Does the International Investment Regime
Induce Frivolous Litigation?
Krzysztof J. Pelc‡

Abstract
The treatment of foreign investment has become the most controversial issue in global governance. At the centre of the controversy lies the mechanism of investor-state dispute settlement
(ISDS), which allows private firms legal recourse against governments, if government interference
has degraded their investment. Using newly released data covering 696 investment disputes, I
assess some of the central claims about ISDS. I argue that the regime has indeed undergone
a major shift: a majority of claims deal not with direct takings by low rule of law countries,
but with regulation in democratic states. The result of this shift towards indirect expropriation
affects firms’ incentives: claimants may gain even when they lose a challenge, if litigation can
deter governments’ regulatory ambitions. The result, as I show, is an increase in the number
of cases, accompanied by a precipitous decrease in their legal merit. Investors bringing indirect
expropriation claims also appear far less likely to settle, and more likely to publicize the dispute,
consistently with theoretical expectations.

‡

William Dawson Scholar Associate Professor, Department of Political Science, McGill University.
kj.pelc@mcgill.ca.
Acknowledgements: I thank Vincent Arel-Bundock, Eric Arias, Leonardo Baccini, Matthew Castle, Armand de
Mestral, Joost Pauwelyn, Peter Rosendorff, and the participants of seminars at McGill and NYU for most helpful
comments. All errors are my own.

 1

Introduction

The treatment of foreign investment has unexpectedly become the most controversial issue in global
governance. In fact, one would be hard pressed to think of another instance, since the abandonment
of the gold standard, where so many countries have walked back their international commitments
in a given issue-area. Today, two major transatlantic trade agreements are in jeopardy over their
investment provisions.1 France and Germany, in particular, are fielding unprecedented domestic
backlash against the proposed investment measures.2 Australia vowed not to sign any further
agreements with investment provisions. Indonesia is promising to revise all its investment treaties,
of which it has signed over 60.3 Brazil and South Africa are opting out of the international
investment regime, stating that they will rely on domestic alternatives instead.4 Ecuador and
Bolivia have formally withdrawn from the investment regime’s central tribunal.5 In sum, the
pushback against the investment regime is no longer a fringe phenomenon: it includes developed as
well as developing, democratic as well as non-democratic countries. At the centre of the controversy
over investment rules lies the mechanism of investor-state dispute settlement (ISDS).
ISDS allows private companies to bring legal claims against a host government. If the
government’s actions are found to have degraded the company’s investment in breach of an investment treaty, the company can be awarded financial compensation. Criticism of ISDS converges
on an alleged disconnect between the original aim of the mechanism and its current use.6 Modern
investment rules emerged in the post-colonial era as a way of protecting Western investors from
expropriation and nationalization by governments in countries with weak rule of law. Yet since
the mid-1990s, these observers claim, the ISDS mechanism has progressively been used against
developed countries that already feature strong domestic judiciaries, in ways that are threatening
these countries’ ability to regulate for the public interest. A string of high profile cases where
multinational companies have challenged German nuclear bans, Australian tobacco regulations,
and Canadian fracking moratoria have added fuel to such concerns.
1

The EU is conducting negotiations in the Comprehensive Economic and Trade Agreement (CETA) with Canada,
and in the Transatlantic Trade and Investment Partnership (TTIP) with the US. In both cases, the investment chapter
constitutes the agreement’s greatest point of contention.
2
“Germany Expresses Concerns About US And Canada Trade Deals”. FT. http://on.ft.com/1BbQObz.
3
Jakarta Post. http://www.thejakartapost.com/news/2015/05/17/the-week-review-investor-state-dispute.
html.
4
“The Arbitration Game”.
The Economist.
http://www.economist.com/news/finance-and-economics/
21623756-governments-are-souring-treaties-protect-foreign-investors-arbitration.
5
“Foreign-Investment Disputes: Come and Get Me”. The Economist. http://www.economist.com/node/
21547836.
6
Lester 2013; Schultz and Dupont 2014; de Mestral 2015; Chen 2015.

1

 In response, policymakers frequently point out that investors lose most of the claims they
bring, and that ISDS thus poses little true threat to legitimate governmental regulation.7 Yet
this leads to an overlooked puzzle: why would investors continue to file these costly cases, if the
expected success rate is so low? As I show, the puzzle is only sharpened when one takes a closer
look at the data. Current estimates actually overstate investors’ success rates, especially when
it comes to specific types of legal claims. What is more, this rate of success has been dropping
precipitously over time—the opposite trend to the one we observe in inter-state disputes in the
trade regime over the same period.
Scholars have a role to play in this debate, yet until recently, they have lacked the means
of engaging in it. Data about investment disputes is notoriously sparse. Successive institutional
reforms promise to increase transparency,8 yet parties can still choose to keep details of a dispute
largely private. Moreover, the lack of a multilateral investment institution9 —arbitration is scattered across a number of different venues—has meant that for a long time there was no centralized
database of investment disputes. The result is that until recently, there has been little means of
empirically assessing the conflicting claims put forth in the policy debate. The picture has improved of late, with several parallel data collection efforts now underway.10 In this article, I rely
on what is to my knowledge the first claim-level dataset of ISDS litigation, which covers all 1421
individual claims across 696 investment disputes from 1993 to present day.
By leveraging this claim-level aspect of the data, I address the most prevalent concerns
surrounding the ISDS regime. The findings suggest that the investment regime has indeed changed
in its primary purpose since its origins. Most disputes today are not over direct takings, but
over indirect expropriation. And most respondent-countries are not rent-seeking regimes with low
rule-of-law, but stable democracies with independent judiciaries. To put it in stark terms, the
greatest portion of legal challenges in the investment regime today seek monetary compensation
for regulatory measures implemented by democracies.
Indirect expropriation differs in a number of ways from direct expropriation, starting with
the fact that the expropriating state usually derives no revenue from the alleged expropriatory
act. I argue that the incentives also differ from the standpoint of the firm. Specifically, firms can
use litigation to temper governments’ regulatory ambitions. This is in part because investor-state
7

“Incorrect claims about investor-state dispute settlement”. European Commission. 3 October 2013.
http://trade.ec.europa.eu/doclib/html/151790.htm.
8
Hafner-Burton, Steinert-Threlkeld and Victor 2014.
9
On the difficulties in arriving at a multilateral agreement to codify investor rights, see Wellhausen (2014).
10
See Schultz and Dupont 2014; Wellhausen 2015; Franck 2007; Allee and Peinhardt 2011, Tucker 2015.

2

 litigation is costly to governments: not only are the legal costs significantly higher than in, e.g.,
trade litigation, but investment flows appear to suffer from litigation, even when the government
ultimately wins the case.11 As a result, firms may benefit from spillover effects of the challenges
they bring forth. When Philip Morris challenged Australia’s labeling regulations, New Zealand put
its own labeling legislation on hold, and Philip Morris loudly praised the decision.12 If litigation
exerts a sufficient deterrent effect, firms may benefit even when they lose a case. The result is an
increased likelihood of frivolous litigation, where the purpose of a challenge is not so much to win
and obtain compensation, as it is to deter regulation.
How would we know if frivolous litigation were taking place? Studies of legal outcomes
invariably come up against the twin challenge of observability and selection. We can only observe
those cases that come up. Without knowing what policies were prone to challenge, any analysis
risks selection bias. While selection is an often insurmountable issue, here I seek to use it to my
advantage, by formulating expectations over the outcome of those cases that one does observe,
given that one knows selection is occurring.
Specifically, if investors are rationally selecting cases that carry varying deterrent effects,
then one can derive expectations over the likely success rate of these different types of claims.
If indirect expropriation claims are especially likely to carry positive spillover effects from the
investors’ standpoint, then one would expect that for a given level of (low) legal merit, investors
would be more likely to file an indirect expropriation claim than a direct expropriation claim, all else
equal. As a result, those indirect expropriation claims that are observable should obtain lower rates
of success in litigation. Secondly, if the goal is in part to deter the respondent and other countries,
rather than to resolve the underlying dispute, then one would expect indirect expropriation claims
to be associated with lower rates of settlement, and be more likely to drag out until a ruling is
rendered. Variation in the publicization of disputes allows for a third theoretical expectation: if
investors derive some additional benefit from deterrence through indirect expropriation claims,
then these should be less likely to be kept private, the better to deter further regulation.
Findings relying on recently released UNCTAD data covering investment disputes from
1993 to 2015 offer support for these specific beliefs, and further document a broad shift in the
investment regime. While the “explosion” of investment disputes has been widely recognized,13
what I show is that the legal merit of these disputes has steadily dropped over time. This trend is
11

Allee and Peinhardt 2011.
Philip Morris Press Release, Feb. 19, 2013. “Philip Morris International Comments on New Zealand’s Standardized Packaging Announcement”.
13
Simmons 2014; Allee and Peinhardt 2011.
12

3

 especially apparent when it comes to indirect expropriation. I argue that the record of investment
disputes is consistent with the view that the regime is growingly being used to challenge domestic
regulation, and that one unintended effect we are seeing is an increase in frivolity over time. Firms
are litigating more and more, and they are winning less and less. To wit, investors win less than
10% of the indirect expropriation claims they bring against democratic countries. The design of the
regime, which allows private standing, contributes to the trend: compared with analogous regimes
like international trade, it features little of the restraint that exists in dispute settlement between
sovereign states.
The findings also provide additional support for two corollary beliefs. The regime’s overall
level of transparency, in spite of attempts at improvements through institutional reforms, has
been decreasing, rather than increasing, which concords with recent findings.14 And legal capacity
appears to play an important role in countries’ ability to defend themselves from legal challenges,
spurring concerns about distributional effects. Wealthier countries do far better in litigation,
winning disputes at a significantly higher rate than less wealthy countries.
The alleged disconnect between the original aims of ISDS and its current application matters
not only for the policy debate, but also for theory. Much of the academic literature on investment
rules appears vested in an era where the regime was designed to protect investors from direct
takings by non-democratic governments. Yet as I go on to show, most claims today are leveled
against democracies, and most concern indirect expropriation arising from regulation, rather than
“sovereign theft”. This shift away from direct takings holds important implications for any attempt
to account for the odds of expropriation across countries and time. Resource-strapped regimes
might be more likely to expropriate, and this may be most likely to occur in high output sectors,
and during periods of high commodity prices15 —but this would only be true for direct takings. The
majority of disputes in the investment regime today concern expropriatory acts that would have
netted the government no actual revenue. On the other hand, indirect expropriation might be a
greater concern in developed democratic regimes where domestic audiences expect high standards
of protection over the environment and public health. In sum, in assessing the validity of the
common criticisms of the investor-state regime, this article finds itself questioning some of the
central assumptions underlying the study of investment in IPE.
14

