International Economic Law and Policy Blog

Non-Discrimination Standards: More on Discriminatory Effect and Individual Products

This is from the EU first written submission in the Philippines - Distilled Spirits case (DS396 for the EC case, DS403 for the parallel U.S. complaint):

105. In the light of the above, it is useful to recall once again that the vast majority of imported products are subject to the higher tax rates whereas all (or most of)118 local products enjoy the lower tax rate119. It has just to be pointed out that the fact that few imported products (e.g. 'Bacardi') may also enjoy the lower tax rate doesnot exclude that the measures violate Article III:2. As the Panel in Argentina – Bovine Hides made it clear: "Article III:2, first sentence, is applicable to each individual import transaction."120 It is thus sufficient to establish a breach of that provision that some (or even one) imported product is taxed in excess of a like domestic product.

106. In the present case, it must be therefore concluded that the taxes applied to (the vast majority of) imported spirits are ‘in excess of’ those applied to the like domestic products.

What's interesting about this passage is that the discriminatory effect (or disparate impact or disproportionate disadvantage or asymmetric impact, or whatever you want to call it) approach is mixed together with the individual product (or diagonal test or best treatment, or whatever you want to call it) approach.  The argument starts off by recalling that "the vast majority of imported products are subject to the higher tax rates whereas all (or most of) local products enjoy the lower tax rate."  So it sounds like they'll be relying on discriminatory effect.  But it then cites to Argentina - Bovine Hides for the proposition that "Article III:2, first sentence, is applicable to each individual import transaction," and on this basis argues, "[i]t is thus sufficient to establish a breach of that provision that some (or even one) imported product is taxed in excess of a like domestic product."  Thus, now they are comparing individual products.  Finally, they note that "the taxes applied to (the vast majority of) imported spirits are ‘in excess of’ those applied to the like domestic products," which seems to go back to the discriminatory effect test.

It may not be as clear as if the opposing sides were arguing for the different approaches, but this claim definitely puts the different options for non-discrimination standards in front of the panel.  I think everyone knows at this point what my view of this issue is (some recent thoughts are here, but in a nutshell, I argue for looking at the overall discriminatory effect rather than just looking at individual products).  The question now is, what will the panel do with this issue?  If the EU is correct about the facts, it seems that the discriminatory effect standard is easily satisfied.  How will that affect the Panel's approach?

Less Favorable Treatment in the Clove Cigarettes Case

There are some good non-discrimination cases going on right now in WTO dispute settlement (including the Philippines - Spirits case mentioned here).  For DSC subscribers, here is a run-down we did of the U.S. position on GATT Article III:4 less favorable treatment issues in the U.S. - Tuna Labeling (DS381) case.  In the U.S. - Clove Cigarettes (DS406) case, only the U.S. first written submission is publicly available at this point, so the issues have not been developed as much as in Tuna, but there's a bit to talk about nonetheless.

Here's how Indonesia put its discrimination argumement, in general terms, in its panel request:

Indonesia believes that the measure discriminates against imported clove cigarettes based on the fact that the clove cigarettes that were sold in the United States were imported (primarily from Indonesia), while virtually all of the menthol cigarettes sold in the United States are produced domestically (imports are negligible).

In its first written submission, the U.S. rejects this de facto discrimination argument.  Here are some key passages:

207. Similarly, the Appellate Body’s approach in Chile – Alcoholic Beverages is instructive on this point. In Chile – Alcoholic Beverages, a tax measure that was not facially discriminatory in fact imposed a higher rate to an imported product. However, the different treatment accorded by the tax was not enough in itself to constitute de facto discrimination, unless the different treatment was based on national origin. Following its approach in Japan – Alcoholic Beverages, the Appellate Body examined the design, architecture and structure of the measure at issue, seeking to determine whether the measure was applied “so as to afford protection to domestic production.” The Appellate Body concluded that the measure in question was “anomalous” and inconsistent with respect to the Chilean tax system, and therefore constituted an instance of de facto discrimination.

208. Unlike in Chile – Alcoholic Beverages, where the Appellate Body found an “absence of countervailing explanations from Chile,” there is in this case a legitimate countervailing explanation for the different treatment under Section 907(a)(1)(A) of tobacco and menthol cigarettes as compared to clove cigarettes.

