Panelists detail limited ISDS in USMCA

Investor-state dispute settlement provisions in the U.S.-Mexico-Canada Agreement are much scaled back from NAFTA’s language.

   U.S.-Mexico-Canada Agreement (USMCA) investor-state dispute settlement (ISDS) provisions apply to limited sectors, exclude Canada and require companies to contract with governments to use the mechanism, said panelists during a Washington International Trade Association (WITA) event on Thursday.
   U.S. companies investing in Mexico are eligible to file ISDS claims once they have entered into a contract with a Mexican government entity, even if the claim stems from a different government-related or private investment, said Aaron Padilla, American Petroleum Institute senior adviser for international policy.
   “By virtue of just having a current agreement for some other part of your business in Mexico, you’re eligible, then, to bring a claim against a breach of an investment protection that may impact any other of your investments in Mexico, so long as you have one of those agreements in place,” Padilla said. “It’s a very interesting kind of keyhole that provides you eligibility for a potentially broader set of … your investments in Mexico.”
   Edward Brzytwa, American Chemistry Council (ACC) director of international trade, said the contract requirement is a “difficult” one for the chemical industry, as its companies normally don’t enter into direct government contracts.
Covington & Burling attorney Marney Cheek predicted extensive forthcoming litigation to challenge whether the contracting requirement is a “broad gateway to the universe of claims” akin to Padilla’s interpretation or the stipulation has narrower applicability.
   Further, the contracting requirement could create some “perverse incentives” for U.S. firms that don’t have government contracts south of the border to independently negotiate with the Mexican government to become eligible for ISDS, Brzytwa said.
   As questions linger about how USMCA’s ISDS provisions will play out under the proposed U.S.-Mexico exclusive framework, Canada has opted out of being part of USMCA’s ISDS system.
   Brzytwa expressed concern that, after USMCA enters into force, U.S. firms will no longer be able to pursue remediation for investments in Canada, even as more than half of NAFTA’s ISDS cases have been brought against Canada.
   Brzytwa said U.S. companies have reaped benefits from the existing system, as cases many times resulted in findings that Canada directly or indirectly expropriated U.S. property or violated NAFTA minimum standard of treatment provisions at the expense of U.S. companies.
   Cheek noted that U.S. industry has won every single NAFTA ISDS case brought against the government of Canada.
   However, NAFTA’s current ISDS structure, including its applicability to all three governments, will continue for a period of three years following the termination of NAFTA, noted Weil, Gotshal & Manges attorney Ted Posner.
   A potential solution to keep Canada as a part of USMCA’s ISDS system is to rework the provisions to terminate Canada’s involvement six years after USMCA’s entry into force, instead of the three years currently provided.
   A six-year time frame would align Canada’s ISDS termination date with the timing of the first sunset review of USMCA, wherein the governments will determine whether to extend the deal past an expiration date of 16 years after USMCA’s entry into force.
   If the new ISDS system isn’t workable, USMCA parties could agree to amend provisions during this formal review process or through other mechanisms, Cheek said.
   In addition to changes related to the number of participating governments and contracting requirements, Posner pointed out that USMCA ISDS applies only to certain sectors, including but not limited to oil and natural gas, power generation, telecommunications and transportation.
   To determine whether ISDS applies to a certain sector, companies must “trace” their eligibility through several different interconnected texts of USMCA, Padilla said.
   “The mere complexity of it, I think, is one reason why we don’t view it as a good precedent,” he said. “It raises questions that will have to be interpreted and resolved over time by lawyers and by others who are parsing the eligibility that it does and may not offer.”
   The Trump administration might have negotiated sectoral limits as a defensive measure to constrain the eligibility of Mexican firms to bring claims against the U.S., while still preserving, “in more of an asymmetric way,” the eligibility of U.S. firms to bring claims against Mexican breaches of investment protections, Padilla said.
   Even for the sectors that would be able to use the new mechanism, USMCA ISDS proposes applicability to a narrower set of investment issues than the legacy NAFTA ISDS mechanism, Cheek said.
   She and Brzytwa noted that USMCA defangs companies’ ability to claim that a government indirectly expropriated a company’s assets, and both pointed to unfair regulations as a common originator of such expropriations.
   USMCA’s proposed ISDS mechanism covers direct expropriations and World Trade Organization (WTO) fair treatment rules, Brzytwa noted.
   It remains to be seen whether USMCA ISDS challenges on the basis of WTO fair treatment — referred to as “most-favored nation” treatment in WTO nomenclature — could extend to issues of indirect expropriation, Cheek said.
   ACC also is concerned with a USMCA provision that would extend from six months to 30 months the period that companies are required to seek redress through a nation’s court system before filing an ISDS claim, Brzytwa said.
“That’s, practically speaking, a disincentive to making an ISDS claim,” he said. “That’s a very long time to go through the local court system.”