Investor-State Dispute Settlements: New Tool to Circumvent the Courts

We’ve discussed forced arbitration issues a lot on our blog. It’s been a favorite topic of late because it is so relevant to today’s legal environment. We’ve explored the ways in which mandatory arbitration violates the rights of average citizens who have been harmed by large corporations. Barred from having their day in a traditional, public court with an unbiased jury determining the outcome of their case, those forced into arbitration are essentially being denied their Constitutional rights to due process and access to the public justice system.

A lot of people argue that, though a traditional trial by jury may not be completely flawless, it is still the best method of settling disputes that any society has ever devised. The American Judicature Society once eloquently stated that “because a jury consists of multiple people from diverse backgrounds, it can arrive at a better verdict than can one person acting alone.” Pretty simple, straightforward reasoning.

Unfortunately, many of the authors of a new Free Trade Agreement (FTA) between The United States of America and 12 other countries do not agree with the American Judicature Society on the clear-cut benefits and superiority of the traditional American court system. The trade deal is called the Trans-Pacific Partnership (TPP), and is the product of over 500 committee members, 85% of whom (according to Elizabeth Warren and Rosa DeLauro) are corporate executives and direct representatives of industry lobby groups for Big Business. Lots of problems with the TPP have already surfaced, and some have even gone so far as to call it a “criminal organization.”  The President wants to “fast-track” the bill by invoking trade promotion authority and rushing it through Congress. The TPP is also completely classified. Only members of Congress are allowed to see its contents and know all of its potential ramifications. In a free and open society, does that make sense? Shouldn’t all of us have the RIGHT to know the content of such important legislation before our elected representatives vote?

The TPP employs Investor-State Dispute Settlement (ISDS), a provision that, like forced arbitration clauses in a variety of domestic contracts between Big Businesses and individual consumers, takes disputes out of the public courtroom and puts them into the hands of private, secret “tribunals.” There is no appeal from the decisions made by the tribunals.

Senator Elizabeth Warren and other Democrats vehemently argue that the employment of ISDS will give huge multi-national corporations the ability to sue foreign governments for adopting and enacting trade regulations. Some of these same corporations have gone so far as to bring lawsuits against countries for raising their minimum wage. Phillip Morris sued two foreign countries after their governments implemented legislation to reduce their smoking rates. Their claim–these laws violated the rules set forth by similar Free Trade Agreements. Translation: Foreign countries may be forced to pay huge corporations large sums of money for passing laws to ensure the safety and health of their own citizens.

The pendulum swings both ways, though, folks. Foreign companies can also sue our government for actions they perceive to cause them to sustain economic harm. In the ‘90s, a large Canadian company called The Loewen Group, Inc. was charged in a lawsuit with running small cemeteries and funeral homes out of business throughout the United States in an unlawful and predatory manner. When a small, private funeral home brought suit against the company for improper business practices, a Mississippi jury ruled in the plaintiff’s favor, awarding $500 million. The Loewen Group appealed several times but lost in each instance. Facing bankruptcy, The Loewen Group then used the arbitral tribunal under the ISDS clause in the North American Free Trade Agreement (NAFTA) to sue the U.S. for $775 million, claiming the Mississippi court system discriminated against the company. The proceeding was ultimately dismissed, but only because The Loewen Group had lost its rights as a Canadian company after it was taken over by a U.S. Corporation. What was troublesome about those proceedings was the fact that the tribunal was asked to, and apparently believed it was empowered to challenge and evaluate the entire Mississippi trial proceedings.

Under the theories advanced by Loewen, almost any type of civil verdict or court rule imposing a requirement on a corporate defendant could be challenged as illegal. Such claims could overturn jury verdicts in products liability cases, such as cases involving defective cars or dangerous drugs and medical devices. The ISDS mechanism could even be used to attacks punitive damages awards in employment discrimination cases or actions based on consumer fraud. Because the definition of “foreign” corporation is broad, a large number of companies could use these provisions to undermine civil verdicts.

A few years ago, all across our country Toyotas started accelerating out of control, causing horrific car crashes and causing millions of dollars in damages. 89 deaths and 57 injuries were reported with a total of 6,200 complaints. Employees at Toyota were found in America’s state courts to be guilty of fraud by continuing to build faulty and dangerous cars when they knew they were defective and potentially deadly. The company was ordered to pay $1.2 billion to settle the claim.

If the TPP is passed, under the rules of ISDS Toyota could fashion a claim against the United States for damaging their business and seek to hold it accountable for their losses.

The President says this is just a hypothetical argument. But we think it’s too real to ignore.