209. In this case, the application of 907(a)(1)(A) is entirely consistent with the object and purpose of the FPSTCA and the approach of the United States to tobacco regulation, in general. An Indonesian product is adversely effected under Section 907(a)(1)(A) not as a result of origin based discrimination, but because U.S. health authorities legitimately determined that clove cigarettes fall into a category of cigarettes that should be banned from the U.S. market for the protection of the public health. Section 907(a)(1)(A) distinguishes among cigarettes as appropriate for the public health, and not based on the national origin of the products. Tobacco and menthol-flavored cigarettes are not covered under Section 907(a)(1)(A) because a ban on such products would involve countervailing public health concerns.

...

212. Article III:4 protects Members from discrimination based on origin – but does not protect foreign products from all adverse effects of a measure which, in pursuit of a legitimate objective, has an adverse impact upon a foreign product. The protections contained in the GATT 1994 are not designed, and should not be applied, to require that Members only can ban a specific class of cigarettes for a legitimate policy reason unless they ban all domestic cigarettes. Such an outcome would seriously hamper national regulatory prerogatives to minimize the harms of tobacco products.

I read the U.S. position as follows:  Discriminatory effect, even if it exists here, is not enough for an Article III:4 violation; you need to show protectionist intent, too.

Hopefully we will get more details of the argument as the dispute progresses.

Another De Facto Discrimination Case

I love a good de facto discrimination case.  Whenever one starts up, I think, "this is the one that's going to clarify all the GATT non-discrimination standards."  That hasn't happened yet, but I keep hoping, and here's another case with potential:

Brazil will ask the World Trade Organization to open a dispute panel over European Union poultry regulations it considers illegal, a senior government official told Reuters on Friday.

"We've concluded that we have a strong case and will proceed," said Carlos Marcio Cozendey, head of the foreign ministry's department of economics.

...

Brazil's poultry exports are the largest in the world and generated revenues of around $7 billion in 2008, before the financial crisis tempered global demand.

The EU, which adopted new regulations in May restricting the sale of certain thawed poultry products, is Brazil's third-largest market.

Brussels says that the measures apply also to its own poultry producers. But Brazil argues they discriminate against non-EU suppliers, who mostly ship frozen, not fresh poultry.

Internet Gambling Bans and the Dormant Commerce Clause

One of the lingering questions for me after the U.S. - Gambling WTO dispute was how a pure internet gambling ban would be treated under WTO rules.  The measures at issue in U.S. - Gambling had some pretty clear discriminatory aspects.  What if the U.S. measures had simply banned all internet gambling, regardless of whether the web site was foreign or domestic?  Would that have been found to be a violation, or upheld under a "public morals" or other justification?

Perhaps we can gain some insights on this issue from yesterday's Washington state Supreme Court decision in Rousso v. State of Washington, which dealt with an internet gambling ban under the dormant commerce clause of the U.S. Constitution.  The dormant commerce clause has a number of parallels with WTO non-discrimination rules and exceptions.

The Court explained the measure as follows:

[T]he legislature ... enact[ed] and amend[ed] RCW 9.46.240, which criminalizes the knowing transmission and reception of gambling information by various means, including use of the Internet. Since sending and receiving gambling information is illegal, Internet gambling in the state of Washington is effectively banned.

In essence, as far as I can tell, it's a pure internet gambling ban.  Very straightforward and simple, not like the complex set of measures at issue in U.S. - Gambling.

As noted, the legal issue was whether this internet gambling ban violates the dormant commerce clause:

The only issue before this court is whether Washington's ban on Internet gambling is an unconstitutional infringement of the dormant commerce clause.

...

Determining whether Washington's ban on Internet gambling violates the dormant commerce clause is a multistep analysis. Outlined briefly, we must first determine whether Congress has granted the states authority to regulate Internet gambling. If it has, the dormant commerce clause does not apply and RCW 9.46.240 is upheld.   ...

If Congress has not, the dormant commerce clause applies, and we must determine (a) whether the language of the statute openly discriminates against out-of-state entities in favor of in-state ones or (b) whether the direct effect of the statute evenhandedly applies to in-state and out-of-state entities. ...

If the statute does not openly discriminate and applies evenhandedly, it does not violate the dormant commerce clause if (1) there is a legitimate state purpose and (2) the burden imposed on interstate commerce is not "clearly excessive'" in relation to the local benefit. ...

If the statute openly discriminates or does not apply to in-state and out-of- state entities evenhandedly, it is upheld only if it is necessary to achieve an important state interest unrelated to economic protectionism. ...

