Atlanic agreement under negotiation because of its potential impact on international derivative rules.She also asserted that they could be used by certain companies — particularly in the tobacco industry — to subvert health regulations.

“ISDS would allow foreign companies to challenge U.S. laws — and potentially to pick up huge payouts from taxpayers — without ever stepping foot in a U.S. court, ” states Warren. ” Here’s how it would work. Imagine that the United States bans a toxic chemical that is often added to gasoline because of its health and environmental consequences. If a foreign company that makes the toxic chemical opposes the law, it would normally have to challenge it in a U.S. court. But with ISDS, the company could skip the U.S. courts and go before an international panel of arbitrators. If the company won, the ruling couldn’t be challenged in U.S. courts, and the arbitration panel could require American taxpayers to cough up millions — and even billions — of dollars in damages.

“If that seems shocking, buckle your seat belt. ISDS could lead to gigantic fines, but it wouldn’t employ independent judges. Instead, highly paid corporate lawyers would go back and forth between representing corporations one day and sitting in judgment the next. Maybe that makes sense in an arbitration between two corporations, but not in cases between corporations and governments. If you’re a lawyer looking to maintain or attract high-paying corporate clients, how likely are you to rule against those corporations when it’s your turn in the judge’s seat?”

President Obama, in an interview published on May 9, disputed that ISDS would enable tobacco companies to avoid American health regulations. “Some companies,” he said, “particularly tobacco companies, have tried to sue other countries — not us — but sue other countries, saying, for example, that if they had a rule that you couldn’t have a brand name, or package cigarettes in a certain way, that that was discriminating against RJ Reynolds or some of the [other] big tobacco companies,” Obama said. “I wouldn’t sign something that undermines even other countries’ efforts to protect public health and safety.”

What about Senator Warren’s fear that American banking institutions would employ ISDS to open the door to purchasing derivatives on the international market that regulators would otherwise prohibit?  Assuming that actually happened, would bank regulators be powerless to address the situation?  Probably not.  Such an action would likely trigger a special examination, followed by the requirement that the bank increase its reserve to cover the additional risk.

CLT

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CLIFF TUTTLE has been a Pennsylvania lawyer for over 45 years and (inter alia) is a real estate litigator and legal writer. The posts in this blog are intended to provide general information about legal topics of interest to lawyers and consumers with a Pittsburgh and Western Pennsylvania focus. However, this information does not constitute legal advice and there is no lawyer-client relationship created when you read this blog. You are encouraged to leave comments but be aware that posted comments can be read by others. If you wish to contact me in privacy, please use the Contact Form located immediately below this message. I will reply promptly and in strict confidence.

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