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New Casebook on Arbitration

ADR Prof Blog - Mon, 2018-07-02 18:36
Along with my wonderful co-authors, Maureen Weston, Kristen Blankley and Stephen Huber, I am proud to announce the publication of our new casebook for use in a course on Arbitration. Arbitration: Law, Policy, and Practice, published by Carolina Academic Press, provides the ideal blend of arbitration case law, problems, and experiential exercises for students. This … Continue reading New Casebook on Arbitration →

Moneyball for Arbitrators

Kluwer Arbitration Blog - Mon, 2018-07-02 03:19

Catherine A. Rogers

You might be forgiven if you thought “moneyball” was the name of a new lottery game. It’s an easy mistake if you have not read Moneyball, Michael Lewis’ critically acclaimed book or seen the 6-time Academy-Award-nominated film starring Brad Pitt.1)The analogy for this post is adapted from Professor Chris Zorn, my Penn State colleague, Member of Arbitrator Intelligence’s Board of Directors, and co-founder of Lawyer Metrics, a company he describes as “Moneyball for Lawyers.” The content of this essay was developed for presentations on July 2-3 in Costa Rica at the Centro Internacional de Conciliación y Arbitraje (CICA), and a conference on Innovation, Technology and Law, co-sponsored by CICA, AmCham San Jose, and arbitration specialist Herman Duarte. jQuery("#footnote_plugin_tooltip_3805_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3805_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

If you have read Lewis’ book or seen the movie, however, you would know that the term “moneyball” is slang for sabermetrics, or the practice of crunching data to pick baseball players who are dismissed by conventional wisdom and hence undervalued by the market. As told in the book, sabermetrics enabled the Oakland Athletics baseball team to put together an exceptionally talented team with a pathetically meager budget.2)Moneyball is not without its skeptics and detractors. jQuery("#footnote_plugin_tooltip_3805_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3805_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Instead of spending millions to buy baseball’s flashiest superstars, the Athletics concentrated on players who consistently got on base and brought in understated runs that added up to victories.

“Wait,” you say, “I know nothing about baseball!” Don’t worry. Neither do I.3)An apology is perhaps also in order. Most of the world is more focused on G-O-O-O-O-A-Ls in the World Cup, not on America’s favorite pastime. Unfortunately, I know even less about football than I do about baseball and Michael Lewis has yet to write a book about selecting football players. jQuery("#footnote_plugin_tooltip_3805_3").tooltip({ tip: "#footnote_plugin_tooltip_text_3805_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Fortunately, Lewis’ book is about much more than just baseball.

The book is also about how information can put underfunded outsiders on a level playing field with rich insiders, about how a new, verifiably superior approach can be irrationally rejected by traditionalists, and about the “ruthless drive for efficiency that capitalism demands.” These themes, as it turns out, apply as much to the process of selecting arbitrators as they do to the process of selecting baseball players.

To give some background, future professional baseball players are traditionally recruited after they have been identified by insider “scouts.” In the course of their scouting, these (most often) retired baseball players reject out of hand, and fail to see the value of, players they consider to be misfits. Conventional wisdom counts among these so-called misfits “short right-handed pitchers,” “skinny little guys who get on base,” or “fat catchers.”

For example, in Moneyball we are told that scouts laughed at a catcher who “wears big underwear” (i.e., is overweight), so they overlooked his uncanny ability to “control the strike zone” and hence earn “walks” to first base that accumulate into scored runs.4)In baseball, a batter earns a “walk” if he receives four pitches that the umpire determines were “balls,” meaning that they were outside of the “strike zone” (the space between the batter’s shoulders and knees). When a batter earns a “walk,” he can go directly to first base and cannot be called out, as can only occur if the batter hits the ball and runs to first base. jQuery("#footnote_plugin_tooltip_3805_4").tooltip({ tip: "#footnote_plugin_tooltip_text_3805_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The scouts likewise dismissed a rather puny center fielder who nevertheless had a “gift for getting on base.” And they also considered a “bizarre sight” the double-jointed pitcher (cruelly nicknamed “The Creature”) who had an “84-mph fastball” and ended up being named “the closer on the rookie league All-Star team.”

In addition to failing to see hidden talent, traditional scouts are also reluctant to admit any misjudgment on their own part. They are apparently so confident in their ability to see talent in young ball players, even when their favored player flames out, they talk “as if he’d become exactly what they all said he would be and it was only by some piece of sorcery that he didn’t have the numbers to prove it.”

While obviously not quite the same thing, the process of “scouting” for international arbitrators has something in common with scouting for baseball players. In international arbitration, parties and lawyers often report that they have picked a “big name” arbitrator for the reassurance that comes with a prominent reputation and, presumably, the relative ease with which they can be identified. These big name arbitrators certainly look the part, and have all the conventional credentials that are hard to argue about.

But when, for whatever reason, the outcome of an arbitration is unexpectedly disappointing,5)Losing may not be the only disappointing outcome. Increasingly, in-house counsel are complaining about long waiting times to schedule hearings and inexplicable delays in the time for rendering the award. jQuery("#footnote_plugin_tooltip_3805_5").tooltip({ tip: "#footnote_plugin_tooltip_text_3805_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); the big name arbitrator is still regarded as having been a proper, “safe choice.” It must have been some piece of sorcery that made the arbitration come out wrong.

Going forward, the expanding and diversifying the pool of arbitrators will require us to reconsider what makes for a good arbitrator and how they should be identified. Parties often say they want the “the best person for the job,”6)Anonymous posting to [email protected] (9 February 2012, 03.27 CST), cited in Lucy Greenwood & Mark Backer, Getting a Better Balance on International Arbitration Tribunals, 28 Arbitration INTERNATIONAL 653, 661 at n. 42 (2012). jQuery("#footnote_plugin_tooltip_3805_6").tooltip({ tip: "#footnote_plugin_tooltip_text_3805_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); but then they fail to inquire further what exactly that means. Let’s consider a few possible examples of features that might make an “unconventional” arbitrator the best choice.

Younger arbitrators who are eager to establish a reputation may redouble their preparation for hearings—a particularly valuable trait in a case with complex facts. An African arbitrator may have unique insights about trade usages in the region that would otherwise require expert testimony,7)This is a point made in Won Kidane’s book, The Culture of International Arbitration (Oxford 2017). jQuery("#footnote_plugin_tooltip_3805_7").tooltip({ tip: "#footnote_plugin_tooltip_text_3805_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and an Asian arbitrator may be more willing to take on allegations of corruption by a multinational. Overall, newer arbitrators may have fewer cases, which will allow them to transform arbitral decisions quickly into written awards.

In Moneyball, Lewis quips that “baseball scouting was at roughly the same stage of development in the twenty-first century as professional medicine had been in the eighteenth.” The same could be said of modern international arbitrator selection. Much like the “fraternity of old scouts” who use their gut instincts to identify future baseball players, parties and attorneys select international arbitrators based on intuition, and supplement that intuition with ad hoc, person-to-person research, usually over the telephone.

One primary obstacle to parties and attorneys making less obvious, but potentially more strategic, choices about arbitrators is that the critical data about newer arbitrators is simply not available in the same way it is about baseball players (or more senior arbitrators). But statistics about baseball players were not always available either. As the forefather of sabermetrics, Bill James, “never turns loose of a statistic unless they get a dollar for it.” This approach was self-defeating, according to James, because:

The entire basis of professional sports is the public’s interest in what is going on. To deny the public access to information that it cares about is the logical equivalent of locking the stadiums and playing the games in private so that no one will find out what is happening.

A similar impatience now exists regarding the unavailability of arbitrator data. Even the most sophisticated lawyers acknowledge that you can never have “enough” information about arbitrators. Meanwhile, a whopping 92% of respondents in a recent survey by Berwin Leighton Paisner (now Bryan Cave Berwin Leighton Paisner, or BCLP), said they want more information about arbitrators.

Some arbitral institutions and outside groups (like ArbitralWomen) are working to expand the pool of arbitrators by making names of arbitrators more readily available for consideration. The problem is that without information to go with these names, even if an arbitrator makes a short list, he or she is unlikely to be chosen, particularly if up against a more known and established arbitrator.

What kind of information is needed? In the same BCLP survey, responders identified the most important qualities in an arbitrator as “expertise” (according to 93% of respondents) and “efficiency” (according to 91%). Expertise and efficiency, however, are not easy to measure or quantify. These qualities are not quantifiable data points listed on arbitrators’ CVs. Instead, expertise and efficiency are cumulative, largely intuitive assessments that are drawn from a number of sources and metrics. Moreover, what constitutes the best expertise or means for achieving efficiency may vary from case to case depending on a client’s needs.

Arbitrator Intelligence (AI), through the AI Questionnaire or AIQ seeks to disaggregate these qualities into data that parties and attorneys can more readily use. For example, in one case, a party might regard “efficiency” as the ability to effectively limit document production, while in another case, that same party may regard “expertise” as the ability to discern that the party can only effectively prove its case with documents held by the opposing party.

To hone in on the critical information, the AIQ asks whether document production was requested (by whom) and, if so, whether it was granted. It then asks what standard was used:

Which of the following describe(s) the document production ordered by the tribunal (please select all that apply)?*
*Descriptions of document categories are based on art. 3(3) of the IBA Rules on the Taking of Evidence in International Arbitration (2010)

  • Production was ordered in accordance with the agreement of the parties
  • Production was ordered of a limited number of individually identified documents
  • Production was ordered of “narrow and specific requested category[ies] of Documents that are reasonably believed to exist”
  • Production was ordered of documents maintained in electronic form based on identification of “specific files, search terms, individuals or other means of searching for such Documents in an efficient and economical manner”
  • Production was ordered of broad categories of documents based on general statements of materiality and relevance

 

When enough data is collected, responses to this question can be triangulated against data from other questions in the AIQ, such as the size of the case, the industry in which the dispute arose, the legal seat, etc. Responses can also be compared with cumulative average among arbitrators in similar cases, or with the specific track records of other arbitrators.

In another example, some cases hinge on interpretation of contract, statutory, or treaty provisions, or on trade usages. The AIQ collects information on arbitrators’ treatment of those issues in the arbitral award. For example, with respect to contract interpretation, the AIQ asks responders:

 

In your professional judgment, which of the following describe(s) the tribunal’s contract interpretation (please select all that apply)?

  • The award reflects a plain meaning analysis of the specific words of the contract
  • The award considers the negotiation and drafting history of the contract
  • The award relies primarily on precedents in relevant cases
  • The award reflects a flexible interpretation of the specific words of the contract in order to give the contract its common sense or commercial sense meaning
  • The award reflects a flexible interpretation of the specific words of the contract in order to achieve fairness and equity in the outcome of the dispute
  • Other (please specify):

Again, responses to this question can be triangulated against various other data points collected through the AIQ, and used to compare particular arbitrators’ past rulings to overall averages or other arbitrators under consideration for appointment.

This data will soon be available in “Arbitrator Intelligence Reports” (AI Reports) that will be available for a fee through Kluwer.

