Honey for lawyers

Last week, I wrote on the connection between investment treaties and regulatory chill. But chill or no chill, these pacts may be objectionable on other grounds. While regulatory chill is a second or third order problem, the direct impact of the lawsuits themselves may be excessive (even if they do not chill regulation).

In this vein, my colleague Anna Katselas (an experienced administrative lawyer for the US government) has written a thoroughgoing comparison between investment treaty standards and domestic administrative law, and finds the latter more efficiency promoting.

For example, she argues that domestic courts defer to regulatory agencies because the latter have greater expertise, because regulators are more politically accountable than judges, and to avoid undue interference in agency functioning (literally: it costs the government money for regulators to testify in and prepare for court). Here is a key argument from Anna’s paper:

It might be argued that there is less risk of undue interference in investment arbitration than there is in APA [Administrative Procedure Act] review because an adverse decision in the former usually requires only the payment of money, while an adverse decision in the latter often requires the agency to stop or withdraw its action and try again. While this is true, it is notable that BITs are often silent on the type of remedies that may be granted, and it has been argued that investment tribunals have the authority to award nonpecuniary relief.318 Further, even if an award is exclusively monetary, it would be a risk for a host state to keep a law or policy in place that has been found to violate a BIT standard, especially if the particular treaty provision is contained in the state’s other BITs or is subject to expansion through most favored nation clauses. Doing so could lead to future investment treaty claims and may worsen the state’s climate for foreign investment. Thus, even though primary remedies are arguably more significant (and meaningful from a rule-of-law perspective) because they generally require an agency to correct an illegal action or withdraw it altogether,319 while secondary remedies require only the payment of compensation to an injured party ex post, both have the potential to disrupt government functioning.320 Notably, the immediate availability of pecuniary remedies in investment arbitration has been criticized as being the opposite of the remedy rules of most systems of domestic administrative law.321 It is believed that states generally do not make such remedies immediately available for administrative law violations due in part to budgetary fears and in part to concerns that doing so would create the wrong incentive, namely money, for private entities to bring lawsuits against the state.322 [emphasis added]

In short, cutting off the possibility of a payday at the end means fewer lawsuits for the wrong reasons. Investors that want to go the APA route have to fully internalize the cost to their decision: they must only want policy change that will help them (in their view) to perform better in the market in the years to come. Investment treaties, on the other hand, may privilege investors that actually want to exit the country (with cash in hand), rather than continuing to invest. (Spoiler alert: Anna makes this exact argument in a forthcoming paper, which draws on Albert Hirschman’s Exit, Voice and Loyalty.)

The NYT editorial from today also takes a similar stance. There, they call – not just for defenses that countries can raise once they are sued (which may or may not work) – but an absolute bar against lawsuits:

It is not surprising that tobacco companies would use international trade and investment agreements to challenge health rules given their historic opposition to regulations. That is why it’s imperative that trade officials make clear in treaties that countries cannot be challenged when they are trying to protect their citizens. The United States is negotiating a trade agreement with 11 Pacific Rim countries right now. American officials have said they plan to include language in that pact, which could be finalized next year, to protect those nations from legal challenges by tobacco companies. Those safeguards must be ironclad and should include provisions to penalize companies that bring frivolous and harassing lawsuits. Governments around the world should add similar provisions to existing trade and investment agreements to stop the tobacco industry’s bullying of sovereign governments.

It’s not clear if the NYT realizes how far-reaching this demand is. Many advocacy groups call for only a defense clause. Instead, the NYT calls the mere launching of the lawsuits a form of bullying that must be stopped.