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ISDS Courts

No TTIP train to Brussels. Lobbying the European Commission. Belgium. © Jess Hurd/NoTTIP
No TTIP train to Brussels. Lobbying the European Commission. Belgium.
© Jess Hurd/NoTTIP

I have written a lot about the Investor State Dispute Settlement courts that make up a central tenet of the Trans Pacific Partnership and other trade agreements. These extra-national courts effectively give corporations a new legal system to protect their interests that has no accountability to nations or peoples, no access for those peoples to defend themselves, and no system so that citizens can even know what is going on in them. Corporations can use them to protect their profits so that if a nation passes a law that could affect future profits, the companies can use the ISDS courts to sue for future profits lost. That could mean that minimum wage laws, anti-mining regulations, protections for forests, pollution regulations, etc., could be effectively overturned. And given the power dynamics involved in the world, it’s going to be western companies going after developing world nation laws more often than not. These courts have been around for a long time, but they are growing more powerful today. There are two recent pieces of journalism exploring the many problems with the ISDS courts.

First from Chris Hamby:

The series starts today with perhaps the least known and most jarring revelation: Companies and executives accused or even convicted of crimes have escaped punishment by turning to this special forum. Based on exclusive reporting from the Middle East, Central America, and Asia, BuzzFeed News has found the following:

A Dubai real estate mogul and former business partner of Donald Trump was sentenced to prison for collaborating on a deal that would swindle the Egyptian people out of millions of dollars — but then he turned to ISDS and got his prison sentence wiped away.

In El Salvador, a court found that a factory had poisoned a village — including dozens of children — with lead, failing for years to take government-ordered steps to prevent the toxic metal from seeping out. But the factory owners’ lawyers used ISDS to help the company dodge a criminal conviction and the responsibility for cleaning up the area and providing needed medical care.

Two financiers convicted of embezzling more than $300 million from an Indonesian bank used an ISDS finding to fend off Interpol, shield their assets, and effectively nullify their punishment.

Driving this expansion are the lawyers themselves. They have devised new and creative ways to deploy ISDS, and in the process bill millions to both the businesses and the governments they represent. At posh locales around the globe, members of The Club meet to swap strategies and drum up potential clients, some of which are household names, such as ExxonMobil or Eli Lilly, but many more of which are much lower profile. In specialty publications, the lawyers suggest novel ways to use ISDS as leverage against governments. It’s a sort of sophisticated, international version of the plaintiff’s attorney TV ad or billboard: Has your business been harmed by an increase in mining royalties in Mali? Our experienced team of lawyers may be able to help.

A few of their ideas: Sue Libya for failing to protect an oil facility during a civil war. Sue Spain for reducing solar energy incentives as a severe recession forced the government to make budget cuts. Sue India for allowing a generic drug company to make a cheaper version of a cancer drug.

In a little-noticed 2014 dissent, US Chief Justice John Roberts warned that ISDS arbitration panels hold the alarming power to review a nation’s laws and “effectively annul the authoritative acts of its legislature, executive, and judiciary.” ISDS arbitrators, he continued, “can meet literally anywhere in the world” and “sit in judgment” on a nation’s “sovereign acts.”

Reviewing publicly available information for about 300 claims filed during the past five years, BuzzFeed News found more than 35 cases in which the company or executive seeking protection in ISDS was accused of criminal activity, including money laundering, embezzlement, stock manipulation, bribery, war profiteering, and fraud.

Among them: a bank in Cyprus that the US government accused of financing terrorism and organized crime, an oil company executive accused of embezzling millions from the impoverished African nation of Burundi, and the Russian oligarch known as “the Kremlin’s banker.”

Some are at the center of notorious scandals, from the billionaire accused of orchestrating a massive Ponzi scheme in Mauritius to multiple telecommunications tycoons charged in the ever-widening “2G scam” in India, which made it into Time magazine’s top 10 abuses of power, alongside Watergate. The companies or executives involved in these cases either denied wrongdoing or did not respond to requests for comment.

Most of the 35-plus cases are still ongoing. But in at least eight of the cases, bringing an ISDS claim got results for the accused wrongdoers, including a multimillion-dollar award, a dropped criminal investigation, and dropped criminal charges. In another, the tribunal has directed the government to halt a criminal case while the arbitration is pending.

To say the least, this should alarm you greatly.
Then from David Dayen, on how financiers are figuring out ways to make money of the ISDS courts:

Here’s how it works: Wealthy financiers with idle cash have purchased companies that are well placed to bring an ISDS claim, seemingly for the sole purpose of using that claim to make a buck. Sometimes, they set up shell corporations to create the plaintiffs to bring ISDS cases. And some hedge funds and private equity firms bankroll ISDS cases as third parties — just like billionaire Peter Thiel bankrolled Hulk Hogan in his lawsuit against Gawker Media.

It’s the same playbook that hedge funds were following when they bought up Argentine, Puerto Rican and other U.S. housing debt for pennies on the dollar. As The Huffington Post reported in May, the financiers were betting they could use lawsuits and lobbying to influence the political system in favor of the creditors like them and reap huge rewards.

