An "investor-to-state dispute settlement" (ISDS) is a special legal right that only those who invest in a foreign country can use to challenge a law, regulation, judicial or administrative ruling or any other government decision. Investors are those who buy property—whether it’s an acre of land, a factory or stocks and bonds.
ISDS allows the foreign property owner to skip domestic courts, administrative procedures, city hall hearings and the like (all the processes that home-grown property owners use) and sue the host-country government before a panel of private “arbitrators” (like judges, arbitrators have the power to make decisions in cases, but they are not democratically elected or appointed, and they are not subject to stringent conflict of interest rules). Not only that but the foreign property owners don’t lose access to the domestic U.S. processes—they can “double dip” to get what they want.
What’s the risk?
The risk is that foreign property owners can use this system of "corporate courts" to challenge anything from plain packaging rules for cigarettes to denials of permits for toxic waste dumps to increases in the minimum wage. For any law, regulation or other government decision that the foreign investor does not like, all it has to do is think of an argument for why the decision somehow violated its right to “fair and equitable treatment” or why it might reduce its expected profits and it’s got a case. And, sometimes, just threatening the case is enough for the proposed law or regulation to be withdrawn.
What are some examples?
The North American Free Trade Agreement (NAFTA): In the Metalclad case, a U.S. corporation sued the Mexican federal government over a local government’s decision to deny a permit to operate a toxic waste dump. Local citizens felt the dump would pollute their water supply and petitioned their government to deny the permit. Metalclad won more than $15 million.
NAFTA: In the Methanex case, a Canadian company sued the U.S. federal government over the state of California’s decision to prohibit the use of MTBE as an additive in gasoline. Although Methanex lost the case, the state and federal government spent millions defending the case. Millions they would not have had to spend without ISDS: Methanex could not have brought the same complaint under U.S. domestic law.
See, these decisions don’t, by themselves, “overturn” the law, regulation or decision that was challenged. But if the country loses a case and wants to keep the decision that was challenged, it has to pay a fine (sometimes a substantial fine: Ecuador was recently ordered to pay more than $2 billion to Occidental Petroleum). And many countries will just change the rule instead of paying the fine.
Currently, in Europe, a Swedish corporation is using ISDS to sue Germany over its decision to phase out nuclear power, and a French company is suing Egypt over a number of labor market measures, including an increase in the minimum wage.
Are these the kind of cases we want European companies (in the case of Trans-Atlantic Trade and Investment Partnership) or Pacific Rim companies (in the case of the Trans-Pacific Partnership Free Trade Agreement) to bring against U.S. laws and regulations? The American people should be deciding what our policies should be, rather than letting foreign companies and their investors hold us up for ransom every time they don't like our laws.