The Trans-Pacific Partnership and the Advancement of Investor-State Regimes

The Trans-Pacific Partnership and the Advancement of Investor-State Regimes

By: Jessica Rose

Photo Credit: epSos .de


On October 5th of this year, the United States and eleven other nations in the Pacific Rim concluded negotiations on the largest regional trade agreement in history – the Trans-Pacific Partnership (the “TPP”). While the finalized version of the text has yet to be released, an outline of the agreement by the office of the United States Trade Representative includes an investment chapter that places the TPP squarely within the tradition of investor-state dispute settlement (ISDS) regimes. According to the outline, the TPP will include rules on expropriation and “provisions for expeditious, fair, and transparent investor-State dispute settlement subject to appropriate safeguards … [that] will protect the rights of the TPP countries to regulate in the public interest.”

The conclusion of TPP negotiations coincides with a significant but little-remarked event in the history of ISDS. A recent skirmish in August between foreign investors and the Polish Parliament suggests that foreign investors have found ways to use investor-state laws to influence governments even before those governments enact legislation, calling into question the right of TPP governments to “regulate in the public interest.”

The Background: Investor-State Dispute Settlement

ISDS treaties are designed to encourage the flow of investment, usually from developed to developing countries. One of the ways that these treaties try to attract foreign investment is by giving foreign investors, usually multinational corporations (“MNCs”), a mechanism to challenge the behavior of host states when that behavior negatively affects the value of their investment. MNCs can sue host governments through private arbitration – a system where ad hoc arbitrators, who are private citizens, act as judges. These arbitrators decide whether or not the host state’s behavior was sufficiently unfair to constitute expropriation– effectively taking the investor’s property. If so, the state must then compensate the MNC for its losses. In order to accommodate a range of claims against host governments, usually the ISDS regime will loosen the meaning of “expropriation” with words such as “tantamount to,” as in Chapter Eleven of North American Free Trade Agreement.

What does this look like in practice? In March of this year, an arbitration panel awarded Owens-Illinois Inc., an American MNC, $455 million because Venezuela, its host country, seized two of its glass-bottle plants back in 2010. This award is of the less-controversial variety, as Hugo Chavez spent much of his tenure nationalizing a significant portion of Venezuela’s economy. In cases like this, there are few concerns that a foreign investor was unfairly leveraging their powers under the ISDS regime to punish the host state for legitimate governing behaviour.

Why is ISDS controversial?

Objections to “interference” by foreign investors in the governance of host states are, however, common, because most ISDS regimes allow investors to object even if the action of a host state only indirectly affects the value of an MNC’s investment. Much discussion has focused on foreign investors’ ability to abuse that power.

For example, Elizabeth May, the leader of the Canadian Green Party, has repeatedly voiced objections to ISDS agreements Canada has entered into on this basis. She argues that governments are likely to avoid passing laws if they think a foreign investor will object on the basis that that law interferes with their investment. She says it is difficult to accurately assess the extent to which this “regulatory chill” is operating to shift the course of government action, since it probably comes up before proposed regulation even makes it into parliaments or congresses.

Quantitative research performed in 2014 analyzed empirical evidence to conclude that such regulatory chill is not, in fact, occurring. However, a political skirmish in Poland suggests that this conclusion may have been reached prematurely.

What Happened in Poland

On August 5th of this year, the lower chamber of the Polish parliament adopted a draft law on the restructuring of consumer mortgage loans denominated in foreign currency. The law mandated conversion of foreign currency mortgage loans into Polish zlotys at the exchange rate on the day of the granting of the loan. Banks were to bear 90% of the restructuring costs imposed by this law. Predictions about the net loss to the banking sector were estimated at five billion euro.

Before the higher chamber of parliament in Poland voted on the law, however, several foreign banks controlling the major Polish banks whose business would be affected by the law started a letter-writing campaign. Their message to Polish governmental authorities was that they would be bringing claims under the applicable ISDS treaty if the government voted the proposed bill into law. The Senate changed the loan restructuring terms by reducing the banks’ share of the costs to 50%. The law has since been sent back to the lower chamber of Parliament, where it may be completely retooled so as not to place any direct restructuring costs on banks.

