Introduction: Recently the United States Trade Representative (USTR) released a memo to reporters with Q&A’s on Investor-to-State Dispute Settlement (ISDS). ISDS is a mechanism by which foreign investors can challenge national governments, alleging that the government violated their investor rights. These rights include the right to be fairly compensated for expropriated property and to non-discriminatory treatment, but also the right to a “minimum standard of treatment,” which includes “fair and equitable treatment” and “full protection and security” and the right to be free from “performance requirements.”

While these may sound reasonable, in fact these are extremely broad legal rights, many of which are not clearly defined in domestic law. The challenges take place not in domestic courts, but in international arbitration panels that do not apply domestic law. There are numerous “investment treaties” in existence, but their proliferation does not make them harmless. There are lots of rats and mosquitos in Washington, D.C., yet you find few defending them based on their capacity to reproduce successfully. You can read the U.S. Model Bilateral Investment Treaty, which embodies the Administration’s position on ISDS and other protections for investors, here.

ISDS Tilts the Playing Field in Favor of Investors by Providing a Separate Justice System

The memo claims that ISDS does not tilt the playing field in the United States further in favor of big multinational corporations. But it fails to explain exactly how a system that is only open to foreign investors—and no one else in our society—isn’t a giveaway of power to that particular group. The argument that separate systems of justice constitute a level playing field doesn’t pass the laugh test. Reporters and citizens should ask who is demanding the special right to bypass domestic courts and why.

ISDS Provides Rights Far Outside of U.S. Law

The memo then claims that ISDS provides “protections for a limited and clearly specified set of basic rights – like non-discrimination and compensation in the event of an expropriation – that are already consistent with U.S. law.” This statement is not correct. The U.S. ISDS model requires countries to provide foreign investors a “minimum standard of treatment,” which includes “fair and equitable treatment and full protection and security.” The concepts of “minimum standard of treatment” and “fair and equitable treatment” are international law vague, ill-defined concepts that do not exist in U.S. law and are not interpreted according to U.S. law. And even the basic protections of U.S. law are interpreted differently by international tribunals than by U.S. judges using U.S. case law.

Let’s examine the Metalclad v. Mexico case, in which a U.S. investor won more than $15 million in compensation from the Mexican government on a claim arising from the refusal of a local government to issue a building permit for a hazardous waste landfill on environmentally sensitive land.

Under U.S. law, a local decision to deny a permit for a particular kind of economic activity on a particular piece of land does not constitute an expropriation. However, in the Metalclad case, the panel determined that the denial was an expropriation. The panel determined that expropriation includes:

“covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State.” Metalclad v. Mexico, ICSID Additional Facility Rules, CASE No. ARB(AF)/97/1, ¶ 103. (emphasis added)

Such a standard is far beyond U.S. law and, if adopted into U.S. law, could require governments to compensate business for virtually every conceivable type of regulatory measure or protective law.

This is just one example of an outrageous case under a U.S. agreement (the kind that the memo implies are only brought under non-U.S. ISDS rules). There are many more. It is simply disingenuous to tell the American public that ISDS claims are limited to actual takings and actual discrimination when the claims can be based on all kinds of arguments, many of which amount to little more than “hey, you lowered my expected profits, that’s not fair!”

ISDS is a Far More Powerful Process than the One Used for Labor & the Environment

The memo then compares ISDS to the dispute settlement provisions used for labor and environmental disputes. In fact, there is no comparison. The arbitration procedures for labor, environmental, and other commercial disputes in trade deals are government-to-government, which simply means the dispute involves the elected governments of two countries, like the U.S. and Guatemala. Workers whose rights are violated (as is currently happening in Guatemala, Honduras, and Colombia) can’t bring a claim on their own. We have to petition our governments to do so—and wait indefinitely for a response. But under ISDS, foreign investors, such as Occidental Petroleum, Chevron, or The Renco Group, can bring cases directly—no government middleman required.

Unlike government-to-government arbitration, ISDS puts the interests of for-profit investors on a higher level than the interests of democratically elected governments responsible for preventing their citizens from being harmed by poisons in the air and water. Are these the values that the U.S. really wants to promote in the world through its trade deals?

ISDS Impedes Rule of Law by Setting Some Actors Outside the Domestic Justice System

Unbelievably, the memo also claims that ISDS—this separate but unequal justice system, one that is only available to non-citizens—creates “incentives for States to ensure that basic due process and rights are being put in place.” What incentives? Countries are not rewarded by graduating from ISDS once rule of law criteria have been met. Instead, countries with strong rule of law are hit over and over again with investor claims under ISDS (Canada is the 5th most frequently sued country, and the U.S. is ranked 11th).

