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Wall Street Journal Cites Law Professor’s Work on Dispute Resolution Controversy

The Wall Street Journal reported this week on the growing controversy over President Obama’s trade ambitions in the Pacific. At the center of the debate sits the investment-treaty dispute resolution (ITA), sometimes referred to as ISDS, a core area of research for Washington and Lee law professor Susan Franck.

The article examines the Trans-Pacific Partnership, a trade pact involving the U.S., Japan and ten other countries and a key focus of the President’s economic agenda. Critics of the trade deal, which includes both Republicans and Democrats, view language in this agreement and other similar pacts as a potential threat to U.S. sovereignty. The National Economic Council, by contrast, explained that offering dispute settlement through ITA does not require states to change their laws.

Franck explained that ITA is a routine aspect of trade deals that already exists in roughly 3,000 bilateral treaties that provide assurances to companies and individuals who invest abroad should a foreign government discriminate against them or seize their property.

“You have to have a process that is perceived to be fair, whether it is a national court or an international tribunal,” she told the Wall Street Journal.

Critics of the system, including prominent democrats and libertarians, argue that ITA, in addition to being a threat to national sovereignty, favors corporations over their employees and can encourage companies to move plants and workers abroad. Critics also say the dispute resolution system favors developed nations over developing nations.

Franck conducts empirical research on a variety of factors involved in ITA, including award outcomes and whether the ultimate result is influenced by factors like investor identity, state democracy and development levels, and whether parties’ retain expert counsel.

The Wall Street Journal referred to Franck’s unpublished research that demonstrated states won reliably more cases than investors. Although investors won 57 of the cases in the dataset, states won 87 cases. Roughly, this means that, for every two cases won by companies and individuals, governments won about three cases.  Factoring in amounts claimed, tribunals awarded an average of 18% of claimed damages in all cases and, for the sub-set of cases where investors won, tribunals awarded an average of 35% of claimed damages.  The relative success rates of claimants shared similarities with outcomes in domestic litigation involving individuals challenging large institutions or governments.

Franck’s other recent article, “Conflating Politics and Development? Examining Investment Treaty Arbitration Outcomes,” appearing soon in the , examines ITA outcomes in greater detail by focusing exclusively on respondent state development and democracy levels.  The majority of tests were unable to identify a link between states’ development status and outcomes.

Although one analysis indicated investors suing upper-middle income states obtained larger awards, after adjusting for amounts claimed, investors suing upper-middle income states did not obtain higher levels of relative success. Moreover, after controlling for states’ internal democracy levels, none of the twelve analyses could identify any reliable link between state development levels and outcome.

Without a reliable link, it is logically impossible for development status, by itself, to cause outcomes, Franck says. Rather, critics of ITA may be inadvertently confusing concerns about the potential unfair treatment of the developing world with problems associated with states that have lower levels of democracy, and presumably, lower levels of good governance.