AI Reports will ultimately be based on thousands of data points, not the millions of data points sabermetrics relies on. For this reason, AI Reports will always be a far cry from moneyball. And that is both a necessary and a good thing. Arbitration is not a game, and arbitrators are not players following a set of prescribed rules on a clearly defined field. The complexity of international arbitration, and the task of arbitrating, will defies an easy algorithmic process for selecting arbitrators. But AI Reports will provide a more meaningful starting point for both insiders and outsiders.

In addition to making arbitrator selection more precise and predictable, AI Reports will allow parties and attorneys to consider a broader range of criteria, and open up information about a broader pool of candidates. AI Reports will also force parties and attorneys to at least begin their selection process with a more objective assessment of arbitrators and their professional qualities.

So, at the end of your next international arbitration, take a few minutes to fill out an AIQ.8)The AIQ can be previewed and accessed on the AI website. jQuery("#footnote_plugin_tooltip_3805_8").tooltip({ tip: "#footnote_plugin_tooltip_text_3805_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); You may not end up being mentioned in a book by Michael Lewis or be played by Brad Pitt (or Jennifer Lawrence) in the movie version. But you can help contribute the much-needed data to upgrade international arbitrator selection.

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References   [ + ]

1. ↑ The analogy for this post is adapted from Professor Chris Zorn, my Penn State colleague, Member of Arbitrator Intelligence’s Board of Directors, and co-founder of Lawyer Metrics, a company he describes as “Moneyball for Lawyers.” The content of this essay was developed for presentations on July 2-3 in Costa Rica at the Centro Internacional de Conciliación y Arbitraje (CICA), and a conference on Innovation, Technology and Law, co-sponsored by CICA, AmCham San Jose, and arbitration specialist Herman Duarte. 2. ↑ Moneyball is not without its skeptics and detractors. 3. ↑ An apology is perhaps also in order. Most of the world is more focused on G-O-O-O-O-A-Ls in the World Cup, not on America’s favorite pastime. Unfortunately, I know even less about football than I do about baseball and Michael Lewis has yet to write a book about selecting football players. 4. ↑ In baseball, a batter earns a “walk” if he receives four pitches that the umpire determines were “balls,” meaning that they were outside of the “strike zone” (the space between the batter’s shoulders and knees). When a batter earns a “walk,” he can go directly to first base and cannot be called out, as can only occur if the batter hits the ball and runs to first base. 5. ↑ Losing may not be the only disappointing outcome. Increasingly, in-house counsel are complaining about long waiting times to schedule hearings and inexplicable delays in the time for rendering the award. 6. ↑ Anonymous posting to [email protected] (9 February 2012, 03.27 CST), cited in Lucy Greenwood & Mark Backer, Getting a Better Balance on International Arbitration Tribunals, 28 Arbitration INTERNATIONAL 653, 661 at n. 42 (2012). 7. ↑ This is a point made in Won Kidane’s book, The Culture of International Arbitration (Oxford 2017). 8. ↑ The AIQ can be previewed and accessed on the AI website. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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African arbitration association is a welcome initiative - The New Times

Google International ADR News - Sun, 2018-07-01 17:08

The New Times

African arbitration association is a welcome initiative
The New Times
According to its article 1, AfAA will “act as a reference point for information concerning activities in international arbitration and alternative dispute resolution within the African continent; increase coordination amongst its members in respect of ...

Ninth Investment Arbitration Forum: Valuation of Damages in Changing Economic and Political Circumstances

Kluwer Arbitration Blog - Sun, 2018-07-01 04:26

Katharina Plavec

On 26 May 2018, the Ninth Investment Arbitration Forum took place at the Juridicum of the University of Vienna jointly organized by Prof. Irmgard Marboe of the University of Vienna, Adriana San Román and Herfried Wöss of Wöss & Partners and ICC Austria. The topic of this year’s forum was “Valuation of Damages in Changing Economic and Political Circumstances” and to what extent lessons learnt in Latin America were relevant for investment arbitration in Europe. The conference was preceded by the ICC Austria Advanced Seminar on Damages in International Arbitration and aimed at analysing discrete key damages and valuation issues in investment arbitration.

Mexico’s Accession to ICSID and ICSID Reform

The conference warmed up with brief reports on two important developments: (i) the accession and ratification of Mexico of the ICSID Convention, and (ii) the ongoing ICSID Reform. The first was addressed by his Excellency Ambassador Hermann Aschentrupp Toledo, deputy-head of mission of the Embassy of Mexico in Austria, who gave an overview of the history of investment protection and the current situation in Mexico, stressing that Mexico is one of the most active countries in the use of dispute settlement mechanism and seeks to strengthen its position as a safe, reliable and attractive country for investment. With respect to the second, Corinne Montineri and Judith Knieper of UNCITRAL gave an overview of ISDS Reform starting with the UNCITRAL Transparency Standards and continuing with the Working Group III mandate to consider possible ISDS reforms to respond to criticism and to perform a thorough review of issues and perspectives.

Lessons learnt in Latin America?

In the first panel Prof. Guillermo Estrada Adán of the Instituto de Investigaciones Juridicas/UNAM, moderating Diego Brian Gosis (GST LLP), Michael Kotrly (Freshfields), Diego Cadena (Foley Hoag) and Herfried Wöss (Wöss & Partners), raised the question whether there were lessons to be learnt from Latin America. Addressing investment cases filed against Argentina on the basis of BITs after Argentina’s abandonment of the peso-dollar parity, Diego Brian Gosis showed how these cases led to different outcomes, despite dealing with the same measures. Michael Kotrly referring to Chavez’ “Bolivarian revolution” asked whether a higher risk of expropriation should be considered in the calculation of damages and presented various cases involving Venezuela from recent years which addressed the issue. He examined whether the existing case law is reconcilable and how precisely expropriation risk can be accounted for.

Diego Cadena introduced Ecuador’s struggle with foreign investors in the petroleum industry referring to a windfall tax set at 50% and later augmented to 99%. The Tribunal in Murphy found that the 50%-tax did not breach claimant’s legitimate expectations, but that it did constitute a violation when applied at 99%. He mentioned that the Tribunal did not determine any other “outer tolerable limit” which leads to uncertainty as regards the damages determination and concluded that one should rely on the objective data reasonably obtained by the investor when placing its investment and not on the picture of the ongoing business.

Referring to the same case, Herfried Wöss raised the issue of how different findings of liability would impact damages under the notion of but-for causality. In Murphy v. Ecuador, the Tribunal considered the second tax increase as violating FET, whereas Burlington v. Ecuador found illegal expropriation leading to a total deprivation of the investment. The Tribunal in Murphy awarded damages for the impact of the second tax increase on its cash flows for the whole contract term. The Tribunal in Burlington considered that the investment was the bundle of contractual rights and obligations which lead to a re-integration of the lost past and future cash flows under the but-for scenario applying the contractual tax-absorption clause. He mentioned that Burlington is worth reading for its clear and detailed reasoning and the precision of the application of the but-for premise.

Changing economic and political circumstances and their effects on damages

Professor Nikos Lavranos of Wöss & Partners and Smaranda Miron of the Energy Community secretariat moderated Prof. Irmgard Marboe (University of Vienna), Alejandro Carballo Leyda (Energy Charter Secretariat), Adriana San Román (Wöss & Partners) and Bernardo V. Preziosi (Curtis, Mallet-Prevost, Colt-Mosle) covering a broad range of discrete topics:

Stressing the difference between lawful and unlawful expropriation, Irmgard Marboe pointed out that the sovereign right to expropriate was solidly based on public international law, but that several conditions had to be met. She focused in particular on the relevance of the payment of compensation. While expropriations were sometimes deemed lawful even though no compensation was paid, in other cases, expropriations were considered unlawful seemingly only because of a lack of compensation. A closer analysis, however, led her to the conclusion that the requirement of due process was in fact the decisive criterion for distinguishing between lawful and unlawful expropriations.

Alejandro Carballo Leyda raised the question of whether changing economic circumstances would be considered under the Energy Charter Treaty, for example pursuant to Art 24.3.a.II ECT (measures necessary in time of war or other emergency in international relations) and Art 24.3.c ECT (maintenance of public order). He concluded that such measures could neither have an effect equivalent to expropriation nor affect the transit or the obligation to compensate for losses. The ECT did not expressly include specific temporary safeguard measures in case of exceptional balance-of-payments difficulties.

Adriana San Román (Wöss & Partners) compared the measure of damages between commercial arbitration and investment arbitration using as examples prominent gas and oil cases such as Bridas v. Turkmenistan and explained how the notion of the hypothetical course of events under the Chorzów formula and the FMV measure of damages ignores extraordinary economic circumstances, which affects the damages to be awarded. Finally, Ms. San Román addressed recent criticisms of the Chorzów formula and ended posting the following questions: Would states not take advantage of investors if there were no full reparation principle and would it not be important to establish a balance between states and investors in order to avoid opportunistic behaviour of states? Would the expropriation risk and the costs of projects not increase by discarding Chorzów? Would discarding the Chorzów formula result in less investments?

Benard V. Preziosi (Curtis, Mallet-Prevost, Colt-Mosle) discussed the effect of contractual limitations on damages in investment arbitration on the basis of Mobil v. Venezuela which establishes that a claimant is only entitled to be compensated for the investment it made. International law protecting that investment does not expand the property rights constituting the investment or eliminate conditions or limitations imposed on the investment by national law at the outset that might impact compensation in the event of later adverse governmental measures. Such conditions and limitations are part of the scope of the investment defined by national law and must be given effect in the calculation of compensation.


Recent developments of investment arbitration in Europe and Latin America

In the next panel (moderators: Dr. Elisabeth Vanas-Metzler, VIAC, and Emmanuel Kaufman, Knoetzl) Antolín Fernández Antuña (State Attorney’s Office, Spain) presented a valuation analysis of various renewable energy cases against Spain. He stressed that the fact that renewable energy plants such as solar plants and wind parks need high subsidies should be taken into account when valuating damages.

Anne-Karin Grill (Vavrovsky Heine Marth) argued that the FMV rationale should not apply to breach of contract cases under umbrella clauses contained in international investment agreements where international legal standards such as the FET standard are not violated and there is no international tort but only a breach of contract protected by the umbrella clause. Rather, one should apply the principle of full reparation of the actual loss through the but-for premise which would lead to market value taking into consideration the prevalent economic circumstances in both the actual and the but-for scenarios.

According to Professor Stefan Weber (Weber & Co) reliance damage is also recoverable in case of a bad business unless the lack of profitability of the investment is proven. The risk of overcompensation (if an investor is compensated for investment that would not pay off in the absence of the breach of contract) might be avoided by means of causation. In this respect the burden of proof and the standard of proof play an important role.

