Right to Regulation & Investment Court System: Alternative to ISDS? (Part I)

   by Pratyush Nath Upreti, Upreti & Associates*

Intellectual Property is sexy! Its romantic endeavor with other branches of law makes it appealing for IP scholars. This romance can be seen through the lens of the global Intellectual property regime. In today’s industrialized world, the landscape of the intellectual property is changing. Mostly, all forms of ‘intellectual property’ have raised debate in the trade agreements domain, making it an important aspect of trade negotiation. The open market economy encourages the developed countries to opt for Investment/Trade Agreement such as Free trade agreement (FTA), Bilateral Investment Treaties to attract investors by strengthening IP regimes. It is evident that IP as incentive commodity has turned into assets, trading commodity.

Similarly, the expectation of investors is increasing. Recent cases such as Philip Morris v. Uruguay have revealed the complexity and potential overlap between intellectual property, Investment Law, and Trade Law. The nature of claims raised in such cases has raised serious concerns regarding state’s sovereign right to regulate, which is reflected in the ongoing negotiation of Transatlantic Trade and Investment Partnership (TTIP). The recent public consultation report on investment protection and investor-to-state dispute settlement (ISDS) in the TTIP reveals that the Commission received a total of nearly 15,000 replies and an overwhelming majority showed concern to the inclusion of ISDS in TTIP.

One of the aspects is the EU Right to regulate provisions in the Investment Agreement. The concern raised is that the ISDS would be a potential limitation to the rights of government to regulate on public interest. Earlier September, European Commission published a draft text of the Investment Chapter in the proposed Transatlantic Trade and Investment Partnership (TTIP) between the EU and the US, propose the ‘Investment Court’, which has generated discussion.

Right to Regulation

According to the report from the Swedish National Board of Trade, the term ‘right to regulate’ is misleading. The report refers right to regulate as ‘to the extent to which the state can legislate and make decisions without running the risk of being found in violation of the treaty and having to pay damages’. It has been an established principle of state sovereign right to regulate on public, health and environment affairs. But the diverse opinions of tribunals and increasing legitimate expectation of Investor has seriously narrowed the state right to regulate.  The very fundamental question is to what extent can investors expectations rise?

In Eli Lilly vs. Canada under the North American Free Trade Agreement (NAFTA), Eli Lilly a pharmaceutical company invoked investment claims under UNCITRAL rules, on the ground that the patent invalidation by a Canadian Court violated a principle of fair and equitable treatment, including Lilly’s legitimate expectation about the treatment of its investment and Canada’s obligation to refrain from conduct that is arbitrary, unfair, unjust and discriminatory. Further, it was argued that ‘Lily was entitled to reasonably rely on the stability, predictability, and consistency of Canada’s Legal and business framework existing at each stage of the establishment, expansion, and development of Lilly’s Investment.

The above cases raised a fundamental question on the scope of application of ‘fair and equitable treatment or reasonable expectation of investment’ under intellectual property investment claims. The investor expectation should not be subjective and not all investor expectations are legitimate. Moreover, the arguments put forward by the claimant in Lilly directly come in conflict with state sovereign right to regulate the domestic Intellectual Property. The investor completely ignores the difference between the pre-existing rights and post-existing rights. Both the pre and post rights have limitation. The right does not arise if a prerequisite is not fulfilled. Similarly, once rights are acquired, they cannot be absolute; they are subject to changes on several grounds.

In practice, fair and equitable treatment and full protection and security are not absolute, there being limitations. Parkerings-Compagniet AS v. Lithuania tribunal analyzed the state sovereign power to regulate lies on higher foot then claims of free and equitable treatment. The Tribunal stated:

 

“It is each state’s undeniable right and privilege to exercise its sovereign legislative power. A state has the tight to enact, modify or cancel a law at its own discretion. Save for the existence of an agreement, in the form of a stabilization clause or otherwise, there is nothing objectionable about the amendment brought to the regulatory framework existing at the time an investor made its investment. As a matter of fact, any businessman or investor knows that law will evolve over time. What is prohibited however is for a State to act unfairly, unreasonably or inequitably in the exercise of its legislative power.”

