Do the Commission’s reform proposals for ISDS really solve the problem?

In order to pacify the ever-growing opposition to Investor-State Dispute Settlement (ISDS), the European Commission published a number of reform proposals on 16 September 2015. Ben Beachy, Senior Policy Advisor at the Sierra Club’s Responsible Trade Programme, examines the extent to which these proposals solve the problems with the existing system.

ISDS Critiques Does the EC Proposal Address the Critique?
There is no need for ISDS in TTIP – U.S. and EU court systems are reliable and domestic investor protections are strong. No. ISDS is still included. This would dramatically expand ISDS liability for both the United States and EU at a time when ISDS cases are surging.
ISDS empowers foreign investors alone to bypass domestic courts and go before extrajudicial tribunals, or to re-litigate issues decided in domestic courts before those tribunals. This undermines rule of law and creates a discriminatory structure in which foreign investors enjoy greater procedural rights than domestic businesses and NGOs. No. There is no domestic exhaustion requirement – foreign investors could skirt domestic courts and go straight to ISDS. There is also nothing to stop a firm from bringing a case before domestic courts and then re-litigating the case via ISDS, so long as the domestic case concluded before the ISDS case began. (And the text would allow a foreign firm to simultaneously pursue their claim in domestic courts and in an ISDS tribunal if they asked for injunctive relief in the domestic court and monetary compensation in the ISDS tribunal.)
ISDS tribunals enjoy wide discretion – they are not bound by a system of legal precedent or any substantive appeal. Partially. An appeal system would be created (with wider grounds for appeal than are allowed for annulment under existing ISDS pacts). But there is no requirement for tribunalists to adhere to a system of legal precedent, either in the initial claims process or in the appeals process, unless a “Services and Investment Committee” issues a binding interpretation at its own discretion.
ISDS incentivizes a pro-investor bias among tribunalists, given that foreign investors alone can choose tribunalists and initiate cases, and that tribunalists are not salaried but paid by the Parties. Partially. Foreign investors would no longer be allowed to pick tribunalists, as they would be assigned randomly from a roster of appointed ISDS “judges.” However, foreign investors still would be the only ones that could launch cases, and the text states that by default, the tribunal’s fees and costs for a case would still be paid by the Parties (unless the “Services and Investment Committee” decided to switch to paying salaries). This still preserves an incentive for ISDS “judges” to rule in favor of investors, as doing so would boost the likelihood that more foreign investors would launch cases, leading to more award-hinged payments for the ISDS “judges.”
The definition of investment is extremely broad, enabling challenges to a wide array of public interest policies and allowing for firms that have made no real “investment” to launch a case. No. The definition of investment includes the broad language of past ISDS pacts, covering “every kind of asset” of “a certain duration” where there is “expectation of gain or profit.”
Foreign investors alone enjoy vague, broadly-interpreted substantive rights like “fair and equitable treatment” (FET) and prohibition of “indirect expropriation” that are used to rule against non-discriminatory public interest policies. This poses a threat to environmental, health and financial protections while privileging foreign investors over domestic firms. No. The FET definition in the proposal, similar to the one in CETA, allows for challenges of a wide array of non-discriminatory public interest policies. For example, the text explicitly states that a tribunal can take into account whether the investor’s expectations were frustrated when deciding whether to rule against a policy as an FET violation. The expropriation definition, in combination with the broad definition of investment, would allow for rulings that would not pass muster in many domestic courts, including that public interest policies constitute expropriation violations.
Public interest policies can be challenged in ISDS disputes. This makes taxpayers liable for commonsense environmental, health and financial protections. It can also contribute to regulatory chill by making policymakers think twice before enacting new safeguards that could trigger costly ISDS challenges. Not really. The EC touts new “right to regulate” language. Far from an actual carve-out, this language would not prevent ISDS “judges” from ruling against public interest policies. As ISDS defenders are fond of pointing out, a ruling against a public interest policy as a violation of a foreign investor’s expansive rights does not in any legal sense “affect the right of the Parties to regulate.” The government is technically required to compensate for the policy, not alter it. Of course, such rulings can have the effect of chilling public interest policymaking, but ISDS “judges” could ignore this effect and still rule against a public interest policy with the logic that nothing in the award technically requires the government to change the policy. In addition, the “right to regulate” language is weakened by several hurdles: a defending government could have to show that the challenged policy was “necessary to achieve” public interest objectives and that those objectives were “legitimate.”
Firms located outside of a pact’s signatory countries can launch ISDS cases under the pact and domestic firms can use foreign subsidiaries to launch cases against their home government. No. From the text we can see, the EC proposal would allow firms based in non-TTIP countries with no real investments in the claimed TTIP home country to launch ISDS cases under TTIP. The text also would allow firms to launch ISDS cases against their own home governments via a subsidiary stationed on the other side of the Atlantic.
Foreign investors can engage in treaty shopping – reshuffling corporate structures (or establishing new subsidiaries) to access ISDS. Partially. The proposal states that “the Tribunal shall decline jurisdiction” when it is clear that a firm acquired an investment in order to launch a case. But the defending government could have to prove that the dispute “was foreseeable on the basis of a high degree of probability” at the time the investment was acquired. Tribunals would have broad discretion in interpreting this ill-defined hurdle.

Update: On October, 6 the Seattle-to-Brussels network of European NGOs published its analysis of the Commission’s reform proposal. Please find this analysis here.