Professor Christoph Schreuer (zeiler.partners/University of Vienna) discussed the consequences of the ICSID denunciations by Bolivia, Ecuador and Venezuela. According to Schreuer’s interpretation of Articles 71 & 72 of the ICSID Convention, rights and obligations based on consent, including the participation in proceedings, remain unaffected by the 6-month period in Art. 71 and will continue indefinitely. Other rights such as participation in the administrative council and the nomination of persons on the board of arbitrators continue only for six months. He concluded that despite the denunciations, the number of arbitrations is likely to rise.
The view of economic and financial experts

The conference ended with a roundtable of prominent financial experts under the moderation of Adriana San Román. Addressing the EU’s Renewable Energy Source (RES), Anton Garcia (Compass Lexecon) mentioned that in order to achieve the EU’s RES deployment, Member States introduced incentives for investors in the form of support schemes, protected from revision by EU Law. Despite this, some states implemented cuts to the support of existing plants. Mr. Garcia argued that DCF, arguably the most widely accepted method for the valuation of damages, is particularly well-suited to value damages in the ensuing arbitrations given the high predictability of cash flows of RES plants. Alternative ad hoc-valuation approaches or asset-based methods do not provide a better alternative.

With respect to differences between damages valuation and company valuation, James Searby (FTI Consulting) explained that damages valuation differs from company valuation as the date of valuation is often in the past, resulting in less certainty. The introduction of counterfactuals, or but-for scenarios, and the need to take account of mitigation introduce further uncertainty. As an alternative to FMV he proposed to use “investment value”, asking what the investment is worth in the hands of the actual owner, before moving to an approach that assumes a transaction between “typical market participants”.

As to the role of hindsight information, Tomas Haug (NERA) examined whether an ex ante or ex post approach is preferable from an economic perspective. He examined unbiasedness (whether risk-neutral agents would be indifferent or whether one approach always leads to over-/ undercompensation of plaintiffs), efficiency (whether neither approach leads to a negative change in behaviour) and practicality (whether one approach increases objectivity). He concluded that there are good arguments for both regimes from an economic standpoint.
Finally, Thierry J. Senechal (Finance for Impact) held his presentation on the time value of money in damage valuation. According to this theory, the delay between the time the injury occurs and the rendering of the arbitral award should be taken into account. While the question of the applicable interest rate is hard to answer due to a lack of a universally accepted standard, there is agreement that a compound interest rate should be used for pre-award interest.

Conclusion and Comments

Recent case law shows a growing sophistication in damages analysis and valuation reflected by high-level contributions also in the academic and professional fields in which the conference’s co-chairs have significantly taken part. However, there are still areas that have not (compensation for a bad business) or only recently (the role of contractual limitations) been tackled in the context of investment cases. The Ninth Investment Arbitration Forum aimed to be thought-provoking in this respect. It also showed that the measure of damages, causality, hindsight and other notions of international damages law leading to “what has to be calculated” are in essence legal questions which require counsel and arbitrators to precisely define their instructions to the financial experts.

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Slovak Republic v. Achmea: When Politics Came Out to Play

Kluwer Arbitration Blog - Sun, 2018-07-01 02:32

Vivek Kapoor

Young ICCA

The Court of Justice of the European Union (“CJEU”) is not an ordinary court but a political court, which means that it is strongly influenced in making its decisions by the political beliefs of the European Commission. The 6 March 2018 judgment of the CJEU’s Grand Chamber in Slovak Republic v. Achmea BV is a reminder; with a preordained weltanschauung and political outcome, the CJEU then proceeded to forge the jurisprudential basis.

The European Commission has long maintained that investor-state arbitration is incompatible with EU law. In 2015, the European Commission initiated infringement procedures against Austria, the Netherlands, Romania, Slovakia, and Sweden, and requested them to terminate their intra-EU BITs. Some EU Member States, including Romania, Poland, Ireland and Italy, have already begun terminating their intra-EU BITs.

The European Commission has also intervened as amicus curiae in several investor-state arbitrations involving issues of EU law. Much to its chagrin, arbitral tribunals facing questions of EU law have routinely held that investor-state arbitration is not incompatible with EU law, and have found themselves competent to interpret questions of EU law. Two instances that come to mind are Electrabel S.A. v. The Republic of Hungary and European American Investment Bank AG (Austria) v. The Slovak Republic, where the European Commission had submitted amicus briefs.

Background to Slovak Republic v. Achmea

On 7 December 2012, a Frankfurt-sited arbitral tribunal constituted under the 1991 Netherlands-Slovakia BIT (the “BIT”) found Slovakia in breach of its obligations under the BIT, and ordered Slovakia to pay damages to Achmea.

Slovakia brought an action before the Higher Regional Court of Frankfurt to set aside the award, arguing that the BIT’s provision for investor-state arbitration was incompatible with EU law. The Frankfurt Court upheld the award, and Slovakia lodged an appeal to Germany’s Federal Court of Justice. The Federal Court of Justice turned to the Court of Justice of the European Union (“CJEU”), requesting a preliminary ruling on whether Articles 267, 344 or 18(1) of the Treaty on the Functioning of the European Union (“TFEU”) preclude investor-state arbitration under an intra-EU BIT.

Fifteen Member States weighed in; the majority in support of Slovakia’s position. One of the Advocates General of the CJEU also gave a formal opinion. In his Opinion of 19 September 2017, he concluded that intra-EU BITs were compatible with EU law.

The Incompatibility

In its decision, the CJEU held that the provision for investor-state arbitration in the BIT was contrary to Articles 344 and 267 of the TFEU. It found that the investor-state arbitration mechanism threatened the effective application of EU law and was incompatible with the duty of sincere cooperation incumbent upon EU Member States in order to ensure the uniform and effective application of EU law.

The CJEU constructed its reasoning on the basis that in resolving the investment treaty dispute, the arbitral tribunal would invariably be called upon to interpret and apply EU law as part of the law and international norms in force. However, such arbitral tribunal did not qualify as a “court or tribunal of a Member State”, and therefore was not competent (under Article 267 of the TFEU) to request preliminary rulings on the interpretation of EU law from the CJEU.

Emphasizing what is essentially an artificial distinction, the CJEU concluded that, unlike commercial arbitration, investment treaty arbitration effectively removed matters relating to the interpretation and/or application of EU law from the jurisdiction of the domestic courts of EU Member State. Moreover, the nature of the process ensures that awards are subject only to limited judicial review by the domestic courts of EU Member States.

Accordingly, the Court held that investor-state arbitration impaired the autonomy of EU law, which is ensured by Articles 344 and 267 of the TFEU.

Having found investor-state arbitration incompatible with EU law, the CJEU did not rule on the question whether it was also incompatible with Article 18(1) of the TFEU.

The Jurisprudential Manoeuvre

The reasoning of the CJEU is fairly synthetic. First, an arbitral tribunal constituted under a BIT essentially rules on the substance of that particular BIT. At no point in time would it stray into the operational domain of the CJEU under Article 344.

Second, the reasoning could very easily apply to a commercial arbitration tribunal which would also not qualify as a “court or tribunal of a Member State” but could be called upon to interpret and apply EU law as it is a fundamental part of any EU Member State’s domestic law. Then why the express exclusion for commercial arbitration? Moreover, arbitration as a process ensures that awards are subject only to limited judicial review by the domestic courts. Commercial arbitration awards too are subject to judicial scrutiny only on limited grounds and it is unclear whether these limited grounds, similarly defined for a better part in most domestic arbitration codes, would allow an examination of the fundamental provisions of EU law. Public policy is not an easy gateway to an extensive judicial review.

The Aftermath

The CJEU’s judgment is indeed in the particular context of the provision for investor-state arbitration under the Netherlands-Slovakia BIT. But make no mistake, it will change the lay of the land.

While the judgment’s analysis does not concern the substantive protections accorded under intra-EU BITs, it effectively renders the 196 intra-EU BITs currently in force impracticable. The investor-state arbitration mechanism is fundamental to a BIT, intra-EU BITs being no different. Investment treaty tribunals constituted under intra-EU BITs may not be required to decline jurisdiction as a result of the judgment, but their awards could very well be set aside or denied enforcement on grounds of incompatibility with EU law.

Even investors (with awards by tribunals sited in EU Member States) seeking enforcement outside the European Union would not be able to escape the judgment. Courts of EU Member States have to comply with the CJEU’s judgment. Thus, where the courts of an EU Member State are asked to set aside awards made on the basis of an intra-EU BIT, they are likely to annul such awards. Awards set aside at the seat tend not to find much favour in enforcement courts elsewhere.

Having the tribunal sited in a non-EU State may tide over the annulment muddle, but the problems would effectively remain the same at the enforcement stage of the awards in EU States. Investors will now be forced to submit claims protected by an intra-EU BIT to the jurisdiction of the courts of their host State, essentially without the substantive protections provided under the BITs.

Investors could consider restructuring their investments in EU Member States to benefit from protection under BITs with third (non-EU) States. However, it is not inconceivable that in the future, BITs with third States might also run into similar rough weather. Any investment treaty award based on a claim that has an EU Member State as the host State can potentially get stuck in this web, the contours of which have been firmly defined by this judgment of the CJEU.

The path of multilateral treaties for intra-EU claimants may also not remain unravaged for long. The European Commission’s disapproval of the investor-state arbitration mechanism of the Energy Charter Treaty (also due to purported incompatibility with EU law) is well known.

An award by an arbitral tribunal constituted under the rules of the Convention On The Settlement Of Investment Disputes Between States And Nationals Of Other States (“ICSID”) is enforceable as if the award were a final judgment of a court in each Contracting State to the ICSID Convention, with no possibility for it to be set aside by a domestic court. Yet, investors may find it difficult to enforce an ICSID award in the EU due to the incompatibility of investor-state arbitration mechanism with EU law. US courts rejected the arguments of the European Commission against the enforcement of the ICSID award in Ioan Micula, Viorel Micula and others v. Romania, however, courts in EU Member States might not take the same view when called upon to do so.

Tour d’horizon

For EU Member States, the CJEU’s finding of an incompatibility of investor-state arbitration with EU law will make revisions to their existing BITs unavoidable.

The recent weeks have seen the EU unveil the finalized draft of the investment protection agreement with Singapore and the outline of the trade deal with Mexico. Both seek to implement the EU approach to investment protection that “fundamentally reforms the old-style ISDS system” – by providing for a permanent two-tier investment court.

The future of investor-state arbitration is fast evolving, and within the European Union, CJEU’s judgment has taken investor-state disputes to the doorstep of a permanent investment court, as has long been advocated by the European Commission.

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The Great Battle of Intellectual Property versus State Sovereignty: Is Philip Morris v Uruguay a Good Referee? (Part II)

Kluwer Arbitration Blog - Sat, 2018-06-30 02:29

Michaela Brett Samuel Halpern

In the first part of this article, we discussed the problems of balancing an investor’s intellectual property rights with the sovereign right of a State. Now, we look at how Philip Morris v Uruguay has added to the debate.

