Questions Follow Sharp Rise In Investor-State Disputes, Far-Reaching Cases

At an unprecedented rate, private companies are using “investor-state” provisions in trade and investment agreements negotiated by governments to challenge foreign government regulations, often made on behalf of the public, a United Nations report has found. And the majority of target governments are developing or transition economies, most of the time being challenged by companies in developed countries.

“The number of investment disputes brought to international arbitration reached a new peak in 2012, amplifying the need for public debate about the efficacy of the investor–State dispute settlement (ISDS) mechanism and ways to reform it,” the UN Conference for Trade and Development (UNCTAD) said about its new report.

Investor-state clauses are intended to protect investors from surprise action by governments that go against those companies’ expections and undermine their investment. It is exceptional that companies can use treaties to directly challenge government policies, as all other elements of treaty disputes are limited to government-to-government challenges. Cases are handled through an arbitration panel.

The report, entitled, Recent Developments in Investor–State Dispute Settlement (ISDS), was published today by UNCTAD. It found that 62 new cases were filed in 2012, “the highest number of known treaty-based disputes ever initiated in one year, confirming the increasing tendency of foreign investors to resort to investor–State arbitration.” UNCTAD keeps an ISDS database.

“In 68 per cent of the new cases, the respondents are developing or transition economies,” an UNCTAD press release said, based on the report. “Although the number of cases filed by developing-country investors has increased, the majority of new cases (63 per cent) are still originating from developed countries.”

There has now been a total of 518 cases filed in relation to treaties, with 95 countries having responded to one or more of these cases, it said. There are some 3,200 international investment agreements in existence today, most of which have investor-state mechanisms, UNCTAD said.

EU-US FTA Outlook; Eli Lilly Case Under NAFTA

Separately, a report in the Inside U.S. Trade newsletter said that “a draft text floated by the European Commission to member states last year on the investor-state dispute settlement (ISDS) provisions it will seek in future EU investment agreements contains similarities to the U.S. model bilateral investment treaty (BIT), especially in the area of transparency. However, it also includes differences that would have to be resolved in potential U.S.-EU trade talks.”

The draft contains investor-state provisions related to transparency, arbitrator independence, binding interpretations of investment language by the parties, and a possible appellate mechanism, Inside U.S. Trade said, adding, “The commission is also intending to pursue these elements in a U.S.-EU deal, according to the commission’s draft negotiating mandate for the talks sent to member states last month.”

Meanwhile, a case under the North American Free Trade Agreement (NAFTA) has prompted the concern of civil society groups that it might harm the public’s access to affordable medicines.

In this case, pharmaceutical company Eli Lilly has issued a notice of intent to use the NAFTA investor-state mechanism to challenge Canada’s patent policy.

US non-governmental group Public Citizen has prepared a briefing paper raising concerns about this case. The briefing paper is available here, or here [pdf]. 

In the analysis, Public Citizen lists legal arguments against Lilly’s claim that Canada’s basis for granting patents violates NAFTA’s investment provisions, it said. For example, it said, “in addition to further dissecting Eli Lilly’s rather bizarre national treatment allegations and sweeping claim of a NAFTA-protected right to have expectations fulfilled … [the] paper takes on Eli Lilly’s confused claim that Canada’s patent policy amounts to expropriation by violating the Patent Cooperation Treaty (in which the company conflates standards for filing for a patent with standards for obtaining a patent).”

The paper also raises concern about investment provisions in the ongoing Trans-Pacific Partnership agreement (TPP), which it said “would magnify NAFTA’s investor-state threat to patent policies, including the leaked TPP investment chapter’s proposed invocation of TRIPS, which could allow private corporations to directly challenge governments’ patent policies as alleged TRIPS violations.”

“[T]he rather extreme FTA investor-state regime, slated for expansion in the TPP, threatens nations’ prerogative to determine their own patent standards,” the group said.