Investor-to-state dispute settlement: a threat to democracy

At the Dutch international camping festival for hackers and makers OHM 2013 I gave a lightning talk about Investor-to-state dispute settlement. Below the text.

Investor-to-state dispute settlement: a threat to democracy

Welcome everyone,

I’m Ante Wessels. I’m involved with Vrijschrift and the Foundation for a Free Information Infrastructure. I will give a short talk about investor-to-state dispute settlement, or ISDS. Why is investor-to-state dispute settlement important?

Investor-to-state dispute settlement gives multinationals the right to sue states before special tribunals if changes in law may lead to lower profits than expected. Multinationals can attack environmental policies, health policies and reform of copyright and patent law. This undermines democracy, the rule of law and the public interest.

I will explain:
– how the system works
– why it ran out of hand
– what we can do about it

What is investor-to-state dispute settlement, how does it work?

International trade and investment treaties contain protections for foreign investors against expropriation, above local protections. For instance, protection against expropriation of a factory. Over the years, the protection got broader and broader. It now also includes expected future profits. If changes in law threaten to make profits lower, that is seen as expropriation.

In addition, multinationals do not have to use the local court system. The cases are decided by tribunals consisting of three investment lawyers. The tribunals are placed outside and above the local court system. Above the supreme courts of countries.

Let me give some examples.

After the nuclear disaster in Japan, the German government decided to close down two nuclear reactors. The Swedish company Vattenfall now claims 3.7 billion euro using investor-to-state dispute settlement.

Second example: Australia introduced health warnings on tobacco packaging. Tobacco company Philip Morris claimed that their trade marks lost value, and sued Australia in local courts. Philip Morris lost the court case and then started an ISDS arbitration case. As a result, Australia decided not to sign treaties with ISDS clauses any more.

Third example: Canada made some minor adjustments to its patent system to ascertain better access to medicine. United States pharmaceutical company Eli Lilly now claims 500 million dollar in ISDS arbitration.

Arbitrators have enormous powers. They also have a negative incentive.

Unlike judges, they are paid by the hour or by the day, very well paid. They have an incentive to let cases drag on. And they have an incentive to make the system more important by taking multinational friendly decisions.

The negative incentive has negative consequences. The legal costs are skyrocketing, in some cases the legal costs are more than 30 million dollar. The number of cases is rising sharply. The damages are rising.

Arbitrators wear many hats. They may also act as government official negotiating investment treaties, corporate lobbyist advocating investor-to-state dispute settlement, council defending the interest of corporations, media commentator and professor. The editorial boards of key journals consist of 50 to 100 percent arbitrators.

The small community of arbitrators is a captive incrowd. A very powerful captive incrowd.

In a democracy, strong institutions are essential. But, giving a captive incrowd enormous powers undermines democracy, the rule of law and the public interest.

What can we do?

Consumer and environmental groups already did a lot of work. The European Parliament is critical about ISDS. The digital community can help to tip the scale.

Note that adding safeguards to the system is not enough. A powerful captive incrowd can always find a way around safeguards. The only solution is exclusion, no investor-to-state dispute settlement in EU trade agreements.

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Some links:

Videos of the OHM 2013 talks at the Nikhef server. No video of my talk yet. When available, the filename will start with d2-t2 (day 2, track 2).

Corporate Europe Observatory, 2012, Profiting from injustice – How law firms, arbitrators and financiers are fuelling an investment arbitration boom,

Investment agreements: A new threat to health and TRIPS flexibilities? By Carlos M. Correa

FFII condemns investor-to-state arbitration in trade talks with US

Glyn Moody: TTIP Update II

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