Hafner-Burton, Steinert-Threlkeld and Victor 2014.
Cole and English 1991; Li and Resnick 2003; Tomz and Wright 2010; Jensen et al. 2012; Pelc and Urpelainen
2015.
15

4

 2

Ancient Regime, Recent Changes

That the property of foreign investors cannot be taken by a government without the payment of
“prompt, adequate and effective compensation” is a well established point of customary international law.16 In his discussion of property rights, Hugo Grotius had already elaborated a theory
of expropriation by the mid-17th century.17 The ISDS regime itself is also far from new: its broad
outlines were first elaborated in 1959, in the Draft Convention on Investments Abroad.18 That ‘first
draft’, in turn, largely restated existing customary rules over the treatment of aliens.19 Countries
have since gone on to sign over 3000 bilateral investment treaties, and 60 trade agreements with
investment chapters, the majority of which rely on some form of investor-state arbitration.
Given this long history, it is somewhat unexpected that the protection of foreign investment
has recently become the object of so much public attention. Policymakers themselves often appear
taken aback by this development. After noting that of all the issues in its trade negotiations
with the US, investment—and specifically, ISDS—“has received the most attention and raised
the most concern”, the EU Commissioner for trade, Cecilia Malmstr¨om, recently noted that “In
some ways that’s surprising. Over 60 years, national governments in the EU negotiated 1400
bilateral investment treaties without any outcry.”20 The lead Canadian negotiator, Steve Verheul,
also admitted that opposition to ISDS came as a “significant surprise”.21
Yet the exact contours of what constitutes expropriation have never been as hazy as they
are today. What legal scholars do agree on is that the concept of expropriation has progressively
moved beyond direct takings of property by governments, and gone on to encompass other acts
that have effects “equivalent to” such takings. The concept of indirect expropriation is not new,
either, but its frequent invocation is: Escarcena (2014, 6) aptly describes it as a “dormant issue” in international law. A rich jurisprudence from the first half of the 20th century deals with
expropriation, chiefly through rulings of the Permanent Court of International Justice (PCIJ),
16

The commonly referred to phrase calling for “prompt, adequate and effective compensation of expropriation”
comes from the so-called Hull formula, drafted by Cordell Hull in the wake of Mexico’s nationalization of American
oil interests in 1936.
17
Reynolds 2010.
18
Also referred to as the Abs-Shawcross convention, for its two authors, Hermann Abs a German national, and
chairman of the Deutsche Bank, and Hartley Shawcross, a British national and director at Royal Dutch Shell.
19
These rules were supported by the jurisprudence of courts that had long ruled on matters of expropriation, such
as the Permanent Court of International Justice (Pauwelyn, 2014; Fitzmaurice and Tams, 2013).
20
“Opening remarks: Discussion on Investment in TTIP”. 18 March 2015. Cecilia Malmstr¨
om, Commissioner for
Trade. Brussels Meeting of the International Trade Committee of the European Parliament.
21
“EU Quietly Asks Canada To Rework Trade Deal’s Thorny Investment Clause”. Janyce McGregor. CBC News.
Jan 21, 2016.

5

 but these come short of considering indirect expropriation.22 The wide array of terms currently
used today to describe this alternative type of expropriation—“indirect expropriation”, “disguised
expropriation”, “tantamount expropriation”, “creeping expropriation”, “measures equivalent to
expropriation”, “de facto expropriation”—speaks to how the concept remains unsettled in law.
Expropriation is indirect when it does not involve a transfer of property, but nonetheless
deprives the investor of the enjoyment of her property, such as when regulation degrades the value
of an investment. Yet as one of the main arbitrators in the ISDS regime puts it, “international
law has yet to draw a bright and easily distinguishable line between regulation and expropriation,
especially indirect expropriation”.23 The majority of cases in the investment regime now fall under
this still ambiguous area of law, which is also at the source of the current public outcry.
The other concurrent reason for the sudden increase in public attention is the sheer volume
of litigation. While the ISDS regime is nominally over 50 years old, the majority of cases brought
over the regime’s entire history have been filed in the last decade. For all intents and purposes,
states and multinationals are dealing with a new legal recourse option.
Figure 1 illustrates both these trends. The UNCTAD dataset I rely on begins in 1993. But
if the timeline were stretched further back in time, litigation activity would be seen to sputter at
its minimum level from the early 1970s to 1996, when it suddenly picks up, as seen in Figure 1.24
The chart shows how the volume of both direct and indirect expropriation cases has increased in
time, but how the increase in indirect expropriation cases has been more pronounced. The main
takeaway, however, is that the past two decades are dominated by indirect expropriation claims. It
is worth mentioning that indirect and direct expropriation claims are effectively mutually exclusive.
They are highly negatively correlated; only 2% of all known cases include both claims. Even in
that handful of cases, they function as “in the alternative” claims, such that no single arbitral
tribunal has ever found a breach under both claims in the same case. Since 1993, 71% of all cases
have featured an indirect expropriation claim, while only 17% have featured a direct expropriation
claim. Indirect expropriation is thus the most commonly invoked claim in investment disputes
in the last twenty years, alongside claims of fair and equitable treatment, with which it is often
packaged.25 By comparison, national treatment claims are brought 3 times less often, and most22

Fitzmaurice and Tams 2013. One possible exception may be found in the Chorz´
ow Factory case, over Poland’s
taking over of a German-owned factory. The PCIJ ruled that the exploitation of patents and licenses associated with
the factory were prejudiced by the taking, since those rights “were, so to speak, concentrated in that factory”. But
even in that case, the indirect expropriation directly resulted from the taking of the factory.
23
Fortier and Drymer 2004, 299.
24
See Schultz and Dupont 2014, whose data cover fewer disputes, but stretching farther back in time.
25
As Dolzer (2005, 87) puts it, the fair and equitable treatment clause is “in its substance closely related to the

6

 20
10

10
20
11
20
12
20
13

09

20

08

20

07

20

06

20

05

20

04

20

03

Indirect Expropriation Cases

20

02

20

01

20

00

20

99

20

98

19

97

19

96

19

95

19

19

19

94

0

Number of Distinct Cases

30

Figure 1: Direct vs. Indirect Expropriation Claims in ISDS

Direct Expropriation Cases

Source: UNCTAD Investment Dispute Settlement Navigator 2015.

favored nation claims are brought 4 times less often than indirect expropriation claims. In other
words, the current investment regime is not chiefly concerned with discrimination.
Figure 1 and the analyses below are based on recently released data from UNCTAD’s
Investment Dispute Settlement Navigator.26 The goal of this considerable data collection effort is
to document all publicly known disputes launched under an international investment agreement. It
only deliberately excludes disputes that arise out of commercial contracts or domestic investment
legislation. Its resulting coverage includes 696 investment disputes.27 Launched in late 2015, it
is to my knowledge the most complete database of investment disputes for the period it covers,
and the only one to code disputes at the claim level. By comparison, a recent empirical analysis
by a prominent legal scholar relies on 159 disputes.28 In other words, these data come closest to
representing the full universe of investment disputes in what remains an otherwise opaque setting.
Concerns over ambiguous distinction between non-compensable regulation and expropriamore specific standards of an indirect expropriation”, and is often added to “round out the case”. It is a more
general, “catch-all” provision that indirect expropriation. In the analysis, I ensure that the findings are robust to
inclusion of the fair and equitable claim.
26
UNCTAD 2015. http://investmentpolicyhub.unctad.org/ISDS/.
27
Some of these disputes offer only partial information, a trait that I exploit in the analysis below.
28
(Franck, 2014).

7

 tion arose as soon as the ISDS regime emerged, even if they have only recently reached a peak
level. The first step taken towards ISDS, in the 1959 Draft Convention on Investments Abroad,
already raised red flags among legal scholars. The concerns of the time read as if they could be
written today. In 1960, the legal scholar Stanley Metzger warned:
“Since the drafters chose to depart from the ‘taking’ language, they intended to prohibit
measures constituting something less than a taking [...] Thus, a regulatory measure may
indirectly deprive a person of property [...] by taxing the property more, curtailing his
disposition of property at any price he sees fit, etc.”29
Metzger concluded that countries would never allow themselves to bargain away their regulatory
powers in such a way: “For the reasons described [...], countries are and will continue to be unwilling
so to commit themselves.”30 This prediction proved wide of the mark. If anything, the regime has
progressed towards far greater delegation. For instance, while the Draft Convention required the
consent of the host country for litigation to proceed, no such consent is needed in the modern ISDS
regime. The concerns voiced today remain the same as in Metzger’s time, but claims of indirect
expropriation have now become the norm. The investment regime has yet to deal with the difficulty
of distinguishing non-compensable regulation from expropriatory acts that demand compensation.
While the possibility for indirect expropriation was already present in that first 1959 draft,
the North American Free Trade Agreement (NAFTA) was instrumental in making it a frequent
legal recourse by firms. Its investment section, Chapter 11, innovated by covering acts “tantamount
to” expropriation: Article 1110 begins,
“No Party may directly or indirectly nationalize or expropriate an investment of an
investor of another Party in its territory or take a measure tantamount to nationalization
or expropriation of such an investment (‘expropriation’).”31
That clause, in turn, drew heavily on US domestic law over regulatory takings, which recognized
that “if regulation goes too far it will be recognized as a taking.”32 Litigation under NAFTA also
generated what is likely the most expansive legal interpretation of indirect expropriation, in the
Metalclad case from 2000, as including:
29

Metzger 1960, 141.
ibid
31
NAFTA Article 1110. Emphasis added. The Energy Charter Treaty, which brings together 54 members, including
Russia and the EU, features a highly similar provision to NAFTA in its Article 13.
32
The phrase is from Supreme Court Justice Brandeis’ famous 1922 dissenting opinion in Pennsylvania Coal Co.
v. Mahon. See Fortier and Drymer 2004.
30