While it would be unfair to presume that these changes were entirely a result of that intervention by the foreign banks, it would also be naïve to suggest that their actions played no role in the Polish Parliament’s change of heart. What this means, then, is that foreign actors managed to leverage the tools afforded them under an ISDS regime to influence the direction and shape of Polish legislation – instead of merely receiving compensation post-facto, when their investment had already been affected by those regulatory actions.

This example presents an interesting dilemma: the democratic process in Poland was arguably compromised by the intervention of foreign interests. However, the effects of a predicted 5 billion loss to the banking sector would likely have been so dire that it is easy to argue that the influence of those foreign interests, in this case at least, were a good thing.


The negotiations underpinning the biggest regional trade agreement in history have just concluded yet the landscape for ISDS regimes is still undergoing drastic shifts. The office of the United States Trade Representative assures that the TTP will include investor-State dispute settlement subject to appropriate safeguards that will protect the rights of the TPP countries to regulate in the public interest.

In this case, foreign corporations redirected the Polish State’s actions – but it is not clear whether it was at the expense of Poland’s sovereignty to regulate in the public interest. Regardless, clarity is necessary for an informed discussion to take place. The relationship between foreign investors and host states must be scrutinized to separate theory from practice, to ensure these agreements are entered into eyes-wide-open.

Jessica Rose is an LLM candidate at Berkeley Law. She is a student contributor for Travaux.



The FCPA and Bribery: We-know-it-when-we-see-it

By: Kelsey Quigley

On October 6, 2014, the United States Supreme Court denied a petition for writ of certiorari that requested review of a case brought under the Foreign Corrupt Practices Act of 1977 (“FCPA”) – the first substantive certiorari petition in the history of the statute.

The FCPA prohibits the “offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value” to a “foreign official,” defined as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” In 2011, the United States District Court for the Southern District of Florida convicted two former executives of Miami-based Terra Telecommunications Corp. of various FCPA violations, including the payment of more than $890,000 in bribes to officials at Haiti’s state-owned sole provider of landline telephone services, known as Haiti Teleco. The court sentenced Carlos Rodriguez, Terra’s former vice president, to seven years in prison; Joel Esquenazi, Terra’s former president, received an unprecedented fifteen years in prison – the longest FCPA sentence ever imposed.

The certiorari petition followed the former executives’ unsuccessful appeal to the U.S. Court of Appeals for the Eleventh Circuit, requesting for the very first time in the FCPA’s nearly forty-year history, a review of the legal meaning of “foreign official” under the statute. Specifically, appellants challenged whether officials at state-owned Haiti Teleco were “foreign officials” under the FCPA’s “instrumentality” designation.

In its opinion, the Eleventh Circuit adopted an “instrumentality” interpretation similar to versions utilized by the Department of Justice and the Securities and Exchange Commission, holding that an “instrumentality” is any “entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” Explaining that this legal designation was necessarily “fact-bound,” the Eleventh Circuit provided potential indicia for the two elements required to designate a foreign government “instrumentality:” government control and government function. First, to determine government control, the Eleventh Circuit articulated, among other potential considerations, a government’s ability to hire and fire the entity’s employees and any government majority interest in the entity’s operations and profits – particularly in the context financial backing. Second, to assess whether the entity performs a function that the foreign government treats “as its own,” the Eleventh Circuit suggested that juries look to “whether the entity has a monopoly over the function it exists to carry out; whether the government subsidizes the costs associated with the entity providing services; whether the entity provides services to the public at large in the foreign country; and whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.” U.S. v. Esquenazi, 752 F.3d 912 (2014).

In the petition to the Supreme Court, counsel for Esquenazi and Rodriguez primarily challenged the adoption of the Eleventh Circuit’s “unacceptably broad,” “we-know-it-when-we-see-it” interpretation of a government “instrumentality.” Indeed, at its outer limits, the Eleventh Circuit’s definition seemed “illogical.” Theoretically, “a janitor working for U.S. Government subsidized General Motors could qualify as a ‘foreign official’ if General Motors were located overseas.” More, the petition explained that with this interpretation the statute would extend to “doctors, pharmacists, lab technicians and other health professionals who are employed by state-owned facilities.” These hypotheticals, while thought provoking, arguably overlooked the Eleventh Circuit’s practically fact-driven focus for discerning a foreign government’s “instrumentality.” Using the petition’s own example, General Motors may presently be under “government control” (having recently emerged from a government-backed Chapter 11 bankruptcy), but the company does not meet the Eleventh Circuit’s second element, government function. Along with individual shareholders, GM’s largest beneficial owners are both the Canadian and United States governments; the company does not enjoy a monopoly in American or in Canadian automobile sales; and the public does not perceive GM as serving a “governmental function.” Despite this inconsistency, counsel for the convicted former executives convincingly advocated for the adoption of an unambiguous formal definition of “foreign official” under the FCPA, especially as increasingly severe criminal sentences are imposed for FCPA violations.

