From Shield to Sword: TTIP’s Lessons on Democratic Legitimacy for International Investment Arbitration

Joanna Diane Caytas

Overwhelming popular rejection in Europe imperils the Transatlantic Trade and Investment Partnership [hereinafter TTIP], a free-trade treaty currently being negotiated between Washington and Brussels.[1] Euroskeptics have already moved to exploit negative sentiment resulting from a massive failure of public diplomacy.[2]

TTIP was geared to provide for Investor-State Dispute Settlement [hereinafter ISDS] to compensate investors for any adverse effects of legislation in areas like environmental protection, data protection, privacy, financial markets, food standards, health, labor, social security, energy, media or entertainment, even regulation affecting foreign and domestic investors alike.[3] This would de facto enshrine the lowest standard as common denominator. Private arbitral damage awards not subject to judicial review are widely feared to render progressive legislation unaffordable to states regardless of voter support. International ISDS cases initiated by the tobacco, energy and other industries even against major developed nations like Australia[4] or Germany[5] through creative treaty shopping[6] gave rise to massive activist lobbying that paints arbitration as a secret, unaccountable parallel jurisprudence developed by corporate lawyers playing musical chairs alternating between plaintiff, defendant and umpire roles while charging four-digit hourly fees and expenses increasingly financed by third parties..[7] After all, highly developed transparent systems of justice exist on both sides of the Atlantic. Departing from the original purpose of securing foreign direct investment in emerging economies not governed by strict rule of law, the reasonable shield offered by ISDS clauses has become over time a sword expertly wielded by some multinational corporations to extract profit and market advantage against the legitimate and indiscriminately enforced interests and values of a nation, its government and its people.[8] Today, ISDS is perceived as a social problem not worth an expected increase in trade. For its critics, it became a serious disincentive to states’ exercise of sovereign rights, putting investors’ property interests above other competing social or policy values without a balancing test.

One cogent argument against unattenuated protection of private property rights does not even originate from the political left (as would concerns about creating extraconstitutional limitations to legislative and regulatory action and about reasonable exercises of the state’s police power to protect the public interest). Instead, its point should be near and dear to the political right but, interestingly, it is not raised: affording absolute protection for investments in the installed base of contemporary technology and business models has a chilling effect on future technologies designed as a replacement. It cripples evolution. Silicon Valley is proof that entrepreneurship and the status quo of vested interests never mixed well. Intellectual property law is chiefly centered on compromises addressing this dilemma. New money constitutes a greater threat to old money than ‘socialism.’ The industrial state arose during the 1800s from the demise of feudal property rights, rendering them obsolete in fewer generations than inheritance taxes or property taxes could have. Today, networked knowledge economies are replacing manufacturing (which is increasingly outsourced to sweatshops). But if not all property rights are equally productive over time, then society does not have a rational evolutionary interest in offering each of them equal protection. The explanation why this analysis gets little traction is simple: start-ups have no lobbying resources. Old money does.

Image via MeretMarine.
Image via MeretMarine.

If 28 national parliaments in the EU need to ratify TTIP, chances for passage are nominal.[9] If referenda are required as well, its defeat is certain. A popular majority against the treaty already exists in Austria[10] while opposition forces gain momentum in major member states.[11] Environmentalist and consumer resentment of American GMOs, ‘hormone beef’ or ‘chlorine chicken’ greatly damages market prospects for U.S. agricultural sales if labeling of origin remains required.[12] And TTIP could not pass without it.

Since both the U.S. and the EU can ill afford abandoning their project of transatlantic free trade, a trimmed-down minimalist version of TTIP is a likely outcome. It will almost certainly not include ISDS. EU Commission President Juncker already committed to forgoing private arbitration in lieu of state courts.[13] Trade Commissioner Malmström (Sweden), a strong supporter of ISDS, threatened to resign over the issue but didn’t.[14] Although German investors are traditionally the greatest beneficiaries of ISDS and likely would be under TTIP as well, Chancellor Merkel’s government professed faith in U.S. public courts and rejected ISDS in the same breath to avoid parliamentary as well as popular defeat.[15]

The EU is by far the largest source of foreign direct investment worldwide[16] and its members are the most frequent plaintiffs in ISDS.[17] Still, arbitration is just one tool among suitable alternatives. Winning this battle is not worth losing the war: TTIP can probably no longer be salvaged if it includes ISDS provisions.[18] The same is true of the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada – its draft contains ISDS clauses as well.[19] Because North America and the EU collectively account for 40% of global GDP,[20] the consequences of an ISDS impasse for the terms[21] of Asia’s forthcoming TPP[22] are portentous. It may change international investment arbitration overall: even if existing conventions such as ICSID,[23] UNCITRAL,[24] and Bilateral Investment Treaties[25] will not be affected in the near term, treaties may face withdrawals if public perceptions of legitimacy do not change.

