EU Investor Court May Fizzle Under Biden Administration

Law360 (October 27, 2020, 4:12 PM EDT) -- The European Union has struggled to find support among other nations as it looks to transform traditional ad hoc investor-state dispute settlement into a worldwide investment court, and it appears unlikely that the proposal would gain much traction in a potential Joe Biden administration.

As many nations have begun to recalculate the cost-benefit analysis of foreign direct investment and reject investor-state dispute settlement over concerns that it erodes their sovereignty, there seems to be little appetite among lawmakers outside of the EU for an investment court.

The EU's proposal is aimed at resolving widespread criticism that ad hoc investor-state arbitration is too secretive and biased in favor of investors. The court, which would include an appellate mechanism and a sitting roster of judges, is being discussed by a United Nations working group.

But the proposal does little to address the broader concern that investor-state arbitration allows corporations to challenge a nation's policies if they can prove those policies violated the country's obligations under a treaty.

While the Trump administration has participated in the U.N. working group discussions, it has not signaled any interest in pursuing such a dispute settlement mechanism — and experts say there's little reason to think a potential Biden administration would be moved to pursue it either, given the disdain for ISDS that many Democrats have adopted in recent years.

"The interest groups that are influential in the Democratic Party have hated ISDS for a long time," said Edward Alden, a senior fellow at the Council on Foreign Relations. "I don't see any appetite in a Democratic administration to revisit this. I think it would create a big fight within the Democratic Party, and I don't really know why they would want to go down that road."

To date, Biden has made only a few specific comments regarding ISDS. In July, he told the United Steelworkers that he didn't support "special tribunals that are not available to other organizations" and wouldn't agree to ISDS provisions in trade deals that would allow private corporations to attack labor, health and environmental policies.

While Biden's comments on the issue lack detail, some have interpreted them as something of a continuation of the stance he adopted as part of the Obama administration.

As vice president under former President Barack Obama, Biden supported a more restrained version of ISDS as a component of the now-defunct Trans-Pacific Partnership, which was aimed at addressing concerns articulated by progressives.

For example, the deal underscored that countries retain the right to regulate in the public interest, including on health, safety, the financial sector and the environment. It also included a new standard permitting governments to seek expedited review and dismissal of frivolous claims.

The TPP also included a carveout excluding claims relating to tobacco control measures adopted by a nation from the pact's ISDS clause — a direct response to claims brought against Australia and Uruguay by Philip Morris.

The claim against Uruguay had to do with the country's enacting of regulations requiring an increase in the size of graphic health warnings on cigarette packages and a single presentation requirement prohibiting different packaging for cigarettes sold under a given brand, such as Marlboro Gold and Marlboro Red. The claim against Australia, meanwhile, related to a 2011 law adopted by the country imposing a sweeping ban on trademarks of any kind on cigarette packages.

Both claims were dismissed: the Australia claim for jurisdictional reasons, and the Uruguay claim on the grounds that the adopted measures were reasonable exercises of the country's sovereign right to protect public health.

But they nevertheless caused a stir among nations over "regulatory chill," referring to the idea that the threat of litigation could prompt nations to think twice about enacting regulations that could potentially affect a foreign investor's bottom line and lead to an investor-state claim.

Could that mean that Biden might continue the approach laid out by his former boss? Maybe, says Allen & Overy LLP partner Patrick Pearsall, former chief of investment arbitration at the U.S. State Department during the Obama administration — though it's unclear whether that approach might translate into support for the investor court.

"I think that there continues to be open questions about what the U.S.' position on investment arbitration as the dispute mechanism will be, either in the second term of the Trump administration or in a Biden administration," he told Law360. "I do think that a Biden administration will ensure that U.S. investors are protected abroad, similar to the way that administrations have sought to protect U.S. investors for 70 years ... [but] there's an open question about what the approach to institutions will look like."

In fact, a potential Biden administration could be in a "unique position" to revisit the policies adopted by the Obama administration given how much U.S. trade policy has evolved over the last four years and the comments Biden provided to the USW, said Baker Botts partner Alejandro A. Escobar.

Moreover, an argument can be made that the inclusion of ISDS within the TPP was meant to appease Republican lawmakers, who have traditionally supported ISDS as a means of protecting U.S. investors abroad.

Fast-forward to the Trump administration and the GOP as it now stands, and it's not so clear that such a political calculation would be necessary. Trump's U.S. trade representative, Robert Lighthizer, issued a scathing rebuke of investment arbitration during a 2018 discussion with lawmakers, suggesting that the mechanism undermines U.S. sovereignty and encourages companies to outsource factories to foreign countries.

It's worth noting, too, that the investor court was a nonstarter for the Obama administration in discussions for the now-defunct Transatlantic Trade and Investment Partnership between the European Union and the U.S.

One of the stumbling blocks there was the EU's proposal for an investment court to replace traditional ad hoc ISDS, according to Jean Heilman Grier, trade principal at international consulting firm Djaghe LLC, who previously served as senior procurement negotiator for the Office of the U.S. Trade Representative.

"The U.S. opposed it, and that gap was one of the issues that prevented the TTIP from going forward," she said. "You'd have to look and say, if the Obama administration was opposed to it, there's probably a fairly good likelihood that at least on first look, a Biden administration would also oppose it or at least be skeptical."

Despite that probable skepticism, Heilman Grier said delegates from a potential Biden administration would almost certainly continue participating in the discussions within the U.N. working group "because you'd want to at least be at the table."

Still, the extent to which those discussions would evolve into any kind of a concrete proposal by the U.S. is unclear, particularly since Biden has made clear he intends to first focus on domestic issues if he is elected.

"There may become a push [from Democrats] to try to relook at this issue, but it's going to need more workup and probably more expressions of either opposition to arbitration or support for a new approach ... before you're going to see something that forces an administration to look at it differently," Heilman Grier said.

--Editing by Philip Shea and Orlando Lorenzo.

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