Indeed, the damage of ISDS goes far beyond the money that investors manage to extract from public coffers and extends to the corruption of a political system by investors who buy off scholars, economists and politicians in pursuit of whatever policy outcome leads to a payoff. And there’s nothing stopping plutocrats with agendas that go beyond profit-making from getting involved ― again the way Thiel did with Gawker. That alone changes the power dynamic: If you’re the government of Thailand, the billionaire you’re negotiating with has one extra threat at his disposal.

If these investors are able to cement ISDS as part of the Trans-Pacific Partnership, the opportunities for hedge funds to do what they’ve already done to Argentina will be endless ― possibly even in cities and states under financial pressure in the U.S., like Detroit and Illinois.

So-called third-party funding of “international arbitration against foreign sovereigns” has been expanding quickly, according to Selvyn Seidel, a pioneer in the litigation finance industry and now CEO of the advisory firm Fulbrook Capital Management.

“You can get an award for billions of dollars when that award would never come out in domestic law,” said Gus van Harten, a professor at Osgoode Hall Law School at York University in Toronto. “It’s just a jackpot for speculators.”

Here’s an example. In 2008, the Spanish government, under pressure from the eurozone to cut its budget during the financial crisis, began to reverse generous subsidies for solar energy. Spain reduced support for solar in stages. It changed the definition of its main solar incentive program in 2008, reduced the subsidies through two measures in 2010, placed a moratorium on subsidies for new solar plants in 2011, and added further restrictions in 2013.

Renewable energy activists could only shout into the air. But a group of investors hatched a plan.

Between November 2011 and December 2013, 22 different companies sued Spain in seven different cases over the subsidy changes – not in Spanish courts, but using ISDS.

As Dayen points out, the expansion of the ISDS courts under the TPP is extremely alarming. But on the other hand, you can have trade courts that actually work.

Now, upcoming trade agreements would dramatically expand this system. Public Citizen estimates that 9,000 new companies would gain ISDS rights to sue the United States under TPP alone. That’s 9,000 new opportunities for financiers to reach down into state and local coffers, in addition to the federal government, to grab cash. TPP would also expand the “minimum standard of treatment” clause, which sets up the most flexible type of ISDS claim, to cover financial services companies, meaning almost any change in the expected future profits of a bank could be challenged. “TPP was a win for the banks on ISDS,” said van Harten, the law professor.

It doesn’t have to be this way. Investors could be forced to prove discrimination in national courts first before proceeding to arbitration. Or national courts could exercise judicial review over ISDS awards. The largest ISDS award in history, $50 billion to a web of companies all owned by Russian oil magnate Mikhail Khodorovsky, was actually set aside by a Dutch court in April, the first time that has happened in a treaty-based ISDS case. Arbitrators — who generally come from a very small group of international corporate lawyers — could be made independent of the process, with set salaries, security of tenure and no financial ties to litigants. The definition of investor could be tightened, giving only companies that contribute to economic development the right to access ISDS.

But the easiest way to fix ISDS is to throw it out. Several countries, including India, Indonesia and Ecuador, have told their trade partners they’re considering terminating bilateral treaties because of ISDS. Some experts question whether the system is necessary even in the situations it was originally designed for.

I understand the need for some sort of trade courts in the age of globalization. The fundamental problem with the ISDS courts though is that they lack any accountability at all. If you bring a case up to one, the lawyers and judges might be neutral. Or they might not be. But no one can really say (and I’ve had conversations with experts on this who have said that it is basically a crap shoot with one of these cases). These courts need to allow access to citizens as well. If companies have access to extra-national courts, regular citizens also need access to those courts. They need to enforce labor law, minimum wages, working conditions, pollution standards, mining and forest protection, etc. Without that ability, we have simply created a legal system that ensures the vast majority of the world’s citizens are not represented and that the desires of those citizens to pass various laws can be undemocratically overturned. That is simply unacceptable. On this point alone, not to mention the many other problems, we should reject the Trans Pacific Partnership.

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  • SP

    Surely the lawyers can get even more creative. The services of specific executives are obviously worth millions because Teh Market says so based on their salaries. So let’s say one of these executives intentionally kills someone- obviously it would cost the corporation millions to lose the services of this unique individual should they be convicted and imprisoned. Corporate value immunity- think of it as the new golden parachute.

  • West

    This makes my blood boil, and I’ve got plenty of anger for the current President and no small number of Democrats on this issue. I’m a die-hard Democrat, will vote Clinton no matter what, and would vote Obama twice over if you jammed me in a time machine back to 2008 or 2012 with all my memories intact. But it’s this sort of thing on which we Democrats need some internal knock-down drag-out fights: this shit needs to stop.

    I know Clinton has backed off this treaty lately, but given her connections to the deep pockets, I trust her on this issue as far as I can throw her. I’m still voting for her, no matter my suspicions on this issue, but on this issue I do not trust her.