With that as background, the Court then considered the internet gambling ban under the dormant commerce clause, as follows.

First, the Court concluded that "Congress has not delegated to the states its authority to regulate interstate Internet gambling," and thus "[t]he dormant commerce clause is applicable here, ... ."

Moving on to the substance of the dormant commerce clause, the Court first asked, "Does [the measure], by its language or effect, discriminate against interstate commerce in favor of in-state economic interests?"  (This part is somewhat parallel to the WTO non-discrimination requirements, such as GATS Article XVII.)  The Court began by noting:

the language of RCW 9.46.240 is not discriminatory; it equally prohibits Internet gambling regardless of whether the person or entity hosting the game is located in Washington, another state, or another country.

Basically, there is no explicit discrimination in the measure itself.  It does not single out foreign internet gambling web sites; it bans all of them.

It then considered the "effect" of the measure:

Neither does RCW 9.46.240 have a direct discriminatory effect on interstate commerce. The statute prohibits Internet gambling evenhandedly, regardless of whether the company running the web site is located in or outside the state of Washington.  ... The effects imposed on in-state and out-of-state entities engaging or that would engage in Internet gambling are the same. ... RCW 9.46.240 is not discriminatory under the dormant commerce clause.

I'm not quite sure how this analysis differs from the preceding part about the "language."  It doesn't seem that they were looking at whether there was a disparate impact on out of state companies. I don't know exactly what they were looking at, and how it differed from the issue of whether there is explicit discrimination.

Next the Court gets into the issues of "likeness" (although that's not the term they use, of course) and disparate impact (sort of):

Rousso argues RCW 9.46.240 is discriminatory because the Internet gambling ban excludes Internet gambling web sites, all of which are out-of-state businesses, from the Washington market while leaving untouched an alternative service—in-state, "brick and mortar" (i.e., where individuals are physically present) gambling businesses. This argument misconstrues and misapplies the test under the dormant commerce clause in several ways.

First, Rousso misapprehends what constitutes a direct discriminatory effect on interstate commerce. The question is how the effects of the ban are imposed on in-state and out-of-state entities, not what the effect is on those entities' revenue. The ban on Internet gambling has the same effect on all entities, regardless of origin: a ban on the transfer of gambling information via the Internet.

The Supreme Court addressed this distinction in CTS Corp., 481 U.S. 69. There, state regulations hindering hostile takeovers of Indiana companies were deemed nondiscriminatory because they imposed the same effects on in-state and out-of-state entities. 481 U.S. at 87-88. It was immaterial to the Court's consideration that the majority of entities seeking to effectuate a hostile takeover of an Indiana corporation were out-of-state, and thus the law, as applied, would affect out-of-state entities more often. Id. at 88.

Second, Rousso alleges direct discrimination because banning Internet gambling will have a secondary effect of promoting in-state, Internet gambling substitutes—such as brick and mortar gambling. But this misses the mark on two counts. Internet gambling and brick and mortar gambling are two different activities, presenting risks and concerns of a different nature, and creating different regulatory challenges; a state can regulate different activities differently. The dormant commerce clause only prevents a state (under most circumstances) from discriminating based on whether the business is in-state or out-of-state. Again, RCW 9.46.240 treats all entities engaging in Internet gambling equally, regardless of origin.

Furthermore, the discriminatory effect under this analysis must be direct. Brown-Forman Distillers, 476 U.S. at 579; Bostain, 159 Wn.2d at 718. Here, the ban on Internet gambling has a direct effect on Internet gambling operations, preventing them from doing business in Washington. Rousso argues this ban has an effect on a substitute service—brick and mortar gambling—because individuals will gamble at casinos if they are unable to gamble on-line. But an increase of business for another industry is not a direct effect of the ban; the ban makes no mention nor imposes any regulation on brick and mortar gambling. This alleged secondary effect on brick and mortar gambling will also occur for any goods or services a person might purchase or use instead of banned Internet gambling - whether a person instead engages in on-line stock trading, buys more snacks for an in-person poker game among friends, or signs up for cello lessons. Increased revenues for in-state banks, snack producers and grocery stores, and music teachers would also constitute "discriminatory effects" under Rousso's argument, but again, these are secondary effects. Purchasing substitute goods and services does not constitute direct discriminatory effects.