Specialist judges, confidentiality, neutrality and ready enforceability under the New York Convention[26] are key advantages of arbitration. Absence of appellate review, lack of transparency and precedential value, total cost and time factors may lead to different conclusions and to a preference for public adjudication. Still, evidence from known cases does not support the principal assertion of critics that arbitral awards statistically favor investors.[27]

In developing jurisdictions, ISDS offers advantages over state courts as a tool against expropriation, discrimination against out-of-state parties, judicial corruption, and selective non-enforcement of laws.[28] But its legitimacy comes into question where private investors may use it to combat sound, non-discriminatory policies that adversely affect their bottom line.[29] U.S. and EU negotiating positions are similarly influenced by special interests and lobbying efforts. When public consultations were held around the 2014 EU elections, 97% of 150,000 responses rejected ISDS.[30] While the economic benefits of free trade are recognized, further globalization based on deregulation without democratic control is not accepted in many developed countries on both sides of the Atlantic and Pacific.

Negotiators failed TTIP by treating public diplomacy as an ancillary marketing tool. Incomplete, inaccurate disclosures aiming for a fait accompli are not conducive to a genuine dialogue with an increasingly watchful and connected public. Concerns about unpredictable, unaccountable and irreversible developments are here to stay. Political classes in democracies as well as other systems ignore them at their peril.


[1] Across the EU it is difficult to distinguish TTIP opposition from resentment of NSA surveillance. In the U.S., congressional denial of fast-track authority for President Obama had a similarly deleterious effect for different reasons. See Nathan Jensen, Experts see a Republican Senate and Fast-track Authority for Obama as Keys to New Trade Agreements, Washington Post, Jan. 21, 2015, http://www.washingtonpost.com/blogs/monkey-cage/wp/2015/01/21/experts-see-a-republican-senate-and-fast-track-authority-for-obama-as-keys-to-new-trade-agreements/ (there should be an explanatory parenthetical explaining what these different reasons are). Compare Siri Srinivas, Democrats Oppose Obama’s Demand for Fast-tracking Pacific Trade Deal, The Guardian, Jan. 21, 2015, http://www.theguardian.com/us-news/2015/jan/21/democrats-oppose-obama-fast-track-trade-agreement.

[2] Most European constitutions do not provide a positive basis for surrendering the state’s sovereignty with regard to adjudication of private claims against its government without compelling necessity. See, with reference to Germany but also other EU nations, TTIP: Ex-Verfassungsrichter hält Schiedsgerichte für rechtswidrig, [TTIP: Former Constitutional Judge Deems Arbitral Panels To Be Unlawful], Der Spiegel, Jan. 19, 2015, http://www.spiegel.de/wirtschaft/soziales/ex-verfassungsrichter-haelt-ttip-schiedsgerichte-fuer-rechtswidrig-a-1013645.html (with reference to the German constitutional situation but also implying other European nations), although this argument appears to have been no obstacle to earlier treaty obligations on investor protection (ever since the very first treaty establishing ISDS, entered into between Germany and Pakistan 1959. See The Arbitration Game – Investor-State Dispute Settlement, The Economist (Oct. 11, 2014), http://www.economist.com/news/finance-and-economics/21623756-governments-are-souring-treaties-protect-foreign-investors-arbitration. But political climate and constitutional sensibilities evolve. The Treaty of Lisbon created EU authority with regard to foreign direct investment. Consolidated Version of the Treaty on the Functioning of the European Union , art. 207, Dec. 13, 2007, 2008 O.J. (C 115) 47 [hereinafter TFEU].

[3] See The Arbitration Game – Investor-State Dispute Settlement, supra note 2 (arguing that an instrument once devised to protect against expropriatory inclinations of third world governments has long come to enforce de facto “regulatory freeze” also in industrialized states by imposing state liability for infringing on profitability of foreign investments)).

[4] See Melissa Parke, Why Support the TPP When It Will Let Foreign Corporations Take Our Democracies to Court? The Guardian (October 29, 2014), http://www.theguardian.com/commentisfree/2014/oct/29/why-support-the-tpp-when-it-will-let-foreign-corporations-take-our-democracies-to-court (Philipp Morris took Australia to investment treaty arbitration in Hong Kong where its regional subsidiary was located after losing in Australia’s High Court on a challenge to the government’s right to impose plain packaging legislation with warning labels).

