The WTO ruled against dolphin-safe labels for the fourth time today. The ruling continues a growing trend of WTO Appellate Body willingness to scrutinize even the most microscopic aspects of national regulatory methods.

A bit of background. In the Eastern Tropical Pacific, tuna swim with dolphins. Tuna fishers know this, so they chase, encircle and throw purse-seine nets on dolphins (who are easy to spot) to get the tuna (who are not). Needless to say, this process hurts and often maims dolphins.

The US had responded to this phenomenon in a number of ways.

  • First, facing pressure from environmentalists and animal rights advocates in the early 1990s, the US banned dolphin-unsafe tuna. Mexico (where purse seine methods are common) complained to the GATT (a pre-WTO dispute settlement body) that the measure violated US obligations. The GATT body agreed.
  • During the Clinton years, the US went for lighter touch regulation, and gave consumers the power to “vote with their dollars”. Labels were introduced to inform consumers about whether their tuna was “Dolphin-safe”. It was not and is not a mandatory regime: tuna canners can decide to apply for the label or not; consumers can buy tuna with the label or not. Ecuador and other nations’ tuna fisheries shifted to more humane tuna fishing practices to get the label, but Mexican industry did not.
  • The Clinton and Bush administration then tried to go even lighter touch, arguing that Mexican tuna should get the label, even if tuna is caught with purse-seine nets. Environmentalists fought this watering down, and got a US court to agree in a 2007 ruling.
  • Shortly thereafter, Mexico launched a WTO case against the US, asking for the labels and court ruling to be set aside. The case has lasted seven years. A lower panel ruled with Mexico against the US in 2011, and the Appellate Body came to the same conclusion (albeit on different legal grounds) in 2012. The US made several changes to its labeling regime in an effort to comply. Mexico was still not satisfied, so requested a WTO compliance  panel. This panel sided with Mexico in April of this year, and the Appellate Body backed it up today.

At a superficial level, the WTO’s approach in these cases is a boon to animal rights. They didn’t fault the US for wanting to reduce dolphin mortality. Instead, they ruled that the WTO’s Technical Barriers to Trade agreement (TBT) requires consideration of both trade promotion and regulatory objectives.

One way to read the Appellate Body decisions is the following: if the US is going to clamp down on harmful fishing methods (and thereby restrict trade), it needs to go whole hog. Ban the same methods everywhere, ban the same injury everywhere, enforce the same standard everywhere in the same way with the same resources. Again, this has a surface appeal. Equality before the law, protect Flipper around the globe, etc.

But there’s one catch. Tuna and dolphin don’t swim together elsewhere outside of the Eastern Tropical Pacific, and (therefore) purse-seine nets aren’t economical.

Consequently, it is not economical for the US to require fishing inspectors to check for these things outside of the Pacific region. So the US applies slightly lighter touch regulation to other fisheries. Namely,

  • Scenario 1: Tuna vessels in the Eastern Pacific need the captain and an observer to both certify that there (1) was no purse-seine nets used and (2) no dolphin injury.
  • Scenario 2: Captains of tuna fishing vessels in other regions that sometimes use purse-seine nets must certify both things.
  • Scenario 3: Captains of vessels that don’t use nets and aren’t in the region must only certify that no dolphins were injured.
  • However, the US can require an observer in scenarios 2 and 3 if there is evidence of harm to dolphins that needs to be addressed. Also, there are slightly different verification and record-keeping requirements for the different scenarios.

The Appellate Body faulted the US on these distinctions, insisting that one standard was needed to avoid a discrimination finding.* Indeed, while the April panel only faulted for the US for its certification and verification practices, today’s ruling flipped that and said that the eligibility distinctions per se were discriminatory (para. 7.230, 7.238).

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Creeping multilateralism and #TPP

The investment treaty regime is mostly bilateral, but with creeping multilateralist tendencies. What I mean by that, as I explained in this WaPo piece, is that investors (and ultimately arbitrators) can pull from a wide range of different obligations between Country A and Country B, even if they are from neither. This is due to most-favored nation rules (or MFN, which require a host state to accord an investor of a given country the BEST treatment they accord investors of any country) and lax definitions of “investor” (which can extend to entities from any country, so long as they incorporate in a country with ISDS treaty protections).

