Here is the abstract of a new paper from Krzysztof Pelc, entitled "Does the Investment Regime Induce Frivolous Litigation?":
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 temper 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. The ongoing shift in the investment regime holds important implications not just for policy, but also for the study of the global investment regime.
And this is from the conclusion:
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. In this article, I suggest that this is precisely where the problem may lie. A legal regime where litigation is both costly and generally unsuccessful fails at its primary function of reliably selecting measures for enforcement. The incentives it generates may be skewed, if claimants gain even when they bring weak cases. Its informational function is jeopardized, if it no longer identifies actual rent-seeking by governments.
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 complainants win about 90% of all disputes that produce a ruling—precisely because states are loath to file 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. Conversely, direct expropriation claims, which carry no analogous spillover benefit, are associated with far higher odds of success for the investors bringing them.
