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The debate on 'no greater rights' for foreign investors

The “investor-state” system provides more favorable treatment to foreign corporations than U.S. citizens and businesses enjoy under the U.S. Constitution.

International investment agreements like NAFTA's Chapter 11 gives foreign corporations greater procedural and substantive rights. 

NAFTA's Chapter 11, and the investor chapters from similar Free Trade Agreements, give companies the right to sue the United States.  With most  international trade agreements, it's only the nation-state that has the right to bring a claim.  But with NAFTA Chapter 11, foreign investors were given the same 'legal standing' as that enjoyed by a country!

Greater procedural rights for foreign investors based on investor-to-state dispute resolution.   International investment agreements, such as Chapter 11 of NAFTA establish systems of investor-to-state dispute resolution that:

•    allow foreign investors to circumvent domestic courts, and
•    allow foreign investors to file claims against national governments seeking money damages in compensation for federal, state, or local laws, regulations, or policies.

The dispute resolution process is used as an alternative to domestic courts.  That is, international agreements grant foreign corporations the right to challenge government policy, at the federal, state, or local level, before a tribunal of three arbitrators.

Arbitration rules.  International investment tribunals operate on the model of international arbitration of commercial contracts. Each of the two parties to the dispute picks one arbitrator, and the third is either mutually agreed upon by both parties or appointed by a World Bank official.

Characteristics of arbitrators. 
In addition to investor-state arbitration's unusual procedural rules, consider the arbitrators themselves:

  • Arbitrators do not enjoy tenure and are not subject to confirmation by the legislative branch;
  • Arbitrators may alternately serve as arbitrators in one case and plaintiff’s counsel in the next, thus raising questions of conflict of interest;
  • Arbitrators may have little or no familiarity with the U.S. constitutional principles of federalism;
  • Arbitrators make their decisions based on the text of an international investment agreement and customary international law, both of which are to be interpreted in light of the purpose of the agreement--to promote international investment.

Greater substantive rights for foreign investors based on definition of investment.  Investment agreements entered into by the United States contain a definition of investment that is broader than the definition of constitutionally-protected property rights in the United States.

The NAFTA definition of ‘investment” includes "assets having characteristics of an investment," such as expected profits.  Forms of investment include not just enterprises, but also stocks, bonds, debts, contracts, concessions, licenses, and permits. U.S. courts, by contrast, generally uphold regulatory takings claims only with respect to physical or intellectual property--and even then, the 'takings' must be almost total in effect, depriving the owner of all uses of the property.  

Greater substantive rights for foreign investors under international “expropriation” obligations.  International investment agreements require member nations to compensate investors if national or sub-national governments “directly or indirectly nationalize or expropriate” an investment of the other countries' investors in its territory. Tribunals decide not only the scope of expropriation, but also what such open-ended references to “indirect” expropriation mean. 

Given the undefined terms of the “expropriation” standard in international investment agreements, arbitrators have room to read the language broadly or narrowly.  And investment tribunals have done both.  The resulting case law is a patchwork of mutually conflicting interpretations.

Greater substantive rights under the 'minimum standard of treatment' obligation.   International investment agreements require member nations to provide foreign investors with a 'minimum standard of treatment' under international law.  This standard includes a right to "fair and equitable treatment and full protection and security.”  But this open-ended standard permits an aggressive review of economic regulation.  In some cases, merely a change to a law or regulation has been taken to be a violation of the 'minimum standard of treatment.' 

Tribunals can effectively enforce decisions.  International investment tribunals can order the federal government to pay money damages to the foreign investor.  The federal government has refused, so far, to assure states and localities that it will not seek reimbursement of any monies paid from the U.S. treasury to satisfy international tribunal judgments. 

Federal lawsuits.  The federal government is authorized to sue to preempt any state or local measure that is a violation of a tribunal decision or that is otherwise inconsistent with an executive-legislative investment agreement.

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