Creeping multilateralism is different than real multilateralism. Unlike true multilateral pacts like the WTO, the 3,200 investment treaties are not a single undertaking that (at least in theory) constitutes a thought-through tapestry that balances between members, sectors and obligations. Instead, it is an ad hoc multilateralism, where the protections an investor can claim for themselves vary in proportion to their wiliness and legal ingenuity.

The final TPP text closes some options for creeping multilateralism, and opens others. Warning: this is pretty wonky, even by this blog’s standards.
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What is “Arbitration”?

The New York Times had a major investigative series last week exposing companies’ extensive use of arbitration clauses to keep disputes out of court.

The journalists Michael Corkery, Robert Gebeloff and Jessica Silver-Greenberg have done a major service showing how churches force their parishioners and employees to use “Christian” arbitration, how doctors and hospitals use their own procedures for disputes with patients and staff, and financial services firms require arbitration for conflicts with customers.

In the wake of the series, friends and family that have long struggled to understand my research on investor-state dispute settlement arbitration (or ISDS) have told me they “get it now”.

But there is no single definition of arbitration, or of what separates it from normal courts. In Marty Shapiro’s (1986) classic typology, arbitrators differ from judges in that the former are un-tenured, chosen by the disputing parties, and pick and impose a solution that is only binding on those same parties. In contrast, judges are tenured and empowered by sovereigns to settle disputes through the making of legal decisions that often set rules also for non-disputants. Lower down on Shapiro’s sliding scale of “triadic conflict resolvers” are “go-betweens” (which transmit messages between disputing parties), and “mediators” (who find a middle solution between the parties’ positions).

But no sooner is this typology than it becomes complicated. Shapiro notes that a lot of what judges do is mediation: forcing parties to take their dispute out of courts. Moreover, when judges are hearing cases where the state is a defendant or prosecutor, the “triad” threatens to collapse into two, as the judge is a part of the state. Barbara Koremenos, while hewing to Shapiro’s typology fairly closely, notes that international arbitrators and international judges aren’t that different – both rely on some national authority to enforce their decisions. Meanwhile, both domestically and internationally, Erik Voeten notes that judges may lack sufficient competence, independence or legitimacy to play their ideal type role.

Just as judges slide away from their ideal type role, arbitrators can often come quite close to judges’ role. In my own work, I have argued that investment arbitrators do many of the things more often associated with judges. Namely, they demonstrate substantial independence (despite lacking tenure). They make law-like pronouncements, and write public-facing written decisions that become highly influential.

In the end, much depends on the rules in a particular adjudication forum. For instance, another emerging type of international arbitration is tax arbitration. This dispute settlement mechanism is triggered when two countries lay claim to the same bit of revenue by a multinational company or taxpayer. Say both the US and Canada want to tax the same bit of income by Budweiser. Under new arbitration rules, the countries could go to arbitration. But unlike investor-state dispute settlement, tax arbitration does not produce written awards. Indeed, all the arbitrators do is pick which proposal (US or Canadian) will prevail. This methodology is called baseball arbitration, after its roots in disputes between labor and management in US baseball. Compared with the relative autonomy of ISDS, tax arbitration seems to be much closer to what Eric Posner and John Yoo call state-dependent international tribunals.

So what, if anything, is the common denominator tying different forms of arbitration together?

I prefer a more limited two-pronged definition. First, arbitration is dispute settlement by un-tenured deciders, who are appointed on a case by case basis.

Second, arbitration requires the collaboration of domestic courts. While the NYT called domestic arbitration the “privatization of justice”, I don’t see it that way. In their own reporting, arbitral decisions were only made effective because courts deferred to and enforced them. Likewise, ISDS decisions only matter because domestic courts help enforce them. Much of this enforcement obligation comes in the same federal statute – the Federal Arbitration Act, which is yet another point of commonality.

On this second prong, arbitration is not a world apart from domestic courts, who also don’t have their own police force and require executive branches to help enforce their decisions. As President Andrew Jackson once said of the Supreme Court chief justice, “John Marshall has made his decision; now let him enforce it!” But arbitration requires the additional first step of domestic court enforcement.

And standing over both arbitration and judging, I prefer the umbrella term “adjudication”. The Oxford English Dictionary defines “to adjudge” as “to pronounce or decree by judicial sentence or by a similar legal or official ruling”. Many of the examples in the etymology include cases from mixed arbitral commissions – suggesting a common tie.