It’s Expensive and Wasteful to Defend ISDS Cases, Even When You Win

According to the OECD, an average ISDS case costs more than $8 million in legal and arbitration fees (outside of any award made or settlement reached). For all countries involved, these fees represent taxpayer money that could be better spent building science labs and repairing bridges. And how much will it cost U.S. taxpayers when the U.S. finally loses a case? No one knows. There is no maximum amount an investor can seek.

Because the System Lacks Accountability, There is No Guarantee that Governments Will Prevail

The reporters’ memo claims, without explanation that there is no possible way a foreign investor could ever successfully challenge an increase in the minimum wage in the U.S. This is simply not a credible assertion. Nothing in ISDS prevents panels from getting the law wrong, and there is no way to correct cases in which they do.

Hypothetical Case: A Challenge to a Minimum Wage Increase

Let’s assume the TPP enters into force, with an investment chapter modeled on the 2012 Model BIT. Let’s further assume that a Japanese company wins a contract to build and upgrade rail, bridges and roads leading into the Port of Portland. Six months later, the City of Portland passes a law increasing the minimum wage and providing other benefits to workers in the city (this, by the way, seems to be the basis of the claim in the ongoing case of Veolia v. Egypt—well, as far as we can tell anyway—because the case is happening in secret). Japan Co. brings an ISDS suit against the U.S., arguing that the City of Portland’s action on behalf of workers violated its right to “fair and equitable treatment” because it frustrated Japan Co.’s profit expectations.

If Japan Co. were a U.S.-based contractor, and the claim were based on a possible violation of the contract between the City and the contractor, the domestic company would go to the domestic courts and pursue the claim under contract law, not property law. If there were no applicable contractual provisions the City had violated, the court’s answer should be “tough luck, Japan Co., you have to follow the new law just like every other business operating in Portland does and the City does not have to compensate you for doing so.”

But Japan Co.’s lawyers don’t have to pursue the case under well-established standards of U.S. law or argue them in front of U.S. judges, who are responsible to uphold the U.S. Constitution. Japan Co.’s lawyers know that there is potential for them to be compensated for the changes to Portland’s wage and benefit standards as a violation of the right to “fair and equitable treatment,” particularly if they have read prior egregious cases brought under U.S. ISDS provisions, such as Pope & Talbot v. Canada, Occidental Petroleum v. Ecuador, and RDC v. Guatemala.

So let’s say the panel, made up of corporate lawyers who sometimes also represent claimants like Japan Co., inexplicably orders the U.S. to pay up. Well, according to USTR, not to worry, there’s always the right to appeal, right? Wrong! There is no right to appeal (see the Model BIT, page 32). There is an annulment procedure under ICSID rules and a limited opportunity to seek non-enforcement of an award for non-ICSID cases, but these are not appeals as Americans traditionally think of them. Neither procedure is designed to review whether the arbitrators applied the substantive law correctly.

There Is No Process to Correct Legal Mistakes Made by ISDS Tribunals

The annulment committee at the World Bank’s ICSID, which USTR refers to in its memo, has made quite clear that its job is “not to correct legal mistakes”! If a legal mistake can’t be corrected, then in our hypothetical example, U.S. taxpayers would be on the hook to pay off Japan Co. for the non-discriminatory, non-confiscatory action of raising wages and benefits.

Because ISDS Lacks Binding Precedent, It Leads to More Challenges to Democratic Laws

Sticking with our same hypothetical case, let’s assume the U.S. wins, as we agree it should. Even that win wouldn’t settle the legal question. That’s because these ISDS panel decisions do not create binding precedent. So, the following week, Malaysia Co. could bring a similar suit based on the City of Portland’s actions, arguing essentially the same claim. And it might win (look up the differing results in the cases of CME v. The Czech Republic and Lauder v. The Czech Republic, which were both based on the same exact facts)!

ISDS is Bad for Democracy

So why should citizens of any country want this dangerous, undemocratic system in the TPP and TTIP? We shouldn’t. Some U.S. companies say they need it to feel more comfortable that they’ll make lots of money when they make decisions to move more American jobs offshore. But U.S. companies already invest heavily off-shore in places like the U.K., China, and Brazil, with which the U.S. has no ISDS agreements. So ISDS isn’t a necessary prerequisite for foreign investment. In the end, ISDS appears to be little more than an unjustified subsidy to protect investment decisions against democratic efforts to rein in corporate excess. That’s not a mechanism any citizen should get behind.

Celeste Drake holds a B.A., J.D. and M.P.P. from the University of California, Los Angeles and specializes in trade and globalization policy issues at the AFL-CIO.