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Article: December 2015: Asia-Pacific Litigation Update

December 01, 2015
Business Litigation Reports

The Trans-Pacific Partnership and Investor-State Dispute Settlement. On October 4, 2015, the long-awaited Trans-Pacific Partnership  (“TPP”) was concluded. The TPP is a free trade agreement among twelve Pacific Rim nations, which include Australia, New Zealand, Singapore,  Malaysia, Japan and the United States, representing around 40% of global GDP and 33% of world trade.  According to the Office of the United States Trade Representative (“USTR”), TPP’s  goal is to  “promote economic growth; support the creation and retention of jobs; enhance innovation, productivity and competitiveness; raise living standards; reduce poverty in our countries; and promote  transparency, good  governance, and enhanced labor and environmental protections.”

One of the most notable and controversial points of the TPP is the inclusion of an investor-state dispute settlement (“ISDS”) mechanism. Some commentators say the ISDS clauses allow investors of member states to bypass local courts, exposing them to liability (and millions in damages payouts) for actions and policy choices of sovereign states.  The flipside, of course, is that ISDS protects foreign investors, where state measures and regulations infringe upon lawful business operations, prejudice foreign (over domestic) investors, or entirely take from or foreclose investors from reaping the rewards of their investment.

Investor-State Dispute Settlement (“ISDS”). Nowadays, ISDS is a  common instrument of international investment protection treaties.   ISDS grants an investor the right to sue a foreign government for violation of treaty obligations before a neutral and impartial tribunal. Various forms of ISDS are a part of over 3,000 agreements worldwide, including the North American Free Trade Agreement, the Energy Charter Treaty, and the China-Australia Free Trade Agreement.

Controversy over ISDS. The most significant concern over ISDS is the potential impact of ISDS rulings on a state’s  internal public policy. The still- pending Philip Morris v. Australia case is an example frequently cited by the critics of ISDS. On December 1, 2011, the Tobacco Plain Packaging Act 2011 (“Act”) became effective in Australia as part of an effort to reduce the rate of smoking in Australia. Philip Morris, one of the world’s  largest tobacco companies, challenged the legislation  under the 1993 Agreement  between the Government of Australia and the Government of Hong Kong SAR for the Promotion and Protection of Investments (“1993 BIT”). Phillip Morris argued that the measure amounted to an expropriation of its Australian investments, unfair  and  inequitable treatment, and  deprivation of  full protection and security in  breach of several articles of the  1993 BIT.   It was reported that the case has already cost the Australian government U.S. $50 million in legal fees and expenses in defending its position. The case is often cited by critics to demonstrate that an ISDS mechanism can be used as a tool for private industry to undermine a government’s public policy and internal regulation.

ISDS in  TPP—Safeguards. In  order to  deal with the concerns over ISDS, minimize the risk that a government’s internal policy will be negatively impacted by an investor’s  suit and safeguard against potential abuses of  ISDS, TPP  has included the following “safeguard” protections:

  • - Recognition of the inherent right of a government of the TPP member states   to protect legitimate public welfare objectives, such as public health, safety       and environment: Article 9.9.3 (d)
  • - Full transparency of the arbitral proceedings: Article 9.23
  • - Dismissal of frivolous claims: Article 9.28.4
  • - Expedited review: Article 9.22.5
  • - Three-year statute of limitation: Article 9.20.1
  • - Appellate mechanism: Article 9.22.11
  • - Binding effects of an interpretation of the treaty issued by a designated                commission: Article 9.24.3
  • - Tribunal’s right to appoint independent experts: Article 9.26

ISDS in TPP—Intellectual Property. In addition to the above safeguards, another notable provision of the TPP is Section 9.1, which lists “intellectual property” as an asset that can be subject to an ISDS procedure. That means investors of TPP members states could sue any of the other member states for introducing rules that unlawfully encroach on their intellectual property rights and interests.  Critics say that this provision impedes on members states’ rights to enact intellectual properly rules that benefit the public, in favor of the profiteering foreign investors. For example, in 2013, U.S. pharmaceutical company Eli Lilly brought suit against Canada for $500 million, alleging that Canada violated similar NAFTA provisions by invalidating two of Eli Lilly’s drug patents.  The Canadian courts found that the drugs did not have the utility or benefits that the company claimed in seeking the patent. Such cases have an important impact on public health and economic policy because the grant of patents can preclude competition for lengthy periods. Whatever the critics say, there is a large and powerful interest in having a neutral legal mechanism to upholdthe rule of law and resolve disputes, although the macroeconomic benefits of the TPP—and in particular the ISDS provisions—to member states’  economies and foreign direct investment, remain to be seen.