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Profiting from Injustice: New European report puts investor-state industry put under the microscope

There’s nothing fair or just about the investor-state dispute settlement (ISDS) process inside Canada’s free trade deals and Foreign Investment Protection and Promotion Agreements (FIPAs). Actually, according to a new European report, ISDS looks more like a racket, supported by an inner circle of secretive investment lawyers and arbitrators with “a vested interest in perpetuating an investment regime that prioritizes the rights of investors at the expense of democratically elected national governments and sovereign states.”

The report, Profiting from Injustice: How law firms, arbitrators and financiers are fuelling an investment arbitration boom, could not have come at a better time in Canada.

The controversy about a recent FIPA with China continues to burn. Ontario and Quebec have just been hit by two ridiculous NAFTA lawsuits against a ban on fracking and a moratorium on offshore wind developments. And there is news today suggesting an investment treaty inside the Canada-EU free trade deal could be much worse than either NAFTA or the China FIPA by expanding the opportunities for European firms to seek compensation from changes to Canadian health, environmental or safety rules that lower profit expectations.

It’s becoming fairly clear to a lot of people (and countries like Australia, South Africa, Ecuador) that the ISDS regime is unfair and unreasonable. But as this new report by Pia Eberhardt of Corporate Europe Observatory and Cecilia Olivet of Transnational Institute says, “one sector has remained largely obscured from public view and that is the legal industry that has profited from this litigation boom.” The report “seeks to address that by examining the key players in the investment arbitration industry for the first time,” and “to shine a light on law firms, arbitrators and litigation funders that have profited handsomely from lawsuits against governments.”

Could it be that the people at the centre of the investor-state dispute regime, who can make up to $1,000 an hour suing governments for environmental or other completely legitimate measures like a fracking ban, are as much a part of the problem as the regime itself?

The CEO/TNI report makes a very strong case that they are a problem through several key findings which I’ve summarized here.

– The number of investor-state disputes expanding from 38 in 1996 to 450 (known cases) in 2011, with the amount of money demanded of governments per case also increasing. There are bragging rights involved. An article on arbitration cited in the report explains, “Bringing a billion-dollar claim is no longer enough to stand out in a survey of international arbitration. Nor is it enough to win a measly US$100 million. Attention, arbitration lawyers: What it takes to distinguish yourself these days is a US$350 million award, minimum.”

– This proliferation of cases has created “bonanza profits for investment lawyers paid for by taxpayers,” including in countries that cannot afford to pay for basic social services. “For example,” says the report, “the Philippine government spent US$58 million defending two cases against German airport operator Fraport; money that could have paid the salaries of 12,500 teachers for one year or vaccinated 3.8 million children against diseases such as TB, diphtheria, tetanus and polio.”

There is a tight-knit group of arbitrators, mostly from the Northern Hemisphere, sometimes referred to as an “inner mafia,” that handle a majority of cases. This small group of lawyers and judges–15 of the top names have decided 55% of all known disputes–“act as both arbitrators and counsels and even call on each other as witnesses in arbitration cases. This has led to growing concerns, including within the broader legal community, over conflicts of interest.”

Three of the top “movers and shakers” of the investor-state arbitration world (there is a fantastic chart in the CEO/TNI report) are Canadian: Yves Fortier, a former Canadian diplomat who has sat on many corporate boards and who, until 2011, worked for top investment arbitration firm Norton Rose (formerly Ogilvy Renault); Marc Lalonde, a former minister of health, justice, energy and finance with strong links to the corporate world, and; Henri Alvarez, “one of the three elite 15 arbitrators still part of global law firm, Fasken Martineau,” according to the report, who specializes in Latin American cases.

Fortier has been involved in 28 known investor-state arbitrations (or 6.2%) and Lalonde 30 (or 6.7%), the latter representing investors in 17 cases and governments in only 3. Alvarez has handled 14 cases (or 3.1%) and is mainly appointed by companies (64% of the time).

– These arbitrators tend to share the same worldview (pro-business) and often sit on the boards of directors of companies, some of which have used investor-state arbitration to dispute government measures in the Global South.

Law firms specializing in investor-state dispute settlement actively seek out opportunities to encourage clients to sue governments, including crisis situations such as in Greece and Libya during the revolution. This is how investment lawyers have earned the name “ambulance chasers,” like old-time lawyers who would follow ambulances to the hospital to pick up clients.

Law firms and arbitrators have actively sold ISDS to countries, including Canada, as necessary for attracting investment, and they have advocated treaties that offer them “maximum possibilities for litigation.” They then use these broadly worded protections in trade and investment deals to increase the number of cases, and there is statistical evidence to suggest arbitrators “consistently adopt an expansive (claimant-friendly) interpretation” in cases but a “restrictive approach in international law when it comes to human and social rights.”

Here we can point to today’s Canadian Press article on the Canada-EU trade and investment deal (CETA), which cites leaked documents showing “the Europeans are resisting Canada’s request to carve out health, safety and the environment from rules about expropriation — even though such clauses have become standard in most of Canada’s trade and investment treaties.” The article compares the leak to other documents obtained by the CAQ and printed in La Presse online, in which the European Commission says, “Canada’s proposed text would permit expropriation without compensation, in order to pursue legitimate policy objectives. This should not be accepted.”