8

 “... not only open, deliberate and acknowledged takings of property, [...] but also covert
and incidental interference with the use of property which has the effect of depriving the
owner, in whole or in significant part, of the use or reasonably-to-be-expected economic
benefit of the property even if not necessarily to the obvious benefit of the host state.”33
This last condition, obviating the requirement for some gain on the part of the state,
confirmed that the expropriatory effect could be entirely incidental to the regulation at issue. The
government need neither intend to expropriate, nor gain from doing so, for a measure to be deemed
expropriatory. The Metalclad award is often favorably cited by claimants in indirect expropriation
disputes across the investment regime.34 Yet arbitral tribunals have not always sided with such a
broad interpretation. Other awards have given more weight to the government’s ability to regulate
for the public good. Two years after Metalclad, the arbitrators in another dispute against the same
country and under the same agreement, Feldman v. Mexico, emphasized this point:
“governments must be free to act in the broader public interest through protection of the
environment, new or modified tax regimes, the granting or withdrawal of government
subsidies, reductions or increases in tariff levels, imposition of zoning restrictions and
the like. Reasonable governmental regulation of this type cannot be achieved if any
business that is adversely affected may seek compensation”35
The takeaways from Feldman v. Mexico were that public interest could be used to distinguish valid regulation from a compensable taking, and that the requirement for compensation in
such cases could hamper reasonable regulatory efforts. Both these points clash with the Metalcald
award. In sum, there remains considerable ambiguity as to what constitutes indirect expropriation,
and what distinguishes it from non-compensable regulation. Yet one thing is plain: this ambiguous
provision has become the investment regime’s bread and butter. Indirect expropriation provisions
are also present in the most recently concluded large deals between states. The Trans-Pacific
Partnership’s (TPP) investment section, for instance, defines indirect expropriation as occurring
whenever “an action or series of actions by a Party has an effect equivalent to direct expropriation
without formal transfer of title or outright seizure”.36 In this article, I argue that as the regime
33

Emphasis added. United Mexican States v. Metalclad Corporation, ICSID Case No. ARB(AF)/97/1, Aug. 30,
2000. in Fortier and Drymer 2004.
34
See, for instance, InterTrade v. Czech Republic, where the claimant cites the interpretation of indirect expropriation in the Metalclad award to support its own “de facto expropriation” claim.
35
Marvin Roy Feldman Karpa v. Mexi- co, ICSID Case ARB(AF)/99/1, Dec. 16, 2002. in Fortier and Drymer
2004.
36
TPP Investment Chapter, Annex 9-B: 2.

9

 has shifted away from protecting investors against direct takings, and concerned itself primarily
with indirect expropriation, it has also affected investors’ incentives in a way that has regime-wide
repercussions.
Beyond its greater legal ambiguity, another aspect of indirect expropriation points to the
need for a re-evaluation of current theoretical expectations in the study of investment. Indirect
expropriation most often offers the host state no short term windfall. In the case of direct takings,
when governments nationalize foreign assets, or forcibly transfer title, they gain the value of those
assets. In fact, for some time, the enrichment of the host state was one test by which a tribunal
might recognize whether expropriation had taken place. Not so in the case of indirect expropriation, where an investment’s value is most often degraded without it benefiting the host state.
When Indonesia banned open-pit mining in protected forests, when Germany decided to phase out
nuclear energy by 2022, when Australia imposed plain packaging on cigarette makers, the state
did not derive any direct financial benefit. Conversely, when Venezuela, in 2007, nationalized all
oil projects, including profit-sharing projects that had until then been exempted from the prior
2001 Hydrocarbons Law, it gained the entire value of the associated rights over oil exploration and
production.37
Another way to put it is that direct expropriation happens because of the presence of an investment, while indirect expropriation happens despite the presence of an investment. This remains
an approximation: rogue governments can use creeping legislative measures in bad faith to purposefully degrade the value of investment—consider Russia’s treatment of the energy firm Yukos.38 And
governments might seek to get out of onerous commitments to firms through regulatory means. Yet
it remains accurate to say that on average, direct expropriation brings expropriating governments
some short-term financial gain, while indirect expropriation most often does not.
The evolution of case law offers support for this view. The rise of indirect expropriation
claims is the very reason cited for the rejection in case law of the requirement that for a measure to be expropriatory, it must enrich the host state.39 The reasoning behind the change was
that to require proof of enrichment would peremptorily “negate the protection against indirect
expropriation”, since in most cases, indirect expropriation gives rise to no such benefit.40
37

See Mobil v. Venezuela, ICSID Case No. ARB/07/27.
Yukos Universal, incorporated in the Isle of Man (UK), brought the case at UNCITRAL against Russia under
the Energy Charter in 2005. See Gibson 2015.
39
For an exception, see the ICSID decision in Olgu´ın v. Paraguay, where the arbitrators put forth both an
enrichment and a purpose test, which led them to find in favor of the state on all claims. This exception has had no
following.
40
Fortier and Drymer 2004, 314.
38

10

 These distinctions hold important implications for theory. A growing literature in international political economy examines the investment regime. Many of these studies rest on a view
of the regime as offering protection from “banditry” or “sovereign theft”, usually by autocratic
regimes.41 Yet such measures are no longer representative of expropriation. Simple descriptive
statistics serve to illustrate the point. Using the conventional cutoff for democracy of a Polity
score of 7 and above, a full 64% of investment disputes in the last two decades target democracies. Even during this period, the percentage of targeted democracies has been rising over time,
especially for specific types of legal claims. When scholars examine the circumstances under which
expropriation grows most likely, they usually focus on the benefit to government of seizing assets.
In this way, Cole and English (1991) build a model where expropriation is likely when output prices
are high. Jensen et al. (2012, 8) view “expropriations as a form of redistribution during crisis”,
and argue that the temptation to expropriate thus peaks during crises, even as the constraints on
expropriation also increase during these periods. Pelc and Urpelainen (2015) base their model on
the way in which the (financial) gains from breaches in the investment regime accrue directly to the
government, rather than to import-competing firms, as in the case of the trade regime. These expectations no longer comport with the super-majority of alleged breaches in the investment regime,
since indirect expropriation most often does not bring the government any windfall revenue. The
type of expropriation that these studies have in mind constitutes only 17% of the ISDS regime’s
entire caseload over the last two decades. In sum, the investment regime’s shift towards protection
against indirect expropriation has considerable implications for studies of the regime.
Finally, that there has been a shift, and that this shift has been unexpected, is supported by
the fact that the default remedy in the investment regime is monetary compensation, rather than
compliance. As Pauwelyn (2014, 410) argues, when dealing with direct expropriation, awarding
“damages as standard remedy makes sense”. Not so “when it comes to treaty claims against public
laws or regulations.” Indeed, in most domestic legal regimes, regulatory breaches are remedied
through compliance. The designers of a regime where the standard remedy is monetary compensation would have had in mind disputes over direct takings. The regime has strayed from that
expectation. Next, I consider the regime from the investor’s standpoint.
41

Li and Resnick 2003; Tomz and Wright 2010; Jensen et al. 2012.

11

 3

Frivolous Litigation in the Investment Regime?

One defining trait of the ISDS regime is the way in which it allows for private standing. That
is, private firms or individuals can themselves bring suit against governments. This distinguishes
investment from international trade, where there is an emphatic rejection of private standing,
or any mechanism reminiscent of it,42 and where only states can challenge one another’s policies.
This feature of ISDS is, according to some, consistent with rational design: governments’ credibility
problem with regards to investors is such, that a high level of enforcement is required.43 Others
describe it instead as a “historical accident”: an unplanned, incidental development, rather than
an essential one, the main intent of which was to keep commercial disputes from spilling over into
interstate relations.44
Regardless of its origins, private standing, as a design feature, eliminates an important
source of restraint against raising legal challenges, by doing away with reciprocity. Looking at the
trade regime, there is considerable evidence of tit-for-tat filing in the international trade regime.45
As a result, countries that anticipate a legal challenge in response to their own filing often choose
not to file. Generally speaking, legal challenges between sovereign nations come at considerable
political cost. Japanese trade officials claim that they are regularly stifled in their litigation efforts
against China by the Japanese Ministry of Foreign Affairs, from fear of inflaming political tensions
between the two countries. The continued interaction between states in a forum such as the trade
regime means that belligerent countries’ reputations may suffer. Firms have less reason to exercise
diplomatic restraint. The only cost they face from a legal challenge is the cost of counsel—which
in the case of the investment regime, in particular, remains quite high. Yet they need not worry
about possible retaliatory challenges, or the reputational costs of belligerence. Quite the opposite,
a reputation as an aggressive claimant may work to a multinational company’s net benefit.
Private standing has long been a feature of ISDS, and thus it cannot, by itself, explain a
recent shift in the volume of litigation, or the nature of those claims. Rather, the point is that
as the perceived gains from litigation increase, the design of the investment regime does not have
in place the natural barriers preventing an “explosion of cases”.46 Investors are likely to launch a
42

One of the greatest controversies to erupt around WTO dispute settlement concerned amicus briefs, over the
question of whether the panel or Appellate Body could accept written submissions from non-state actors if it deemed
these relevant to reaching a positive solution to the dispute. In other words, WTO members are highly suspicious of
any private party involvement.
43
Simmons 2014.
44
Pauwelyn 2014, 404.
45
Davis and Bermeo 2009; Feinberg and Reynolds 2006.
46
Simmons 2014.

12

 case whenever the cost of legal counsel is outweighed by the benefits of litigation. Next, I examine
the nature of those costs and benefits.

3.1

The Cost of Investment Disputes

The argument hinges in part on the high cost of litigation to governments. In the case of the World
Trade Organization, the cost of litigation is often mentioned as a reason countries ultimately decide
not to challenge an offending trade barrier.47 Yet the cost of investment disputes is far higher.
In a 2010 report, UNCTAD admitted that “[c]ontrary to the expectations [...] costs involved in
investor-State arbitration have skyrocketed in recent years.”48 There is every indication that these
costs have only kept increasing since. In the case of ICSID, a recent estimate finds average costs
per dispute of USD$ 5.5 million for governments since 2011.49 This is about 5 times more than
the average WTO dispute, which is the same ratio by which arbitrators’ fees at ICSID outstrip
panelist fees at the WTO.50
From the state’s standpoint, the costs of litigation are not limited to legal fees. Allee
and Peinhardt (2011) show how investment disputes can undo much, if not all, of the benefit
of international investment agreements as measured by investment flows. Crucially, this effect
is present even if governments ultimately prevail in the dispute. This appears consistent with
findings from the trade law literature showing that the initial announcement of a WTO challenge,
by itself, increases the attention paid to the relevant industry by domestic audiences.51 Because
international disputes are costly actions, they are usually thought to be credible indicators of rentseeking behavior by states.52 Yet if a large proportion of disputes in the investment regime are of
low merit, this no longer holds. Frivolity jeopardizes a regime’s information-gathering function.
The takeaway relevant to the argument is that governments have an incentive to avoid
litigation, even if they believe they will ultimately prevail on the merits. This incentive will
be highest for developing countries, for whom these costs, both in terms of legal fees and lost
investment flows, are relatively more onerous. Next, I consider the benefits of litigation from the
standpoint of the firm.
47

