Corporate Sovereignty Suits Increasingly Used to Deter Regulation, Not Win Compensation

By Glyn Moody and cross-posted from Tech-Dirt

The rise in public awareness of the dangers of corporate sovereignty provisions in agreements like TPP and TAFTA/TTIP has brought with it a collateral benefit: academics are starting to explore its effects in greater depth. An example is a new paper from Krzysztof J. Pelc, who is an Associate Professor in the Department of Political Science, at McGill University in Canada. Called “Does the Investment Regime Induce Frivolous Litigation?” (pdf), it looks at how the investor-state dispute settlement (ISDS) mechanism has evolved in recent years, and in a very troubling direction.

Along the way, the paper explores one of the central arguments made by those supporting the inclusion of corporate sovereignty chapters in major agreements: investors lose most of the claims that they bring against governments, so ISDS is really nothing to worry about. But Pelc identifies a key question posed by this line of thinking:

Why would investors continue to file these highly costly cases, if the expected success rate is so low?

In fact, things turn out to be even more mysterious:

Current estimates actually overstate investors’ success rates, especially when it comes to specific types of legal claims. What is more, this rate of success has been dropping precipitously over time — the exact opposite trend to the one we observe in inter-state disputes in the trade regime over the same period.

By analyzing 1421 individual claims in 676 investment disputes from 1993 to present day, Pelc discovered that most disputes are over what are claimed to be instances of indirect expropriation by governments. That’s in contrast to the traditional direct kind, for example when dictators send their armed thugs to throw foreign investors out of a factory they own — something that almost never happens these days. Indirect expropriation is claimed by companies to include things like enforcing higher standards for drug patents, or simply trying to protect key water supplies from pollution. Pelc explains why investors are doing this, even though the odds of winning are low:

The cost of investor-state litigation — far higher than the cost of, say, trade litigation — means that firms may benefit from spillover effects of the challenges they bring forth. When Philip Morris challenged Australia’s labeling regulations, New Zealand put its own labeling legislation on hold, and Philip Morris loudly praised the decision. If litigation exerts a sufficient deterrent effect, firms may benefit even when they lose a case. The result is an increased likelihood of frivolous litigation, where the purpose of a challenge is not so much to win the dispute or obtain compensation, as it is to deter further regulation

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