Investor-state dispute settlement: Who uses it?

Note to Readers: This post is the second of three on the subject of investor-state dispute settlement in trade policy. Part one describes why governments created a dispute settlement mechanism for investment that differs from mechanism for trade disputes, and part three will consider the debate over investor protections in the NAFTA.

Foreign Direct Investment: the Ins and Outs

Foreign investment is an important driver of the global economy, and the United States has been the number one destination for foreign investors. Foreign direct investment coming into the United States adds around $870 billion in value to the U.S. economy as of 2014, and foreign investors employ some 6.4 million American workers. Foreign direct investment also drives more than one quarter of U.S. trade.

How about U.S. investments outside the United States? The common gripe about U.S. investments overseas is that companies appear to be wholly “offshoring” their production. But foreign investment is generally complementary to a firm’s investments in the home market, not a substitute exports or domestic production. In some cases, foreign direct investment is required to do business elsewhere. For example, Citibank might better serve its customers by opening a branch in Shanghai. The branch didn’t displace a branch in Idaho – it’s there to serve another customer, the one who lives in Shanghai. It’s a way of growing sales by being present in another market, or of tapping into physical resources that are located outside of the United States.

Enforceable Rights

While the overwhelming majority of U.S. investors never utilize the specific investor-state dispute settlement provisions (ISDS), they benefit every day from the substantive obligations of U.S. international investment agreements (IIA), which are made stronger because of their enforceability.

U.S. investment agreements include a commitment to provide “national treatment” with respect to establishment, acquisition, and expansion prior to the investment being made, which is a powerful market access tool. Basically, it affords U.S. investors the same opportunities as domestic firms. Once the investment is made, investment agreements provide a guarantee from the host government to provide reasonable and fair treatment, including:

• Prohibitions on certain performance requirements, such as technology transfer requirements, domestic content requirements or limitations on imports.

• The right to transfer funds related to an investment-interest, dividends, repatriated profits, etc. — into and out of the host country-allowing the investor to deploy capital in the most efficient and timely manner.

• Guarantees that the host government will provide “fair and equitable treatment,” as well as “full protection and security” for their investments. Further, they agree not to engage in “arbitrary” or “discriminatory” measures.

• Prohibitions from expropriating an investment — directly or indirectly — without prompt, adequate and effective compensation, consistent with rights under the U.S. Constitution that all investors here possess.

These obligations reflect core U.S. legal principles, and are intended to provide U.S. investors abroad the same treatment all firms, foreign or domestic, receive in the United States.

How Often Has ISDS Been Used?

Given the large number of international investment agreements in force, it’s a challenge to find a comprehensive overview of their application and usage. Fortunately, the United Nations Conference on Trade and Development (UNCTAD) has developed an excellent web-based tool, the Investment Policy Hub. On the investment dispute settlement page, the site shows a running total of all known investment arbitrations, as well as the results of concluded arbitral proceedings. Readers can surf to their heart’s content, but here are some observations of the cumulative data.

First, with a total of 817 known ISDS arbitrations and over 2500 IIAs in force, it’s safe to say that the majority of IIAs have operated without a single dispute.

Second, of the 528 concluded arbitrations, governments win more often than investors:

• about 27 percent of disputes are settled before arbitrators reach a decision

• governments prevail in 37 percent of disputes, while investors succeed in 24 percent of arbitrations

• around 11 percent are discontinued after the appointment of arbitrators, and a few cases result in a decision by the panel but no damages are awarded.

Third, governments have wide-ranging experience in the number of arbitration cases. For example, the United States has been a respondent in 16 arbitrations, while U.S. investors have entered 152 arbitration claims. Canada has been the respondent in 26 disputes; Canadian investors have been claimants in 45 disputes.

ISDS is Used More by the Little Guy

Susan D. Franck, Professor of Law at American University, has done extensive research into ISDS outcomes, costs, and operations. One interesting conclusion from Dr. Franck’s work is the predominance of small enterprises as users of ISDS. Roughly two-thirds of the U.S. investors who have filed with for investment arbitrations with the International Center for the Settlement of Investment Disputes (ICSID) would be classified by the Commerce Department as small or medium-sized businesses.

Why So Few Cases?

Individual disputes are highly fact-intensive, in the manner of complex civil litigation. Consequently, it’s difficult to generalize about firm decision-making regarding ISDS. Overall, however, we can say that investment disputes are (from an investor’s standpoint) expensive to file, time-consuming, and difficult to win.

Add to these drawbacks the risk of alienating the host government, and it’s not surprising that in a world of ever-growing international investment, ISDS appears to be used by investors as a last resort.

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