See e.g. Davis 2012; Busch, Reinhardt and Shaffer 2009.
“Investor-State Disputes: Prevention and Alternatives to Arbitration”. 2010. UNCTAD Series on International
Investment Policies for Development.
49
Commission (2016) finds that average ICSID costs to governments from FY2011 to FY2015 were USD$ 4 954
461, and total tribunal costs, which are usually split between parties, were of USD$ 882 668.
50
Pauwelyn 2015, 23. And arbitrators sometimes turn down ICSID cases in favor of UNICTRAL cases, where fees
are higher still.
51
Pelc 2013.
52
Mansfield, Milner and Rosendorff 2002.
48

13

 3.2

Regulation and the Threat of Litigation

Frivolous litigation occurs when legal challenges are filed despite low odds of success.53 If rational
claimants file a case knowing that it is of low legal merit, it may be because litigation itself brings
some other benefit. In the case of indirect expropriation, I argue that the additional benefit derived
from litigation is the possibility of tempering governments’ regulatory ambitions. Popular accounts
have associated indirect expropriation claims with the threat of “regulatory chill”, yet the reasoning
behind these claims is often murky. Here I seek to assess it more systematically.
Direct takings are idiosyncratic in a way that regulation is not. A direct expropriation
occurs in a highly specific context. Meanwhile, regulation has a tendency to spread across countries. A large literature on diffusion attests to how countries learn from one another’s policies in
arriving at their own policy profile.54 In the same way, governments may draw conclusions about
the desirability of policies by seeing these attacked in high profile disputes. Public health and
environmental initiatives across different countries growingly rely on the same scientific standards,
as is the case with smoking laws, nuclear energy, and fracking legislation, to refer to cases that
have attracted most attention in recent years.55 The result is that while it is not inconceivable that
direct expropriation challenges might carry a deterrent effect—if only by demonstrating willingness
to litigate—this becomes far more likely in the case of indirect expropriation.
The second reason to think that indirect expropriation claims are especially prone to regulatory chill is the one mentioned above: because measures subsequently judged to be indirect
expropriations most often bring the government no revenue, the threat of costly litigation may be
a more effective deterrent than in the case of direct expropriation, where a government may simply
tally the expected cost of arbitration against the current value of expropriation. By comparison,
regulatory initiatives prone to indirect expropriation challenges rarely come out on top from such
cost-benefit calculations. And because of the international aspect of regulation, and of the multinational aspect of the firms that act as claimants, such a deterrent effect may actually be felt across
borders.
There is disagreement among scholars about the likelihood of the ISDS regime generating an
effect of this sort, though as mentioned, the idea is highly salient in the public debate. Among legal
scholars, some affirm that the investment regime “has serious potential to prevent the adoption
53

Accordingly, the legal literature sometimes refers to frivolous litigation as “low-probability litigation”. For a
review of findings on frivolity in the domestic civil justice system, see Guthrie 2000.
54
See, among others, Simmons and Elkins 2004; Post 2005; Lazer 2001.
55
See Philip Morris v. Australia, Philip Morris v. Uruguay, Vattenfall v. Germany, and Lone Pine v. Canada.

14

 of a regulatory measure with public purposes”,56 while others warn that “proof is very scarce”57 ,
though they go on to admit that it is more likely for developing countries.
There actually exists considerable anecdotal evidence of investment arbitration, or the
threat of such arbitration, affecting government behavior in a way consistent with a regulatory
chill hypothesis. When Canada attempted to enact tobacco legislation similar to the one that
Australia implemented before being hit by a series of legal challenges, it faced threats of ISDS
disputes from the tobacco industry on two occasions, in 1994 and 2001. In both cases, it ultimately
backed down from the proposed law.58
When Indonesia tried to ban open-pit mining in protected forests, mining companies threatened to launch investment disputes under the Aus-Indo and UK-Indo BIT.59 Indonesia backed
down and exempted foreign mining investors from the proposed ban, even though legal observers
noted that the threatened arbitration claims would have had little chance of succeeding.60 But the
threat proved sufficiently compelling: as the Indonesian Environmental Minister admitted, “There
were investment activities before the Forestry Act was effective. If shut down, investors demand
compensation and Indonesia cannot pay.”61
In the Canadian and the Indonesian cases, the potential deterrent effect of the indirect
expropriation challenge was felt in the respondent country. But the same effect can conceivably
spill over across borders. New Zealand has long contemplated a similar plain packaging tobacco law
to the one implemented by Australia. When Australia’s legislation was challenged in both trade
and investment venues, New Zealand suddenly suspended the proposed legislation.62 Philip Morris
rejoiced. It praised New Zealand’s decision as “demonstrat[ing] that the New Zealand government
recognizes the significant international trade issues with standardized packaging and will not implement it until the pending international legal challenges to Australia’s law are resolved.”63 Nor are
these spillovers likely to be limited to New Zealand. As in other cases, developing countries are the
most prone to deterrence, given their inability to muster sufficient legal resources to counter ISDS
challenges. In the case of tobacco regulation, these countries are concentrated in Africa, where the
56

Chen 2015.
de Mestral 2015.
58
Tienhaara 2011; Lencucha, Labonte and Drope 2015.
59
Tienhaara 2011.
60
Gross (2002) performs a careful analysis of the likely claims claimants might have brought against Indonesia—on
indirect expropriation and fair and equitable treatment—and assesses their merits on the basis of analogous cases.
61
in: Gross 2002, 895.
62
The Health Minister Tariana Turia stated “the Government will wait and see what happens with Australia’s
legal cases, making it a possibility that if necessary, enactment of New Zealand legislation and/or regulations could
be delayed pending those outcomes.”
63
See supra, note 12.
57

15

 tobacco industry’s growth potential is highest. Namibia, Gabon, and Togo have all faced threats
from the industry in reaction to plans for tobacco regulations. As the World Health Organization’s
director general put it, existing legal challenges “are deliberately designed to instil fear in countries
wishing to introduce similarly tough tobacco control measures.”64 Namibia’s proposed regulations
was the most ambitious of the group, but in the face of threatened litigation, it has thus far come
short of implementing any provisions from the proposed law. As the Namibian Health Ministry
behind the legislation put it, “the fear is that they [the tobacco industry] have the money and they
have the resources, so they can pay for anything”.65
In sum, there are a number of salient cases where challenges of indirect expropriation, or
the mere threat thereof, appears to have successfully swayed policy outcomes in host states.

3.3

How Might We Recognize Frivolity?

To systemically assess frivolity, one would ideally observe all potential breaches of countries’ investment obligations, and the merit of each, and see which ones are challenged. One could then ask
whether the legal merit threshold beyond which investors choose to file a case is lower for indirect
expropriation claims than for measures that give rise to a claim of direct expropriation. If so, then
one could conclude that frivolous litigation is more likely in indirect expropriation claims.
Yet observing all measures open to challenge, even within a single state, is not feasible. The
result is that analyses that consider only those breaches that were challenged expose themselves to
selection bias: any observed effect may be reducible to firms’ calculation to file the claim or not.
Rather than trying to address the problem head-on by looking for a set of potential cases that were
not challenged, one can think about the expected composition of the sample of observable claims,
given that we know selection is occurring.
3.3.1

Expectations Over Legal Merit

How are claims chosen? Investors deciding whether to bring a claim against a government perform
a specific cost-benefit analysis. On the one hand, they weigh the expected value of a claim: the
amount of compensation multiplied by the odds of success. To this, they add any benefit derived
from deterring regulation. On the other hand, they consider the cost of litigation, which one can
64
“The Changed Face Of The Tobacco Industry”. Keynote Address at the 15th World Conference on Tobacco or
Health Singapore. 20 March 2012.
65
“Tobacco Firms’ Strategy Limits Poorer Nations’ Smoking Laws”. New York Times. Sabrina Tavernise, Dec.
13, 2013.

16

 assume is constant across claim types. The resulting testable expectation is that if indirect claims
do give rise to a higher deterrence benefit, then the average legal merit of those indirect claims
that are filed should be lower, all else equal. Investors will require a lower level of legal merit to file
a case, if they think doing so has a chance of staving off regulation. The result is that we should
expect lower odds of a pro-claimant finding for those indirect expropriation claims that are filed.
The necessary assumption is that not all breaches—either over direct or indirect expropriation—
are challenged. In other words, actual selection must be taking place in both categories of claims
for the reasoning to hold. Claimants must actually be weighing legal merit and deterrence benefits
against costs of litigation, without one side of the scale dictating the filing decision. In the case of
investment disputes, this seems a reasonable premise.
The expectation relies on “all else being equal”, and thus it is worth verifying that the two
claim types are comparable in other respects. If the size of the award, for instance, differs in one
claim type over another, then it might be that investors fight one type of claim, even at lower levels
of legal merit, simply because the financial value of success is greater. This does not appear to be
the case: looking at the data on damages, claims of indirect expropriation appear to be associated
with slightly lower claimed damages on average, and slightly higher awards obtained; yet neither
difference is statistically significant. The average amount claimed is USD$1.6 billion for direct
expropriation claims, and USD$1.1 billion for indirect expropriation claims. These figures are
skewed upward by two large outliers, but the difference remains insignificant if these are omitted.
Similarly, there is no reason to think that litigation costs differ across the two categories. Direct and
indirect expropriation claims are fought in much the same way, in the same arbitration venues.66
To sum up the expectation, if indirect expropriation claims carry additional deterrent benefits from
the firm’s standpoint, then conditional on being filed, they should be associated with lower odds
of success.
One response might be that some claims are simply harder to litigate than others, perhaps
because they pose a harder legal test. That is, some types of claims would be inherently more
meritorious. As a result, a differences in success rates could be reducible to a measure of legal
complexity. Yet this belief also requires that claimants themselves be ignorant about such variation.
Indeed, if some claims were harder to litigate than others, these differences should be internalized
in investors’ cost-benefit calculations when deciding whether to bring a case or not. That is, if
one type of claim were “harder” to argue for any reason, investors should be less likely to bring it
66
Neither ICSID nor the Energy Charter, the two institutions that correspond to the greatest number of cases, are
significantly more likely to see one type of claim versus the other.