On the comparability of the services at issue, the Court refers to internet and "brick and mortar" gambling as "different activities."  Presumably, they think that these services are not "like," to use the WTO term.  However, they didn't really go into much detail.  I didn't find this part of the reasoning all that convincing.  Not that I think "bricks and mortar" gambling is definitely "like" internet gambling, but I would have been interested to see more analysis of this issue, in particular the degree of substitutability.  Their reference to spending money on other activities, such as "cello lessons," seems to miss the key point here.

As to the role of disparate impact, they seem pretty dismissive of this.  I'm not really sure why.  I would have liked to see how they dealt with this factor if they had found that the services were "like" (that is, not "different activities").

The Court concluded as follows on the discrimination point:

The discriminatory language or direct effect step of the dormant commerce clause weeds out laws that regulate by virtue of whether a business is in-state or out-of-state. It ferrets out "simple protectionism." See id. at 471. RCW 9.46.240 applies based upon whether an individual—regardless of origin—is engaged in Internet gambling operations. The statute does not directly discriminate against out-of-state businesses in favor of in-state ones. 

At this stage, the Panel turned to the issue of whether "the burden on interstate commerce [is] 'clearly excessive' in relation to a legitimate state interest?" (This part is somewhat parallel to the GATT/GATS exceptions.)  Here, the Court said:

Because neither the language nor direct effect of RCW 9.46.240 is discriminatory, the statute does not violate the dormant commerce clause if (a) there is a legitimate state purpose and (b) the burden imposed on interstate commerce is not "clearly excessive" in relation to the local benefit, considering also whether the local interest could be promoted in a way that would impose a lesser impact on interstate commerce.

With regard to the "state interest" here, the Court explained:

The State wields police power to protect its citizens' health, welfare, safety, and morals. On account of ties to organized crime, money laundering, gambling addiction, underage gambling, and other societal ills, "[t]he regulation of gambling enterprises lies at the heart of the state's police power."  ...

Internet gambling introduces new ways to exacerbate these same threats to health, welfare, safety, and morals. ... Washington has a legitimate and substantial state interest in addressing the effects of Internet gambling.

It then noted the burden placed on interstate commerce by the ban:

RCW 9.46.240 imposes a burden on interstate commerce by walling off the Washington market for Internet gambling from interstate commerce. ... preventing Internet gambling businesses from having access to Washington consumers who would otherwise patronize those businesses still has a considerable impact on interstate commerce. This burden on interstate commerce is comparable to the substantial state interest stemming from the State's police power to protect the health, welfare, safety, and morals of its citizens.

Finally, the Court considered whether this burden is "cearly excessive" in relation to the state interest:

... The phrase "clearly excessive" carries with it a sense of "too much"—that is, whether the burden is clearly unnecessary to achieve the state interest, whether that same interest could be protected in another way while imposing a lesser burden on interstate commerce. We thus consider whether the State clearly could avoid threats to health, welfare, safety, and morals posed by Internet gambling equally as well in a manner that imposed less of a burden on interstate commerce.

Rousso argues regulating Internet gambling is a less restrictive alternative. This falls short of the mark because (1) it is not clear regulation could avoid concerns over Internet gambling as well as a complete ban and (2) it is not clear, even if regulation providing comparable protection is possible, the burden on interstate commerce would be decreased through that regulation. ...

... Under the dormant commerce clause, we observe only that it is not clear that regulation of Internet gambling could protect state interests as fully as, or at least in a comparable way to, a complete ban.

Moving on to the interstate commerce burden, Washington regulation of Internet gambling would be an interstate-commerce burdening nightmare. ...

Even assuming there is an equally effective, Internet equivalent to Washington's brick and mortar regulations, Washington would need to impose its regulatory requirements and intrusive vigilance on foreign on-line operations to regulate foreign Internet gambling. The very structure and practice of those foreign operations would need to be reorganized in conformity to Washington regulations. When a foreign operation failed to conform, all Washington commerce on that web site would be precluded.

And when the conflict is not with only one web site, but also the regulations of the country of origin of that web site, that country would be blacklisted from Washington on-line gambling. ...

...

Rather than impose its pervasive regulation on Internet gambling, Washington could permit Internet gambling without regulating it at all or, as Rousso suggested at oral argument, Washington could trust in the regulatory systems of the native countries of the Internet gambling web sites to protect Washington citizens. But whether either of these options would address the concerns of Internet gambling as effectively as a complete ban is not clearly established here, nor could it be.