In 2010 Philip Morris challenged two measures adopted by the government of Uruguay: (1) a “single presentation requirement” in which brands were allowed to sell products with only one packaging style therefore limiting products to one variant and (2) the “80/80 Regulation” which called for the increase in size of the graphic health warnings on cigarette packages from 50% to 80%. Uruguay defended these measures on the basis that they were adopted for the sole purpose of protecting public health, the measures were within the scope of Uruguay’s sovereign powers and applied in a non-discriminatory manner to all tobacco companies. While the root of the FET standard was not contested, the content and interpretation of the standard was and remains today up for debate.1) Philip Morris ¶ 312. jQuery("#footnote_plugin_tooltip_6810_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6810_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In an award dated 8 July 2016, all of Philip Morris’ claims were rejected and the Claimants were required to pay $7 million to cover arbitration costs. The Tribunal unanimously rejected the claim of expropriation, emphasizing that this was a valid exercise by Uruguay of its police powers to protect public health2) Finding that the measures were a “valid exercise of the State’s police powers, with the consequence of defeating the claim for expropriation” Philip Morris, ¶ 287. jQuery("#footnote_plugin_tooltip_6810_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6810_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and, by majority, rejected Philip Morris’ other claims.

Is Philip Morris a Good Precedent?

As the President of Uruguay, Tabaré Vázquez, said in the midst of the Philip Morris dispute: “It is not acceptable to prioritize commercial considerations over the fundamental right to health and life…”3) Benedict Mander, Uruguay Defeats Philip Morris Test Case Lawsuit, FINANCIAL TIMES (Jul. 8, 2016) jQuery("#footnote_plugin_tooltip_6810_3").tooltip({ tip: "#footnote_plugin_tooltip_text_6810_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Even though Philip Morris tried to differentiate its particular case and claim that their suit had nothing to do with questioning “Uruguay’s authority to protect public health,” the implications of this decision is a milestone in the battle between investor rights and public policy.

As discussed in the previous post, arbitration has been criticized as a method for large, wealthy companies to threaten small countries into conceding or settling in order to avoid the risk of an avalanche of expense and even potential bankruptcy. Philip Morris shows that it is not a given that wealthy multinational corporations can bully smaller countries.4) Todd Weiler, Philip Morris vs. Uruguay: An Analysis of Tobacco Control Measures in the Context of International Investment Law, PHYSICIANS FOR A SMOKE FREE CANADA (Jul. 28, 2010), at 36 said that “the claim is nothing more than the cynical attempt by a wealthy multinational corporation to make an example of a small country with limited resources to defend against a well-funded international legal action…” jQuery("#footnote_plugin_tooltip_6810_4").tooltip({ tip: "#footnote_plugin_tooltip_text_6810_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The original intent of developing the field of ISDS was to help developing countries attract foreign capital. Those same developing countries, instead, fear that this system will either bankrupt them or undermine their sovereignty.5) Claire Provost & Matt Kennard, The Obscure Legal System that Lets Corporations Sue Countries, THE GUARDIAN, (Jun. 10, 2015) jQuery("#footnote_plugin_tooltip_6810_5").tooltip({ tip: "#footnote_plugin_tooltip_text_6810_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); For example, in Guatemala, the risk of a suit appeared to have weighed so heavily on the government that they decided not to challenge a controversial gold mine despite citizen protests and a recommendation of closure from the Inter-American Commission on Human Rights.6)id. jQuery("#footnote_plugin_tooltip_6810_6").tooltip({ tip: "#footnote_plugin_tooltip_text_6810_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The Tribunal in Philip Morris acknowledge that it is “common ground” that “the requirements of legitimate expectations and legal stability as manifestations of the FET standard do not affect the State’s rights to exercise its sovereign authority to legislate and to adapt its legal system to changing circumstances.”7) Philip Morris, ¶ 422 citing Parkerings v Lithuania, ¶¶ 327-328; BG Group Plc v the Republic of Argentina, UNCITRAL, Award (Dec. 24, 2007), ¶¶ 292-310; Plama Consortium Ltd v Republic of Bulgaria, ICSID Case No. ARB/03/24, Award (Aug. 27, 2008), ¶ 219; Continental Casualty Co v Argentine Republic, ICSID Case No. ARB/03/9, Award (Sept. 5, 2008), ¶¶ 258-261; EDF (Services) Ltd v Romania, ICSID Case No. ARB/-5/13, (Oct. 8, 2009), ¶ 219; AES, ¶¶ 9.3.27-9.3.35; Total S.A. v the Argentine Republic, ICSID Case No. ARB/04/1, Decision on Liability, (Dec. 27, 2010), ¶¶ 123 and 164; Sergei Paushok, CJSC Golden East Company, and CJSC Vostokneftegaz Co v the Government of Mongolia, UNCITRAL, Award on Jurisdiction and Liability, (Apr. 28, 2011), ¶ 302; Impregilo, ¶¶ 290-291; and El Paso, ¶¶ 344-352 and 365-367. jQuery("#footnote_plugin_tooltip_6810_7").tooltip({ tip: "#footnote_plugin_tooltip_text_6810_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The Tribunal further went on to acknowledge that “police powers” necessarily entail a State’s ability to enact measures to protect public welfare as long as they are bona fide and non-discriminatory.8) Philip Morris, ¶ 305. jQuery("#footnote_plugin_tooltip_6810_8").tooltip({ tip: "#footnote_plugin_tooltip_text_6810_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); And in fact, in Born’s dissent, he reiterated a multitude of times that he is in no way questioning the host State’s ability to adopt legislative measures to protect health and safety.9) Born Dissent, for example ¶¶ 86, 89, 90, 140, 141, and 197. jQuery("#footnote_plugin_tooltip_6810_9").tooltip({ tip: "#footnote_plugin_tooltip_text_6810_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Yet even though it seems to be universally agreed and recognized that a State has a right to regulate in the interests of its citizens, we continue to see arbitration proceedings brought and States failing to enact helpful regulations and measures for fear of being brought through arbitral proceedings.

So what does Philip Morris mean for State rights?

The Tribunal acknowledge the supremacy and profound leeway to be granted to the State in regulation. While this is a positive reinforcement of a State’s right to regulate, this does not acknowledge the role that tribunals have increasingly been playing, for better or for worse, in balancing investor rights, intellectual property, and state sovereignty. Governments cannot perform this balancing act alone while the FET standard is still obscure. Tribunals do have a role in the balance; this role is in defining the FET standard.

The core of the problem is in the fact that FET is not fully explored and circumscribed. “The exact contours of FET protection are amorphous and can depend on the language of the relevant IIA, as well as the approach taken by the presiding arbitral tribunal”10) PETER CHROCZIEL ET AL (EDS), INTERNATIONAL ARBITRATION OF INTELLECTUAL PROPERTY DISPUTES: A PRACTITIONER’S GUIDE, 153 (2017). jQuery("#footnote_plugin_tooltip_6810_10").tooltip({ tip: "#footnote_plugin_tooltip_text_6810_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); with this “deliberate vagueness” being used as a catch-all claim.11) Valentina S. Vadi, Towards a New Dialectics: Pharmaceutical Patents, Public Health and Foreign Direct Investments, 5 NYU J. INTELL. PROP. & ENT. L. 113, 166 (2015). See also F.A. Mann, British Treaties for the Promotion and Protection of Investment, 52 BRITISH Y.B. INT’L. L. 241, 243 (1981) that FET claims are so broad they cover “all conceivable cases.” jQuery("#footnote_plugin_tooltip_6810_11").tooltip({ tip: "#footnote_plugin_tooltip_text_6810_11", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The European Commission has stated that because FET is not clearly defined, “tribunals have had significant leeway in interpreting this in a manner that has been seen as giving too many or too few rights to investors.”12) European Commission, Fact Sheet – Investment Protection and Investor-to-State Dispute Settlement in EU Agreements, 2 (Nov. 2013). jQuery("#footnote_plugin_tooltip_6810_12").tooltip({ tip: "#footnote_plugin_tooltip_text_6810_12", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); There needs to be more consistency in the interpretations and applications of the FET claim.

Interpretations of the FET standard range across the whole spectrum. Some tribunals apply the FET standard broadly13) International Thunderbird Gaming Corporation v the United Mexican States, UNCITRAL, Award, (Jan. 26, 2006). jQuery("#footnote_plugin_tooltip_6810_13").tooltip({ tip: "#footnote_plugin_tooltip_text_6810_13", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); while some tribunals14) Crystallex International Corporation v Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/11/2, Award, (Apr. 4, 2016). jQuery("#footnote_plugin_tooltip_6810_14").tooltip({ tip: "#footnote_plugin_tooltip_text_6810_14", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); take a narrower approach. With no hierarchical system of precedent in arbitration, these competing awards leave neither guidance nor hope of consistency or stability; ironically, the same complaint brought by a claimant arguing breach of FET.

Instead of taking this opportunity to try to better circumscribe the FET standard, the Tribunal left the door open. The Tribunal rejected reading the BIT as reflecting the minimum treatment standard of international law. Such an application would have provided a better guideline for analyzing the standard. If the Tribunal was to be dissuaded from applying the international law standard to FET cases, it should have at least attempted to delineate the proper standard rather than conclude that each case of FET depends on the particular circumstances and listing out the various ways different Tribunals have attempted to define the standard. The end result is a multitude of tribunals each trying to give a more definite meaning of breaches of the FET standard and ultimately creating a still confusedly applied standard accompanied by a random list of potentially breaching acts from particular circumstances.

While the Tribunal ultimately reached the same conclusion, this methodology does not solve the root of the problem that has been plaguing the ISDS system. The evolving nature of what is “fair” and “equitable” adds another layer of complications. Ideas of fairness and equality do indeed change every generation, even every day, but that does not mean we cannot have a circumscribable standard; it just means the created definition needs to account for flexibility.

Conclusion

The battle of rights has only just begun. State sovereignty and the right for a State to legislate and regulate in the public interest is a deeply engrained and important concept spanning many millennia. The technological revolution and the increasing emphasis on globalization has given intellectual property rights not only a new importance in and of itself, but also entangled IPRs with other fundamental aspects of human society. When the two realms clash, which should prevail?

Investment arbitration, while far from perfect, provides the most suitable forum for resolving these types of disputes. However, the vagueness of standards of review and the lack of a system of precedence has created a climate in which tribunals are seen to emphasize the rights of investors over a State’s public interest regulatory scheme. Private arbitral tribunals cannot be substituting their own judgments on policy issues in place of those of the State.

While Philip Morris is a significant step in equilibrating the balance, it is not sufficient. The root of the issue is the vagueness of the fair and equitable treatment standard and the consequent conflicting tribunal decisions. Rather than attempt to delineate the FET standard, the Tribunal in Philip Morris left the gap open. There needs to be more concrete guidelines on the FET, particularly in an intellectual property context so States are not threatened and discouraged.