17

 Figure 2: Effects of Uncertainty of Outcome on Filing

0.05

0.15

.20

0.25

0.30

0.35

0.40

Perceived Legal Merit

in the first place. Variation in the average “difficulty” of claims should thus not affect theoretical
expectations, unless we believe firms are unaware of it, which is unlikely.
A related belief might be that even if the average legal merit of a pool of cases remained
constant, greater uncertainty over this legal merit might itself affect the selection of cases, and
thus the success rate of those claims that are filed. The rules covering indirect expropriation, as
described above, are less established than those related to direct expropriation. Even if investors
had similar beliefs about the average expected chance of success, they may be less confident in the
accuracy of those odds when it comes to indirect expropriation.
Figure 2 illustrates a hypothetical distribution of beliefs about the legal merit of cases for
two types of claims. Both types exhibit the same average expectation of success, but one (indicated
by the dashed line) reflects greater uncertainty about the odds of success. If investors file a case
anytime it crosses a given merit threshold (indicated by the solid vertical line at 0.35), then more
uncertainty over outcomes leads to a greater volume of cases, even as the average merit remains
the same. Because the average merit is still the same, however, the pool of cases filed is necessarily
weaker. As a result, conditional on being filed, cases taking on more ambiguous law would be less
likely to succeed—owing strictly to a selection effect.
This reasoning rests on some restrictive assumptions. First, most potential cases must not
get filed; that is, the required merit threshold must rest above the average merit of potential cases.
If it is below (as indicated by the dotted vertical line in Figure 2), then the effect of legal ambiguity
18

 would run in the opposite direction: ambiguity would be associated with fewer filings, and a higher
average merit for these. Just as importantly, the required threshold would remain constant for all
types of claims, irrespective of the level of uncertainty over their outcome. Yet it is likely that
as uncertainty grows, investors would require higher perceived merit before filing. If risk aversion
is sufficiently high, legal ambiguity could again be associated with a lower volume of filing. In
other words, while there are plausible circumstances under which we might expect greater legal
ambiguity, by itself, to result in a higher number of cases filed with lower merit, this effect is highly
contingent.
What variation in uncertainty cannot explain is a trend through time: if anything, we would
expect that ambiguity over indirect expropriation claims would decrease over time, as jurisprudence
converges over its treatment of similar claims. This would, according to the reasoning above,
decrease the volume of indirect expropriation claims filed, and increase their average legal merit.
Yet as I show below, the trend we observe is the opposite, with the merit of claims decreasing
precipitously through time, which should lead us to think that uncertainty is unlikely to be playing
a dominant role.
To sum up, if investors choose to file indirect expropriation claims in part to deter regulation,
they will require lower merit to file, all else equal, and we will see these claims lose with higher
odds.
3.3.2

Expectations Over Settlement

Litigation is a costly and inefficient means of settling disagreements between parties.67 As Robert
Hudec, one of the seminal theorists of the trade regime, put it, “No functioning legal system can
wait until then [the ruling] to exert its primary impact.”68 The ISDS regime does not fare well
by this metric, since the data show that more than 75% of cases reach the award stage, with the
remainder either settled or discontinued. By comparison, less than 45% of cases produce a ruling
in the trade regime.
Among investment claims, which would we expect to settle early? If firms file indirect
expropriation claims in part to deter governments’ regulatory ambitions, then this has implications
for the odds of early settlement: the deterrence objective would be advanced by dragging out
litigation as much as possible. To refer back to the case of Philip Morris and Australia, five
years elapsed between the filing of the claim, which made headlines worldwide, and the arbitrators’
67
68

Gilligan, Johns and Rosendorff 2010.
Hudec 1993, 360.

19

 decision on jurisdiction (in favor of Australia). It would have taken at least one additional year, and
likely more, if the arbitrators had reached a ruling on the merits. During this time, the firm benefits
from any deterrent effect that its litigation may produce: in that case, New Zealand explicitly made
it known that it would await the case’s conclusion before continuing with its own plain packaging
regulation.69 Even past the ruling stage, of course, governments, especially those in developing
countries, may be deterred from implementing regulation if they are sensitive to litigation costs or
drops in FDI flows.70 But during the period of litigation, the case is at its most salient. The result
is that companies motivated in part by this deterrent effect should be less likely, all else equal, to
settle early. The theory suggests that firms in these cases should be relatively less interested in
compensation, and relatively more interested in the effects of litigation itself, compared to firms
pursuing direct expropriation claims.
The incentives of governments combine to produce the same outcome—even if governments
are aware of firms’ incentives, and wary of the publicity that may accompany prolonged litigation.
This is because of the prior expectation: if firms motivated in part by deterrence require a lower
merit threshold to file, then governments will be faced with a pool of lower merit cases. They should
be less likely to settle these. Indeed, in both domestic and international legal systems, settlements
in the ‘shadow of the law’ usually represent a victory for the claimant or the plaintiff. In the case
of the trade regime, scholars have shown that complainants obtain no fewer concessions from early
settlements than following a favorable ruling.71 A similar pattern seems to emerge in investment
disputes. Looking at the amounts of compensation obtained in settlements, these do not appear
statistically different from the average amount awarded when the claimant wins the ruling.72
In sum, we should expect indirect expropriation cases to be more likely to reach the ruling
stage, and direct expropriation cases to be more likely to settle early. Firms will seek to drag out
cases partly motivated by deterrence, and governments will be loathe to settle on cases of relatively
lower legal merit.
69

See supra, note 12.
Allee and Peinhardt 2011.
71
Busch and Reinhardt 2000.
72
Average amount post-settlement is USD 495 million (based on 31 settlements with data on compensation
amounts), compared to USD 524 million following a ruling. Once again, these amounts are skewed upward by
a few outliers, but the difference remains statistically insignificant if we remove these outliers. Naturally, these
descriptive figures do not account for selection.
70

20

 .8
.6
.4
.2
0

1995

2000

2005

Indirect Expropriation Claims with Rulings

3.4

Average Annual Claimant Success Rate

20
15
10
0

5

Number of Concluded Disputes

25

1

Figure 3: Direct vs. Indirect Expropriation Claims in ISDS

2010
Claimant Win

What Does the Record Show?

How does the record in ISDS vary across different types of claims, and does it correspond to the
theoretical expectations? It is useful to begin by visualizing a couple of different aspects of this
question. First, how does realized legal merit vary through time? Figure 3 illustrates the trend
for indirect expropriation claims. The smoothed line shows the average annual success of indirect
expropriation against a histogram showing the volume of concluded indirect expropriation cases.
I purposefully align the cases shown in the histogram with those appearing on the legal merit
curve. That is, the outcome recorded for a dispute in the histogram is shown in the same year,
even if the ruling occurred three years later. As one might expect, the volume of concluded cases
decreases in more recent years, even as the number of indirect expropriation claims filed continues
to increase: these more recent cases have yet to produce a ruling. The downwards trend through
time is statistically significant in both linear and non-linear estimations, for every 5-year span of
the period under study. In sum, as the volume of litigation has increased, the rate of success of
cases has declined precipitously.
Next, it is worth asking whether democracies are more prone to one type of claim than
the other. If indirect expropriation claims are targeted at regulation, then we might expect that

21

 Figure 4: Legal Claims and Success Rate By Regime Type
Democracies

Non-Democracies
Finding of
breach
13%

Other
30%

Indirect
Expropriation
60%

Other
37%

No Finding of
Breach
87%

Direct
Expropriation
10%

Finding of
Breach
21%
Indirect
Expropriation
44%

No Finding of
Breach
78%

Direct
Expropriation
19%

democracies would be more prone to such challenges. In fact, this is one recurrent criticism of
ISDS in the policy debate. Figure 4 shows two pie charts. Democracies are defined as a Polity
score of 7 or more, and non-democracies are those countries with a Polity score of less than 5.
The difference is readily apparent: democracies face mostly indirect expropriation claims, while
these constitute a minority of the claims brought against non-democracies. The opposite pattern
pertains to direct expropriation claims, which make up nearly twice the proportion of litigation
against non-democracies as they do against democracies. Further, one can quickly verify whether
the rate of success differs by regime. Looking specifically at indirect expropriation, the answer is
yes: democracies appear to lose 62% fewer indirect expropriation cases.73
Much attention in studies of ISDS has been paid to the claimant’s industry.74 For this
reason, it is useful to look at variation in the rate of success of claims across different sectors.
Figure 5 relies on the ISIC classification of the industry at issue in the dispute to chart the success
rate across all industrial sectors that have seen a minimum of ten legal claims filed from 1993 to
2015. I also include the rate of settlement for comparison. While there is visible variation across
industries, no obvious pattern emerges: using Wellhausen (2015) or Hafner-Burton et al. (2014)’s
coding, neither mobile industries nor capital intensive ones are consistently associated with greater
or lower rates of legal success or settlement.75 Yet the variation across sectors is nonetheless
sufficient that I explicitly take it into account in the analyses below.
73

This simple descriptive statistic does not control for wealth, which, as I show below, plays an important confounding role.
74
Wellhausen (2015) distinguishes industries by their degree of “mobility”, while in Hafner-Burton, SteinertThrelkeld and Victor (2014), the capital intensity of the industry is what drives variation in transparency.
75
What is apparent, however, is that the latter two outcomes are inversely related, which is likely due to the fact
that as more cases settle, a poorer pool of cases reaches the ruling stage.

22

 Figure 5: Rates of Success Across Industrial Sectors

Professional, scientific activities
Water supply; waste management
Real estate activities
Wholesale and retail trade
Mining and quarrying
Transportation and storage
Electricity, gas, and steam supply
Construction
Information and communication
Manufacturing
Agriculture, forestry and fishing
Financial and insurance activities
0

.1

.2

Pro-Claimant Award (average)

.3

.4

.5

Dispute Settled (average)