The petition also contended that, in drafting the FCPA, Congress intended for a narrow interpretation of the term “instrumentality.” For example, the Foreign Sovereign Immunities Act (“FSIA”), passed just one year before the FCPA in 1976, specifically defines an “instrumentality” as any entity with a “majority of whose shares or other ownership interest is owned by a foreign state or political subdivisions.” Though this language likely applied to state-owned and operated Haiti Telecomm, petitioners argued that the absence of this language from the FCPA “warrants construing ‘instrumentality’ as excluding state-owned or state-controlled enterprises that are not political subdivisions and that do not perform core, traditional governmental functions.” Congress could have included the FSIA’s previously established definition in the FCPA, but chose not to: “[i]f Congress desires to go further [in defining an “instrumentality”…] it must speak more clearly than it has.”

Furthermore, in a joint amicus curae brief, free-market advocates Washington Legal Foundation and Independence Institute acknowledged that the definition of “foreign official” is “the single greatest source of confusion regarding the scope of the FCPA,” and thus of great international business interest. Therefore, as the petition noted, “the time is now ripe for this Court to settle the meaning of instrumentality under the FCPA” – as FCPA actions continue to pertain to “individuals who are not traditional government officials,” and before federal appeals courts publish conflicting opinions. It urged that the Supreme Court settle the question, so that valuable international business officials would not “be left to wonder whether the  [United States] [g]overnment will unilaterally declare their conduct criminal.”

Despite these legal questions, the Supreme Court declined to review the case. According to Southern Illinois University School of Law’s Professor Mike Koehler (who also authors the FCPA Professor blog), the Supreme Court likely declined the petition for writ of certiorari because of the lack of a “circuit split” on the issue. So far, only the Eleventh Circuit has ruled on the FCPA’s “foreign official” issue – largely a result of the SEC’s, the DOJ’s, and other enforcement agencies’ increasing use of alternative dispute resolution forums in FCPA cases. With only the Eleventh Circuit’s precedent and in a climate favoring alternative dispute resolution, questions surrounding the FCPA’s treatment of “foreign officials” who do not fit the more traditional definition, will likely go unanswered.

In an official statement that accompanied the conviction of Esquenazi and Rodriguez, Assistant Attorney General Lanny Breuer declared that violating the FCPA “is a serious crime with serious consequences” and that the federal government will “continue to hold accountable individuals and companies who engage in such corruption.” And yet, the Supreme Court persists in declining to review a fundamental tenet of the statute – what constitutes a “foreign official.” As successful FCPA actions become more prevalent, and especially as the subsequent punishments become increasingly severe, resolving the statute’s ambiguities will become critical to the equitable enforcement of international justice.

Kelsey Quigley is a J.D. Candidate at Berkeley Law. She is a student contributor for Travaux.

Debt, Vultures, and International Law: Argentina’s Mess of a Default

By: Guilherme Duraes

The words “Argentina” and “default” are used in the same sentence more often than anyone would like. Unfortunately, the country defaulted again on its public debt this July, the eighth time in its history. However, what is unique this time is that Argentina has “chosen” to go into default. A US court injunction mandated that Argentina pay some investors it has ignored since 2001, the so-called “vultures.” The decade-long legal battle between Argentina and the “vulture” investors presents important US and international legal issues related to investor protection, sovereign debt restructuring, and national sovereignty.

How did we get here, and who are these vultures anyways?

Economists argue that in the 1990s Argentina borrowed more money in the domestic and international markets than it could afford. In the early 2000s, this budgetary mismanagement, coupled with deeply entrenched protectionist and clientelistic practices, threw the country into one of the most severe economic depressions it has seen. In 2001, the government officially announced that it did not have money to pay its creditors, and declared a default on its debt of about US$95 billion. Following Argentina’s declaration of bankruptcy, riots broke out across the country, people were killed, the president resigned, unemployment skyrocketed in the years following, and millions of middle-class families were thrown into poverty.

