"ISDS Provisions in TPP Violate Article III of the U.S. Constitution"

Conservative constitutional lawyer Bruce Fein agreeing with Alan Morrison: Fast Track is "defective constitutionally" (source: Thom Hartmann program)

by Gaius Publius

There's a growing recognition within the legal community that the ISDS provisions of treaties like NAFTA, TPP, many trade agreements already signed and almost all agreements going forward ... may well be unconstitutional. That is, they violate protections offered to citizens by important articles of the Constitution — for example, Article III, which establishes the judicial branch of the U.S. government, assigns its powers and establishes the right of trial by jury (my emphasis, obviously):

The judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority;—to all Cases affecting Ambassadors, other public Ministers and Consuls;—to all Cases of admiralty and maritime Jurisdiction;—to Controversies to which the United States shall be a Party;—to Controversies between two or more States;—between a State and Citizens of another State;—between Citizens of different States;—between Citizens of the same State claiming Lands under Grants of different States, and between a State, or the Citizens thereof, and foreign States, Citizens or Subjects.

In all Cases affecting Ambassadors, other public Ministers and Consuls, and those in which a State shall be Party, the supreme Court shall have original Jurisdiction. In all the other Cases before mentioned, the supreme Court shall have appellate Jurisdiction, both as to Law and Fact, with such Exceptions, and under such Regulations as the Congress shall make.

Trial of all Crimes, except in Cases of Impeachment, shall be by Jury; and such Trial shall be held in the State where the said Crimes shall have been committed; but when not committed within any State, the Trial shall be at such Place or Places as the Congress may by Law have directed.

I recommend taking a moment to read the above. It's from our founding document, and it's pretty clear.

What Do Constitutional Lawyers Say About ISDS?

ISDS is shorthand for "Investor-State Dispute Settlement" provisions in current trade "agreements" — these are carefully not called treaties, apparently as an attempt to bypass the Treaty Clause of the U.S. Constitution, which mandates that treaties be ratified by a two-thirds vote of the Senate:

[The President] shall have Power, by and with the Advice and Consent of the Senate, to make Treaties, provided two thirds of the Senators present concur.

ISDS provisions are described more fully below.

You can listen to conservative constitutional lawyer Bruce Fein in the interview above. Below is the opinion of Alan Morrison, described by Public Citizen as "a constitutional law professor and associate dean at George Washington University Law School who has practiced law for 45 years, taught at six law schools including Harvard, and argued 20 Supreme Court cases." Here is what Dr. Morrison wrote in a letter to the U.S. Congress (pdf).

Bottom Line First

I'm going to quote liberally from Dr. Morrison's letter — you can read it in its entirety here (pdf). Emphasis is mine except where specified.

"The Investor-State Dispute Settlement Provisions in the Trans-Pacific Partnership Agreement Violate Article III of the United States Constitution"

... Given the importance of the ISDS provisions to the TPP, the Administration owes it to Congress and the American people to explain how the Constitution allows the United States to agree to submit the validity of its federal, state, and local laws to three private arbitrators, with no possibility of review by any U.S. court. That is simply not the way that our Constitution provides for the resolution of the legality of federal, state, or local government laws, rules, or other actions. If someone from the Department of Justice has a different view, I would be more than happy to debate that person before a committee of Congress or in any other appropriate forum.

Let's look at Morrison's argument point by point.

What Are Investor-State Dispute Settlement Provisions?

What are these provisions? What do they allow and what do they disallow?

I am writing to call to your attention a serious, but previously undiscussed constitutional problem with the investor-state dispute settlement (“ISDS”) provisions of the proposed Trans-Pacific Partnership Agreement (“TPP”). They would allow foreign investors to challenge laws, regulations, and court decisions of our federal, state, and local governments, not in our court systems, but before three privately appointed arbitrators.

And:

Such arbitration tribunals would be empowered to order the United States Government to pay unlimited sums in damages to the foreign investor if the investor could convince two of the arbitrators that the challenge to a governmental action violated any of its substantive rights provided by the TPP.