The mention of settlement brings us to the next important point. One of the article’s
theoretical expectations is that if indirect expropriation claims have a deterrent function for firms,
then they should be less likely to settle, and more likely to produce a ruling. If the objective is not
merely to settle a disagreement, but also to temper regulatory ambitions, then litigation itself may
be beneficial. The expectation over settlement also gains from being tested before the analysis of
legal merit, since it gets at a type of selection that bears on that analysis: which claims are more
likely to be settled will affect the pool of cases that make it to a ruling. Once again, a simple
descriptive test allows us to provisionally reject the null hypothesis that settlement rates are the
same across our two claim types of interest: the average rate of settlement for direct expropriation
claims is 32%. The equivalent figure for indirect expropriation claims is a third of that, at just
under 11%. Indirect expropriation claims are thus far more likely to go on to a ruling. This first
concords with theoretical expectations over deterrence. But just as importantly, it dictates the
type of estimation required for our main legal merit test. Any estimation of legal merit needs to
account for the fact that a greater proportion of indirect expropriation claims are selected into the
ruling stage.
To do so, I rely on a Heckman probit selection estimation. This model allows me to
first estimate the odds of a case reaching the ruling, and then to use those estimates to correct for
23

 selection in the outcome equation, which estimates the odds of a ruling in one direction or the other.
To identify the model, one ideally needs a variable that affects the odds of a ruling, but that does
not have an independent impact on the second stage outcome, the direction of the ruling. Theory
provides us with a good candidate: a growing number of studies, looking especially at litigation in
the trade regime, document how privacy increases the odds of settlement.76 Specifically, settlement
grows more likely when the stakes of a case can remain private. This insight can be readily applied
here. One of the main dimensions of privacy in ISDS, which I further examine below, is whether the
amount of compensation sought by the claimant is publicized. Displaying the “ask” in a bargaining
game always makes it less likely that an agreement is reached—that is why interstate negotiations
are invariably held in private. Yet whether the amount of compensation sought is made public
or not is unlikely to have an independent bearing on the direction of the ruling. Indeed, when
it is included in the second stage in the analysis below, it is insignificantly related to the ruling
direction. In sum, it is an apt first-stage variable. I code the binary variable Amount Sought
Private by looking at whether UNCTAD is able to arrive at this number.
The main explanatory variable of interest in both stages compares indirect expropriation
claims to direct expropriation claims. I expect indirect expropriation claims to show higher odds of
ruling, but lower odds of success for the claimant, conditional on a ruling. So that these variables
refer to a common baseline, I code a variable, Other Legal Claim, to refer to cases that are
neither direct nor indirect expropriation claims: these principally include National Treatment,
MFN, and Arbitrary Discrimination claims. The result is that the Indirect Expropriation
Claim is the exact opposite of a direct expropriation variable: the coefficient remains the same,
only the sign changes. The only downside is that I lose the handful observations where both claims
were filed. In the Appendix, I show how estimations that simply include a Indirect or Direct
Expropriation indicator show the same results. Finally, I include a measure of the firm’s prior
experience with arbitration, and the host government’s democracy level in the first stage equation,
as these may shape preferences over the value of settlement.
In the second stage, the outcome variable is the direction of the tribunal ruling. Here I rely
on UNCTAD’s own coding, which distinguishes between awards “decided in favor of the investor”
and awards “decided in favor of the State”. I include only those disputes that have known outcomes,
which leaves me with 425 cases (tellingly, the increase in the volume of litigation is such, that there
are currently 223 cases that are pending across the various venues of the investment regime.) I also
76

Davey and Porges 1998; Porges 2003; Busch and Reinhardt 2006; Bown 2005.

24

 control for a number of potentially confounding variables that might have an influence over the
direction of the award. First among these is the wealth of the government. A number of studies
have suggested that poorer countries lack the legal capacity to mount an effective defense against
investment challenges. I use the log of GDP per capita, in constant 2005 dollars, obtained from
the World Development Indicators. Along these lines, Country Legal Experience controls for
the number of ISDS challenges a country has handled in the past, to account for any learning effect,
which has been identified in dispute settlement in the trade regime.77 Because there is a prevalent
belief that filing more claims in a case is a sign of low legal merit, Claims Number controls for
the number of legal claims filed. The average is 2 claims, but some disputes include up to 7. I
include a variable for Democracy, since democracies may face different incentives over investment
disputes, and democracy may be another proxy for legal capacity. I account for the investment
agreement underlying the dispute by including a dummy variable for the two agreements most
frequently invoked, NAFTA and the Energy Charter, in case either of these sees higher odds of
awards in a given direction. One fifth of disputes fall under one of these two agreements. Perhaps
most importantly, I control for time, which I have already shown to be an important factor. We
know that the legal merit of claims has been decreasing over the past two decades. The question is
whether there is a difference in the success rate of different claims once we control for this catholic
trend. I include Schoenberg splines at four knots in all estimations; using a simple year term
instead produces the same results, but does not account for the non-linear effect of time. Because
there may be some commonality of outcome within the industry of the claimant, as per Figure 5,
I cluster the robust standard errors on the ISIC sector of the relevant investment.
The results are shown in Table 3. The first column estimates the odds of the firm winning
the case, while the second column estimates the odds of the state winning the case—as the results
demonstrate, these are not exact opposites: cases are not only settled, but they can also be
discontinued, or decided in favor of neither party.
The findings are telling: indirect expropriation claims are significantly less likely to result
in pro-claimant findings. When a case rests on an indirect expropriation claim, the odds of the
claimant winning immediately drop by 51%, keeping all other variables at their mean values. In
other words, indirect expropriation claims appear to be of significantly lower legal merit, all else
equal, which is consistent with the belief that investors may derive some additional benefit from
filing these cases.
77

Davis and Bermeo 2009.

25

 Table 1: Legal Merit in the Investment Regime
(1)
Pro-Firm Ruling

(2)
Pro-State Ruling

-0.98∗∗∗
(0.25)
-0.60∗
(0.35)
-0.26∗∗∗
(0.06)
0.01
(0.01)
-0.14
(0.17)
0.14
(0.16)
0.06
(0.05)
0.35∗
(0.18)
-18.01
(16.20)

0.66∗∗∗
(0.24)
0.16
(0.40)
0.18∗
(0.09)
-0.02∗∗
(0.01)
0.16
(0.24)
0.05
(0.35)
0.02
(0.05)
-0.34∗
(0.18)
0.31
(17.78)

-0.59∗∗∗
(0.13)
0.98∗∗∗
(0.24)
0.11
(0.23)
-0.05
(0.11)
-0.09
(0.16)
0.39
(0.28)

-0.55∗∗∗
(0.18)
0.98∗∗∗
(0.24)
0.11
(0.25)
-0.08
(0.14)
-0.05
(0.16)
0.40
(0.31)

Yes
415

Yes
415

Indirect Expropriation Claim
Other Legal Claim
GDP/cap (log)
Country Legal Experience
NAFTA
Energy Charter
Claims Number
Democracy
Constant
Goes to Ruling
Amount Sought Private
Indirect Expropriation Claim
Other Legal Claim
Claimant Experience
Democracy
Constant

Time cubic splines
N

Heckman probit selection model with maximum likelihood (ML) estimates. First stage estimates likelihood of an
award being rendered. Second stage estimates likelihood of a pro-claimant award (column 1) and a pro-state award
(column 2). Robust standard errors clustered on the ISIC sector.

26

∗

p < 0.10,

∗∗

p < 0.05,

∗∗∗

p < 0.01

 Across all estimations, richer countries fare better: the state wins more often, the wealthier
it is. Controlling for wealth, democracy appears to have a tenuous negative effect on the odds of
a state successfully warding off a legal challenge. This relationship between wealth and success is
robust across both pro-firm and pro-state awards, and directly contradicts a recent claim in Franck
(2014). There, relying on a smaller sample (159 disputes) and without accounting for selection, the
author found that democracy wiped out the effect of wealth. This does not appear to be the case
here. Interestingly, a country’s legal experience with arbitration is not associated with higher odds
of success. This is likely due at least in part to flurries of challenges against the same state arising
from a similar context. For instance, Spain has recently been hit by over 20 disputes following the
suspension of renewable energy projects in the midst of its recent fiscal crisis. When this happens,
any learning effect is limited, and the state may face a number of losses, as Argentina did after its
own crisis.
The selection model performs well: the Wald test for the first model shows a χ2 (1) of 16.98,
suggesting that the null according to which the two equations are unrelated can be rejected at 0.0001
confidence level. In other words, accounting for selection is called for. Just as importantly, the key
variable identifying the selection model behaves as expected: when the amount of compensation
sought is made private, the odds of settlement is significantly increased. In fact, the odds of a
ruling being produced increases by half when the amount sought by the claimant is kept private.
Consistent with the theory, indirect expropriation claims are far more likely to go to a
ruling. In fact, a dispute is 52% more likely to result in the tribunal rendering a final award if it
includes an indirect expropriation claim. The opposite is true for disputes that rest on a claim of
direct expropriation: these appear significantly more likely to settle.
In sum, Table 3 provides support for two major theoretical expectations: (i) indirect expropriation claims are more likely to drag on and lead to a ruling, rather than to settle early. And (ii)
conditional on proceeding to a ruling, indirect expropriation claims are far less likely to be ruled
in favor of the claimant, and far more likely to be ruled in favor of the government.
The results are robust to a host of changes in the estimations. Including country wealth or
experience at the first stage does not affect the findings for claim type at either stage. Secondly,
as mentioned above, indirect expropriation claims are growingly filed alongside fair and equitable
treatment claims. There is also some anecdotal evidence that this claim is sometimes included
in the event that indirect expropriation claims fail. Might it be that those disputes that include
both types of claim do better, by winning at least one of the two claims? I account for this

27

 possibility by replacing the claim type by an indicator variable for disputes that include both
indirect expropriation and fair and equitable treatment claims. The results remain the same: these
disputes are significantly more likely to reach the ruling stage, and they are significantly less likely
to be found in favor of the company filing them. Finally, while the Heckman selection model is
called for on theoretical grounds, and supported by model diagnostics, it is worth noting that a
single-stage probit model offers the same findings, both when the second stage equation is run by
itself, and when all the first stage variables are added to the right-hand side. In all cases, indirect
expropriation cases are still significantly more likely to be ruled in favor of the state, and less likely
to be ruled in favor of firms.

3.5

Deterrence and the Incentives for Transparency

A final implication can be tested. If firms bring forth indirect expropriation claims not only to gain
compensation, but also to temper regulatory ambitions by the respondent and other countries, then
we would expect them to seek to publicize these disputes, rather than to hush them up. Conversely,
when it comes to direct expropriation, where the main objective is to obtain compensation in the
case at hand, firms would have no equivalent incentive for publicity, and may instead prefer to keep
the matter private, to increase the odds of an agreement. From studies of other legal forums like
the international trade regime, we know that privacy is conducive to settlement.
Do we observe the expected variation in transparency between the two claim types? Disputes vary in their level of transparency in a number of ways. Little can be said about the estimated
10% of all investment disputes that we lack any record of.78 But the parties to a dispute can also
decide to conceal various aspects of the case.79 One key aspect of each dispute is the amount of
compensation being sought. The amounts claimed in arbitration are often spectacular, and make
for flashy headlines. Such headlines may be in the claimant’s interest, if the objective is to scare off
policymakers from enacting regulation, both in the claimant country and in other countries where
the claimant may operate. Vattenfall, a Swedish multinational that generates energy in a number
of countries, brought claims against Germany over its legislation to phase out nuclear power plants
in the country. Vattenfall had every incentive to make this challenge salient, the better to deter
German legislators, and other countries that might consider following suit, from phasing out nuclear power. It chose to publicize the amount of compensation sought, over USD$ 5 billion. This
spectacular figure made headlines worldwide, sending a clear message: banning nuclear power can
78
79

Schultz and Dupont (2014) estimate that 10% of the total universe of cases are such entirely opaque disputes.
Hafner-Burton, Steinert-Threlkeld and Victor 2014.

