The claim

The Trans-Pacific Partnership trade and investment agreement was formally signed by 12 ministers in Auckland on February 4.

Independent Senator Nick Xenophon spoke in the Senate about the agreement.

"It has been put to me that, if a government introduced poker machine legislation to protect consumers, an overseas poker machine manufacturer could end up suing that government for doing what was clearly in the public interest," he said on November 10, 2015.

ABC Fact Check asked the Senator whether this statement reflected his own views.

"The risk I have identified in the statement is, I believe, well founded, given my understanding of the TPP and the initial analyses of the text," he told Fact Check.

Fact Check takes Senator Xenophon's statement to mean a successful legal claim against the Government, given a manufacturer can already launch an unsuccessful claim against the Government in an Australian court or elsewhere.

The verdict

The scenario painted by Senator Xenophon is unlikely.

Technically, under the TPP it will be possible for an overseas poker machine manufacturer to bring a claim for damages against the Government.

However, for this to succeed and not be quickly dismissed, the company needs to have real operations in Australia and the Australian government must have changed gambling laws in such an egregious or discriminatory way that it breaches the investment protections in the TPP.

Ultimately, a TPP dispute will be decided on the specific facts of the case, and a tribunal's interpretation of the agreement remains uncertain.

But the introduction of reasonable gambling legislation that is "clearly in the public interest" is unlikely to lead to a successful claim by an overseas poker machine manufacturer.

The TPP

The Trans-Pacific Partnership, or TPP, is a trade and investment agreement entered into by 12 Pacific Rim countries: Australia, the United States, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

The agreement was concluded on October 5, 2015, with the text officially released on November 5, 2015. It was formally signed on February 4, 2016.

Fact Check has already answered your questions about the TPP with the help of experts across the world.

Senator Xenophon's statement in the Senate raises some specific concerns about the Investor State Dispute Settlement, or ISDS, component of the TPP.

The ISDS mechanism allows an "investor" in a foreign country to bring arbitration proceedings against a government in an international arbitration tribunal, if investor protections in Chapter 9 of the TPP are not complied with.

Among others, there are protections against unequal treatment between local and foreign companies and against expropriation of private property without fair compensation.

Further information about ISDS, and its use under other trade or investment agreements, is set out in the TPP Fact File.

The poker machine industry

The production and sale of gaming machines is heavily regulated by Australian states and territories.

There are a number of local and international suppliers of gaming machines for the Australian market.

Independent Senator Nick Xenophon has long been an opponent of poker machines. ( Flickr: Raging Wire )

The two biggest suppliers are Australian companies Aristocrat Leisure and Ainsworth Gaming Technologies.

Foreign suppliers include Japanese owned Aruze Gaming and Konami Australia, US based but Italian owned International Game Technology and US company Scientific Games.

Some of the foreign companies manufacture or assemble machines in Australia, while all of the major companies have local sales teams and offices.

How could a poker machine manufacturer bring a claim?

It is technically possible for a poker machine manufacturer to bring a claim under ISDS.

Whether it can do so in reality will depend on the facts of a particular case. In particular it needs:

To be a foreign "investor" based or with substantial business activities in a TPP country (other than Australia);

To be a foreign "investor" based or with substantial business activities in a TPP country (other than Australia); To have an "investment" under the meaning of that term in the TPP;

To have an "investment" under the meaning of that term in the TPP; Grounds for a claim (for example, it was discriminated against, had its assets confiscated without compensation or wasn't being given "fair and equitable treatment" - unless one of several exceptions in the TPP applies to prevent a claim).

A TPP "investment" needs to involve the "commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk".

If a claim is brought without any real basis, Australia can seek summary dismissal of the dispute, and seek costs from the other party.

The TPP and public interest laws

Senator Xenophon refers to "poker machine legislation" that is "clearly in the public interest".

According to the Department of Foreign Affairs and Trade, the TPP "contains a suite of mechanisms that, together, explicitly safeguard a state's ability to engage in legitimate public policy regulation".