Intellectual property is not an absolute right and must be put into perspective and harmonized with other rights.15) Valentina S Vadi, ‘Towards a New Dialectics: Pharmaceutical Patents, Public Health and Foreign Direct Investments’ (2015) 5 NYU J Intell Prop & Ent L 113, 192–93. jQuery("#footnote_plugin_tooltip_6810_15").tooltip({ tip: "#footnote_plugin_tooltip_text_6810_15", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In the same vein, even though investment law is aimed at providing investors with certain protections, this does not operate in a vacuum and must work with other aspects of international law. An investor losing millions of dollars is not greater than or equivalent to loss of life due to lack of access to pharmaceuticals or mass tobacco consumption or irreversible environmental damage. Each day new medical and technological discoveries are made which changes our perceptions of the status quo and the legal system needs to account for this and allow for flexibility and adaptation.16) Rochelle Dreyfuss and Susy Frankel, ‘From Incentive to Commodity to Asset: How International Law is Reconceptualizing Intellectual Property’ (2015) 36 Michigan J Int’l L 557, 587. (“Science is not static, and neither can be its interface with the legal system. As new technologies develop and as the impact of old technologies are better understood, countries must have some freedom to adapt both IP legislation and impacted regulatory regimes”). jQuery("#footnote_plugin_tooltip_6810_16").tooltip({ tip: "#footnote_plugin_tooltip_text_6810_16", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Perhaps now that the Philip Morris Tribunal has published its award, countries will no longer feel this chill however, just because the pressure may be eased, does not mean the problem is fully resolved. Instead of relying on various interpretations and various aspects of international law the next tribunal needs demonstrate the balance of intellectual property rights and Sovereign rights by circumscribing the limits of FET claims.

The author is the editor of the Intellectual Arbitrator.

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References   [ + ]

1. ↑ Philip Morris ¶ 312. 2. ↑ Finding that the measures were a “valid exercise of the State’s police powers, with the consequence of defeating the claim for expropriation” Philip Morris, ¶ 287. 3. ↑ Benedict Mander, Uruguay Defeats Philip Morris Test Case Lawsuit, FINANCIAL TIMES (Jul. 8, 2016) 4. ↑ Todd Weiler, Philip Morris vs. Uruguay: An Analysis of Tobacco Control Measures in the Context of International Investment Law, PHYSICIANS FOR A SMOKE FREE CANADA (Jul. 28, 2010), at 36 said that “the claim is nothing more than the cynical attempt by a wealthy multinational corporation to make an example of a small country with limited resources to defend against a well-funded international legal action…” 5. ↑ Claire Provost & Matt Kennard, The Obscure Legal System that Lets Corporations Sue Countries, THE GUARDIAN, (Jun. 10, 2015) 6. ↑ id. 7. ↑ Philip Morris, ¶ 422 citing Parkerings v Lithuania, ¶¶ 327-328; BG Group Plc v the Republic of Argentina, UNCITRAL, Award (Dec. 24, 2007), ¶¶ 292-310; Plama Consortium Ltd v Republic of Bulgaria, ICSID Case No. ARB/03/24, Award (Aug. 27, 2008), ¶ 219; Continental Casualty Co v Argentine Republic, ICSID Case No. ARB/03/9, Award (Sept. 5, 2008), ¶¶ 258-261; EDF (Services) Ltd v Romania, ICSID Case No. ARB/-5/13, (Oct. 8, 2009), ¶ 219; AES, ¶¶ 9.3.27-9.3.35; Total S.A. v the Argentine Republic, ICSID Case No. ARB/04/1, Decision on Liability, (Dec. 27, 2010), ¶¶ 123 and 164; Sergei Paushok, CJSC Golden East Company, and CJSC Vostokneftegaz Co v the Government of Mongolia, UNCITRAL, Award on Jurisdiction and Liability, (Apr. 28, 2011), ¶ 302; Impregilo, ¶¶ 290-291; and El Paso, ¶¶ 344-352 and 365-367. 8. ↑ Philip Morris, ¶ 305. 9. ↑ Born Dissent, for example ¶¶ 86, 89, 90, 140, 141, and 197. 10. ↑ PETER CHROCZIEL ET AL (EDS), INTERNATIONAL ARBITRATION OF INTELLECTUAL PROPERTY DISPUTES: A PRACTITIONER’S GUIDE, 153 (2017). 11. ↑ Valentina S. Vadi, Towards a New Dialectics: Pharmaceutical Patents, Public Health and Foreign Direct Investments, 5 NYU J. INTELL. PROP. & ENT. L. 113, 166 (2015). See also F.A. Mann, British Treaties for the Promotion and Protection of Investment, 52 BRITISH Y.B. INT’L. L. 241, 243 (1981) that FET claims are so broad they cover “all conceivable cases.” 12. ↑ European Commission, Fact Sheet – Investment Protection and Investor-to-State Dispute Settlement in EU Agreements, 2 (Nov. 2013). 13. ↑ International Thunderbird Gaming Corporation v the United Mexican States, UNCITRAL, Award, (Jan. 26, 2006). 14. ↑ Crystallex International Corporation v Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/11/2, Award, (Apr. 4, 2016). 15. ↑ Valentina S Vadi, ‘Towards a New Dialectics: Pharmaceutical Patents, Public Health and Foreign Direct Investments’ (2015) 5 NYU J Intell Prop & Ent L 113, 192–93. 16. ↑ Rochelle Dreyfuss and Susy Frankel, ‘From Incentive to Commodity to Asset: How International Law is Reconceptualizing Intellectual Property’ (2015) 36 Michigan J Int’l L 557, 587. (“Science is not static, and neither can be its interface with the legal system. As new technologies develop and as the impact of old technologies are better understood, countries must have some freedom to adapt both IP legislation and impacted regulatory regimes”). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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Mindfulness in Law Society Conference August 3rd

ADR Prof Blog - Fri, 2018-06-29 15:03
FOI Richard Reuben (Missouri) sends along this conference announcement for the Mindfulness in Law Society.  Please note that lack of conference registration information in the message, so if you’re interested please contact Richard directly. As many of you know, I have been focusing a lot of my time the last few years on opening doors … Continue reading Mindfulness in Law Society Conference August 3rd →

The Great Battle of Intellectual Property versus State Sovereignty: Is Philip Morris v Uruguay a Good Referee? (Part I)

Kluwer Arbitration Blog - Fri, 2018-06-29 04:27

Michaela Brett Samuel Halpern

The constructive framework of ISDS was intended to promote investment and growth through the establishment of a stable and predictable atmosphere for investment. However, some have argued that this purpose has been warped to allow a small group of private individuals to rule on public matters. Arbitrations such as CMS v Argentina, Tecmed v Mexico, and Metalclad Corp v Mexico have led to a concern that the rights of investors are given prominence over a State’s sovereign rights and the legitimate use of a State’s regulatory power. There have therefore been an increasing number of discussions on the need for greater safeguards. Even though investments are crucial to building the modern international economy, investment arbitration should not be seen as a hindrance to a country’s ability to govern its population and pursue public policy objectives.

In a similar vein, intellectual property rights are essential to a country’s development; a well-balanced intellectual property regime can promote innovation, consumer protection, and are increasingly becoming intertwined with human rights. Occasionally, however, the protection of intellectual property rights and the public interest of a state may clash. As discussed by various scholars including Rochelle Dreyfuss, Susy Frankel, Peter Yu, and Ruth Okediji, intellectual property rights being seen as an “investment” has critical consequences. The increased recognition of intellectual property rights as an investment itself opens the way for intellectual property law to “turn…on its head” by creating the possibility for questions of national innovation policy to be adjudicated by private actors.1) Ruth Okediji, Is Intellectual Property “Investment”? Eli Lilly v. Canada and the International Intellectual Property System, 35 U. PA. J. INT’L. L. 1121, 1122 (2014); Peter K. YU, The Investment-Related Aspects of Intellectual Property Rights 843 (2016) noting that it is not the fact that intellectual property rights are considered investments that is the novel problem, it is the fact that this now means private investors can bring a suit without requiring assistance from the government and support of their home states. jQuery("#footnote_plugin_tooltip_9201_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9201_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This series examines this battle between the intellectual property rights of investors and public interest considerations of a host State. In the majority of disputes brought to arbitration, the investor argues that the host State has breached the FET standard and therefore owes the investor appropriate compensation. The issue is that there is a lack of consensus as to the precise content and scope of the FET standard. This lack of a uniform approach or even definition of “fair and equitable treatment” leaves host states at risk of being beleaguered by large multinational corporations burying them in lengthy adjudicative procedures.

In 2016, a tribunal of three arbitrators rejected the claims of tobacco company, Philip Morris, against Uruguay in the World Bank ICSID case, Philip Morris Bran Sàrl (Switzerland), Philip Morris Products S.A. (Switzerland), and Abal Hermanos S.A. (Uruguay) vs. Oriental Republic of Uruguay. Philip Morris is considered to be a significant step towards rebalancing the “battle of rights” and reinforcing that States have a sovereign right to decide the laws for their own populations.

The Battle of Rights

A major concern in ISDS is that decisions of public policy are left in the private hands of arbitrators and corporate lawyers. When investor rights, such as intellectual property rights, conflict with public policy initiatives and national priorities such as health regulations, environmental concerns, and human rights, the perception is that with ISDS, a handful of arbitrators become “the judge of the policies of the state, deciding on the basis of a subjective standard, because there is no public and shared determination about it.”2) Riccardo Fornasari, The Protection of Legitimate Expectations under the Fair and Equitable Treatment Standard, KSLR COMMERCIAL & FINANCIAL LAW BLOG (May 12, 2015). jQuery("#footnote_plugin_tooltip_9201_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9201_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The one or three arbitrators adjudicating the dispute are chosen by the parties to the dispute, whereas a state’s legislative power is backed by the “core principles of modern representative democracies” (for the most part). In other words, a country’s legal framework is the result of an elected legislature and/or executive with any changes in the regulatory framework as reflective of the “the will of the people souverain.” 3)id. jQuery("#footnote_plugin_tooltip_9201_3").tooltip({ tip: "#footnote_plugin_tooltip_text_9201_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

