Business in Court(s)

Obama’s trade push has brought unparalleled levels of attention to investor-state dispute settlement. Mark Bittman writes in the NYT about Obama’s Trans-Pacific Partnership (TPP):

The agreement would even allow countries to challenge one another’s laws… If our laws are seen as restraining trade or limiting profits, they could be challenged in special courts, per the TPP’s “investor state” clause. Philip Morris is suing Uruguay over that country’s antismoking laws under just such circumstances; there are several examples of American companies’ flouting local laws and citing trade agreements as an excuse; and Mexico has been sued repeatedly for theoretically diminishing investor profits.

Underlying this argument seems to be that investment treaties’ “special courts” are more pro-business (or less pro-public interest) than national courts. At least, that seems to be the appropriate comparator.

Yesterday’s US Supreme Court oral arguments challenge that assumption. As Adam Liptak writes:

With scorn bordering on anger, some of the Supreme Court’s more conservative members on Wednesday gave a hostile reception to a government program dating to the Great Depression meant to increase raisin prices by keeping some raisins off the market.

“Central planning was thought to work very well in 1937,” Justice Antonin Scalia said, “and Russia tried it for a long time.”…

The case, Horne v. Department of Agriculture, No. 14-275, arose from the activities of Marvin D. and Laura Horne, raisin farmers in Fresno, Calif., who in 2002 set up a business arrangement that they claimed allowed them to avoid the program.

The Agriculture Department imposed fines, and the Hornes defended themselves on the ground that aspects of the program violated the takings clause of the Fifth Amendment, which says private property may not be taken for public use without just compensation….

“It doesn’t help your case that it’s ridiculous,” Justice Scalia said…

Despite the scorn, the raisin program apparently has some merits. Justice Breyer noted that the program left the raisin farmers better off than without the program. The government defense, moreover, emphasized that farmers that didn’t like raisin regulations could move into different crops – a seemingly reasonable argument that nonetheless attracted conservative ire (“That’s a pretty audacious statement,” the chief justice said. “If you don’t like our regulations, do something else.”).

The raisin case wasn’t the only unconventional takings dispute working its way through the US court system this week. As Aaron Kessler writes, US judges have been more willing to entertain a fanciful takings claim by AIG shareholders against the US government financial bailout than most observers would have thought possible. I’ve written about this case before. At its core, as Kessler notes, is about whether a government measure that actually salvages value in a bankrupt company could nonetheless be so forceful that it counts as a taking. If the US loses (which seems a bit more possible than it did a year ago), the taxpayer could be on the hook for billions.

These cases take place against the backdrop of an evolutionary debate in US law about the balance between business and public interests. As Will Baude notes over the Volokh Conspiracy, there is an ongoing debate within US constitutional law as to what kinds of property and deprivation are covered by the “takings clause”. The frontier of these rules have moved over time, from total state discretion in the early days of the Republic (as William Treanor argues here) to gradually more categories of compensable takings today (as Matt Porterfield argues here).

This domestic evolution has seemed to play out in reverse in the investment arbitration world. After years of worry that international arbitrators would stretch anti-expropriation rules in investment treaties beyond that allowed in the analogous domestic takings rules, they have rarely found against states under these provisions. For example, in Merrill Ring v. Canada (a NAFTA case from 2010) entertained a logging investor’s claim against Canada’s decades-old policy of regulating the logging industry. Despite some lengthy pro-business musing in the text of the award (the lead arbitrator was none other than one of Augusto Pinochet’s diplomats), the arbitral tribunal decided that nothing in international law allowed the forestry regulations to be considered takings (or even violations of the considerably looser “fair and equitable treatment” standard). In Biwater Gauff v. Tanzania, a government was found to owe nothing after its forced invasion of a water concessionaire before its contract was up. The reason? The government action was mostly reasonable in an emergency situation, and actually salvaged some of the value in a worthless company.

These parallel developments are a bit of a puzzle. I would predict that national judges would be more restrained to follow state interests than arbitrators in ad hoc international arbitration (where investors bring the case load and the pay days). These cases – then – are somewhat confounding. Why would US judges be more willing to scrutinize decades-old agricultural policies and emergency bailouts than arbitrators whose fees come from business? Coming up with adequate answers would require more understanding into the effective opportunity and constraint structure facing US judges in a time of US political gridlock, as compared with investment arbitrators in a time where even food columnists write scathing attacks on them.

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