When Australia began prohibiting brand logos and requiring grim pictures of smoking-borne diseases on cigarette packs, tobacco giant Philip Morris fired back using a novel tactic.
It turned to an obscure dispute-arbitration clause in a 1993 trade agreement between Australia and Hong Kong to argue that the Australian government's new public-health law amounted to discrimination and an expropriation of a foreign investment.
That case, which is pending, illustrates what opponents of the Trans-Pacific Partnership say they fear most about the nearly completed trade pact: that it will benefit big corporations at the expense of consumers and workers.
Few things have galvanized critics of the 12-nation Pacific Rim trade deal as much as an arbitration clause aimed at protecting foreign businesses from the hazards of investing in countries with weak rule of law and unstable governments.
The provision allows multinational investors to sue foreign governments for expropriation and unfair or unequal treatment, giving them the ability to bring cases before a special, extrajudicial arbitration tribunal that is unavailable to domestic investors.
Though the clause is already common in hundreds of existing treaties around the world, critics fear that the largely secretive arbitration mechanism, however well-intended, will increasingly be exploited by large companies to demand compensation for or exemptions from certain laws and policies meant for the public good.
Although there are not yet any known cases in which multinational companies have succeeded in rolling back such a law, critics of the trade deal point to several cases that they fear could yield that result or chill other nations from enacting similar measures.
Even though Australia's High Court upheld the legality of the cigarette-packaging rule when challenged by other companies, New York-based Philip Morris was still able to able to take action under Australia's treaty with Hong Kong by using a Hong Kong-based unit of the company.
Though the U.S. also has a trade pact with Australia, Philip Morris could not seek a claim under that accord because Australia had refused to include an investor-state dispute settlement provision in the agreement with the U.S.
In another case, Lone Pine Resources, a Canadian firm, is using the fact that it is incorporated in Delaware to access the dispute clause in the North American Free Trade Agreement. It is seeking $250 million in damages from the Canadian government after the province of Quebec issued a moratorium on the controversial drilling method known as fracking.
Opponents of the arbitration provision warn that it's only a matter of time before foreign companies or even perhaps U.S. companies with foreign subsidiaries ramp up their use of the dispute-settlement process to avoid U.S. courts and fight American laws.
"What makes us think we couldn't face a similar challenge?" said Ben Beachy, research director on trade at Public Citizen, a watchdog group and leading critic of the Trans-Pacific Partnership.
Dozens of law school professors — including noted Harvard scholar Laurence Tribe — along with environmentalists, health policy experts and other civil society groups, have raised similar concerns. The issue is certain to heat up once negotiations for the trade pact conclude, possibly in the next few weeks, and details of the sweeping trade accord are disclosed to the public.
Sen. Elizabeth Warren (D-Mass.), one of the most vocal critics of the investor-state dispute settlement clause, argued in a recent Washington Post opinion piece that the Pacific trade deal "would tilt the playing field in the United States further in favor of big multinational corporations" and "undermine U.S. sovereignty."
Obama administration officials respond that similar arbitration procedures are used every day by businesses, governments and individuals to resolve conflicts. Protection of a citizen's property is a right enshrined in the U.S. Constitution, Jeffrey Zients, a top economic advisor to Obama, wrote in a White House blog.
"Unfortunately, foreign courts have not always respected this principle," he said, "and U.S. investors often face a heightened risk of bias or discrimination when abroad."
Zients noted that there have been only 13 investor-state dispute settlement cases brought to judgment against the American government — and the U.S. has won them all.
U.S. business groups said opponents of the arbitration provision have misstated or grossly exaggerated the facts.
For one thing, most of cases brought worldwide under investor-state arbitration processes since the 1960s have come from individuals and small and medium-sized businesses, not large multinational corporations, said Linda Dempsey, vice president of international economics at the National Assn. of Manufacturers.
Such investors include Spence International Investments of El Dorado Hills, Calif., and its partners. They sued the government of Costa Rica in 2013 for alleged expropriation of prime beachfront land that they had planned to develop. Spence filed the case under the investor-state dispute clause in the U.S. free-trade agreement with Central American nations known as CAFTA. The suit is pending.
Dempsey said it's also inaccurate to suggest that any of these decisions, typically rendered by a panel of three lawyers, can overturn a law or policy of a sovereign state. Dempsey noted that the cases most cited by detractors, including the suits by Philip Morris and Lone Pine, haven't been decided yet.
Investors and trade businesses need such legal protections, Dempsey said, particularly in places with high corruption and authoritarian regimes. Governments have been known to send in armies to take over foreign cement plants, gas fields and other operations, as they have done in Venezuela and Russia.
"You are subjecting yourselves to the rules and whims of foreign governments," Dempsey said.
Still, the surge in the number of these investor suits in recent years, including some contentious cases challenging national social goals, has prompted some governments to reassess the need for having an arbitration procedure.
South Africa and Indonesia plan to pull out of or let expire trade agreements with such clauses. Germany has been having second thoughts too after it was sued by a Swedish utility in the wake of Germany's decision to stop using nuclear power. With France and some others also wary of the investor provision, that could complicate free-trade negotiations between the U.S. and the European Union.
Since both the U.S. and the EU have well-developed, independent legal systems, many question why a separate arbitration system is needed, according to Rachel Wellhausen, an international investment specialist at the University of Texas at Austin.
In the Trans-Pacific Partnership, the provision on investor-state arbitration is very strong on transparency, according to draft texts leaked in 2012 and in March. Whenever a lawsuit is filed, for example, it would have to be made public.
Even so, Australia is said to be resisting the inclusion of the arbitration clause, and some other member nations are seeking certain exemptions from such investor suits, including a carve-out for tobacco companies.
Wellhausen's research has turned up 686 investor-state dispute cases since 1990, when the majority of such suits started to be filed. Nobody knows the actual number of investor-state cases because dispute-settlement provisions generally don't require filings to be made public.
Details of proceedings often are kept under wraps, too. Complainants have included firms from all sectors, though utilities and gas and oil topped the list. Companies are of all sizes, though the rising cost of litigation is making it increasingly harder for the mom-and-pop investor, she said.
Of the known closed cases, she said, about a third were won by investors, a third by governments and the remaining third settled, suggesting that companies have had an edge because settlements generally mean compensation to the investor.
Wellhausen counted 147 suits brought by U.S. firms, more than from any other nation. The number is probably higher as some American corporations hold multiple nationalities.
Mobil Corp., for instance, used a Dutch-based unit to file a case in 2007 against Venezuela under the Netherlands-Venezuela investment treaty. Seven years later the company won $1.6 billion plus costs in compensation for assets seized by the country under the late socialist President Hugo Chavez.
To date, most of the investor-state cases have been against developing countries, but the share of suits brought against governments of developed nations has been increasing. The Trans-Pacific Partnership includes a mix of economies at different stages of development, Mexico and Vietnam on one end and the U.S. and Japan on the other.
The investor arbitration clause in the Pacific accord is expected to function similarly to what's in the North American Free Trade Agreement and other treaties. Deciding the case would be one arbitrator chosen by the plaintiff, one by the state and the third agreed to by both sides. There would be no appeal process.
Arbitrators are often corporate lawyers paid up to $700 an hour, and it takes time to sift through arguments on complex cases and determine what may constitute expropriation or unfair treatment, terms that leave considerable room for interpretation.
Wellhausen, the University of Texas scholar, said the best argument for the investor-state settlement system is that it helps boost investment flows. But on that, she says, the data is decidedly mixed.
"If it does work [in promoting investments], it's on the margins," she said.