That said, in resolving disputes that inevitably arise, arbitration provides a number of advantages over domestic litigation for both the investors and States. However, given the private nature of ISDS, we end up with private actors affecting public policy “in a vacuum.”4) Susan D. Franck, The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law through Inconsistent Decisions, 73 FORDHAM L. REV. 1521, 1571 (2005) [hereinafter “Franck”]. jQuery("#footnote_plugin_tooltip_9201_4").tooltip({ tip: "#footnote_plugin_tooltip_text_9201_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); There is consternation that “as corporations become larger and more influential in global politics and trade negotiations, they will disproportionately control and benefit from [international investment agreements] at the expense of state sovereignty.”5) Leite, fn 14 citing Tamara L. Slater, Investor-State Arbitration and Domestic Environment Protection, 14 WASH. U. GLOBAL STUD. L. REV. 131, 132-133 (2015). jQuery("#footnote_plugin_tooltip_9201_5").tooltip({ tip: "#footnote_plugin_tooltip_text_9201_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Some commentators even go so far as to criticize investment arbitration as a “supranational decision-maker” which lacks any of the democratic checks and balances.6) James Gathii & Cynthia Ho, Regime Shifting of IP Lawmanking and Enforcement from the WTO to the International Investment Regime, 18 Minn. J. L. Sci. & Tech. 427, 495 (2017) citing Barnali Choudhury, Democratic Implications Arising from the Intersection of Investment Arbitration and Human Rights, 46 ALTA. L. REV. 983 (2009) and Sergio Puig, The Merging of International trade and Investment Law, 33 BERKELEY J. INT’L. L. (2015). jQuery("#footnote_plugin_tooltip_9201_6").tooltip({ tip: "#footnote_plugin_tooltip_text_9201_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Ruth Okediji notes that having private actors adjudicate public policy is a “subver[sion of] a core judicial function” and consequently “alters the contours of state power and responsibility.”7) Okediji, at 1122.
jQuery("#footnote_plugin_tooltip_9201_7").tooltip({ tip: "#footnote_plugin_tooltip_text_9201_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Given the notion that intellectual property was originally seen as primarily in the public domain for the purpose of promoting creativity, the expansion and shift of intellectual property rights into an “investment” capable of expropriation risks perturbing the initial public good motivation behind intellectual property as well as the traditional safeguards.8) Rochelle Dreyfuss & Susy Frankel, From Incentive to Commodity to Asset: How International Law is Reconceptualizing Intellectual Property, 36 MICHIGAN J. INT’L L. 557, 559–560 (2015); YU, at 835. jQuery("#footnote_plugin_tooltip_9201_8").tooltip({ tip: "#footnote_plugin_tooltip_text_9201_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In other words, as Rochelle Dreyfuss and Susy Frankel discuss, intellectual property rights shifted from being seen as an incentive to becoming a commodity in itself.9) See Dreyfuss and Frankel. jQuery("#footnote_plugin_tooltip_9201_9").tooltip({ tip: "#footnote_plugin_tooltip_text_9201_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The purpose of investment agreements was to provide an unprecedented avenue for private foreign investors to resolve disputes with the State hosting their investment and thereby reduce the risk of investing. However, the system appears to have become somewhat one sided with investment agreements seen as “a charter of rights for foreign investors, with no concomitant responsibilities or liabilities, no direct legal links to promoting development objectives, and no protection for public welfare in the fact of environmentally or socially destabilizing foreign investment…”10) United Nations Conference on Trade and Development, The Development Dimension of FDI: Policy and Rule-Making Perspectives, UNCTAD/ITE/IIA/2003/4 (Nov. 6-8, 2002), 212. jQuery("#footnote_plugin_tooltip_9201_10").tooltip({ tip: "#footnote_plugin_tooltip_text_9201_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); If the objective of these investment agreements was to reduce investor risk with “risk” defined as a “moral wrong” from which an investor should be protected,11) Azernoosh Bazrafkan & Alexia Herwig, Reinterpreting the Fair and Equitable Treatment Provision in International Investment Agreements as a New and More Legitimate Way to Manage Risks, 7 EUROPEAN J. OF RISK REG. 439, 440 (2016) [hereinafter “Bazrafkan & Herwig”]. jQuery("#footnote_plugin_tooltip_9201_11").tooltip({ tip: "#footnote_plugin_tooltip_text_9201_11", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); then it is only logical and moral to allow a state to prioritize and act in accordance with bona fide public interests.

The FET context

Despite the pervasiveness of the FET claim, there is no defined mechanism for factoring into the balancing equation whether the host State had valid reasons for enacting the measure in question. The result is a “regulatory chill” in which smaller and developing countries do not enact necessary legislation for fear of crushing liability.

The case law paints a sporadic and confused picture. In an expropriation context, some tribunals12) Siemens A.G. v The Argentine Republic, ICSID Case No. ARB/02/8, Award, (Jan. 17, 2007), ¶ 270; Compañía del Desarrollo de Santa Elena, S.A. v The Republic of Costa Rica, ICSID Case No. ARB/96/1, Award (Feb. 17, 2000), ¶ 72; AES Summit Generation Limited AES-Tisza Erömü KFT v The Republic of Hungary, ICSID Case No. ARB/07/22, Award (Sept. 23, 2010), ¶¶ 14.3.1-14.3.4 [hereinafter “AES”]; Metalclad Corporation v The United Mexican States, ICSID Case No. ARB(AF)/97/1, Award (Aug. 30, 2000), ¶¶ 103 and 107. jQuery("#footnote_plugin_tooltip_9201_12").tooltip({ tip: "#footnote_plugin_tooltip_text_9201_12", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); look only at the effects of a host State’s measure, some13) Azurix Corp. v The Argentine Republic, ICSID Case No. ARB/01/12, Award (Jul. 14, 2006), ¶¶ 309-312; Tecnicas Medioambientales Tecmed S.A. v The United Mexican States, ICSID Case No. ARB(AF)/00/2, Award, (May 29, 2003), ¶¶ 121-122. jQuery("#footnote_plugin_tooltip_9201_13").tooltip({ tip: "#footnote_plugin_tooltip_text_9201_13", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); look at whether the measure was non-discriminatory, bona fide and had a proportionate legitimate public purpose, and others14) Methanex Corp. v United States of America, Final Award on Jurisdiction and Merits, 44 ILM 1345 (2005), award rendered Aug. 3, 2005, pt. IV, ch. D, ¶ 7: “As a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alia, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.” jQuery("#footnote_plugin_tooltip_9201_14").tooltip({ tip: "#footnote_plugin_tooltip_text_9201_14", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); try to balance the host State’s right to regulate in the public interest with the protection of the investor’s rights. In an FET context, tribunals appear to be even more split and indeterminate. This lack of clarity, especially in the context of the rapidly changing intellectual property context, can evolve into disastrous results if not properly and promptly resolved.

Hirsch has said that Tribunals find breaches of FET on two grounds.15) Moshe Hirsch, Between Fair and Equitable Treatment and Stabilization Clause, 12 THE JOURNAL OF WORLD INVESTMENT & TRADE, 784, 790, 792–99 (2011). jQuery("#footnote_plugin_tooltip_9201_15").tooltip({ tip: "#footnote_plugin_tooltip_text_9201_15", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The first ground being specific government assurances in which FET is treated like detrimental reliance in contract law and the second ground being that the legislative change was accompanied by procedural defects. The problem is that the balance at stake here, investor rights vs. public interests, are not between contractual parties. Instead, what we have is an economic operation, on one side, and a sovereign power resulting from a political commitment to the populous, on the other.16) Fornasari. jQuery("#footnote_plugin_tooltip_9201_16").tooltip({ tip: "#footnote_plugin_tooltip_text_9201_16", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The ability of the FET claim to limit a State from regulating in pursuance of public interest is both unclear and confused as the application of the standard is undeveloped and inconsistent. What qualifies as “fair and equitable treatment” is not yet defined. But “fair” treatment should not mean the investor’s rights are paramount. “Fair” should mean fair which necessarily requires an equitable balancing of all rights and interests at play.

The Intellectual Property Context

There is an emerging “new form of dialectics between the private and public interests in IP governance at the international level”.17) Valentina S. Vadi, Towards a New Dialectics: Pharmaceutical Patents, Public Health and Foreign Direct Investments, 5 NYU J. INTELL. PROP. & ENT. L. 113, 118 (2015). jQuery("#footnote_plugin_tooltip_9201_17").tooltip({ tip: "#footnote_plugin_tooltip_text_9201_17", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); As discussed above, the battle in this case is not an even playing field as we have private interests competing with public national entities.18)id. jQuery("#footnote_plugin_tooltip_9201_18").tooltip({ tip: "#footnote_plugin_tooltip_text_9201_18", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Arbitration provides the most well-equipped forum for such disputes as unlike national courts, arbitration offers an avenue for private investors to file claims against states. The arbitration of disputes concerning intellectual property rights “has the potential to revolutionize IP governance at the national and international levels.”19) Id, 118-119 citing Muthucumuraswamy Sornarajah, Evolution or Revolution in International Investment Arbitration? The Descent into Normlessness , in EVOLUTION IN INVESTMENT TREATY LAW AND ARBITRATION (Chester Brown and Kate Miles eds., 2011), 631-657 arguing that “disparate trends” in international investment law and arbitration “show neither evolution nor revolution but an ongoing conflict [between private and public interests] that either will bring a new system – resulting in a revolution – or will keep the old, simply because one or the other of the camps wins the tussle,” at 632. jQuery("#footnote_plugin_tooltip_9201_19").tooltip({ tip: "#footnote_plugin_tooltip_text_9201_19", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Given the global reach and impact of intellectual property as well as the constantly changing nature of the industry, an international and flexible forum such as arbitration can provide the best medium for resolving intellectual property disputes.

IP rights and their proper enforcement are crucial to the promotion of innovation and, ultimately, to the growth of society as a whole. The importance of IPRs, particularly in the international realm, is becoming increasingly recognized. While a person having their work copied is not the same as someone being stripped of food and shelter, IP is increasingly seen as being entangled with human rights issues. When IP rights are considered important public policy tools in themselves, the question becomes to what extent these rights take precedence over other factors such as public interest and a State’s sovereign rights.

In the second part of this article, we consider how the award in Philip Morris has affected this balance.

The author is the editor of the Intellectual Arbitrator.

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References   [ + ]