...

... Under the dormant commerce clause, the burden on interstate commerce is not "clearly excessive" in light of the state interests. RCW 9.46.240 does not violate the dormant commerce clause.

So, after considering alternative measures, the Court finds that the internet gambling ban is not "clearly excessive."

All very interesting, and I would be curious to see how the WTO would deal with such a measure.  And for that matter, I'd be curious to see how the U.S. Supreme Court deals with it.  In that regard, the plaintiff said he is planning an appeal:

Rousso said he would appeal to the U.S. Supreme Court, and he said he was also considering filing an additional action in federal court.

"I think this is an important issue of constitutional law," he said. 

"Best Treatment," "Individual" Claims and the "Class of One"

I've mentioned before (most recently, here) that I'm skeptical of applying a "best treatment" / "individual comparison" standard to non-discrimination in the IEL context (I'm more concerned with WTO rules than with investment treaties, but my views apply to the latter as well).  I'm not sure if everyone uses the terms "best treatment" and "individual comparison" in exactly the same way, but at the very least they are similar.  (You could also use the term "diagonal" comparison, as described by Lothar Ehring here).

Let's look at some specifics.  In the GATT Article III:4 National Treatment context, such a standard would be applied something like this.  A complainant argues that an individual foreign product is receiving worse ("less favorable") treatment than a comparable ("like") individual domestic product.  As a result, a violation exists, regardless of the overall treatment of the group of imported products in relation to the group of comparable domestic products.  Similarly, in the investment treaty context, the argument is that an individual foreign investor is receiving worse treatment than a comparable domestic investor. 

Using the term "best treatment," the same argument can be made by saying that the foreign product/investor is not receiving the "best treatment" that is being offered to a comparable domestic product/investor.  That is, as long as one domestic product/investor is receiving better treatment, the foreign product/investor in question is not receiving the "best treatment" available.

I think these two ways of arguing the point get you to pretty much the same place.

This "best treatment"/"individual comparison" approach can be distinguished from a "nationality" based non-discrimination standard, in which the class or group of foreign products/investors is examined in relation to the class or group of comparable domestic products/investors.

So that's the IEL context.  I don't look at domestic law all that much (mostly some law blog reading), but recently I came across an approach to non-discrimination in the context of the U.S. Constitution's Equal Protection Clause that appears to be similar to the "best treatment"/"individual comparison" idea: The "class of one" claim. Here's a good summary:

Generally, the Equal Protection Clause only applies where a person can show that he is a) part of a protected class, and b) is being discriminated against because of his class membership.  A couple of years ago the Supreme Court held that a person not belonging to a protected class could sue under the Equal Protection Clause if a government actor treated him irrationally and differently.  The person being mistreated belongs to a "class of one." In other words, under the "class of one" theory, it violates the Equal Protection Clause for a government actor to treat you differently than others similarly situated, just because the government official doesn't like you.

Let's say "George" wants to build a deck.  His permit application is denied because someone at city hall hates his guts, but George's neighbor's permit application is granted.  George can sue under a class-of-one theory since he has been treated differently from others similarly situated (in this case, homeowners), and because his disparate treatment was irrational.

For more detail, see the papers/articles here, here, here, here, and here.  Basically, the idea is that while Equal Protection is generally about comparing the treatment of classes of people (e.g., based on race, gender), you can also have discrimination against individuals who are not part of a larger class, i.e., they are a class of just one person.  An Equal Protection violation will exist if there is no rational basis for the government action (a minority view is that a violation will only exist if the discrimination is based on ill-will).

(I assume that this issue has come up in other jurisdictions, but I'm not aware of the details.  If you know something about it, feel free to post in the comments). 

After reading a bit about the "class of one" jurisprudence, it struck me that the idea is similar to the "best treatment"/"individual comparison" approach to non-discrimination in the IEL context.  In a sense, the individual product/investor is a "class of one" who is receiving worse treatment than a comparable product/investor.  There may be a slight distinction in that the IEL context requires a domestic to foreign comparison.  Thus, the individual foreign product/investor is compared to an individual domestic product/investor.  This foreign/domestic comparison injects a class-based element (i.e., nationality), in effect combining elements of an individual comparison (the effect on an individual is considered) with elements of a full class-based comparison (the class is taken into account).