In the end, what the NYT series (and friends’ reactions to it) show is how attached Americans are to a specific vision of the domestic legal system. One would think that access to courts (and class action lawsuits) is the only way that underdogs can get justice. But there are other ways. As Robert Kagan argues, European democracies do a much better job at achieving through regulation what America attempts (badly) to achieve through litigation. But, as Kagan also notes,  with the serious political barriers that exist to getting comprehensive welfare protections in place, adversarial legalism may be all we have. In that context, it is not surprising that readers would be outraged by these shifts – by whatever name they go by.

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Does #TPP Meet Hillary Clinton’s #ISDS Standards?

In 2002, Hillary Clinton laid out a marker for what good investment protections would like. The vehicle for this proposal was a suggested amendment to the Republican fast track trade legislation.

How well does the Trans-Pacific Partnership (TPP) final text match up?

As it turns out, the TPP falls short of some of the protections Clinton prescribed for both investors and states. It also presents different procedural provisions than what Clinton had in mind.

On the investor side, Clinton called for eliminations of exceptions to national treatment, free capital transfers and performance requirements rules. The TPP largely maintains the exceptions of past trade pacts, and even builds some new ones into place.

On the state side, Clinton called for new pacts to align international investor rights with the US Constitution, and its due process and takings provisions. U.S. nationals do not get to sue the U.S. government outside of U.S. courts (and there are limitations on when it may do so domestically – rarely for cash compensation), although TPP investors will be able to do so. U.S. citizens do not get to appeal a U.S. Supreme Court decision, although a SCOTUS ruling could be the subject of an investment arbitration claim under the TPP. All investment disputes involve the former, and many have involved the latter. The TPP does not change that. Investment tribunals have used broader expropriation and fair-and-equitable treatment standards than those contained in U.S. takings and due process jurisprudence. U.S. takings, regulatory takings and due process doctrine evolves over time, and the TPP does not require that its rules be aligned with U.S. standards in the present or future.

Finally, as for procedure, Clinton called for broad home state state authority to block claims by its own investors against other countries. The TPP includes no such broad requirement. In contrast, in financial services, the home state has a say in some cases as to whether the host state can invoke a prudential defense (Article 11.22.2), whether the TPP should trump a host state’s tax treaties (Article 29.4.4), and whether a host state’s taxation measures constitute an expropriation (Article 29.4.8).

Clinton’s meatiest procedural recommendation – the creation of an appellate body – is not included in the TPP (Article 9.22.11). Also contra her recommendations, there are no changes to upgrade the “efficiency” of arbitral selection, or mechanism for host state governments to get input from affected domestic parties (although this may exist under TPP countries’ domestic law).

Finally, Clinton made several calls for improvements to the transparency of ISDS proceedings. The TPP will require that respondent governments promptly make most major documents public,which actually exceeds her recommendations that only requests for dispute settlement be made public. However, this requirement does not seem to be backed up with any mechanism to ensure that governments do so (Article 9.23.1). There are various restrictions on respondents’ disclosing of confidential information. The TPP does not explicitly require that “all” hearings be open to the public (as Clinton recommended), only that some of its hearings be open (Article 9.23.2). Finally, unlike Clinton’s recommendation that tribunals allow non-disputing parties to make submissions, it will be up to each TPP tribunal whether they accept amicus briefs – and these are subject to various requirements of pertinence (Article 9.22.3 – Article 9.23).

For a full side-by-side comparison of Clinton’s 2002 recommendations to the TPP, see this memo: Pro-state and pro-investor changes in TPP. It updates the one I put out last week comparing the TPP to various preceding documents.

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The #TPP text reveals some subtle shifts in governments’ approach to financial and investment regulation in trade deals.

For the uninitiated, the text for the 12-nation Trans-Pacific Partnership (TPP) has been kept secret for years. Yesterday, the governments dumped 30 plus chapters into the public domain.

The “green flag” has supposedly been waved for the debate to begin. As someone with the rare and terminal condition of having read many trade agreement texts, I was skeptical that a public text would add up to many changed positions. That’s in part because trade debates are often more about politics than substance, and in part because these texts don’t vary that much.

For example, investor-state dispute settlement (ISDS) is the most important institutional innovation in recent trade pacts. This allows foreign investors to challenge host government regulations for cash compensation outside of national courts. While lawyers pay a lot of attention to how the fine print of these pacts vary, the fundamental governance aspects of ISDS (ad hoc tribunals, no appeals, cash remedies, ample treaty shopping opportunities) are remarkably constant over 3,000 plus pacts around the globe. TPP is no exception.

