The Real Intent of ISDS Lawsuits – Compensations Are Just Icing on the Cake

Investor-State Dispute Settlement, a dispute mechanism typically embedded in bilateral and multilateral investment agreements, has witnessed a dramatic rise in its use in the past two decades. If the general public have been largely been kept in the dark about these claims which typically are handled out of public view, the dollar amounts involved in the recent claims and the shocking rulings coming out of the ISDS secret tribunals certainly have caused an increasing chunk of the population wondering what is going on.

For those who are just dialing in, here are a few WTF cases which hopefully will entice you to read on:

  • Meyers sues Canada for closing its border trade in toxic PCB and won, receiving $6 million and having the law repealed (link) .
  • Bilcon sues Nova Scotia over disapproval of quarry terminal and won, $300 million awarded (link).
  • Canada’s Lone Pine Resources uses a US mailbox location to sue for $250 million over Quebec moratorium on fracking under the St. Lawrence River (link).
  • Ethyl Corp sues Canada over import ban of neurotoxin gasoline additive, won and had the law repealed (link).
  • Veolia sues Egypt for $100 million over minimum wage increase (link).
  • Vattenfall sues Germany for $4.6 billion over premature phaseout of nuclear plants (link).
  • See more ISDS cases and the jaw-dropping conflict of interest built into the private ISDS tribunals.

Notably, accompanying the sharp rise in quantity, the nature of the lawsuits in recent years is also evolving. A recent study suggests that the relative number of frivolous lawsuits is on the rise, as the apparent motivations of the lawsuits also seem to be shifting.

Does the Investment Regime Induce Frivolous Litigation? (PDF), a new research report written by Krzysztof J. Pelc, Associate Professor in the Department of Political Science, at McGill University in Canada, analyzed 1,421 individual claims in 676 disputes since 1993, makes the following observations.

  • Instead of the traditional image of a foreign investor suing a corrupt third-world government for expropriation of his land and factory, the recent lawsuits are launched against democratic nations with mature legal systems and the claims continue to shift towards indirect expropriation.
  • Along with the dramatic rise in ISDS lawsuits, the cases are getting increasingly frivolous.
  • Perhaps as a consequence of #2 above, foreign corporations have been suing more and more , but percentage-wise they are winning less and less;

which led to the author speculating why these corporations keep cranking up the dial as their odds deteriorate – is it simply a numbers game, or something else is at play here?

As ridiculous and shocking as some of the lawsuits – and some of the even more shocking judgments and subsequent awards – might be, a lot of ISDS lawsuits do not proceed to arbitration, as outlined in the report. A good majority of them get dropped (some are just too frivolous, even for the conflicted tribunals) while some are settled with an undisclosed amount plus a gag order.

Then why are ISDS cases growing like bacteria on a Petri dish?

There are a couple of plausible reasons.

The first one is that the cost of a lawsuit, though prohibitively high for a small enterprise, is manageable for a multinational, along with the fact that there is no further downside. From the report:

The only cost they face from a legal challenge is the cost of counsel which in the case of the investment regime, in particular, remains quite high. Yet they need not worry about possible retaliatory challenges, or the reputational costs of belligerence. Quite the opposite, a reputation as an aggressive claimant may work to a multinational company’s net benefit.

The second and more plausible reason is anchored to the old adage that an ounce of prevention is better than a pound of cure.

The objective of an ISDS lawsuit is not in the obscene amount of compensation awarded by a conflicted secret tribunal. As obscene as that amount may be, that’s only icing on the cake.

The real intent is one of deterrence – to cast a chill and stifle any attempt by any level of government contemplating to introduce legislation to protect the environment, health, work safety and other public interests.

Imagine you are an aspiring entrepreneur who has come up with a bigger and better Facebook like platform and getting a lot of traction after releasing a beta version into the wild to test the waters. The next day Facebook knocks on your door and serves you a legal notice stating that your platform has violated certain IPs which the mega corporation owns, and that unless you ‘cease and decease’ right this moment, they are going to deal you a one billion dollar lawsuit.

What would you do in this case, assuming that you know how to count the number of zeros involved in the notice? Would you mortgage your house in order to fight the lawsuit? I’d bet you my next 500 Facebook Likes that you will close up shop and go back to your daytime job.

So the tactic is rather simple. Any legislator contemplating new legislation unfriendly to a multinational would likely get a tap on the shoulder and a thinly veiled warning that a ton of ISDS bricks, metaphorically speaking, is going to come down on her/him if the proposed legislation goes any further.

It is a shot across the bow.

If someone warns you that he would use violence and you know he has a bazooka in his pocket and has demonstrated his willingness to use it, what would be your best course of action?

Such would be the predicament you would be faced with as a federal, provincial/state or municipal legislator before you even take a first step of tabling new legislation.

A quick glance at your hand would reveal that:

  • The foreign multinational can sue you, but not the other way around. Nor can your citizens sue the foreign corporation.
  • Their war chest is loaded. For crying out loud, some corporations have revenue which rivals your country’s GDP, let alone your tiny municipality.
  • The lawsuit, if it comes to that, will be held in a secret court – in a jurisdiction of their choosing – by a private, conflicted tribunal tilted in their favor. WTF, chances are the ‘judges’ have just finished another case serving (and handsomely paid) as counsel for another multinational suing another nation!
  • Your chance of winning is at best a crap shoot (below 500 for Canada so far). The best outcome for you is that you win the case and only have to pay attorney and arbitration fees (average $8 million a case).

What would you likely do?

Folding like a lawn chair would be a pretty good bet.

Even in the unlikely event that a legislator is brave enough to proceed despite the warning and the whole thing ends up in arbitration and the corporation actually ends up losing, as they often do, the casualties in the long war of attrition would give other legislators enough of a chill to contemplate any similar legislation.

An ancient Chinese proverb describes it best: You kill the chicken to warn the monkeys


Thanks to this regulatory chill, the volume of legislation which never sees the light of day is probably analogous to the submerged portion of an iceberg. The tip of the iceberg, though not plenty, can certainly be spotted. To wit:

Exhibit #1: Big Tobacco

RJ Reynolds Tobacco issued this memo to the Canadian Federal Government threatening it with a hundreds-of-million lawsuit when it contemplated its ‘plain packaging legislation’ in 1994.  The Canadian government folded, and the legislation has not seen the light of day since.

In 2013, the government of New Zealand planned to introduce similar plain packaging legislation, but decided to wait for the ISDS lawsuit launched by Philip Morris against Australia to clear (link).

Exhibit #2: Auto Insurance

When an all-party committee of the provisional government of New Brunswick, Canada, recommended a publicly run auto insurance program in response to a public outcry over skyrocketing premiums in 2004, the association representing the largest insurers in Canada warned that it would trigger legal action under NAFTA’s Chapter 11. The proposal was swiftly abandoned (link).

A similar episode also unfolded in the province of Ontario with an identical outcome.

And we’ll close with a quote from a former Canadian government official who told a journalist five years after NAFTA’s ISDS provisions came into force:

“I’ve seen the letters from the New York and DC law firms coming up to the Canadian government on virtually every new environmental regulation and proposition in the last five years. They involved dry-cleaning chemicals, pharmaceuticals, pesticides, patent law. Virtually all of the new initiatives were targeted and most of them never saw the light of day” (link)

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