In reality, though, this distinction might not have much significance.  As long as any differentiation exists with respect to the individual product/investor (that is, the individual product/investor gets worse treatment than some comparator), there is likely to be differentiation that exists between the foreign individual and a domestic comparator.  It is theoretically possible that the only actual differentiation is with other comparators of the same nationality, and thus there will be no foreign/domestic class-based comparison to make, but that seems likely to be a rare occurrence.  In most cases where there is alleged to be unfavorable treatment for a foreign product/investor, there will be some domestic product/investor getting better treatment.  So, in practice, the way "best treatment"/"individual" comparisons work in the IEL context is going to be pretty similar to the "class of one" approach.  (And regardless, if there were no foreign/domestic comparison, there would be a foreign/foreign MFN comparison.)

Even assuming this distinction does mean something, while the IEL "best treatment"/"individual comparison" approach might not go quite as far as the "class of one," it is along the same lines.  Perhaps it could be thought of as a hybrid of class-based and individual comparisons.  Taking gender-based discrimination as an example, while a standard disparate impact analysis might look at how many women received the bad treatment in comparison to how many men received that treatment, the hybrid approach would look only at whether any individual woman received worse treatment than any individual man, regardless of the overall impact on the two groups.

Looking at the cases, the similarities in language between the IEL and Equal Protection contexts are readily apparent.  Recall this recent statement from para. 94 of the Merrill NAFTA Chapter 11 tribunal:

... While nationality-based discrimination would make a finding of breach of national treatment unavoidable, some argue that this is not the only aim of the concept of national treatment under Article 1102. They would say that, even in the absence of discrimination, a differentiated treatment which is arbitrary and unjustified might qualify as a breach of national treatment. ...

So the argument is that National Treatment is violated where there is "a differentiated treatment which is arbitrary and unjustified," aside from any nationality-based discrimination.  I take this as an argument along the lines of "best treatment"/"individual comparisons" although it was not explicitly referred to in these terms (and it's sometimes difficult to get a precise understanding of what underlies specific statements of this sort).  This statement reads very much like a description of the "class of one" theory.  In the Olech case, which is the 2000 case that established the concept, the Supreme Court said the following:

  Our cases have recognized successful equal protection claims brought by a “class of one,” where the plaintiff alleges that she has been intentionally treated differently from others similarly situated and that there is no rational basis for the difference in treatment. See Sioux City Bridge Co. v. Dakota County, 260 U.S. 441 (1923); Allegheny Pittsburgh Coal Co. v. Commission of Webster Cty., 488 U.S. 336 (1989). In so doing, we have explained that “‘[t]he purpose of the equal protection clause of the Fourteenth Amendment is to secure every person within the State’s jurisdiction against intentional and arbitrary discrimination, whether occasioned by express terms of a statute or by its improper execution through duly constituted agents.’” Sioux City Bridge Co., supra, at 445 (quoting Sunday Lake Iron Co. v. Township of Wakefield, 247 U.S. 350, 352 (1918)).

And this is from the 2008 Engquist decision, which carved out an exception for government employment:

What seems to have been significant in Olech and the cases on which it relied was the existence of a clear standard against which departures, even for a single plaintiff, could be readily assessed. There was no indication in Olech that the zoning board was exercising discretionary authority based on subjective, individualized determinations--at least not with regard to easement length, however typical such determinations may be as a general zoning matter. See id., at 565 (Breyer, J., concurring in result). Rather, the complaint alleged that the board consistently required only a 15-foot easement, but subjected Olech to a 33-foot easement. This differential treatment raised a concern of arbitrary classification, and we therefore required that the State provide a rational basis for it.

While the language is not identical, it is quite similar, as both the IEL and Equal Protection contexts refer to "different" or "differential" or "differentiated" treatment that is "arbitrary."

However you refer to this concept, does it make sense in either the Equal Protection or IEL context?  The big difference I see between Equal Protection and IEL non-discrimination standards is the explicit textual limitation in IEL treaties to the class of "nationality."  The Equal Protection clause is vague enough that I see how it can go beyond classifications, and thus can deal with individuals.  By contrast, it seems to me that classification by nationality is at the heart of most IEL non-discrimination.  Without it, the nature of IEL non-discrimination is changed considerably.