In other words, ISDS provisions bypass the constitutionally established court systems of all countries that sign these agreements. In addition, the ability to bypass courts is offered only to investors, as opposed to labor unions or environmental and human rights advocacy groups. Again, decisions of these extra-judicial tribunals are not subject to review by any national court.

Violating the U.S. Constitution

Dr. Morrison, as does Dr. Fein above, asserts that these provisions violate cornerstone protections of the U.S. Constitution. Morrison (entire passage emphasized in original):

I am writing this letter because I believe that the creation of private arbitral tribunals to decide whether otherwise valid federal, state, and local laws are inconsistent with the investor protection provisions of the TPP improperly removes a core judicial function from the federal courts and therefore violates Article III of the Constitution.

I can easily see a judicial challenge to all of these provisions arising out of this claim. But to continue.

ISDS "Arbitrators" Are Not Judges, But Lawyers With a Built-In Interest in Ruling in Favor of Investors

Consider for a moment that you had a dispute with a contentious neighbor, one given to filing lawsuits. When you go to court, you discover that the judge in your case is also the lawyer representing the same neighbor in someone else's case — and that both cases were being heard simultaneously. That is, your judge was also your current opponent's lawyer.Would you trust the impartiality of your judge?

The ability of the same individual to cross back and forth from judge to advocate provides perverse incentives in the case of the "judge." Yet that's basically the setup with ISDS tribunals. Morrison:

Instead of making the challenge in a court in the country where the investment was made, or before judges of a recognized international tribunal, the TPP would allow an investor to bring the case before an ad hoc tribunal of three arbitrators, one appointed by the investor, one by the nation in which the investment was made, and the third by the agreement of the other two arbitrators. The arbitrators are generally private citizens, often lawyers who specialize in international trade and investment, for whom serving as arbitrators is only one source of their income. Indeed, many of those who serve as arbitrators in one ISDS case represent investors challenging governments in another. Their decisions on the merits of the case are final and not subject to judicial review in any court.

If I'm an investor (a hedge fund owner; a multinational corporation; its CEO), I would pay almost any amount of money to anyone who would take it to get that setup passed and signed.

The Sole Defendant Is the Federal Government. The Sole Remedy is Money Damages.

This is an especially tough set of restrictions, since the real defendants in these cases are likely to be state and municipal governments, as you'll see in the examples further down. In addition, even when the defendant is the federal government, for example, when federal "country of origin" labeling (COOL) laws are challenged, the response of the government — whose representatives, it must be said, depend on big money interests to maintain themselves in office — can usually be counted on to bend to big money interests.

Congress is about to do just that by repealing COOL laws as a result of a challenge filed by Canada and Mexico before another "trade" organization, the WTO.

Morrison:

Under the proposed TPP, in a foreign investor case challenging one of our laws or decisions, the sole defendant would be the federal government, even if the investor’s claim is that a state or city enacted the law or took the action being challenged. The sole remedy is money damages. Others, such as the state that enacted the challenged law, may only participate at the invitation of the federal government which controls the proceeding for the defense. If a law is found to be inconsistent with an investor protection provision, it may remain in effect, but other investors could also bring claims seeking U.S. taxpayer compensation. Thus, an adverse arbitral decision under TPP may well result in repeal or amendment of the offending law. In the case of the United States, if the challenge is to a state or local decision, Congress would probably pass a law preempting the offending provision. Indeed, the mere instigation of an ISDS proceeding has resulted in other governments, including Germany and Canada, reversing specific regulatory decisions as part of compensation packages for investors.

Again, the repeal of country-of-origin laws is slated for this session of Congress and, in the name of "trade," is almost certain to pass (links above the quote).

Some Examples

Morrison offers four examples of how ISDS provisions can result in perverse and unconstitutional outcomes.

Example 1 — Post-TPP regulation of e-cigarettes:

Concerned about the loss of customers who no longer smoke conventional cigarettes, the tobacco companies have created e-cigarettes, which are currently unregulated. If Congress decided to regulate them after enactment of the TPP, a non-U.S. investor from a TPP country that makes e-cigarettes here could ask an ISDS panel to rule that its investment-based expectations were improperly violated and thus that it is entitled to damages under the minimum standard of treatment provisions.

