Investor-State Regulatory Disputes (Part 1)

The project I am currently working on looks for new approaches to the problem of investor-state regulatory disputes.  The problem is well-known among international investment law scholars, and a variety of solutions have been proposed, but none in my view has been satisfying. 

The basic problem arises when a foreign investor challenges a generally applicable regulation that was enacted by the host state as a good-faith attempt to promote the public interest.  Although any effect on the foreign investor’s business would have been incidental, the investor has at least a viable claim under the fair and equitable treatment obligation contained in the bilateral investment treaty between the host state and the investor’s home state.  Such claims do not need to show bad faith or other opportunistic conduct by the host state, as the fair and equitable treatment standard has been construed to require a degree of stability in the regulatory framework irrespective of the host state’s motives.  To give one particularly controversial example of this increasingly common form of dispute, tobacco companies have challenged regulations on cigarette marketing in a few different countries as violating their rights as foreign investors, even though the regulations are clearly designed to promote public health and not to extract value from them. 

The increasing prevalence of such claims is troubling to many because it puts international investment arbitral tribunals in the position of evaluating the policies of host states.  In an earlier phase of international investment, when investors were more likely to challenge outright expropriations or other forms of bad-faith conduct, the availability of impartial tribunals was seen as a valuable check on host state abuse.  But as investor-state disputes increasingly involve challenges to regulatory efforts that only incidentally affect foreign investment, the discussion has shifted to concerns about the potential for tribunals to interfere with host state sovereignty.

In response to such sovereignty concerns, commentators -- and increasingly the tribunals themselves -- have begun to converge around a view that analyzes regulatory disputes within a public law framework.  That means proceeding with special concern for the needs of the sovereign state, recognizing that the parties to the dispute are not co-equal in status but stand in a vertical relationship.  Commentators have drawn on analogies to constitutional and administrative law to propose a variety of doctrinal solutions, such as a balancing test that would weigh the host state’s regulatory concerns against the investor’s rights to determine whether the enacted measure is proportional to the burden imposed on the investor.

I am skeptical about the existing proposals and more generally about whether the public law analogy points us in the right direction.  While it is true that we entrust domestic judges to employ balancing tests and the like when reviewing domestic legislation, international arbitrators lack the expertise and legitimacy to do the same.  One concern is that most arbitrators do not have experience or training in public policy, as they typically come from commercial backgrounds.  But the more fundamental problem is that foreign arbitrators are not part of the same political community that enacted the challenged measures and thus lack the expertise (and accompanying legitimacy) a domestic court would have to make the context-sensitive, value-laden judgments required.  Others have made similar points, though they go on to propose a solution that, in my view, suffers from the same essential problem and creates additional concerns as well.

Having set up the basic issue and described my concerns about the prevailing ideas in the literature, I will turn in a follow-up post to the alternative path I propose.