Note: This post is the second in a series of posts on the final text of the Trans-Pacific Partnership (TPP) by Covington’s International and Public Policy lawyers.  The final TPP text, which was released on November 5, 2015, is available here.  TPP is not expected to enter into force until at least 2016, with the timeline dependent on the pace of ratification by member states.  In the United States, this means first securing Congressional approval, after the Agreement is signed by the President, pursuant to the requirements set forth under recently enacted Trade Promotion Authority (TPA).

The final text of the TPP’s Investment Chapter remains broadly consistent with other U.S. investment agreements and includes some important new language that is consistent with the model bilateral investment treaty (the U.S. Model BIT) issued by the U.S. State Department in 2012 after wide-spread consultation among stakeholders.  The Investment Chapter has meaningful protections (with some notable exceptions) for U.S. investors in the Asia-Pacific region, and establishes a workable and transparent investor-state arbitration system for the enforcement of such protections.

Core Investment Protections

The TPP preserves core protections against nationality-based discrimination against investors (Articles 9.4 and 9.5), uncompensated expropriations (or takings) of investments (Article 9.7), and treatment of investments and investors that runs afoul of the obligation to provide fair and equitable treatment and full protection and security (Article 9.6).  Consistent with the U.S. Model BIT,  the fair and equitable treatment obligation “prescribes the customary international law minimum standard of treatment of aliens.”[1]  In general, the provisions articulating these protections align with existing U.S. agreements and do not introduce new norms.

In TPP’s Exceptions Chapter, the self-judging “essential security” provision found in the U.S. Model BIT also is included in the TPP.  Under this provision, “[n]othing in [the] agreement shall be construed to . . . preclude a Party from applying measures that it considers necessary for the fulfilment of its obligations with respect to . . . the protection of its own essential security interests” (Article 29.2, emphasis added).

The TPP also includes explicit language confirming that the Investment Chapter does not interfere with a Party’s ability to adopt measures that are otherwise consistent with the Chapter that “it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental, health or other regulatory objectives” (Art. 9.16).

Investor-State Arbitration Procedures

The TPP permits investors to arbitrate disputes with member states for breaches of the core protections summarized above, and it contains extensive procedural provisions related to such investor-state arbitral proceedings.  In general, these provisions track existing best practices, but in some respects they are novel.

Notably, and atypically, the TPP requires investment tribunals to share their decisions with litigating parties (if requested to do so) before they are finalized, allowing the parties an opportunity to comment on draft arbitration awards (Art. 9.22(10)).  This requirement is surprising in a non-state-to-state dispute context, and will add up to three-and-a-half months of delay to an already lengthy arbitral process.

The TPP also introduces several other procedural provisions not found in older BITs, including provisions: requiring public access to hearings and documents; permitting amicus submissions; establishing a procedure for expedited dismissal of frivolous claims; and permitting TPP members to issue binding joint interpretations of the Investment Chapter.  These provisions appear consistent with existing or evolving practices in other fora.  For example, the 2014 UNCITRAL Transparency Rules favor public access to arbitral proceedings, and state parties to treaties such as the North American Free Trade Agreement have issued joint interpretations of those treaties (although the validity of such interpretations has been contested and the deference afforded to such interpretations has not been uniform).

Broad Coverage of Investments

The TPP includes a broad definition of “investment” that covers a non-exhaustive list of tangible and intangible assets.  Consistent with other recent U.S. investment treaties, it affirms that core investment protections apply to intellectual property rights.

As with prior U.S. agreements, the expropriation provisions do “not apply to the issuance of compulsory licenses granted in relation to intellectual property rights in accordance with the TRIPS Agreement, or to the revocation, limitation or creation of intellectual property rights, to the extent that the issuance, revocation, limitation or creation is consistent with Chapter 18 (Intellectual Property) and the TRIPS Agreement” (Article 9.7(5)).

In addition, the TPP includes a new provision related to forced licensing of intellectual property rights.  This provision, which forms part of a wider prohibition on specified “performance requirements,”[2] would generally prohibit parties from requiring investors, in connection with the making or management of an investment, to adopt royalty rates or license durations that would directly interfere with existing license contracts (Article 9.9(1)(i)).  There are several exceptions to the prohibition on forced licensing and on the other prohibitions on performance requirements, including with respect to pre-existing non-conforming measures that are carved out in annexes to the TPP and measures necessary to achieve legitimate regulatory objectives in areas ranging from competition law to environmental protection.