1. ↑ Ruth Okediji, Is Intellectual Property “Investment”? Eli Lilly v. Canada and the International Intellectual Property System, 35 U. PA. J. INT’L. L. 1121, 1122 (2014); Peter K. YU, The Investment-Related Aspects of Intellectual Property Rights 843 (2016) noting that it is not the fact that intellectual property rights are considered investments that is the novel problem, it is the fact that this now means private investors can bring a suit without requiring assistance from the government and support of their home states. 2. ↑ Riccardo Fornasari, The Protection of Legitimate Expectations under the Fair and Equitable Treatment Standard, KSLR COMMERCIAL & FINANCIAL LAW BLOG (May 12, 2015). 3, 18. ↑ id. 4. ↑ Susan D. Franck, The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law through Inconsistent Decisions, 73 FORDHAM L. REV. 1521, 1571 (2005) [hereinafter “Franck”]. 5. ↑ Leite, fn 14 citing Tamara L. Slater, Investor-State Arbitration and Domestic Environment Protection, 14 WASH. U. GLOBAL STUD. L. REV. 131, 132-133 (2015). 6. ↑ James Gathii & Cynthia Ho, Regime Shifting of IP Lawmanking and Enforcement from the WTO to the International Investment Regime, 18 Minn. J. L. Sci. & Tech. 427, 495 (2017) citing Barnali Choudhury, Democratic Implications Arising from the Intersection of Investment Arbitration and Human Rights, 46 ALTA. L. REV. 983 (2009) and Sergio Puig, The Merging of International trade and Investment Law, 33 BERKELEY J. INT’L. L. (2015). 7. ↑ Okediji, at 1122.
8. ↑ Rochelle Dreyfuss & Susy Frankel, From Incentive to Commodity to Asset: How International Law is Reconceptualizing Intellectual Property, 36 MICHIGAN J. INT’L L. 557, 559–560 (2015); YU, at 835. 9. ↑ See Dreyfuss and Frankel. 10. ↑ United Nations Conference on Trade and Development, The Development Dimension of FDI: Policy and Rule-Making Perspectives, UNCTAD/ITE/IIA/2003/4 (Nov. 6-8, 2002), 212. 11. ↑ Azernoosh Bazrafkan & Alexia Herwig, Reinterpreting the Fair and Equitable Treatment Provision in International Investment Agreements as a New and More Legitimate Way to Manage Risks, 7 EUROPEAN J. OF RISK REG. 439, 440 (2016) [hereinafter “Bazrafkan & Herwig”]. 12. ↑ Siemens A.G. v The Argentine Republic, ICSID Case No. ARB/02/8, Award, (Jan. 17, 2007), ¶ 270; Compañía del Desarrollo de Santa Elena, S.A. v The Republic of Costa Rica, ICSID Case No. ARB/96/1, Award (Feb. 17, 2000), ¶ 72; AES Summit Generation Limited AES-Tisza Erömü KFT v The Republic of Hungary, ICSID Case No. ARB/07/22, Award (Sept. 23, 2010), ¶¶ 14.3.1-14.3.4 [hereinafter “AES”]; Metalclad Corporation v The United Mexican States, ICSID Case No. ARB(AF)/97/1, Award (Aug. 30, 2000), ¶¶ 103 and 107. 13. ↑ Azurix Corp. v The Argentine Republic, ICSID Case No. ARB/01/12, Award (Jul. 14, 2006), ¶¶ 309-312; Tecnicas Medioambientales Tecmed S.A. v The United Mexican States, ICSID Case No. ARB(AF)/00/2, Award, (May 29, 2003), ¶¶ 121-122. 14. ↑ Methanex Corp. v United States of America, Final Award on Jurisdiction and Merits, 44 ILM 1345 (2005), award rendered Aug. 3, 2005, pt. IV, ch. D, ¶ 7: “As a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alia, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.” 15. ↑ Moshe Hirsch, Between Fair and Equitable Treatment and Stabilization Clause, 12 THE JOURNAL OF WORLD INVESTMENT & TRADE, 784, 790, 792–99 (2011). 16. ↑ Fornasari. 17. ↑ Valentina S. Vadi, Towards a New Dialectics: Pharmaceutical Patents, Public Health and Foreign Direct Investments, 5 NYU J. INTELL. PROP. & ENT. L. 113, 118 (2015). 19. ↑ Id, 118-119 citing Muthucumuraswamy Sornarajah, Evolution or Revolution in International Investment Arbitration? The Descent into Normlessness , in EVOLUTION IN INVESTMENT TREATY LAW AND ARBITRATION (Chester Brown and Kate Miles eds., 2011), 631-657 arguing that “disparate trends” in international investment law and arbitration “show neither evolution nor revolution but an ongoing conflict [between private and public interests] that either will bring a new system – resulting in a revolution – or will keep the old, simply because one or the other of the camps wins the tussle,” at 632. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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U.S. Supreme Court Holds That Individualized Employer-Employee Arbitration Agreements Must Be Enforced As Written

Kluwer Arbitration Blog - Fri, 2018-06-29 02:05

Cherine Foty

ArbitralWomen

On May 21st, 2018, the Supreme Court of the United States in Epic Systems Corp. v. Lewis (“Epic Systems”) held in a 5-4 majority that one-on-one mandatory arbitration agreements imposed by employers upon their employees must be enforced as written in accordance with the Federal Arbitration Act (“FAA”). The majority opinion, written by Justice Neil Gorsuch, reasoned that the FAA superseded the federal right of employees to bring claims in class or collective actions contained in the National Labor Relations Act (“NLRA”) and the Fair Labor Standards Act (“FLSA”).

Enacted in 1935 during U.S. President Franklin D. Roosevelt’s New Deal Era, the NLRA established a “‘fundamental right’ [of employees] to join together to advance their common interests”. The rationale was that by permitting workers to collectively confront employers with respect to the conditions of their employment, they would “gain strength […] in numbers” and avoid the threat of retaliation. Low-value minimum-wage and overtime claims could thus be brought on a collective level to equalize the employer-employee power imbalance, allowing employees to be an adequate match for the much stronger employers.

However, in recent years, the imposition of mandatory arbitration agreements by employers upon their employees has drastically risen, affecting over 50% of non-unionized companies in the United States (as opposed to 2% in 1992). According to Justice Ruth Bader Ginsburg, who criticized the Epic Systems majority decision as “egregiously wrong” in a scathing dissent, this exponential growth of individualized employer-imposed arbitration is a direct result of recent Supreme Court jurisprudence which has rendered “the cost-benefit balance of underpaying workers […] heavily in favor of [employers] skirting [their] legal obligations”.

The FAA’s Saving Clause

The Epic Systems majority decision debated what exceptions exist to the general requirement that arbitration agreements must be enforced by courts as written. It considered Section 2 of the FAA, or its “saving clause”, which states that a written arbitration agreement “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”

The majority examined divergent lower court opinions from the Fifth, Seventh, and Ninth Circuits. On the one hand, the Fifth Circuit held that no unfair labor practices were committed by requiring employees to sign individual arbitration agreements waiving their right to pursue class and collective actions. However, on the other hand, the Seventh and Ninth Circuits held that enforcing an arbitration agreement which violates a “substantive federal right” renders the agreement illegal and hence unenforceable under the FAA. They found that enforcing an agreement which requires individualized arbitration proceedings contravenes the “substantive federal right” contained in the NLRA which protects workers’ right to engage in class or collective action.

This was indeed the position taken by the National Labor Relations Board’s (“NLRB”) General Counsel in 2012 that “employer-imposed contracts barring group litigation in any forum – arbitral or judicial – […] unlawfully restricts employees’ Section 7 right to engage in concerted action for mutual aid or protection, notwithstanding the Federal Arbitration Act (FAA), which generally makes employment-related arbitration agreements judicially enforceable.”

However, the majority in Epic Systems drastically departed from the reasoning of the Seventh and Ninth Circuits and the NLRB, holding that the text of the FAA’s “saving clause” only recognizes “defenses that apply to ‘any’ contract”. As such, only general contractual defenses such as fraud, duress, or unconscionability can be invoked to invalidate an arbitration agreement under the FAA. This means that unless the arbitration agreements in question were extracted by fraud or duress, which would serve to invalidate any contract, the clear terms of an arbitration agreement, allegedly validly entered into, should prevail.

In her dissent, Justice Ginsburg criticized this reasoning, suggesting that the illegality of collective litigation waivers contained in employer-imposed arbitration clauses is what qualifies as an excludable contractual provision which would fall under the FAA’s “saving clause”.

She also highlighted Section 1 of the FAA which expressly excluded employment contracts from the scope of the FAA: “but nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

In fact, the legislative history of the FAA shows that organized labor had objected to the application of arbitration in the employment context but were contented with the fact that the FAA clearly excluded workers from its scope. That understanding of the Section 1 exclusion in the FAA was confirmed in historic Supreme Court jurisprudence. For example in the 1967 Prima Paint case, the Supreme Court stated that “categories of contracts otherwise within the [FAA] but in which one of the parties characteristically has little bargaining power are expressly excluded from the reach of the [FAA].”

However, more recent jurisprudence has gradually whittled away the employment contract exception in the FAA, beginning with the 1991 Gilmer case which authorized arbitration of claims under the Age Discrimination and Employment Act of 1967. Thereafter, the 2001 Circuit City case ruled that the employment exception should be construed narrowly, only to cover transportation workers. According to Justice Ginsburg, the resulting spike in the number of mandatory employer-imposed arbitration agreements in recent years is a direct result of that decision.

Individualized Arbitration Proceedings and the Issue of Consent (or Lack Thereof)

The Epic Systems majority also found issue with the invocation only of the “individualized nature” of the arbitration proceedings, suggesting that a contract cannot be unenforceable “just because it requires bilateral arbitration”. It likened the employer-employee arbitration agreements prohibiting class actions to company-consumer arbitration agreements with class action waivers recently upheld as valid by the Supreme Court in the 5-4 split 2011 AT&T Mobility LLC v. Concepcion case (with Justice Scalia writing for the majority rather than Justice Gorsuch). When discussing the Concepcion case, the Epic Systems majority held that in both the employer-employee and the company-consumer context, “courts may not allow a contract defense to reshape traditional individualized arbitration by mandating classwide arbitration procedures without the parties’ consent”.

However, in response, Justice Ginsburg’s dissent highlights that by limiting employees to individualized arbitration proceedings, employers inherently prevent them from utilizing “existing, generally available procedures” to exercise their right to engage in “other concerted activities” as permitted by the NLRA. Employees should be able to use procedures such as joinder, class action litigation, and class arbitrations, permitted under the FLSA, Federal Rules on Civil Procedure, and for example the Supplementary Rules for Class Arbitrations established by the American Arbitration Association (“AAA”).

Interestingly, Justice Ginsburg also took issue with the majority’s use of the word “consent” when referring to individualized arbitration proceedings. She questioned whether the arbitration agreements between the employers and employees in the three lower court decisions in question were truly “bilateral” in nature and whether they were in fact “voluntary”. Indeed, the employers Epic Systems and Ernst & Young in the Seventh and Ninth Circuit decisions respectively, had e-mailed their employees an arbitration agreement imposing individual arbitration, providing that if the employees continued employment, they would be deemed to have accepted those terms. It is debatable whether the employees sufficiently entered into the arbitration agreement on consensual terms.

Justice Ginsburg emphasized that the FAA was designed to apply to “voluntary, negotiated agreements” to arbitrate. It was never meant to support arbitration “where one party sets the terms of an agreement while the other is left to ‘take it or leave it’.”

The Epic Systems decision has served to further increase the divide between the position of the United States and that of France, for example, which has carved out an exception to the primacy of arbitration agreements when it comes to labor and employment disputes. In fact, according to Article L. 1411-4 of the French Labor Code, only the Labor Courts (Conseils des Prud’hommes) are competent to hear employment disputes and recourse to arbitration is hence prohibited. It remains to be seen how the United States and the various EU Member States will continue to diverge on this issue in the future, as class actions continue to take a foothold in Europe.

The views expressed in this article are those of the author alone and should not be regarded as representative of, or binding upon ArbitralWomen and/or the author’s law firm and its clients.

