Keeping the “I” in TTIP: Investor Experience in the EU

A key point of controversy in the Trans-Atlantic Trade and Investment Partnership (TTIP) negotiations centers on whether to include Investor-State Dispute Settlement (ISDS) in the agreement. While some critics challenge the legitimacy of ISDS per se, another, more subtle argument is being made. Specifically, it is asserted that international investment agreements (IIAs) with ISDS may be necessary in some countries, but not all. If local governance records and court systems are sufficiently impartial, then ISDS is unnecessary. Since both the U.S. and Europe have “high-quality” legal institutions, the argument goes, investors do not need access to arbitration in the event of a dispute.

If it’s true that European courts offer adequate recourse for foreign investors, then one would expect there to be a relatively low rate of ISDS utilization by European investors. The record is contrary to the theory. According to the United National Conference on Trade and Development (UNCTAD), EU member states have been the respondents in 117 investor-state disputes. Fully 75% (88 of 117) of these dispute claims were filed by EU investors. Further, a report by the European Centre for International Political Economy found that the rate of intra-EU disputes appeared to be increasing, noting that 71 of the 88 intra-EU disputes were filed between 2003 and 2013.

There have been a wide range of claims, arising from both intra-EU bilateral investment treaties and the Energy Charter Treaty (ECT). For instance, investors from the UK, Luxembourg, and Holland have filed claims against Spain under the ECT related to regulation of the renewable energy sector. A Dutch company filed a claim under the Netherlands-Slovak Republic BIT related to regulation of the insurance sector. A French pharmaceutical company filed a claim alleging multiple breaches of the France-Poland BIT. Among the claims against Hungary is one filed by a Belgian energy company alleging unlawful expropriation under the ECT or lawful expropriation absent payment of prompt, adequate, and effective compensation. Finally, a German renewable energy firm filed a claim under the ECT and the German-Czech Republic BIT alleging retroactive and discriminatory regulatory actions that caused severe damage to the company’s investment.

Why has this occurred? From the viewpoint of a foreign investor in Europe, “the EU” encompasses the national laws and regulation in each of the 28 Member States as well as EU-wide law and regulation, much as an investor in the U.S. faces both Federal and state law and regulation. And there is wide variation in the conditions that give rise to investment disputes, namely government conduct in application of law and regulatory authority. In a recent extensive study of ISDS, Dutch scholars Christian Tietje and Freya Baetens argued that an important reason for including ISDS in TTIP is the variability among the EU’s 28 independent regulatory and judicial regimes. The pattern of Intra-EU ISDS claims validates this view. Similarly, U.S. investors have filed nine claims against four EU Member States with whom the U.S. has BITs.

It’s clear that European investors often choose not to rely on domestic courts in Europe. A TTIP investment chapter without ISDS would force American investors to pursue their claims in the very courts that European investors have the option to avoid.

The record of American investors in European courts where ISDS is not available does not inspire confidence. The case of Raytheon v. the City of Palermo is illustrative. In 1968, Palermo’s mayor “requisitioned” Raytheon’s electronics factory and allowed its workers to occupy the facility. Raytheon sued in Italian courts alleging expropriation without compensation and failure to provide proper security for Raytheon’s facilities. The case dragged on while Raytheon liquidated its ownership at a loss. The U.S. government eventually espoused the case, but ultimately lost at the International Court of Justice in 1989, more than 20 years after the incident.

For the TTIP Investment chapter, U.S. investors face three possibilities. The best result would be a TTIP with ISDS and investor protections consistent with the 2012 U.S. Model BIT. A TTIP investment chapter with ISDS but establishing a lower standard of protection, like CETA, would be worse than the status quo in the nine EU member states where U.S. BITs are in force but better than nothing in the other 19 EU member states. This scenario, however, is complicated because the nine U.S. BITs with EU members are currently “grandfathered” under current EU policy toward Member State BITs with third parties – in this case the United States -- following the Lisbon Treaty, because the EU has stated that it would seek to require Member States to terminate BITs with third parties once an EU-wide investment agreement is in place. A TTIP without ISDS would also be highly problematic, depriving American investors of a dispute settlement mechanism that European investors frequently use in Europe, leaving either local courts or espousal. Considering this, it’s no surprise that U.S. Trade Representative Michael Froman has said that a TTIP without ISDS would “fall short of the goal.”

Scott Miller holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C. Greg Hicks is a State Department fellow at CSIS. The views expressed herein are those of the authors and do not necessarily reflect the views of the U.S. Department of State or the U.S. government.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Scott Miller
Senior Mentor (Non-resident), Executive Education

Greg Hicks