As a final point, some people don't even think the "class of one" concept works in the Equal Protection context.  Thisis from law prof David Fagundes:

... Olech didn’t generate much reaction, let alone criticism, from commentators, but has always seemed to me to rely on a problematic interpretation of the equal protection clause.  There may be a lot of dispute over which and what kind of groups the clause is supposed to protect, but it seems to me that the best reading of the clause is that it was designed to protect groups in the interest of preventing the development of a caste-based society, as opposed to merely shielding individuals from arbitrary exercises of state authority.

I'm not sure what I think about all of this in the Equal Protection context, but I do think this last quote is a very good way to frame the issue in the IEL context:  Is IEL non-discrimination about protecting non-nationals from discrimination against them as a class, or is it about "shielding individual foreign investors/traders from arbitrary exercises of state authority"?
 

More on Nicolas Diebold's Non-Discrimination Paper

I want to say a bit more about Nicolas Diebold's SIEL conference paper "Non-Discrimination and the Pillars of International Economic Law – Comparative Analysis and Building Coherency".  I've read it more closely now, and I like it even better than when I first skimmed through it.  Let me go through some of the key points he makes.

First, he argues that the lack of clarity in non-discrimination standards is a serious problem:

the current situation entails a number of shortcomings. Most importantly, contracting parties have no possibility to anticipate the consequences when entering into an international economic treaty. By the same token, private individuals – to the extent the treaty empowers them to assert their rights under the agreement – are virtually left in the dark when assessing their rights and risks prior to an investment decision. The scope, substance and standard of a non-discrimination obligation – and nota bene many other obligations – depends on the interpretation of the individual arbitrator who happens to be appointed to rule on the specific dispute. Moreover, even once the arbitral tribunal made its ruling by applying a specific treaty, the concerned parties have no guarantee that a second arbitral tribunal will follow the same interpretation. Consequently, the parties to a dispute – whether in state-to-state or investor-state arbitration – have no or very little guidance on how to make their claim, how to present their legal arguments and, most importantly, what evidence will be relevant.

I absolutely agree.  Non-discrimination is a core legal standard in international economic law.  We can never have complete certainty about what the law is (there are competing views, and ideas change over time), but we should know a lot more than we do currently.  (As noted here, there are some cases coming up that could clarify things in the WTO context).

Next up, when describing the "fragmented standards and terminology" for "less favourable treatment," he discusses what is often referred to as the "best treatment" approach:

The non-discrimination principle may also be interpreted as an obligation to grant the best treatment accorded to any domestic market participant. Following this approach the non-discrimination obligation is already breached if one individual foreign market participant receives treatment that is less favourable in comparison to any individual domestic market participant (NT) or to any foreign market participant from different origin (MFN). For instance, less favourable treatment occurs if a measure negatively affects only 1 out of 100 foreign market actors, even if 99 out of 100 domestic market actors are also negatively affected. Consequently, the non-discrimination principle becomes an obligation to treat all foreign market participants equivalent to the best treatment accorded to any ‘comparable’ domestic or other foreign market participant. Under this approach, non-discrimination has a strong liberalizing effect and far reaching consequences for the regulatory autonomy of the contracting parties, in particular if additionally the comparator clause is interpreted widely.

Here, I would suggest that the "best treatment" standard is not really a "non-discrimination" standard, because no discrimination against foreign actors exists.   He describes a situation where "a measure negatively affects only 1 out of 100 foreign market actors" and "99 out of 100 domestic market actors are also negatively affected."  If anything, there is discrimination against domestic actors (disparate impact at least).  But I don't see how you can look at this situation and say there is discrimination against foreign actors (barring some evidence of specific intent).  I'm not sure Diebold would agree with me on this point, although later he says some things that perhaps indicate that he would:

Overlap between non-discrimination and non-restriction

Depending on how each element of the non-discrimination obligation is construed, the result may be that non-discrimination overlaps with the more integrative principle of non-restriction (Beschränkungsverbot). The legal concept of non-restriction goes much further in trade liberalization than the principle of non-discrimination.

Some commentators suggest that de facto discrimination in WTO law should also be interpreted such that any measure which is more burdensome than necessary for foreign services and suppliers should qualify as discrimination in violation of Articles II or XVII GATS. Under this approach, the elements of ‘less favourable treatment’ and ‘likeness’ would have to be replaced by a test of necessity and proportionality. Yet, another way of assimilating non-discrimination to non-restriction would be to combine the ‘best of the best treatment’ approach for ‘less favourable treatment’ with a broad economic or interpretation of the comparator clause. As it would be almost always possible to determine at least one distant competitor receiving more favourable treatment, the principle of non-discrimination would in essence be transformed into an obligation of non-restriction.