Nonetheless, there is some variance at the margins. I took a look at the TPP’s investment chapter, financial services chapter, and a general exception related to balance of payments. For the wonky at heart, here is a quick and dirty run-down of the changes relative to past pacts and texts (memo – Pro-state and pro-investor changes in TPP).

Apologies in advance, as I make no real attempt to explicate anything in much detail. The audience is probably only those people who really care about the difference between the final TPP text (on the one hand), and (on the other) leaked text from January 2015, Korea FTA (Obama’s most recent major trade deal), and the WTO’s services agreement. Let me know if I have gotten anything wrong.

I group the textual changes into a few buckets: pro-investor, pro-state, mixed/cosmetic, and pro-contract norms. I include the latter as a separate category because some investment tribunals have allowed free-floating treaty obligations to substitute for specific obligations that specific states and specific investors hammered out with each other. (This divergence is important for both normative and empirical reasons, as one of the supposed channels connecting treaties to economic growth is through promoting contract sanctity.)

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Dissents Matter

Ecuador has been partially relieved of its debt to Occidental in an annulment of the largest investor-state award ever.

Back in 2012, an arbitral tribunal at ICSID (the World Bank arbitration facility) ordered Ecuador to pay Occidental nearly $1.8 billion for the country’s natural resource policy changes. This was the largest award ever for an investment treaty claim,* as I noted at the time. This amounted to several percentage points of the country’s national income, and 79 times greater that US foreign aid to the developing nation. Ecuador immediately applied for annulment of the tribunal’s decision.

A bit of background: when a company brings an investor-state lawsuit, the case is decided in the first instance by a panel of three arbitrators. Typically, the investor appoints one, the state a second, and the two arbitrators (or litigants) agree on a third. In contrast, annulment committees are appointed by the World Bank president – who is currently Jim Yong Kim, an Obama appointee. In theory, this second level is more subject to state control – as state appointees run the World Bank. In practice, annulment is a very limited form of appeal that has only been successfully invoked by states a handful of times over hundreds of cases.

Today, the annulment committee sided with part of Ecuador’s appeal. Specifically, they aligned themselves with a dissenting opinion by Brigitte Stern – the state-appointed arbitrator in the original tribunal. As Luke Eric Peterson at IAReporter.Com notes, Stern’s dissenting opinion was so specifically laid out that it virtually constituted a roadmap for how to annul the case.

On the one hand, the ruling is by far the most economically and substantive annulment action in ICSID history. It also shows that dissents matter. Even when states don’t win a case, today’s decision shows that convincing even one of the three arbitrators on even part of the sovereign defenses – and then getting that arbitrator to dissent – can matter for case outcomes.

On the other, the annulment committee was careful to leave most of the tribunal’s award intact. Today’s decision reduced the damages owed by Ecuador to a bit over $1 billion – or a third of Occidental’s original $3 billion request. That still constitutes over a percentage point of Ecuador’s 2012 GDP.

More importantly, the tribunal did not side with any of Ecuador’s broader political and economic arguments about its national sovereignty. Indeed, the tribunal maintained that Ecuador had done nearly $2 billion in damage, but that Occidental wasn’t owed all of it. As today’s decision read,

Occidental “had transferred 40% of its interest to a third party, initially the Bermudan company AEC, which thereafter sold it to the Chinese company Andes”…

The extent and scope of Claimants’ investments is more than a purely legal issue, relevant only for the calculation of damages in this case. It has wider repercussions, touching on the natural tension between general principles of equality and equity vis-à-vis the jurisdictional scope of ICSID arbitration. This tension is inbuilt in a legal system which only protects investments held by investors of a certain nationality, covered by a specific BIT, but denies protection to other investors, including domestic investors.

(As I wrote here, the jurisdiction of investment tribunals are not as narrow as this quote suggests. Nonetheless, it is undeniable that a tribunal should not be awarding damages to parties not involved in the litigation in question – and especially not awarding their damages to the claimant.)

Indeed, today’s decision is arguably a very pro-investor decision, in two ways.

