Ius Gentium

University of Baltimore School of Law's Center for International and Comparative Law Fellows discuss international and comparative legal issues

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Apple Bobbing, Double-Dipping Corporate Fat-Cats Go Shopping

Esther-Jane Grenness

A corporate fat-cat struts from a court-like room. He totes around not just one, but two cash-laden suitcases. Behind him, one of two arbitrators steps down from the bench. This arbitrator surreptitiously tucks a wad of cash into his pants belt under his official-looking robe. In his other hand, he nonchalantly waves a case file in the air. The other arbitrator leans back in her chair and tents her fingers together; a satisfied smile plays across her lips as she admires her own wad of cash. Her wad is nicely tucked under the file for the case on which she has just ruled. The sound of two gavels striking their respective blocks still rings in the air. Behind the defendant’s bench, a little man stands with a bemused expression. In one hand he holds pennies in his palm.  With the other hand, he has turned inside-out a very empty pocket.


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Courtesy of Helene Grenness-Atkins (www.heleneatkinsart.com)

How did that corporate fat-cat get two suitcases full of cash? Why are there are two gavels and two case files? And who is that poor little man behind the defendant’s table with empty pockets? This is how investor-State arbitration is viewed by the outside world – with a proverbial corporate fat-cat strutting from a room with suitcases full of cash. The corporate fat-cat represents the foreign investor, and the poor, empty pocketed little man represents the State. The two arbitrators with wads of cash represent corporate bias, and the two case files represent separate investment treaties. Finally, the single court-like room symbolizes that the two cases are based on the same claim, and the sound of the gavels underscores the general finality of arbitral awards.

Such a turn of events can – and did – arise as a result of a fragmented system where there are a multitude of options to pick from when foreign investors wish to sue States. This has led to so many problems that the system is almost at a crisis point. Legitimacy issues and Swiss-cheese-worthy procedural rules abound. These are problems inherent to a fragmented system. With each new treaty, it seems more provisions are added to fix problems in prior treaties. But merely patching the holes in the system with new treaties is not sufficient. There are too many treaties with too many countries involved for a treaty-by-treaty fix.

One of the problems in the current system is known as treaty shopping. This is where a corporation (or individual) picks and chooses among investment treaties to find the one most beneficial to its purposes. A corporation will create subsidiaries or shell corporations in a particular country to gain national status, which is known as mailbox citizenship. Because there are over three thousand investment treaties worldwide, a corporation can easily have access to the benefits from multiple investment treaties for its business in a single country. There are two problems that arise from access to multiple treaties in one country: double-dipping and apple bobbing.

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Ronald Lauder, Corporate Fat-Cat

Double-dipping happens when treaty shopping leads to parallel claims where a claimant can have two cases for the same claim under two different treaties. This allows foreign investors to potentially obtain two judgments for the same claim from separate tribunals (i.e. double-dipping in a State’s coffers). This was the result in the infamous Czechoslovakian cases, Lauder v. The Czech Republic and CME Czech Republic B.V. v. The Czech Republic.[1] In this situation, our “real” corporate fat-cat, Ronald Lauder, an American businessman, brought suit in his own right under the U.S.-Czech Republic bilateral investment treaty (BIT). But, like a Cheshire cat stealing cream, Lauder filed an additional suit with virtually the same facts using a Dutch subsidiary of one of his companies.[2] This second suit was brought under the Netherlands-Czech Republic BIT. Lauder won both cases.[3]

Arbitral tribunals utilizing United Nations Commission on International Trade Law (UNCITRAL) procedural rules decided both of these cases. Two separate tribunals using the same dispute settlement rules led to a double payout. Two other sources of rules for such suits against States are the International Centre for the Settlement of Investment Disputes (ICSID) and the Permanent Court of Arbitration (PCA) procedures. The procedural rules under which an arbitral tribunal operates often dictate the outcome.[4] To prevent outcomes such as that in the Czechoslovakian cases, there are safeguards in the EU Commission’s investment court proposal, which is part of the EU-Vietnam BIT,[5] Comprehensive Economic and Trade Agreement (CETA),[6] and the yet-to-be-concluded Transatlantic Trade and Investment Partnership (TTIP).[7] In the TTIP, no case may proceed unless the claimant can show that any pending cases have been dismissed.[8] But these treaties only bind the EU, Vietnam, Canada, and the United States.