28

 .4
.2
0

Proportion of Opaque Disputes

.6

Figure 6: Opacity of Disputes in the Investment Regime

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

prove a costly goal. The point is that this signal is conveyed whether Vattenfall wins the case or
not. If a claimant is hoping to deter governments, one of the best ways of doing so if to publicize
the amount it is suing over. This one variable thus acts as an ideal proxy of transparency.
Looking at the data of investment disputes from 1987 to the present day, the amount of
compensation sought is publicized in just under 70% of cases, and kept private in just over 30% of
cases. But the true surprise is to look at the trend through time. While much is being made of the
increased push for transparency within the ISDS regime,80 the evidence belies such efforts. The
fact is that over the last decade, the amount of transparency in the ISDS regime has been dropping
steadily, a trend already identified by Hafner-Burton, Steinert-Threlkeld and Victor (2014) using
a different measure. Figure 6 illustrates the proportion of claims where the amount of the award
is hidden from the public. From an average of 11% in 2004, the proportion of opaque disputes,
as proxied for by publicity of the award, rises to nearly to 60% in 2013. Several reforms, both at
ICSID and UNCITRAL, have meant that de jure transparency has been increasing; but insofar as
parties retain discretion over which aspects of a dispute to make confidential, they are increasingly
using it to obscure. The result is decreasing de facto transparency.
Yet the variation that interests us is at the claim level: do disputes that bring indirect
80

de Mestral 2015.

29

 expropriation claims show a different propensity to publicity than those that pursue direct expropriation claims? A quick look at the data suggest the preliminary answer is yes: 26% of direct
expropriation claims keep the amount of compensation sought private, while only 14% of indirect
expropriation claims do the same, and this difference is statistically significant.
Table 2: Opacity in the Investment Regime

Indirect Expropriation Claim

(1)
-0.79∗∗∗
(0.13)

Country Legal Experience
Claimant Experience
NAFTA
Energy Charter
0.05∗∗∗
(0.01)
No
659
0.11

Year
Time cubic splines
N
r2

(2)
-0.77∗∗∗
(0.14)
-0.00
(0.00)
-0.04
(0.07)
-1.51∗∗∗
(0.41)
0.15∗∗∗
(0.05)
0.04∗∗∗
(0.01)
No
659
0.14

(3)
-0.59∗∗∗
(0.13)
0.00
(0.00)
0.04
(0.07)
-1.66∗∗∗
(0.41)
-0.01
(0.06)

Yes
659
0.18

Probit model with maximum likelihood (ML) estimates. The dependent variable is an indicator of whether a
dispute keeps the amount of compensation sought in the dispute private. The constant is suppressed. Robust
standard errors clustered on the ISIC sector.

∗

p < 0.10,

∗∗

p < 0.05,

∗∗∗

p < 0.01

Table 2 further demonstrates that this relationship holds when accounting for time, which
Figure 6 showed to be such a significant driver of opacity. I use a probit model to estimate the odds
of the compensation amount being kept private. I control for the legal experience of the company,
since claimants may learn how privacy affects them as they gain experience in arbitration. As
before, I control for disputes under both NAFTA and the Energy Charter. NAFTA, especially, is
distinguished by high transparency requirements. I first include a simple year variable, since the
upwards trend in opacity appears largely linear, but I also ensure that the results hold with cubic
splines, in the third column.
The findings support the article’s last major expectation. Indirect expropriation claims are
significantly less likely to be opaque: that is, claimants are more than twice as likely to publicize
the size of compensation sought when they file an indirect expropriation claim, all else equal. To
be exact, the odds of privacy are 41% for other claims, and only 15% for indirect expropriation

30

 claims. This significant effect holds whether cubic splines, or a linear control for time are used. As
might be expected, NAFTA disputes are far more likely to have the size of the award public than
any other institution. Meanwhile, neither the claimant’s nor the country’s experience appears to
have any effect on the opacity of disputes.

4

Conclusion

The investment regime has become the most controversial aspect of global governance. This article
assesses the extent to which this controversy is warranted. First, I have been interested in whether
the regime has undergone the fundamental shift identified by observers who claim there is a disjoint
between the regime’s original aim and its current application.
The shift is real, though it is largely of a de facto, rather than a de jure nature. The long“dormant” issue of indirect expropriation has been permanently stirred up.81 The investor-state
arbitration regime now considers mostly claims of indirect expropriation, rather than the type of
“sovereign theft” represented by direct takings, and often envisioned by the literature. It targets
mostly democracies, rather than rent-seeking regimes with poor rule of law. The current peculiar
design of the regime, which awards financial compensation for regulatory breaches, further suggests
the unintended nature of this shift. These are changes that the IPE literature studying investment
has yet to fully come to terms with. As I argue, much of our theoretical apparatus is suited to a
definition of expropriation that is now long out of sync with the reality of the regime.
Yet the paper’s main findings are more nuanced. I examine whether the regime’s most
frequent type of legal challenge, claims over indirect expropriation, is prone to frivolous litigation.
Because indirect expropriation most often targets regulation, investors filing these claims may
derive a benefit from litigation no matter whether they win, if they are able to sway policy. I
document a set of cases where the threat of costly litigation alone appears to have been enough
to temper regulatory ambitions in a country—in Canada, New Zealand, Indonesia, Namibia. If
these claims carry benefits other than financial compensation, then I argue that the process of case
selection should lead us to expect that conditional on being filed, these cases should display lower
legal merit, all else equal.
In trying to defend the legitimacy of the investor-state regime, policymakers often point
out that investors fail to win most of the claims they bring.82 In this article, I suggest that this is
81
82

Escarcena 2014.
See supra, fn. 7

31

 precisely where the problem may lie. An international legal regime where litigation is both costly
and generally unsuccessful fails at its primary function of bringing attention to treaty violations by
sovereign states. The incentives it generates may be skewed, if claimants gain even when they bring
weak cases. If the regime no longer identifies actual rent-seeking by governments, its informational
function is jeopardized.
In aggregate, are indirect expropriation claims more prone to frivolous litigation? First,
I show that the legal merit of cases has declined precipitously over time, and that this decline is
concentrated in indirect expropriation cases. Investors have won only 21% of indirect expropriation
disputes in the last decade. Contrast this to the trade regime, where the complainant rate of success
hovers around 90%83 —precisely because states are so wary of filing a dispute against another
country if they are unsure of its merit.
Secondly, indirect expropriation cases, which are more apt to generate positive spillovers for
the investor by deterring regulation, are systematically less successful than other types of claims,
such as direct expropriation cases. Third, indirect expropriation claims are 52% more likely to
persist to the ruling stage, in a manner consistent with the belief that investors bringing such
cases may be more interested in the benefits of litigation itself than in securing a favorable early
settlement. By comparison, direct expropriation claims are far more likely to end in settlement,
with no ruling rendered.
Fourth, I consider variation in transparency. Contrarily to the hopes of some, I show
that the ISDS regime is growing more opaque with time. Yet in one subset of disputes—indirect
expropriation claims—I argue that investors may actually gain from greater publicity if they seek
to chill regulatory ambitions. This is exactly what we observe: indirect expropriation disputes are
more than twice as likely to publicize the amount of compensation being sought by the investor in
the dispute. In sum, evidence from settlement rates, ruling outcomes, and variation in transparency
is consistent with a view that the most prevalent type of legal claim in the investment regime, over
indirect expropriation, is prone to frivolous filings.
One final corollary finding bears mention. Wealthier countries do significantly better in
litigation across the board. This would be an issue in any legal regime, but it is especially worrying
in investment. Poor countries are most vulnerable to regulatory deterrence: they may be least
willing to run the risk of costly litigation—even when the investor’s potential claim has little legal
merit, as in the aforementioned case of Indonesia’s ban on open pit mining in protected forests84 —in
83
84

Leading some to ask “Why Does the Complainant Always Win at the WTO”? (Turk, 2011).
See supra, fn. 61.

32

 order to push through public interest regulation. Another legal issue compounds this distributional
concern: indirect expropriation claims often rely on investor “expectations” as a baseline against
which to gauge whether there has been undue interference on the part of government.85 Since
developing countries on average feature weaker regulatory environments, they are more prone to
such claims as a result,86 since the regulatory baseline is lower. Taken together, these considerations
suggest that concerns over distributional effects are well founded.
States are catching on to the trends outlined in this paper. In fact, governments’ attempts
to revise existing agreements, and amend the design of new agreements, suggest the extent to
which these changes were unanticipated. Miscalculation in international relations is rare; sustained
miscalculation, repeated across hundreds of agreements, is rarer still. Yet all signs point to states
having failed to foresee the development arc of this particular regime. The increase in volume of
filings, together with the decrease in their legal merit, suggest a distortion of the intended system.
The design of the regime, starting with private standing, has shaped investors’ incentives in such
a way that it may pay to litigate even if the ruling is unlikely to be in their favor.
The US, arguably the world’s greatest proponent of investment rules, has revised its model
BIT in reaction to its experience in NAFTA. Scholars point out that this change was precisely
in reaction to the way in which “several [Chapter 11 claims were] perceived as ‘frivolous’ by the
American government”.87 The EU, whose member states, after all, invented the practice of ISDS,
has also adapted its position on investor-state arbitration, and sought to decrease the risk of
litigation challenging public interest regulation.88 Its agreement with Canada, CETA, contains a
provision allowing states to “file an objection that a claim is manifestly without legal merit”.89
The TPP similarly tries to tilt control towards governments.90 The findings in this article suggest
that such changes, contained in agreements that have yet to be ratified, are beneficial. Judging by
the widespread pushback against the regime, they may also come too late.

85

See Fortier and Drymer (2004). The sector of investment becomes relevant in these assessments: in sectors prone
to fast moving environmental regulation, for instance, investors may have a higher hurdle if they argue that they
could not have expected regulatory reform.
86
Gross 2002, 899.
87
Gagn´e and Morin 2006, 359.
88
See supra, fn. 7.
89
CETA Draft, Chapter 10, art X.29(1).
90
The Investment section of the TPP features the phrase “legitimate public welfare objectives” on no less than
three occasions, each time in an attempt to distinguish between regulatory actions and indirect expropriation. Yet
it falls short of providing an actual test to distinguish between the two.