Example 2 — Post-TPP water rationing in California:

A similar challenge could be made by a TPP investor who owned farm land in California and objected to an intensification of mandatory water rationing for farms enacted after the TPP goes into effect, even if such rules also applied to U.S. owners of land that would be adversely affected by them.

Example 3 — Post-TPP minimum wage increases:

Or the non-U.S. TPP-owner of restaurants in Los Angeles could demand arbitration over a post TPP-enactment of an increase in the minimum wage to $15 an hour, which, he claims, violates his investment-based expectations when he decided to purchase the restaurants.

Example 4 — Post-TPP tightening of regulation for abortion clinics:

Or suppose a non-U.S. investor from a TPP nation decided to open a chain of abortion clinics in Texas and received permits for all of them. If, shortly after the TPP went into effect, Texas passed a law imposing additional health and safety requirements that significantly increased the investor’s cost of doing business, the law would be subject to challenge under the TPP.

Morrison concludes: "Instead of suing in federal or state court, raising U.S. or state constitutional law claims, the investor in each of those cases could circumvent domestic courts and demand ISDS arbitration."

What Makes These Cases Different from Other Cases Settled by Arbitration?

Each of the cases above involve judgements of law, not facts. The facts in all of the above examples are not in dispute; what is disputed is whether one law — the municipal, state or federal regulation — is inconsistent with another law — the ISDS provision of the trade agreement.

In all such cases as these:

The relevant facts in this kind of case, including my four hypotheticals, are rarely in dispute, and the question of legality is typically resolved by a state or federal judge and then ultimately by the U.S. Supreme Court. But not under the TPP. The foreign investor can avoid the U.S. court system entirely by choosing arbitration, not just in the first instance, but at all, since the TPP excludes judicial review of the merits of decisions by these private arbitrators.

Here's why previous case law, discussed in the letter, "falls heavily on the side of unconstitutionality":

None of these [previously discussed court] decisions resolves the constitutionality of the TPP ISDS arbitration procedures, but their collective reasoning falls heavily on the side of unconstitutionality, based on four factors that apply to the TPP tribunals: (1) they deal with questions of law, that judges normally decide, not questions of fact, that could go to juries or arbitrators; (2) the arbitrators are not federal officers, construing and applying federal law, but are private parties, none of whom has to be an American citizen; (3) the consent of the United States is general and not case specific and, where the challenge is to a state or local law, the state or locality never consents at all, but had the decision to arbitrate mandated by Congress, thereby raising federalism concerns; and (4) there is no judicial review of the merits of what the arbitrators decide, especially whether the TPP had been violated at all.

I suspect if there were significant (real, financed) challenges to these provisions, the entire basis of modern trade agreements could be ultimately overturned.

The court system is a powerful tool, as climate activists are discovering. Citizens United was a court case that worked (for the other side). I believe the unconstitutionality of these "agreements" is a significant vulnerability that could and should be profitably explored. As Morrison and Fein attest, it's certainly a bipartisan concern.

Who is Alan Morrison?

For completeness, and because most of us aren't followers of the major players in the world of Supreme Court lawyers, here's what Dr. Morrison says about himself. From the letter:

Interest and Public Service Law at the George Washington University Law School, where I teach constitutional law, with a special focus on separation of powers. I have also taught at Harvard, NYU, Stanford, Hawaii and American University law schools. During my more than 45 years of legal practice, I have argued 20 cases before the Supreme Court and have been co-counsel for a party or an amicus in more than another 100. Included in those Supreme Court cases are eleven major separation of powers rulings. Because I was not part of any of the three branches of the federal government, I was free to support or oppose a law depending on my view of its constitutionality.

Not nobody; definitely somebody. We could use a few more people like Morrison and Fein to weigh in, as well as judicial commenters — paging Dahlia Lithwick and Jonathan Turley? — to contribute to the conversation. On its face, it would be a fruitful conversation to have.

Judiciously yours,

GP