In 2005 and 2010, President Néstor Kirchner made two take-it-or-leave-it deals with investors. Through exchange offers, Argentina restructured its debt and replaced the old bonds with new ones that were worth approximately only 30% of the original. While about 92% of investors accepted the offer and the steep discounts, some hedge funds wished to recover full payment, and decided to keep their bonds under the original terms, which gave them the name of “holdouts.” The holdouts have also been dubbed “vultures,” because some of them bought the Argentinian bonds in the secondary market after Argentina had already defaulted and the bonds had lost their value. Argentina claims that these hedge funds merely aim to speculate and take advantage of the country’s economic hardships. In fact, some of these funds specialize in buying bonds from countries in dire circumstances and suing for full payment.

Since the restructuring agreements, Argentina has been paying the investors who accepted the new, discounted bonds, but has not made any payments to the holdouts. Still in the early 2000s, NML Capital, Ltd. and Aurelius Capital Management, LP, two of the holdout hedge funds, took Argentina to court in New York (the bonds are governed under New York law) in order to receive full payment on their bonds.

So why did Argentina go into default this time?

NML Capital, Ltd. v. Republic of Argentina has been in court in New York for over a decade now. NML and Aurelius demand to be paid what is owed to them in full, while Argentina claims that the funds’ actions are tantamount to extortion. In 2012, Judge Thomas Griesa of the Southern District of New York ruled that Argentina could not continue to pay the creditors who adhered to the restructured bonds without paying US$1.3 billion plus interest to NML and Aurelius, which represents the full amount the country has failed to pay since 2001.

However, Argentina is concerned that other holdout funds will start litigation as well if they see that the country was forced to pay NML and Aurelius, which would obliterate the country’s economy. Moreover, the country points to the Rights Upon Future Offers (RUFO) Clause of their bonds, under which bondholders can require Argentina to disburse the same payments to them as it voluntarily disburses to others. According to Argentina, if all the holders of the restructured bonds file suit under the RUFO Clause, the country could be liable for about $150 billion, which is more than four times the country’s foreign-currency reserves. NML argues that, in paying the holdouts due to a court mandate, Argentina would not be disbursing “voluntary” payments, and the RUFO Clause would not be triggered. However, Argentina’s caution is understandable, as there is still uncertainty about how the court would interpret the term “voluntary” in the RUFO Clause.

In June of this year, Judge Griesa ordered all American financial institutions to cease disbursing payments from Argentina to its bondholders until the country pays the holdouts. Argentina deposited $539 million in a Bank of New York Mellon (the trustee for the bonds) account to pay investors by June 30, when payment on the restructured bonds was due. The bank was unable to transfer the funds due to the court injunction and the investors were not paid. Fearing additional demands for payments with which it would not be able to comply, Argentina made the difficult choice not to pay NML and Aurelius, and on July 30, after the grace period expired, the country entered “selective” default.

Argentina attempts to circumvent Judge Griesa’s orders

In order to bypass Judge Griesa’s blockage of the Bank of New York Mellon account, Argentina passed a law that allows holders of the New York-governed bonds to be paid through an Argentinian bank. In fact, the country will completely cease to use Bank of New York Mellon as its trustee and will instead use the state-owned Banco de la Nación. Bondholders will have the option of being paid in Argentina or France, and will be able to swap their bonds for bonds governed by Argentinian law.

On September 29, Judge Griesa ruled that Argentina is in contempt of court. He expressed frustration at the explicit attempts the country has made to circumvent his orders and avoid paying the holdouts. The holdouts requested sanctions on the country of $50,000 per day, but Judge Griesa stated that he would defer on making decisions on sanctions to a future date.

Argentina goes global in its fight against the holdouts

In August, Argentina filed a complaint at the International Court of Justice (ICJ) against the United States, claiming that the U.S. court’s decision to bar the country’s payment to investors violates Argentinian sovereignty. Specifically, Argentina claims that the court’s decision interferes with Argentina’s right and decision to restructure its sovereign debt. Since the U.S. opted out of the ICJ’s compulsory jurisdiction in 1986, when the Court determined that the US involvement in the Nicaraguan war was illegal, the Court can only hear the complaint if the U.S. chooses to submit to its jurisdiction. The United States has not yet officially refused to litigate at the ICJ, but it is highly unlikely that it will submit itself to the Court’s jurisdiction on this matter, especially because this is a contractual dispute rather than a dispute based on a treaty. Investment contracts set forth rights and obligations between the parties, and they often establish the specific jurisdiction for litigation. The bonds here in dispute are governed by New York law and, by contract, should be litigated in New York. Bilateral investment treaties are signed between nation states and establish an international court as the forum for arbitration.