33

 References
Allee, Todd and Clint Peinhardt. 2011. “Contingent credibility: The impact of investment treaty
violations on foreign direct investment.” International Organization 65(03):401–432.
Bown, Chad P. 2005. “Participation in WTO Dispute Settlement: Complainants Interested Parties,
and Free Riders.” World Bank Economic Review 19:287–310.
Busch, Marc L. and Eric Reinhardt. 2000. “Bargaining in the Shadow of the Law: Early Settlement
in GATT/WTO Disputes.” Forham International Law Journal 24(1):158–172.
Busch, Marc L and Eric Reinhardt. 2006. “Three’s a Crowd: Third Parties And WTO Dispute
Settlement.” World Politics 58(03):446–477.
Busch, Marc L, Eric Reinhardt and Gregory Shaffer. 2009. “Does legal capacity matter? A survey
of WTO Members.” World Trade Review 8(04):559–577.
Chen, Tsai-Fang. 2015. “Deterring Frivolous Challenges in Investor-State Dispute Settlement.”
Contemp. Asia Arb. J. 8:61.
Cole, Harold L and William B English. 1991. “Expropriation and direct investment.” Journal of
International Economics 30(3):201–227.
Commission, Jeffrey P. 2016. “How Much Does an ICSID Arbitration Cost? A Snapshot of the
Last Five Years.”.
URL: http://kluwerarbitrationblog.com/2016/02/29/how-much-does-an-icsid-arbitration-cost-asnapshot-of-the-last-five-years/
Davey, William J. and Amelia Porges. 1998. “Comments on Performance of the System I: Consultations and Deterrence.” International Lawyer 32:695–707.
Davis, Christina L. 2012. WTO Adjudication as a Tool for Conflict Management. Technical report
Working Paper, Princeton University.
Davis, Christina L and Sarah Blodgett Bermeo. 2009. “Who files? Developing country participation
in GATT/WTO adjudication.” The Journal of Politics 71(03):1033–1049.
de Mestral, Armand. 2015. “Investor-State Arbitration Between Developed Democratic Countries.”
Centre for International Governance Innovation .
Dolzer, Rudolf. 2005. “Fair and equitable treatment: a key standard in investment treaties.” The
International Lawyer pp. 87–106.
Escarcena, Sebasti´
an L´
opez. 2014. Indirect expropriation in international law. Edward Elgar
Publishing.
Feinberg, Robert M and Kara M Reynolds. 2006. “The spread of antidumping regimes and the
role of retaliation in filings.” Southern Economic Journal pp. 877–890.
Fitzmaurice, Malgosia and Christian J Tams. 2013. Legacies of the Permanent Court of International Justice. Martinus Nijhoff Publishers.
Fortier, L Yves and Stephen L Drymer. 2004. “Indirect expropriation in the law of international
investment: I know it when I see it, or caveat investor.” ICSID Review 19(2):293–327.
34

 Franck, Susan D. 2007. “Empirically evaluating claims about investment treaty arbitration.” North
Carolina Law Review 86:1.
Franck, Susan D. 2014. “Conflating Politics and Development: Examining Investment Treaty
Arbitration Outcomes.” Va. J. Int’l L. 55:13.
Gagn´e, Gilbert and Jean-Fr´ed´eric Morin. 2006. “The Evolving American Policy On Investment
Protection: Evidence From Recent FTAs And The 2004 Model BIT.” Journal of International
Economic Law 9(2):357–382.
Gibson, Christopher S. 2015. “Yukos Universal Limited (Isle of Man) v The Russian Federation A
Classic Case of Indirect Expropriation.” ICSID Review 30(2):303–314.
Gilligan, Michael, Leslie Johns and B Peter Rosendorff. 2010. “Strengthening international courts
and the early settlement of disputes.” Journal of Conflict Resolution 54(1):5–38.
Gross, Stuart G. 2002. “Inordinate Chill: Bits, Non-NAFTA Mits, and Host-State Regulatory
Freedom-An Indonesian Case Study.” Mich. J. Int’l L. 24:893.
Guthrie, Chris. 2000. “Framing frivolous litigation: A psychological theory.” The University of
Chicago Law Review pp. 163–216.
Hafner-Burton, Emilie, Zachary Steinert-Threlkeld and David G Victor. 2014. “Transparency of
Investor-State Arbitration.” Available at SSRN 2431522 .
Hudec, Robert E. 1993. Enforcing international trade law: The evolution of the modern GATT
legal system. Vol. 7 Butterworth Legal Publishers Salem, NH.
Jensen, Nathan M, Noel P Johnston, Chia-yi Lee and Abdulhadi Sahin. 2012. “Economic shock,
political shifts, and sovereign theft: The domestic and international determinants of investment
expropriation.”.
Lazer, David. 2001. “Regulatory interdependence and international governance.” Journal of European Public Policy 8(3):474–492.
Lencucha, Raphael, Ronald Labonte and Jeffrey Drope. 2015. “Tobacco plain packaging: too hot
for regulatory chill.” The Lancet 385(9979):1723.
Lester, Simon. 2013. “Liberalization Or Litigation? Time To Rethink The International Investment
Regime.” Policy Analysis. Cato Institute. July(730).
Li, Quan and Adam Resnick. 2003. “Reversal of Fortunes: Democratic Institutions and Foreign
Direct Investment Inflows to Developing Countries.” International Organization 57(01):175–211.
Mansfield, Edward D, Helen V Milner and B Peter Rosendorff. 2002. “Why democracies cooperate more: Electoral control and international trade agreements.” International Organization
56(03):477–513.
Metzger, Stanley D. 1960. “Multilateral Conventions for the Protection of Private Foreign Investment.” J. Pub. L. 9:133.
Pauwelyn, Joost. 2014. “At the edge of chaos? Foreign investment law as a complex adaptive
system, how it emerged and how it can be reformed.” ICSID Review 29(2):372–418.

35

 Pauwelyn, Joost. 2015. “WTO Panelists Are From Mars, ICSID Arbitrators Are From Venus:
Why? And Does it Matter?” And Does it Matter .
Pelc, Krzysztof J. 2013. “Googling the WTO: what search-engine data tell us about the political
economy of institutions.” International Organization 67(03):629–655.
Pelc, Krzysztof J and Johannes Urpelainen. 2015. “When Do International Economic Agreements
Allow Countries To Pay To Breach?” The Review of International Organizations 10(2):231–264.
Porges, Amelia. 2003. “Settling WTO Disputes: What Do Litigation Models Tell Us?” Ohio State
Journal on Dispute Resolution 19:141–184.
Post, Diahanna L. 2005. “Standards and regulatory capitalism: The diffusion of food safety standards in developing countries.” The ANNALS of the American Academy of Political and Social
Science 598(1):168–183.
Reynolds, Susan. 2010. Before eminent domain: toward a history of expropriation of land for the
common good. Univ of North Carolina Press.
Schultz, Thomas and C´edric Dupont. 2014. “Investment Arbitration: Promoting the Rule of
Law or Over-empowering Investors? A Quantitative Empirical Study.” European Journal of
International Law 25(4):1147–1168.
Simmons, Beth A. 2014. “Bargaining over BITs, arbitrating awards: The regime for protection
and promotion of international investment.” World Politics 66(01):12–46.
Simmons, Beth A and Zachary Elkins. 2004. “The globalization of liberalization: Policy diffusion
in the international political economy.” American political science review 98(01):171–189.
Tienhaara, Kyla. 2011. “Regulatory chill and the threat of arbitration: a view from political
science.” Evolution In Investment Treaty Law And Arbitration, Chester Brown, Kate Miles,
Eds., Cambridge University Press .
Tomz, Michael and Mark LJ Wright. 2010. “Sovereign Theft: Theory and Evidence about Sovereign
Default and Expropriation, The Natural Resources Trap: Private Investment without Public
Commitment.”.
Turk, Matthew C. 2011. “Why Does the Complainant Always Win at the WTO: A ReputationBased Theory of Litigation at the World Trade Organization.” Nw. J. Int’l L. & Bus. 31:385.
Wellhausen, Rachel. 2015. “Recent Trends in Investor-State Dispute Settlement.” Journal of International Dispute Settlement .
Wellhausen, Rachel L. 2014. The Shield of Nationality: When Governments Break Contracts with
Foreign Firms. Cambridge University Press.

36

 Table 3: APPENDIX: Legal Merit in the Investment Regime

Indirect Expropriation Claim

(1)
(2)
(DV: Pro-Firm Award)

(3)
(4)
(DV: Pro-State Award)

-0.61∗∗∗
(0.18)

0.55∗∗∗
(0.20)
0.68∗∗∗
(0.22)
-0.26∗∗∗
(0.07)
0.01
(0.01)
-0.18
(0.17)
0.19
(0.19)
0.06
(0.04)
0.32∗∗
(0.15)
-11.86
(15.39)

Direct Expropriation Claim
GDP/cap (log)
Country Legal Experience
NAFTA
Energy Charter
Claims Number
Democracy
Constant

-0.25∗∗∗
(0.06)
0.01
(0.01)
-0.20
(0.18)
0.18
(0.20)
0.10∗∗∗
(0.04)
0.24
(0.17)
-13.09
(14.16)

-0.56∗∗
(0.26)
0.19∗∗
(0.09)
-0.02∗∗
(0.01)
0.15
(0.26)
0.00
(0.36)
0.06∗
(0.04)
-0.33∗∗
(0.15)
-0.99
(17.68)

0.19∗∗
(0.09)
-0.02∗∗
(0.01)
0.18
(0.24)
0.00
(0.39)
-0.00
(0.05)
-0.31∗
(0.17)
-2.14
(17.91)

Goes to Ruling
Amount Sought Private
Indirect Expropriation Claim

-0.61∗∗∗
(0.12)
0.89∗∗∗
(0.16)

-0.74∗∗∗
(0.16)

Constant

Time cubic splines
N

-0.76∗∗∗
(0.18)

-0.07
(0.12)
0.45∗∗
(0.21)

-0.42∗
(0.24)
-0.15
(0.13)
1.08∗∗∗
(0.25)

-0.08
(0.15)
0.45∗
(0.24)

-0.44∗
(0.25)
-0.18
(0.17)
1.12∗∗∗
(0.29)

Yes
425

Yes
425

Yes
425

Yes
425

Direct Expropriation Claim
Claimant Experience

-0.57∗∗∗
(0.18)
0.90∗∗∗
(0.16)

Heckman probit selection model with maximum likelihood (ML) estimates. First stage estimates likelihood of an
award being rendered. Second stage estimates likelihood of a pro-claimant award (columns 1-2) and a pro-state
award (columns 3-4). Robust standard errors clustered on the ISIC sector.

37

∗

p < 0.10,

∗∗

p < 0.05,

∗∗∗

p < 0.01