Some exceptions and carve-outs Broad statement about public interest regulation in the the Preamble to the TPP.

Broad statement about public interest regulation in the the Preamble to the TPP. Article 29.3 allows "temporary safeguard measures" in exceptional circumstances.

Article 29.3 allows "temporary safeguard measures" in exceptional circumstances. Article 29.5 excludes tobacco control measures.

Article 29.5 excludes tobacco control measures. Requirement to consider "legitimate public welfare objectives" in relation to National Treatment and Most Favoured Nation standards (Investment Chapter, footnote 14).

Requirement to consider "legitimate public welfare objectives" in relation to National Treatment and Most Favoured Nation standards (Investment Chapter, footnote 14). Australia-specific exceptions (Annex II - Schedule of Australia).

Fact Check has undertaken its own investigation of the TPP wording with the assistance of recognised legal experts.

Audley Sheppard QC and Sam Luttrell, of international law firm Clifford Chance, who are regularly involved in ISDS disputes acting for both corporations and countries, tell Fact Check that "the main way TPP states went about reserving their rights to act in sensitive policy areas... was by adding carve-outs and regulatory exceptions to the provisions that actually establish the substantive protections and explain how they are to be interpreted".

Article 9.16 also addresses the issue of public policy regulation.

Article 9.16 "Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental, health or other regulatory objectives."

However, Lise Johnson of the Columbia University Center on Sustainable Investment in New York City views Article 9.16 as a "self-defeating provision" that "doesn't provide governments any protection".

Ms Johnson also suggests that the specific carve-out for tobacco regulation "signals that such measures would have otherwise been subject to potential challenges, and that similar measures are subject to challenges without similar carve-outs".

Mr Sheppard and Dr Luttrell suggest that Article 9.16 has "a general interpretative function, emphasising that ISDS tribunals need to take into account environmental and public health considerations when they interpret the other provisions of the TPP Investment Chapter".

When it comes to the other exclusions, they tell Fact Check that "tobacco control measures are very specific, and are therefore able to be clearly defined... and made the subject of a preclusive clause. If the TPP states tried to do the same thing with measures to protect public welfare objectives or the environment, that could have led to the creation of an exclusion of an open-textured nature — which could be abused by the host state in its capacity as a legislator and regulator".

Trade Minister Andrew Robb, signs the Trans Pacific Partnership trade agreement in New Zealand, Thursday, Feb. 4, 2016. ( Supplied: AAP/Peter Meecham )

Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington D.C. says: "The TPP, like prior ISDS provisions but to a more forceful extent, protects the right to regulate in the interests of health, safety and the environment".

"Hypothetical scenarios about poker machines and 'strategic litigation' are pure fancy," he says

Donald Robertson, international law expert and partner of Herbert Smith Freehills, says: "This treaty, more than any other I have seen, makes this concept of public interest a touchstone of the drafting. This binding principle will influence strongly the overall interpretation of the TPP."

Associate Professor Amokura Kawharu of the University of Auckland says: "The text includes novel safeguards which are aimed at clarifying the purpose of the rules and preserving policy space. Nonetheless, some issues are not addressed, and the scope of the rules and the exceptions (and therefore the Government's right to regulate in the public interest) remains uncertain."

What is an 'investment'?

To be able to even qualify to use ISDS, a poker machine manufacturer would need to show it has an "investment" in Australia.

Simply exporting machines to Australia is not enough.

Mr Robertson tells Fact Check:

"Merely being a manufacturer does not give you standing under the TPP or any other bilateral investment treaty. You must be an investor. It is possible for manufacturers to be investors (i.e. essentially to have the characteristics of one who has committed capital in the relevant host state). But you do not become one simply by being a manufacturer and exporting goods or services."