First, the original tribunal unanimously declared that Ecuador’s “administrative goal[s] must be balanced against the Claimants’ own interests”. While such so-called proportionality analysis has precedent in legal systems, this was the most significant application of it to investment arbitration. It effectively declares that governments must always be on the lookout to make regulations less onerous on foreign investors. Today’s decision reads:

Ecuador … argues that the Tribunal has manifestly exceeded its powers because the principle of proportionality is allegedly not encompassed in the Participation Contract, Ecuadorian law, or in customary international law.

The argument cannot succeed, because the standard for annulment in allegations of misapplication or misinterpretation of law applicable to the merits is especially high: only exceptionally gross or egregious errors of law could be construed to amount to a failure to apply the proper law to the merits, and could give rise to the possibility of annulment. The Tribunal has not committed any gross or egregious error of law.

In other words, the committee will not second-guess a tribunal’s re-visioning of the very content of investment treaties.

So annulment committees are supposed to be modest…

…Except when they choose not to be.

Second, annulment is meant to be a blunt instrument. Annulment committees can vote up or down on the whole award of the original tribunal. They can vote up or down on specific paragraphs. They have not traditionally been willing to revisit the merits of decisions, or edit and revise specific tribunal conclusions. Under that old paradigm, the annulment committee would have ix-nayed a specific paragraph on damages, and the investor would have had to re-litigate the whole case to get a second tribunal to insert a new amount of damages. Today’s annulment committee struck out in a pro-investor direction by saving them from this step, and simply inserting in a revised damage calculation:

The next question to be addressed is whether the Committee is authorized to substitute the annulled figure of damages with the correct number, or whether this task must be entrusted to a new investment tribunal. The parties have discussed this issue, and while Respondent favours the constitution of a new tribunal, Claimants have accepted that in the proper circumstances annulment committees are authorized to insert correct data in partially annulled decisions.

The Committee concurs with Claimants.

It is true that annulment committees are not empowered to amend or replace awards. But this is not the task at hand. What is required in this case, in which the Committee is partially annulling the Award, is for the Annulment Committee to substitute the Tribunal’s figure of damages with the correct one. If this task can be performed without further submissions from the Parties and without additional marshalling of evidence, committees should be entitled to do so. Basic reasons of procedural economy speak in favour of this solution. There is no need for the parties to incur the additional cost and delay of going through a second investment arbitration, when the correct number can be inserted by the annulment committee, after performing a very simple arithmetic calculation and without further input from the parties.

In short, from a quick reading of the annulment committee decision and Stern’s original dissenting opinion, today’s events are not so much a statist remaking of investment arbitration. Instead, they constitute a pretty legalistic and conservative application of property rights by a state appointee dissenter. This was in turn adopted by an annulment committee that was modest (as to the state’s further claims) and ambitious (as to the investor’s further claims).

Nonetheless, the decision is remarkable. Annulment almost never happens, so the mere occurrence is noteworthy – as it a dissent actually mattering in some way. Ecuador will breathe easier, to the tune of nearly $1 billion.

Read the annulment decision here. HT IAReporter.Com.


* Another case, Eureko v. Poland, reportedly produced a larger nominal state-to-investor payment – although this was in the form of a post-award settlement.

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WTaxO Lesson #5: Name It

The fifth and final lesson from last month’s World Trade Organization ruling against Argentina’s anti-tax haven policies is:

Naming is (or should be) half the battle.

When countries have disputes over goods trade, it’s relatively straightforward what to compare. If my country makes cars, and your country keeps them out in favor of your nation’s carmakers, then you are discriminating against LIKE goods.

In services trade, matters are less clear. Is a haircut by an expert stylist LIKE a haircut from your dad, who uses a razor he got in the 1970s from Sears Roebuck? Is a haircut by someone who doesn’t speak your language (and so can’t understand your style preferences) the same as someone who does? Is a haircut in a place that doesn’t regulate and license barbers like a haircut from a barber that had to pass aptitude exams? The opportunity for qualitative distinctions in the services arena is  limited only by your zest for Seinfeld-ian discursions.

It is unsurprising, then, that disputes under the WTO’s General Agreement on Trade in Services end up coming down to how the service is characterized. When the gambling haven Antigua challenged the US Internet gambling ban, the island’s lawyers had to show that the US GATS commitment in “recreational services” implicitly included “gambling services”. The US had to contest that claim. They also had to try to convince WTO adjudicators that “gambling via the Internet” was not like “gambling in a brick and mortar casino”, as the latter is easier to regulate.

What is surprising, however, is how little attention WTO panelists dedicated to likeness in their recent ruling against Argentina.

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