    • CrunchyFrog

      Agree completely. Sometimes you get the impression that Obama has some autonomy, but on certain issues he is like puppet on strings.

    • Rob in CT

      I tend to agree, though this gives me some hope:


      Where do you situate Hillary Clinton ideologically in terms of economics?

      I think that’s a good question. I think the world today is different from where it was 20 years ago, and the issues are being framed considerably differently. For instance, I think there’s a recognition that inequality is a much bigger problem. I think she is much more concerned about more progressive taxes and dealing with tax avoidance of multinational corporations. I think she is very committed to that. I think progressives are not against trade, but they are concerned with trade agreements that are pushed by corporations, for their interests, by and for corporations. That is what we have in the form of TPP. I think it is a good thing that she has come out against that.

      And you think she will stick to that if elected?

      Yes, I do.

      Stiglitz could, of course, be wrong. But I figure his gut feeling is as least as good as ours on something like this.

      • humanoid.panda

        I don’t think she can reverse on this, politically speaking, even if she wanted to. I guess I could see how the TPP gets passed in lame duck, and she objecting to it in public but does nothing to stop it in practice, but once she is inaugurated, the TPP is dead.

        • SNF

          I think the most likely outcome (assuming it doesn’t pass in the lame duck) is that she insists on certain changes to the TPP, and then supports it after those changes are implemented.

          Don’t know exactly what changes she would insist on though.

    • Ghostship

      Like a lamb to the slaughter – if Obama doesn’t push through TPP, Clinton will.

  • Shameless advert for a blog post of mine explaining why big trade negotiations, as at present organised, cannot give a democratically legitimate result. Another of Mark Kleiman’s arguing that the refusal of conservatives to fund compensation programmes for the workers losing from trade deals dooms their political legitimacy.

    These arguments are, I admit, independent of the ISDS scam and much broader. But I include links to critiques by Australian CJ French and Professor Bross, former judge on the German Constitutional Court.

    • Srsly Dad Y

      Oh how I wish you could get through to people like your Twitter interlocutor Noah Smith! He is so young and smart and yet stuck in the false old paradigm of “pro trade” versus “anti trade.” He simply can’t bear to side with the hippies.

  • “In 2008, the Spanish government, under pressure from the eurozone to cut its budget during the financial crisis, began to reverse generous subsidies for solar energy.”
    This is much too kind to the PP government. One: the cuts included retroactive changes to the subsidies on which investors, many small Spanish farmers, had relied. That’s morally equivalent to Trump’s plan to default on the US national debt. Two: the reversal was promoted by the Spanish incumbent electricity generators, who had over-invested hugely in fossil generating plant – which becomes even less profitable if solar is allowed to cream off the daytime peak. Three: electricity rates had been frozen five years earlier, which led to a huge imbalance in the finances of the sector. The minister responsible? None other than Rodrigo Rato, who went on to create the largest bankruptcy and bank rescue in Spanish history as boss of Bankia. Amazingly, this clown served a stint as Director-General of the IMF.

  • DrDick

    Great piece and a major problem with modern trade agreements. However, while it is certainly true that most of the damage is going to be done to developing countries, the multinationals will also use these to overturn new labor and environmental protections in the developed countries, as well.

  • MacK

    i remember a case I was working on in Indonesia, shortly after it had publicly stated that 48 or 50 judges on its highest court were known to be corrupt, and in fact floated the idea of importing some retired judges from the Netherlands for a while so they could sort things out. The judge on our case was issues truly bizarre decisions for the other side, and it was obvious he’d been bought. At some point someone demanded in exasperation “why don’t we just buy him back.” There was a silence and a “you can’t say things like that to us….”

    There are some countries around the world where you cannot use the court system, you just can’t.

    • Linnaeus

      Maybe not, but that shouldn’t be an excuse to abuse the ISDS process.

      • MacK

        Indeed – and arbitration has its frequent flyer problems too.

  • DAS

    Why can’t ISDS work both ways? Can a US company sue a foreign government to force them to enforce labor standards because by not enforcing labor standards they’re giving their businesses an unfair advantage and hence hindering the US business from earning profits?

    • Brett

      We’ll have to see if somebody tries that. It’d be interesting to see the result (even if it’s nothing).

    • Linnaeus

      I’m not an expert by any means on this, but I’d guess that such a case would probably be considered outside of the scope of ISDS courts. A complaint that a party to the agreement failed to uphold the standards stipulated in the agreement would have to come from another party to the agreement, i.e., another national government. At least that’s my understanding of how labor and other standards in the TPP are to be enforced.

  • Brett

    I’m trying to imagine how you’d adapt ISDS to include environmental and civil protections. It’d probably be too broad to simply allow lawsuits against countries for refusing to enforce their regulations – you’d have to narrow it down to export-oriented companies and their domestic contractors/subcontractors in terms of economic activity. So activists could sue export firms in Bangladesh and their international partners for labor violations in it, but not sue any activity not for trade . . . and that gets really tricky really quick, because it’s increasingly difficult to separate domestic and international economic activity.

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