Emerging Voices: Can Foreign Investors Enforce International Investment Law in U.S. Courts?

[John Coyle is an Assistant Professor at the University of North Carolina School of Law.]

On June 14, 2016, the Islamic Republic of Iran initiated proceedings against the United States before the International Court of Justice (“ICJ”), alleging that the United States had violated the 1955 Treaty of Amity, Economic Relations, and Consular Rights (“Treaty”) between the two nations.  Iran claimed, inter alia, that the United States had discriminated against Iranian companies, failed to accord these companies the most constant protection and security, and expropriated their property without compensation.  In support of its claim, Iran noted that the ICJ had jurisdiction to hear the dispute pursuant to Article XXI(2) of the Treaty, which provides that “[a]ny dispute . . . as to the interpretation or application of the present Treaty . . . shall be submitted to the International Court of Justice.”

Similar treaty provisions can be found in more than a dozen other treaties of friendship, commerce, and navigation (“FCNs”) negotiated by the United States in the two decades following the Second World War.  At the time, these agreements to submit to the jurisdiction of the ICJ was viewed as a significant milestone in the peaceful resolution of international investment disputes.  In the decades that followed, however, nations increasingly turned to bilateral investment treaties (“BITs”) and investor-state arbitration to resolve such disputes.  It is today common in the academic literature for authors to identify two—and only two—fora whereby the rights granted to foreign investors under FCNs or BITs may be enforced.  The first is the ICJ.  The second is an international arbitral panel.

In a recent paper, Jason Yackee and I argue that this account overlooks a third possible forum—the courts of the United States.  We argue that the FCNs negotiated by the United States in the 1940s and 1950s, most of which remain in force, provide foreign investors with domestically enforceable rights. These FCNs contain promises of favorable substantive treatment that are quite similar to the rights commonly extended to investors through BITs and investment chapters in free trade agreements such as NAFTA and CAFTA.  Unlike NAFTA and CAFTA, however, the FCNs are self-executing and give rise to a private right of action. This means that their provisions may be directly enforced in U.S. courts by private litigants.

This ability to access substantive international investment law through domestic litigation rather than international arbitration is of significant practical and theoretical importance.  It could lead foreign companies to rethink their approach to asserting indirect or regulatory takings claims against governmental entities within the United States.  The choice available to foreign investors who believe that they have suffered a regulatory taking has long been viewed as binary. The investor may either bring a constitutional takings claim before a U.S. court or a treaty-based expropriation claim before an international arbitral tribunal. There was no way—or so conventional wisdom held—for a foreign investor to invoke the enhanced protections afforded by the treaty in domestic litigation. The FCNs make it possible, at least in principle, for foreign investors to litigate takings claims in U.S. courts under international investment law standards rather than constitutional ones.

The ability to access the substance of international investment law through the FCNs also suggests that foreign investors may in some cases enjoy domestically enforceable rights under those treaties that are superior to those accorded to citizens under the U.S. Constitution. The U.S. Supreme Court held in Penn Central that courts must balance three factors in determining whether a regulatory taking has occurred under the Takings Clause: (1) the economic impact of the regulation on the claimant, (2) the extent to which the regulation interferes with investment-backed expectations, and (3) the character of the government action. In theory, the test constitutes a neutral attempt to balance the interests of the government against the interests of private property owners. In practice, the test typically results in a finding that no taking has occurred and that no compensation is owed to the property owner.  The standard of protection for regulatory expropriations under international investment treaties, by contrast, is generally viewed as more demanding than the standard of protection set forth in the Takings Clause. Indeed, when the U.S. Congress became aware of this divergence in 2002, it enacted a law directing U.S. trade negotiators to “[e]nsur[e] that foreign investors in the United States are not accorded greater substantive rights with respect to investment protections than United States investors in the United States.”  The treaty negotiators subsequently modified the text of the U.S. Model BIT to effectuate this goal for future agreements.  However, these textual modifications do not affect treaties that were then in existence, a list that includes all of the FCNs.

We acknowledge that there are a number of practical obstacles that would need to be overcome before the FCN revival could successfully occur.  The first is the well-documented reluctance on the part of U.S. judges to directly enforce rules of international law in the absence of a statute expressly directing them to do so.  The second is the fact that FCNs couch their promises to investors in language that is sometimes different from the domestic-law analogues with which U.S. judges are familiar. Judicial unfamiliarity with the language of international investment law may make it more likely for judges to restrict private access to the treaties.  The third obstacle is that U.S. courts have, at least historically, been reluctant to grant rights to foreign nationals while denying these same rights to U.S. citizens. Under our argument, foreign investors would be asking the courts to enforce a treaty provision granting rights to foreign companies that are arguably superior to those enjoyed by U.S. citizens.  While there are scattered precedents in which U.S. courts have recognized such rights in the past, contemporary judges may prove resistant to the idea in practice.

There is also at least one significant doctrinal obstacle that would need to be overcome—sovereign immunity.  In the United States, the state and federal governments generally enjoy sovereign immunity unless they have waived this immunity or consented to suit.  The Supreme Court has stated that the Takings Clause amounts to a de facto waiver of federal sovereign immunity for suits in which a taking is alleged.  Some scholars have argued that the Takings Clause also abrogates state sovereign immunity for constitutional takings claims.  If the takings claim were to be framed as a treaty violation, rather than a constitutional one, then it is unclear whether the state and federal governments could invoke sovereign immunity as a defense.  On the one hand, the Fifth Amendment could be read as a waiver of sovereign immunity with respect to treaty-based takings claims as well as constitutional ones.  This argument derives support from (1) the fact that the text of the standard treaty provision relating to takings closely tracks the text of the Fifth Amendment, and (2) the fact that foreign sovereigns generally do not enjoy immunity in U.S. courts when they take property in violation of international law.  On the other hand, the Fifth Amendment could be read to waive sovereign immunity only with respect to constitutional claims.  This argument derives support from the Supreme Court’s repeated admonition that waivers of federal sovereign immunity must be “unequivocally expressed” and the Court’s consistent practice of “construing waivers of sovereign immunity narrowly in favor of the sovereign.”  To date, there is a dearth of case law on this issue.

It is important to note, however, that sovereign immunity only presents an obstacle with respect to suits against the United States or one of the several States; counties and municipalities do not enjoy sovereign immunity.  Even if a court were to conclude that the state and federal governments could assert sovereign immunity as a defense, FCNs could still serve as a useful check on any regulatory takings conducted by U.S. counties and municipalities.

In summary, the FCNs are not historical relics. They remain in force, and they provide doctrinally meaningful legal guarantees to foreign investment in the United States due to their self-executing character and the fact that they give rise to a private right of action. While the FCNs have not played a prominent role in domestic litigation over the past half-century, it is easy to imagine how they might be relevant in future years. The U.S. government and its sub-federal counterparts interact with FCN-covered investors all of the time. To the extent that the government thinks in advance about the consequences of its actions toward foreign investors, it should at least consider the possibility that an FCN treaty might impose legally enforceable limitations on its freedom of action. Investors who feel mistreated by the government, moreover, should consider the availability of FCN-based causes of action when planning their legal responses.