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Saudi ECA, SCCA partner to boost investments - ZAWYA

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Proskauer Bolsters National Litigation Practice With Addition of Jonathan Weiss - Markets Insider

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Corruption as a ‘Sword’ in Investor State Arbitrations

Kluwer Arbitration Blog - Thu, 2018-06-28 00:10

Edmund Bao

King & Wood Mallesons

That investor state tribunals may deal with allegations of corruption in ISDS disputes is well acknowledged. The seminal World Duty Free1) World Duty Free Company Limited and The Republic of Kenya, ICSID Case No. ARB/00/7 (Award dated 4 October 2006). jQuery("#footnote_plugin_tooltip_5092_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5092_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); decision involved the payment (in a briefcase) of USD$2 million dollars cash to (the then) President of Kenya to secure a concession contract. The subsequent decision became (although it was by no means the first)2) See for example earlier decisions such as Southern Pacific Properties (Middle East) Limited v Arab Republic of Egypt, ISCID Case No. ARB/84/3 (Award on the Merits dated 20 May 1992); Wena Hotels Ltd. v Arab Republic of Egypt, ICSID Case No. ARB/98/4 (Award dated 8 December 2000). jQuery("#footnote_plugin_tooltip_5092_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5092_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); the leading authority for the proposition that claims based on contracts tainted by corruption cannot be upheld on the basis of host state illegality and international public policy. In this respect, corruption has been primarily used as a ‘shield’ (i.e. a defence) by host states to challenge the enforcement of a contract, or as in Metal Tech, to challenge the Tribunal’s jurisdiction (see our previous discussion on Metal Tech).

On the other hand, there appears scant commentary on whether corruption may be used as a ‘sword’, such as the basis for a claim under an investment treaty or agreement. This usually involves corrupt solicitation of bribes that are unconsummated, as investors that have engaged in corrupt conduct do not themselves have clean hands. Predominantly, the avenues for a claim will be premised upon a violation of the fair and equitable principle, expropriation or a breach of the full security and protection provisions. Below we analyse two decisions (and their related tests) which demonstrate instances of corruption that have been relied upon by investors to bring a claim against the host state.

 

A. EDF (Services) Limited v Romania ICSID Case No. ARB/05/13 (Award dated 8 October 2009)

The case of EDF (Services) involved the alleged solicitation by (the then) prime minister of Romania for a US$2.5 million-dollar bribe. When EDF Services refused to pay the bribe, it was alleged that Romania (though various governmental departments and regulatory agencies) took retaliatory action by engaging in a concerted effort to destroy EDF’s business, resulting in a total loss of EDF’s operations. EDF claimed this was a breach of the FET principles (among other things). While EDF’s claim ultimately failed for other reasons as discussed below, the EDF Tribunal affirmed as uncontroversial that in the context of an investor claim, acts of corruption “is a violation of international public policy, whereby ‘exercising a State’s discretion on the basis of corruption is a […] fundamental breach of transparency and legitimate expectations’”.3) EDF (Services) Limited v Romania ICSID Case No. ARB/05/13 (Award dated 8 October 2009), [221]. jQuery("#footnote_plugin_tooltip_5092_3").tooltip({ tip: "#footnote_plugin_tooltip_text_5092_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });


• The requirement for “clear and convincing” evidence in substantiating allegations of corruption

EDF (Services) demonstrates that tribunals will not entertain corruption allegations on the basis of a claim in the absence of clear and convincing evidence. The Tribunal held that “[t]he seriousness of a corruption charge also requires that the utmost care and sense of responsibility be taken to ascertain the truthfulness and genuine character of the evidence that the party intends to offer in support of its claim.”4) EDF (Services) Limited v Romania ICSID Case No. ARB/05/13 (Procedural Order No. 3), [28]. jQuery("#footnote_plugin_tooltip_5092_4").tooltip({ tip: "#footnote_plugin_tooltip_text_5092_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This was highlighted by the Tribunal especially in the context that the bribe was allegedly facilitated at the highest levels of the Romanian government, including the Prime Minister.

In EDF (Services), the oral testimony of EDF’s witnesses in relation to the solicitation of payment was held to be inconsistent with respect to statements made concurrently to the NAD (the Romanian anti-corruption agency) during the course of its investigations. In particular, whereupon the statement made to the NAD expressly disavowed any knowledge of the identity of the bribe solicitants, the arbitration witness statement did name the individual who requested the bribe. This led the Tribunal to characterise the evidence as of doubtful value. In this respect, EDF was also unable to prove that the bribe was not made in the personal interest of the solicitant but rather on behalf of and for the benefit of the governmental authorities.

 

• That evidence of corrupt conduct be authentic, reliable and obtained lawfully

Another crucial piece of evidence sought to be admitted by EDF was an audio recording between one of EDF’s agents and a staffer of (the then) Prime Minister of Romania. The recording was claimed by EDF as capturing a bribe being requested. The Tribunal however also rejected this piece of evidence. First, it was held that there was a lack of authenticity and reliability regarding the recording. The recording was subject to expert scrutiny as it had sections missing, including the beginning and end sections, various irregularities and instances of transient sounds indicative of possible manipulation. The Tribunal therefore ruled that the EDF had failed to discharge the burden of satisfying the court of the authenticity and reliability of the audio recording. A crucial factor in this finding was due to EDF not able to provide the original copy of the recording for analysis.

Second, the Tribunal held that the recording was not obtained lawfully under Romanian law. In particular, the recording was made clandestinely at the private home of a Romanian public servant without her knowledge. The Claimant’s submission that Romanian privacy law did not apply to public servants was held not to be persuasive as the Romanian constitution guarantees all citizens (notwithstanding their public servant status) equal enjoyment of their rights and liberties (such as privacy).

 

B. Rachel S. Grynberg, Stephen M. Grynberg, Miriam Z. Grynberg and RSM Production Company v. Grenada, ICSID Case No. ARB/10/6 (Award dated 14 October 2010) and related proceedings

The proceeding history is complex. The original merits arbitration was brought under an investment agreement between RSM Production and Grenada. The crux of the dispute related to the cancellation of RSM’s exploration licence by Grenada for offshore hydrocarbon reserves. The merits Tribunal ruled in favour of Grenada and found that the cancellation had been in accordance with the agreement. RSM (the claimants in the first merits hearing) subsequently sought to annul the award (unsuccessfully) under the annulment committee’s inherent powers. RSM then proceeded to bring fresh proceedings under FET, full protection and treatment and expropriation provisions (among others) under the Grenada-United States Bilateral Investment Treaty. RSM did this on the basis of new evidence relating to allegedly corrupt payments received by Grenada from certain Russian parties. RSM alleged that such payments were for the purpose of inducing Grenada to rely on a technicality with licence approval timeframes as a pretext to terminating its agreement (even if arguendo the terms of the Agreement permitted it to do so) and reissue the exploration licence to a Russian company. The following novel issues arose in the context of a claim based corruption argument:

 

• Related corrupt conduct may lead to a breach of investment protections, notwithstanding that there were no breaches of the contractual agreement itself

Despite the fact that a previous Tribunal had found Grenada’s termination of the agreement valid, RSM invited the successor Tribunal to reopen the prior Tribunal’s findings under Article 51 of the ICSID Convention in light of the new corruption evidence. The successor Tribunal declined to do so on the basis that the facts and circumstances which gave rise to the alleged conduct had in fact been available to RSM in the previous case but was not raised by RSM. The Tribunal characterised this as “no more than an attempt to re-litigate and overturn the findings of another ICSID Tribunal, based on allegations of corruption that were either known at the time or which ought to have been raised by way of a revised application and over which the Prior Tribunal had jurisdiction”.5) Rachel S. Grynberg, Stephen M. Grynberg, Miriam Z. Grynberg, and RSM Production Corporation v Grenada, ICSID Case No. ARB/10/6 (Award dated 10 December 2010), [7.3.6]. jQuery("#footnote_plugin_tooltip_5092_5").tooltip({ tip: "#footnote_plugin_tooltip_text_5092_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); As such, the successor Tribunal held that it was not open to them to revisit the facts and issues that had been distinctly determined by the merits Tribunal.

Distinguishing on the facts of this case, it seems that the Tribunal left open the possibility that fresh evidence in relation to corruption may be sufficient as a standalone basis for ISDS proceedings. This is assuming that the evidence that came to light is in fact new and rises issues not covered under collateral estoppel.

 

• The alleged corrupt conduct must have a causative link with the alleged violation of the BIT

The Tribunal ruled that even if it was established that the Grenadian officials were accepting bribes, the agreement (and exploration licence) was terminated by Grenada by relying on its contractual rights.6) Rachel S. Grynberg, Stephen M. Grynberg, Miriam Z. Grynberg, and RSM Production Corporation v Grenada, ICSID Case No. ARB/10/6 (Award dated 10 December 2010), [7.2.6]. jQuery("#footnote_plugin_tooltip_5092_6").tooltip({ tip: "#footnote_plugin_tooltip_text_5092_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); As the merits Tribunal found, RSM was solely responsible for its application’s timing which led to the loss of the exploration licence. As such, the causative link between the bribes and RSM losing the licence was broken.

 

Conclusion

The use of corruption as a sword presents many challenges to investors. There is a high evidentiary bar to successfully proving corrupt conduct. Absent clear and convincing proof and reliable evidence of corrupt conduct directly linked to and attributable to the host state, a breach of investment protections is unlikely to be made out. Some of this is linked to practicalities surrounding the nature of corruption; the Tribunal in EDF (Services) acknowledged that “corruption is notoriously difficult to prove since, typically, there is little or no physical evidence”.7) EDF (Services) Limited v Romania ICSID Case No. ARB/05/13 (Award dated 8 October 2009), [221]. jQuery("#footnote_plugin_tooltip_5092_7").tooltip({ tip: "#footnote_plugin_tooltip_text_5092_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This is not withstanding the accepted position in international investment law that allegations of corruption, if made out, is contrary to international public policy and is a breach of the fair and equitable policy. Therefore, despite the current lack of success by investors in using corruption as a sword, corruption as the basis for a claim in international investment arbitration appears nonetheless to be well-established.

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References   [ + ]

1. ↑ World Duty Free Company Limited and The Republic of Kenya, ICSID Case No. ARB/00/7 (Award dated 4 October 2006). 2. ↑ See for example earlier decisions such as Southern Pacific Properties (Middle East) Limited v Arab Republic of Egypt, ISCID Case No. ARB/84/3 (Award on the Merits dated 20 May 1992); Wena Hotels Ltd. v Arab Republic of Egypt, ICSID Case No. ARB/98/4 (Award dated 8 December 2000). 3, 7. ↑ EDF (Services) Limited v Romania ICSID Case No. ARB/05/13 (Award dated 8 October 2009), [221]. 4. ↑ EDF (Services) Limited v Romania ICSID Case No. ARB/05/13 (Procedural Order No. 3), [28]. 5. ↑ Rachel S. Grynberg, Stephen M. Grynberg, Miriam Z. Grynberg, and RSM Production Corporation v Grenada, ICSID Case No. ARB/10/6 (Award dated 10 December 2010), [7.3.6]. 6. ↑ Rachel S. Grynberg, Stephen M. Grynberg, Miriam Z. Grynberg, and RSM Production Corporation v Grenada, ICSID Case No. ARB/10/6 (Award dated 10 December 2010), [7.2.6]. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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