In September, on Argentina’s and Bolivia’s request, the Group of 77 Plus China presented to the United Nations General Assembly a proposal to draft a multilateral legal framework to restructure sovereign debts. The proposal aims to help struggling developing countries restructure their sovereign debt in a fair and sustainable way. At the Assembly, Argentinian Foreign Affairs Minister asserted that “we must prevent more people paying with hunger and misery for the speculation of these sinister gentlemen of opulence: the vulture funds.” The proposal was passed by overwhelming majority: 124 countries voted in favor, 41 abstained, and 11 voted against it, including the United States, the United Kingdom, Japan and Germany. With this resolution, the General Assembly sent out the clear message that debt repayment in struggling countries is an important issue which should be addressed on an international scale. However, though the majority supported the resolution, it is not binding, and countries are not required to help elaborate the framework or abide by it.

The implications of Argentina’s default on international and US law

Judge Griesa’s decision to hold Argentina in contempt of court is virtually unprecedented. It is an established principle of international law that nation-states are immune from judgment at another state’s tribunals. International law also dictates that property belonging to nation states is immune from attachment.

Article 24 of the United Nations Convention on Jurisdictional Immunities of States and Their Property provides that:

(1) Any failure or refusal by a State to comply with an order of a court of another State enjoining it to perform or refrain from performing a specific act or to produce any document or disclose any other information for the purposes of a proceeding shall entail no consequences other than those which may result from such conduct in relation to the merits of the case. In particular, no fine or penalty shall be imposed on the State by reason of such failure or refusal.

Therefore, the extent of Judge Griesa’s power is uncertain, and it is difficult to envision how he could enforce his judgments on Argentina. If attaching property or demanding payments prove difficult enough, imposing non-monetary sanctions on another state, to which the court has alluded, is nearly impossible. Doing so would create a disastrous impasse in foreign relations between the U.S. and Argentina.

In fact, Argentina claims that being held in contempt of a foreign court is an affront to a state’s sovereignty. That is the central argument of a letter that the Argentinian Foreign Affairs Minister wrote to US Secretary of State John Kerry on September 29, ahead of the hearing that ultimately ruled that Argentina is in contempt. Argentina argues that the court’s decision is in violation of international law and urges the US executive branch to interfere in the judiciary’s decision, claiming that a government is responsible for the decisions and omissions of all its organs. It reiterates that it is willing to take the United States to the ICJ for breaching Argentina’s sovereign right to restructure its public debt.

The heart of the matter is that the two countries will remain at an impasse. The United States will not submit to the ICJ’s jurisdiction, and Argentina cannot be forced to pay up. If the United States does end up seizing any property of the Republic of Argentina within the United States or abroad, it runs the risk of causing undesired results from a foreign policy perspective. It could generate uncertainty for other countries and fear that their property could be seized anywhere if a US court so ordered. It could also compel other countries to seize American property within their borders. Moreover, fearing that a couple of US hedge funds could always have the power to push a country into default, other states could choose not to issue bonds under US law anymore, causing capital to leave the country.

On the other hand, if the United States shows that it is not able to enforce its laws on other nation-states, it sends the message to its citizens who invest in the public debt of foreign countries that they cannot trust the power of the law to solve disputes related to those bonds. Investors would feel that they have no protection when pitted against another country. It has been suggested that one way the US Congress could solve this impasse in the future is to require foreign countries to post a collateral when they issue public debt under US law, so as to guarantee that investors are paid.

In Argentina’s case, the best bet is probably to reach a compromise with the US court in order to revert the blockage of payments to the holders of the restructured bonds. Argentina could accomplish this by demonstrating a good-faith effort to negotiate with the holdouts in order to pay them after January of 2015, when the RUFO Clause expires and the country will not have to worry about 93% of bondholders riding on NML’s litigation.

Guilherme Duraes is a J.D. Candidate at Berkeley Law. He is a student contributor for Travaux.