The TPP does provide a complete carve out for a limited category of claims, noting that any TPP party may “elect to deny the benefits of [the Investment Chapter] with respect to claims challenging a tobacco control measure” (Article 29.5).

Conclusion

Overall, the Investment Chapter that emerged from the TPP incorporates many important features of the U.S. Model BIT.  The agreement underscores that the BIT provisions can exist side-by-side with legitimate regulation and provides for public transparency.  The agreement also ensures a predictable and transparent framework for resolving investment disputes across a range of trading partners not covered by existing investment agreements – from Vietnam to Japan – thereby providing an important avenue for neutral resolution of investment-related disputes that fall under the ambit of the BIT.

 

[1] This standard protects against, among other things, arbitrary or discriminatory governmental actions, and governmental actions that are inconsistent with basic due process.

[2] Performance requirements are conditions on the establishment or operation of an investment, such as a condition that an investment use a minimum percentage of domestic goods, export a minimum percentage of its production, or transfer a particular technology to domestic partners.

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Photo of Marney Cheek Marney Cheek

Marney Cheek co-chairs Covington’s International Arbitration and Disputes practice and has advised companies, non-governmental organizations, and governments on high-stakes international disputes and legal strategy for more than 20 years.

Marney serves as both counsel and advocate before numerous international arbitral tribunals and courts…

Marney Cheek co-chairs Covington’s International Arbitration and Disputes practice and has advised companies, non-governmental organizations, and governments on high-stakes international disputes and legal strategy for more than 20 years.

Marney serves as both counsel and advocate before numerous international arbitral tribunals and courts, including the International Court of Justice and major arbitral institutions such as the AAA, ICSID, PCA, and SIAC. She represents clients in complex international business disputes, having successfully defended a client in a $1.8 billion claim filed by a collaboration partner. Ms. Cheek serves as both counsel and arbitrator in numerous investment treaty arbitrations. She is an expert on public international law and currently represents the Government of Ukraine in its landmark cases before the International Court of Justice adverse to the Russian Federation, including Allegations of Genocide under the Convention on the Prevention and Punishment of the Crime of Genocide (Ukraine v. Russian Federation). In addition to leading complex investment treaty and international commercial disputes under the rules of major arbitral institutions, Marney routinely advises clients on public international law matters and issues arising under numerous multilateral treaties. She also is at the forefront of business and human rights disputes, having represented global labor unions in the first binding arbitration brought under a business and human rights compact, the Bangladesh Accord on Fire and Building Safety.

Drawing upon her experience as Associate General Counsel at the Office of the U.S. Trade Representative, Marney routinely counsels clients on international trade matters and is a member of the roster of arbitrators for several U.S. free trade agreements. Her pro bono work includes representation of Radio Free Europe/Radio Liberty, among other matters.

Marney is a member of the Council on Foreign Relations and serves as a Vice President of the American Society of International Law. She has previously taught investment law at Columbia University School of Law. She is recognized as an “extraordinarily thoughtful” and “creative” lawyer with a “wealth of knowledge” on international law matters in Chambers and Legal 500.

Photo of Nikhil Gore Nikhil Gore

Nikhil V. Gore is a partner in Covington’s financial services and arbitration practices, representing sovereigns, financial institutions, and global corporations in civil and criminal investigations, as well as cross-border arbitrations and disputes.

In his financial services investigations and enforcement practice, Nikhil leads anti-financial…

Nikhil V. Gore is a partner in Covington’s financial services and arbitration practices, representing sovereigns, financial institutions, and global corporations in civil and criminal investigations, as well as cross-border arbitrations and disputes.

In his financial services investigations and enforcement practice, Nikhil leads anti-financial crime investigations, as well as a wide range of financial institution governance, control, safety and soundness, and consumer and market conduct matters. He was lead counsel for a global bank in its recent trade surveillance resolutions with U.S. bank regulators, represented another global financial institution in successfully navigating multi-year criminal and civil investigations concerning an alleged corruption scheme in Asia, and has represented regional and community banks across the country in contesting and negotiating supervisory and enforcement outcomes before the OCC, Federal Reserve, and FDIC. He also counsels clients on BSA/AML regulations, and the structure and functioning of their control, compliance, and audit frameworks.

In his disputes practice, Nikhil is part of the Covington team representing Ukraine in state-to-state arbitrations against the Russian Federation and was appointed by the Prosecutor-General of Ukraine to the Legal Task Force on Accountability for Russian War Crimes. He regularly handles treaty arbitrations and commercial disputes spanning Asia, Eastern Europe, North America, the Middle East, and Africa.