[5] A recent case involved Swedish state-owned nuclear plant operator Vattenfall AB seeking €3.7 billion ($4.7 billion) in damages from Germany for its post-Fukushima decision to abandon nuclear energy through an ICSID arbitration invoking the Energy Charter Treaty, signed at The Hague, Dec. 17, 1991, entered into force April 16, 1998, 2080 UNTS 95; 34 ILM 360 (1995). See generally Nathalie Bernasconi-Osterwalder & Rhea Tamara Hoffmann, The German Nuclear Phase-Out Put to the Test in International Investment Arbitration? Background to the new dispute Vattenfall v. Germany (II). The Int’l Inst. Sustainable Dev. (June 2012), 11-12, http://www.iisd.org/pdf/2012/german_nuclear_phase_out.pdf.

[6] Symptomatic for globalized private justice is the case of Romanian-born billionaire twin brothers Ioan and Viorel Micula whose French counsel sued Romania based on a Swedish-Romanian Bilateral Investment Treaty (BIT) before ICSID in Washington. See Christina Knahr, Ioan Micula, Viorel Micula, S.C. European Food S.A., S.C. Starmill S.R.L., & S.C. Multipack S.R.L. v. Romania, ICSID Case No. ARB/05/20, Decision on Jurisdiction and Admissibility, 48 ILM 51 (2009), 104 Am. J. Int’l L. 81-86 (2010). Treaty shopping was also at the heart of Philip Morris Asia’s challenge of Australia’s plain packaging legislation under a 1993 Australia-Hong Kong BIT, following the company’s defeat in the High Court of Australia. See Philip Morris Asia Limited v. The Commonwealth of Australia, UNCITRAL, PCA Case No. 2012-12. This arbitration attracted world-wide media attention and damaged political prospects for ISDS clauses like few others have.

[7] See Org. Econ. Co-operation & Dev., Government Perspectives on Investor-State Dispute Settlement: A Progress Report 8 (Dec. 14, 2012), available at http://www.oecd.org/daf/inv/investment-policy/ISDSprogressreport.pdf.

[8] Melissa Parke, supra note 4.

[9] Former Austrian EU Commissioner Franz Fischler ruled out passage if parliamentary consent is required, as several governments insist it is. See Fischler sieht Chancen für TTIP bei 50:50 [Fischler views chances for TTIP at “50:50“], Salzburger Nachrichten (Feb. 19, 2015), http://www.salzburg.com/nachrichten/dossier/ttip/sn/artikel/fischler-sieht-chancen-fuer-ttip-bei-50-zu-50-138865/.

[10] As of February 2015, 53% of Austrians oppose TTIP in its entirety. Österreicher sind Europas grösste TTIP-Skeptiker [Austrians are Europe’s greatest TTIP skeptics], Der Standard (Feb. 21, 2015), http://derstandard.at/2000011989438/Malmstroem-Werden-TTIP-vor-US-Wahl-2016-abschliessen. Opposition to TTIP registers lowest in Latvia (9%; EU average is 25%) while TTIP has just 39% supporters in Germany and Austria. Id.

[11] Opposition forces include the UK and Germany, but increasingly also France, Belgium and Spain. Schiedsgerichte rücken in weite Ferne [Arbitral panels become very remote], TAZ. Die Tageszeitung (Jan. 13, 2015), http://www.taz.de/!152784/.

[12] See Sara Lewis, Retailers Slam, Consumer Groups Hail origin Labelling Vote. Eurofoodlaw (Feb. 11, 2015), http://www.eurofoodlaw.com/labelling/country-of-origin/retailers-slam-consumer-groups-hail-origin-labelling-vote–1.htm.

[13] See Press Release from European Parliament, Parliament Elects New European Commission, (Oct. 22, 2014), http://www.europarl.europa.eu/news/en/news-room/content/20141016IPR74259/html/Parliament-elects-new-European-Commission. Juncker publicly opposed ISDS already in July 2014 after the EU elections: “I don’t understand why great democracies would not have faith in the judiciary. We have courts which are able to deal with cases that are brought to them, and so I’m not really in favour of what one could call “private courts” or arbitration bodies which may sometimes reach good decisions but don’t always have to justify their decisions.” Simon McKeagney, Breaking: Juncker to take ISDS out of TTIP, TTIP: Beware What Lies Beneath Blog (Oct. 16, 2014), http://ttip2014.eu/blog-detail/blog/ISDS%20out%20Juncker.html.

[14] Id. Cf. People’s Movement, 113 People’s News 1 (Nov. 2, 2014), http://www.people.ie/news/PN-113.pdf. See also Pasquale De Micco, Highlights from the European Parliament Hearing of Cecilia Malmström, European Commissioner for Trade, Pol’y Dept., Directorate-General for External Policies, European Parliament (Sept. 29, 2014), http://www.europarl.europa.eu/RegData/etudes/BRIE/2014/536417/EXPO_BRI(2014)536417_EN.pdf.