Instead, write CP, “the EU says companies should always be fully compensated if their businesses are hurt by government policy, regardless of the good intentions of the policy.”

– The CEO/TNI report also describes how arbitrators and investment lawyers use their position of influence to actively lobby against reforms to the investor-state regime.

Often this lobbying happens in public, in the pages of newspapers and other news media. For example, in a letter to the editor responding to an Ipolitics.ca interview with Victoria law professor Andrew Newcombe (FIPA fears of environmental blowback overblown, say experts), Osgoode Hall law professor Gus Van Harten wondered why the online newspaper did not mention that Newcombe “worked as a lawyer in at least one case for a foreign company that used these arbitration mechanisms to challenge environmental measures.”

Van Harten says he points this out because:

in observing media coverage on the Canada-China FIPA, I have noticed that various experts who are cited in support of the FIPA also evidently work, or are at law firms that do business, in investor-state arbitration under NAFTA or similar treaties. While I do not begrudge them their right to be heard, I think it important that readers be informed when sources cited as experts have an apparent financial stake in the matter, especially when the source is taking a position that purports to assess and downplay NAFTA’s or the FIPA’s financial risks to taxpayers and legal constraints on voters.

I hyperlinked part of Van Harten’s letter (various experts) to feed into the next key finding in the CEO/TNI report on investor-state arbitration:

“There is a revolving door between investment lawyers and government policy-makers that bolsters an unjust investment regime,” write the corporate watchdogs. How better to describe the move this summer of Matthew Kronby from head of the federal government’s trade law bureau to trade and investment lawyer with Bennett Jones LLP?

Kronby would have played a role in negotiating FIPAs and Canadian free trade deals over his ten years in government. Now is is working for a firm that advertises Investment Treaties and Disputes as one of its services, and which has been retained by the Government of Canada to advise on trade negotiations, including the current agreement with the European Union.

(When the federal government couldn’t spare any officials to explain the Canadian position in the CETA negotiations during a March 2012 conference, organized by the European Chamber of Commerce, they sent Milos Barutciski of Bennett Jones. Barutciski has co-authored at least two op-eds on the importance of the China FIPA with his new associate, Kronby.)

The revolving door doesn’t just move between government and private practice but between both and academia, says CEO and TNI. “Investment lawyers have a firm grip on academic discourse on investment law and arbitration, producing a large part of the academic writings on the subject, controlling on average 74% of editorial boards of the key journals on investment law, and frequently failing to disclose the way they personally benefit from the system. This raises concerns over academic balance and independence.”

– Finally, the report warns that the investor-state dispute regime is becoming increasingly “integrated with the speculative financial world,” to the point where investment funds are helping cash-strapped investors front the costs of corporate lawsuits against governments in exchange for a cut of the settlement. These investments can also be traded on financial markets in a twisted process that “has even extended to proposals to sell on packages of lawsuits to third parties, in the vein of the disastrous credit default swaps behind the global financial crisis.”


The good news in the report–and there isn’t much of it, to be honest–is that there is a growing backlash against the investor-state dispute settlement regime.

We’ve talked here (in this blog) about the Australian decision last year to stop negotiating FIPA-like investment protections or ISDS into bilateral or regional trade agreements. Can you believe the Australian economy did not collapse as a result? Of course you can. Now, the Australian resistance to giving foreign companies excessive rights to challenge public health measures such as plain packaging rules for cigarettes is causing troubles for the Trans-Pacific Partnership negotiations, where ISDS is important to the U.S. (as it will be to Canada when the federal government joins the TPP negotiations next week in Auckland.)

India and South Africa are also getting cold feet about ISDS. And Brazil “has never signed a BIT and yet receives the largest amount of foreign direct investment of any Latin American country,” according to the CEO/TNI report out today — a fact that strips away any argument that this regime is an important part of attracting foreign investment to Canada or anywhere else. It isn’t. There’s no proof anywhere it creates an incentive one way or another. So why negotiate these treaties?

I don’t think there’s any doubt that these investment treaties serve an ideological purpose by punishing governments that would dare interfere with the profits of multinational capital. NAFTA has forced Canada to pay for environmental regulations that treat all companies the same. The ISDS regime hangs the perpetual threat of costly lawsuits over the heads of Canadian policy makers. New health measures or new social services or new environmental regulations may never see the light of day for fear of attracting arbitration.

But the CEO/TNI report offers a compelling case that ISDS has become an industry unto itself, with its own self-preservation and perpetuation fueling a proliferation of treaties (there are over 3,000 in existence) and of actual cases. Awards are now reaching towards the $2 billion mark and claims, as in the recent Vattenfall challenge to Germany’s nuclear phaseout, have surpassed $5 billion. The corporate watchdogs offer some simple reforms that might make the process more transparent and accountable. But as they conclude:

these reform proposals will not suffice to address the most egregious injustice of the international investment regime: the exclusive right of foreign investors to threaten and initiate claims against legislative, executive or judicial decisions outside of national courts and the lack of mechanisms for communities to address corporate impunity when violations of human and environmental rights occur.

Without turning away from investor-state arbitration, the balance will remain skewed in favour of big business and a powerful and highly lucrative arbitration industry.

To download the full report, Profiting from Injustice, click here.