Similarly, in Chemtura v. Canada, the tribunal upheld the Canadian government’s right to legislate laws based on scientific reviews and dismissed the investor’s claims. However, critics of ISDS have raised that such limitation of state right to regulate may bring regulatory snare. Therefore, Europe is trying to narrow down the scope of provision under the agreement to avoid vague interpretation by a tribunal. The previous agreements such as CETA and EU Singapore FTA, were drafted in a way to have a higher benchmark on the right to regulate.

For example under CETA, Article X.9 clears list down the contents of fair and equitable treatment such as (i) denial of justice in criminal, civil or administrative proceedings (ii) fundamental breach of due process (ii) arbitrary conduct and among others. The closed list avoids unwarranted interpretation by the tribunal, which may affect state right to regulate. Similarly, Article X.11 excludes expropriation claims on compulsory license and exclusively explains that indirect expropriation occurs when measure substantially deprives the investor property right such as (i) right to use (ii) enjoy and dispose of its investment (ii) transfer of title or seizure. In spite of such approach, public outcry on ISDS provisions seems to be a major hurdle for the European Union.  Therefore, to negate such a scenario and create a positive public opinion on TTIP, the Commission has proposed ‘Investment Court’ to address Investor claims.

Investment Court: Coffin for ISDS?

The concept of ‘Investment Court’ has been floating through Commission Draft Text of TTIP, which opens with a disclaimer that the document is solely for internal purpose and the commission will consult with the EU’s Member States and discuss the proposal with the European Parliament before presenting it formally to the United States.  The said EU proposal for an Investment Court is described as ‘over ambitious’ and deprives investors of the traditional possibility to choose their arbitrator. The proposal establishes a two tier court system; Tribunal of First Instance (tribunal) and Appeal Tribunal. The tribunal will follow the existing international arbitration rules of ICSID and UNCITRAL. Similarly, Article 13 allows the tribunal to apply only international law and interpret agreements in accordance with customary rules of interpretation. The provision expressly argues that the tribunal is not obliged by domestic interpretations of the law and the tribunal shall not have jurisdiction to determine the legality of a measure under the domestic law of the disputing party.

One of the criticisms of ISDS was the lack of transparency and maverick arbitrators. The proposed Investment Court has overcome such criticism. According to Article 11 of the proposal, judges of the Tribunal and members of the Appeal Tribunal must be persons whose independence is beyond doubt. Similarly, judges shall not be affiliated with government or organizations and also upon appointment, they shall refrain from acting as counsel in any pending or new investment protection disputes under this or any other agreement or domestic law.  In addition, the party to the dispute may challenge the appointment of the judge if it considers that the judge or member has a conflict of interests.

The very fundamental principle of investment arbitration is the investor’s active role in the appointment of an arbitrator. The proposed draft takes away this privilege of investors. However, the proposed draft gives an opportunity to the United States and the European Union to appoint permanent judges to the Appeal Tribunal and also to the Tribunal of First Instance.

This makes me suspicious regarding the possible political appointment of judges. This is very much possible, considering the worries of EU. Moreover, such pro-state judges will keep in mind to avoid unnecessary interpretation which limits the state’s right to regulation.  I believe that the investors cannot accept such an appointment process as the very fundamental reason for the involvement of investors in the appointment process was to avoid political interference. Therefore, I think the Commission should reconsider the appointment of judges and – if needed – some share should also be given to investor to balance the appointment process.

The proposed draft clearly fills the demand for more transparency in the arbitration process by abiding with the ‘UNCITRAL Transparency Rules’ and lists down documents to be publicly made available upon request. Additionally, it goes beyond and allows disclosure of third party funding to the parties.  This is indeed a very important aspect of the proposed draft.

In the end, I conclude that the proposed Investment Court seems a way to avoid ISDS. Moreover, it looks that proposal aims to gather positive public opinion on TTIP. The major question is even if the proposal of Investment Court System is accepted, then will it be applied retrospectively to all previous several Investment Agreement to which EU is member? If not, then there is always a scope of diverse opinion, which may narrow the state right to regulate. Time will tell whether ‘Investment Court’ is coffin to ISDS or muffin to the EU trade policy.

Let time be the protagonist.


Pratyush Nath Upreti recently completed Advanced Master (LLM) Intellectual Property Law & Knowledge Management (IPKM) from Maastricht University, Netherlands.  He is also an active member of New IP Lawyer’s, a wing of school of Law and its research centre SCule (Science, Culture and the Law) under University of Exeter, United Kingdom. He can be reached by p.upreti@student.maastrichtuniversity.nl

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