[15] See Zacharias Zacharakis & Alexandra Endres, Regierung gegen Investorenschutz im Freihandelsabkommen [Government against investor protection in free-trade agreement], Die Zeit (Mar. 13, 2014), http://www.zeit.de/wirtschaft/2014-03/investitionsschutz-freihandelsabkommen-bundesregierung-ttip. Unless TTIP is finalized in 2015, it will likely be an issue in the U.S. election season 2016 and conceivably postponed indefinitely. Opposition is currently strongest in Austria, Germany and the UK. Schiedsgerichte rücken in weite Ferne [Arbitral panels become very remote], supra note 11.

[16] Roderick Abbott, Frederick Erixon & Martina Francesca Ferracane, Demystifying Investor-State Dispute Settlement (ISDS), ECIPE Occasional Paper No. 5/2014, European Ctr. Int‘l Pol. Econ. at 9, available at http://www.ecipe.org/app/uploads/2014/12/OCC52014__1.pdf.

[17] Id. at 10-11.

[18] Bernadette Ségol, TTIP Will Not Be Approved Unless ISDS Is Dropped, Fin. Times, Oct. 27, 2014, available at http://www.ft.com/intl/cms/s/0/1c06a35c-5b92-11e4-a674-00144feab7de.html .

[19] BJ Siekierski, Germany Insists It Hasn’t Scuttled CETA: Report, iPolitics, July 28, 2014, available at http://www.ipolitics.ca/2014/07/28/germany-insists-it-hasnt-scuttled-ceta-report/.

[20] William H. Cooper, EU-U.S. Economic Ties: Framework, Scope, and Magnitude, Cong. Research Serv., Feb. 21, 2014, at 2, available at https://www.fas.org/sgp/crs/row/RL30608.pdf .

[21] For likely impact of TTIP on non-parties, see, e.g., European Comm’n, Transatlantic Trade and Investment Partnership: The Economic Analysis Explained 10 et seq., (Sept. 2013), available at http://trade.ec.europa.eu/doclib/docs/2013/september/tradoc_151787.pdf.

[22] Trans-Pacific Partnership (TPP) is a proposed treaty under negotiation between 12 parties as of 2014: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam.  Ian F. Fergusson & Bruce Vaughn, The Trans-Pacific Partnership Agreement, Cong. Research Serv. (Dec. 12, 2011), http://www.fas.org/sgp/crs/row/R40502.pdf.

[23] Convention on the Settlement of Inv. Disputes Between States and Nat’ls of Other States, Mar. 18, 1965, 17 U.S.T. 1270, 575 U.N.T.S., available at https://icsid.worldbank.org/ICSID/StaticFiles/basicdoc/CRR_English-final.pdf.

[24] The United Nations Commission on International Trade Law recognized in 2013 a need for publicity of ISDS arbitral awards. See UNCITRAL Rules on Transparency in Treaty-based Investor-State Arbitration, Apr. 1, 2014, available at http://www.uncitral.org/uncitral/uncitral_texts/arbitration/2014Transparency.html.

[25] Over 1400 Bilateral Investment Treaties (“BITs” )exist world-wide. Hendrick Kafsack, Überwältigende Mehrheit gegen TTIP-Schiedsgerichte [Overwhelming Majority Against TTIP-Arbitral Panels], Frankfurter Allgemeine Zeitung, Jan. 13, 2015, available at http://www.faz.net/aktuell/wirtschaft/wirtschaftspolitik/ueberwaeltigende-mehrheit-gegen-ttip-schiedsgerichte-13368269.html. See also Kenneth J. Vandevelde, A Brief History of International Investment Agreements, 12 U.C. Davis J. Int’l L. & Pol’y 157 (2005), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1478757.

[26] Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38, available at http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention.html [hereinafter “the New York Convention”].

[27] The Backlash Against Inv. Arb.: Perceptions and Reality 213-216 (Michael Waibel et al. eds., 2010). However, because of routine confidentiality and lack of databases, reliable statistics do not exist.

[28] What is international arbitration? Int’l Arb. Att’y Network, https://www.international-arbitration-attorney.com/what-is-international-arbitration/ (last visited March 30, 2015).

[29] Leala Padmanabhan, TTIP: The EU-US Trade Deal Explained, BBC News, Dec. 18, 2014, available at http://www.bbc.com/news/uk-politics-30493297.

[30] European Commission, Report Presented Today: Consultation on Investment Protection in EU-US Trade Talks, Jan. 13, 2015, available at http://trade.ec.europa.eu/doclib/press/index.cfm?id=1234.