Apple bobbing happens when treaty shopping allows a losing foreign investor to sue a State for a second time via a different method (i.e. going for a second bite at the apple). Phillip Morris attempted this strategy in Australia. Australia passed the Tobacco Plain Packaging Act of 2011 in which all tobacco products had to be in brown packaging with public health messages. The packaging could not display company logos. Phillip Morris challenged the prohibition on using its logo in Australia’s domestic courts and lost. Not willing to back down, Phillip Morris created a shell company in Hong Kong and brought another case against Australia on the same claim under the Hong Kong, China-Australia BIT.[9]

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Plain Packaging for Cigarettes in Australia

Ultimately, Phillip Morris lost,[10] but this dispute, and others like it, led to a provision nicknamed the tobacco carve-out in the recently concluded Trans-Pacific Partnership (TPP). This provision protects a signatory State’s sovereign right to pass regulations protecting such things as public health.[11] The TTIP and CETA have similar provisions.[12] But this fix only binds the EU, Vietnam, Canada, Australia, Japan, Malaysia, Mexico, Peru, Chile, Brunei, Singapore, New Zealand, and the United States.

Clearly, it’s time to close the store. In both examples of abusive treaty shopping, the fixes were treaty-by-treaty, and they are only binding on a few States. This method is insufficient to address the magnitude of the problem. Much of those old treaties are still on the shelf, ripe for the foreign investor’s picking. With over three thousand investment treaties in existence, it doesn’t take much to fathom the futility of the treaty-by-treaty remedy to a fragmented system. Treaty shopping is just ONE of the problems with the existing system. The case for a single, worldwide investment court is nigh. Sadly, there are no easy ways to implement such a court. With the International Investment Court proposed in the recent EU BITs, we’re a step closer, but some in the industry have been dismissive, calling the investment court proposal “creative” when asked for an opinion.[13] Notwithstanding the critics, I believe we’re turning in the right direction. Unfortunately, whether our destination is on the horizon, over the hill, or on the other side of the mountain is impossible to predict.

Esther-Jane Grenness is an evening student in her third year of studies at the University of Baltimore School of Law. She graduated from the University of Baltimore in 2013 with a Bachelor of Arts in Jurisprudence and obtained her Associate of Arts in General Studies from Howard Community College in 2001. In addition to her studies, Esther has managed projects for almost 10 years in AT&T’s Global Business – Public Sector Solutions group. Esther lives in Columbia, MD, with her teenage daughter. Esther is primarily interested in private international law, specifically related to investment-state dispute settlement.

[1]Andrea K. Bjorklund, “Private Rights and Public International Law: Why Competition Among International Economic Law Tribunals Is Not Working,” 59 Hastings L.J. 241, 258-259.

[2] Id.

[3] http://www.italaw.com/documents/LauderAward.pdf and http://www.italaw.com/sites/default/files/case-documents/ita0180.pdf

[4] Bjorklund, above note 1, 249 – 259 (general discussion of the developments in ICSID tribunals’ interpretation of whether to grant jurisdiction in cases of corporate restructuring to gain access to arbitration for a particular dispute even where the treaty doesn’t explicitly address such an abuse)

[5] EU-Vietnam BIT, Article 24(2), http://trade.ec.europa.eu/doclib/docs/2016/february/tradoc_154224.pdf

[6] CETA, Article 8.24(b), http://trade.ec.europa.eu/doclib/docs/2016/february/tradoc_154224.pdf

[7] TTIP, Section 3, Sub-Section 5, Article 14(1), http://trade.ec.europa.eu/doclib/docs/2015/september/tradoc_153807.pdf

[8] Id., Section 3, Sub-Section 5, Article 14(2)

[9] Julien Chase, “The Treaty Shopping Practice: Corporate Structuring and Restructuring to Gain Access to Investment Treaties and Arbitration,” 11 Hastings Bus. L.J. 225, 245-246

[10] http://www.theguardian.com/australia-news/2015/dec/18/australia-wins-international-legal-battle-with-philip-morris-over-plain-packaging

[11] TPP, Article 9.9(d)(ii), https://medium.com/the-trans-pacific-partnership/investment-c76dbd892f3a#.v3c7otd7r

[12] TTIP, Section 2, Article 2(1), and CETA, Section D, Article 8.9(1)

[13] Quip from panel speaker Ko-Yung Tung during the breakout session, Forum Non Concurrence in the Resolution of Investment Treaty Disputes, at the American Society of International Law’s110th Annual Meeting in Washington, DC, March 31, 2016.