Similarly, Mr Sheppard and Dr Luttrell say that:

"Short-term contracts, including contracts for the sale of goods, have repeatedly been recognised by ISDS tribunals...as lacking the required characteristics of an 'investment' under international law. The situation might be different if the foreign manufacturer sets up part of its supply chain within the territory of Australia (for example, by establishing a factory or import facility in Australia).

However, Ms Johnson of Columbia University tells Fact Check:

"If an overseas poker machine manufacturer had a corporate affiliate in Australia that was responsible for sales, distribution, marketing or servicing the machines, then the overseas manufacturer could use that affiliate as a 'hook' in order to get the tribunal to take jurisdiction to review the legislation. The opportunities for creative use of these treaties are relatively wide, particularly given the flexibilities companies have to structure themselves and their corporate families so as to be able to take advantage of the treaties' protections."

Given some foreign gaming machine companies have extensive operations in Australia, including machine assembly, some could argue that they have a TPP "investment".

Fair and equitable treatment

Even if qualified as an "investor", the poker machine manufacturer would need to show one of the TPP investment protections was breached by new Australian legislation.

A common basis for ISDS claims by investors under other trade and investment agreements is an alleged breach of "fair and equitable treatment" requirements.

In the TPP, this protection is contained in the Article 9.6 which sets the minimum standard of treatment as being "the customary international law minimum standard of treatment of aliens".

Mr Sheppard and Dr Luttrell tell Fact Check that "there is a line of case authority to the effect that the international minimum standard sets a high bar for proving [a] violation".

Unlike Australian courts, previous decisions are not binding on an ISDS tribunal, although they can influence subsequent decisions.

Mr Sheppard and Dr Luttrell point to a landmark 1926 decision (Neer v Mexico) in which the tribunal found that a violation required conduct amounting to "to an outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency".

In a 2009 dispute under the North American Free Trade Agreement between the United States and a Canadian mining company, the tribunal found that the principles in Neer were applicable, and in that case found that a violation of minimum standard of treatment the act needed to be "sufficiently egregious and shocking".

Article 9.6(4) also says that "the mere fact" an action by a government is "inconsistent with an investor's expectations" does not constitute a breach.

Mr Sheppard and Dr Luttrell say that in practice this means that "the investor would need to show that its expectations as to the stability of of Australian gaming laws were legitimate in the circumstances and that the change in law was arbitrary, discriminatory or manifestly disproportionate".

Given gambling laws are often controversial, it seems unlikely that an investor could prove it had a legitimate expectation that they would never change.

Expropriation of property

Alternatively, a poker machine manufacturer could argue its property has been "indirectly" expropriated or nationalised (a breach of article 9.8).

Annex 9-B, Article 3(b) also states that "Non-discriminatory regulatory actions by a party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute indirect expropriations, except in rare circumstances."

Tobacco giant Philip Morris famously tried and failed to sue the Australian Government over its plain packaging laws, using an ISDS provision in a trade agreement with Hong Kong. ( AAP: Department of Health and Ageing )

In deciding whether property has been indirectly expropriated, the tribunal will be guided by the considerations set out in Annex 9-B.

These considerations include the extent to which the government action interferes with the investor's reasonable expectations (which in turn will depend on matters including "the potential for government regulation in the relevant sector").

In the absence of the government giving a clear guarantee to the poker machine manufacturer that it would not change the law, it again is unlikely that a breach of article 9.8 would be made out.

Mr Sheppard and Dr Luttrell take the view that "non-discriminatory government action of a legislative nature, in a policy-sensitive field like gaming (where there is historically high potential for regulation), is unlikely to qualify as a indirect expropriation under the TPP (absent evidence or government representations as to the legal stability or clear evidence that the action taken is manifestly disproportionate to the stated policy objective".

Mr Robertson says:

"No one can stop parties arguing all sorts of things but the drafters of this treaty have gone to lengths to hammer home the point that mere changes of regulation in the public interest do not constitute an expropriation and that parties cannot use their own inadequate business plans to avoid their social responsibilities, nor to blame the state when external circumstances require proper state intervention to protect the public."

Sources