International Expropriation Rules and Federalism

Abstract

The standard for indirect expropriation under international investment agreements is frequently compared with the standard for regulatory takings under the Fifth Amendment. The decisions of tribunals in cases interpreting the expropriation provision in Chapter 11 of NAFTA, however, indicate that the standard for indirect expropriation provides significantly greater substantive and procedural rights to foreign property owners than the Takings Clause. The definition of investment that is protected under Chapter 11 is much broader than the real property rights and other specific interests in property that are protected under the Takings Clause. In addition, under Chapter 11, an investor may be entitled to compensation for a regulatory measure that has a significant or substantial impact on the value of an investment. The degree of economic impact apparently may be calculated with regard to only the directly affected portion of the property, an approach - known as conceptual severance - that the Supreme Court has repeatedly rejected in its takings jurisprudence. Moreover, under NAFTA an investor seeking compensation for the impact of a state or local regulatory measure will have his claim heard before an international arbitral tribunal rather than in the state courts, and will not face the same ripeness and abstention hurdles that would apply in a regulatory takings case.

Concern over the expansion of property rights under NAFTA's expropriation provision led state and local officials to lobby aggressively for a provision in the Trade Act of 2002 that instructs the Office of the United States Trade Representative (USTR) to ensure that expropriation provisions in future trade agreements do not provide foreign investors with greater rights than those provided to property owners under United States law. In response to Congress's no greater rights mandate, USTR has made some changes to the NAFTA model expropriation text in recent free trade agreements. It appears, however, that the expropriation provisions, both in these agreements and in other agreements currently being negotiated - such as the thirty-four-nation Free Trade Area of the Americas (FTAA) - will, like NAFTA Chapter 11, provide foreign investors with significantly greater rights than the Takings Clause.

Arguably, the impact of NAFTA's expropriation provision on state and local authority is mitigated by its lack of direct domestic legal effect. If a NAFTA tribunal were to find that a state law had expropriated a foreign investment, the tribunal would have only the authority to award damages to the investor. The offending law would not be preempted by the tribunal's decision, and the federal government, rather than the state, would be liable for paying the damages. Even if the federal government brought an action seeking to have a federal court declare that NAFTA preempted the state law, such an action could be construed as an impermissible attempt to expand the restrictions imposed on the states under the Takings Clause, without complying with the procedures for amending the Constitution specified in Article V. Yet, even if international expropriation rules cannot be directly enforced against the states, they could nonetheless establish a new regulatory takings norm that could undermine state regulatory authority.