I agree that there is some "overlap" here, but I think it's also the case that, to a great extent, "non-discrimination" and "non-restriction" just cover different issues.  Whether it is "non-restriction," or "best treatment," or "necessity," these principles all go beyond non-discrimination.  It's great to have a debate on what principles should be included in IEL agreements.  But I think it confuses the issue to refer to these principles in the context of non-discrimination.  Going back to his situation where 1 out of a 100 foreign actors are negatively affected, it may be that this particular actor has received unfair, unreasonable, unnecessary, overly restrictive, or just generally bad treatment.  But that's something different from discrimination.

Of course, someone might point out that I'm assuming non-discrimination is "nationality" based.  I have to concede that this is true.  My only response is that if trade and investment treaties are to contain a general non-discrimination principle that is not tied to nationality, I think that should be discussed, debated and written down in the text clearly.  As things stand now, it seems pretty clear to me that the text of all the treaties I have seen is about "nationality" based discrimination.  On the other hand, I recognize that not everyone sees it the same way, and it may be pretty clear to them that non-discrimination is not just about nationality.

Now he gets into issues of intent/purpose/motivation:

Fragmented standards and relevance of ‘regulatory purpose’

The main objective of non-discrimination obligations in international economic law is to outlaw measures which are specifically designed to protect the domestic market from foreign competition. ...

I'm pretty sympathetic to this view.  I'm not sure everyone else is, though.  My sense is that many, if not most, people get nervous about the use of intent here.

As to how intent should be included, he notes:

From a practical and pragmatic perspective it seems indifferent whether the regulatory purpose is considered under the comparator clause, the ‘less favourable treatment’ element or as a distinct and separate element. However, from a doctrinal and systemic angle it would be welcomed if the jurisprudence, or preferably the treaties themselves, would clarify whether and under which title the purpose of an allegedly discriminatory measure may be analysed. Such transparency would enhance legal security and facilitate the parties to a dispute to build their legal arguments. For clarity and structural reasons, the regulatory purpose should ideally be considered as its own legal element. However, due to the lack of a textual basis, adjudicating bodies mostly rely on the comparator clause or to a lesser extent on the element of ‘less favourable treatment’.

On this point, I would argue that the word "treatment" can be used to address issues of intent.  The following aren't necessarily the best definitions of that term, but they seem like reasonably good ones, and, more importantly, they are online, so I can link to them:

The Free Dictionary: Treatment - The act, manner, or method of handling or dealing with someone or something

Cambridge Dictionaries Online: Treat - to behave toward (someone) or deal with (something) in a particular way

Granted, neither definition talks explicitly about the intent of the actor.  Nonetheless, I see in both of them the idea that the motives of the actor are relevant.  I want to avoid taking dictionary definitions too far, so I'm not going to look up all the words in these definitions (though I admit I was tempted!).  But the references to the "manner" or "method" of "handling or dealing with," and "behave toward" or "deal with" in "a particular way," all suggest to me that the thinking of the actor is part of the concept of "treatment."

Others take a different view of this, of course.  Many people who want to include intent think it goes best in "likeness."  Along these lines, this is from para. 118 of the Corn Products NAFTA Chapter 11 decision: "there is a close relationship between whether the State intentionally discriminated on grounds of nationality and the test of like circumstances."

Finally, here is Diebold's proposal for non-discrimination:

A FLEXIBLE FACTOR-BASED STANDARD OF NON-DISCRIMINATION

Considering that the interpretation of non-discrimination obligations in international
economic law lacks coherence, which in turn creates legal uncertainty for the contracting
parties, individuals and parties to a dispute, the present section attempts to develop a factor
based approach to non-discrimination. Pauwelyn argued that the non-discrimination analysis
should treat ‘likeness’ as a mere threshold question and focus more specifically on ‘less
favourable treatment’ as the substantive test, taking into account a mix of elements. Section
III takes up this theory, suggesting that the entire non-discrimination analysis could be
viewed as a threshold question. In other words, ‘less favourable treatment’, ‘likeness’ and
other elements such as ‘so as to afford protection’ or ‘regulatory purpose’ should not be
incorporated in non-discrimination provisions as strict legal conditions which must be proven
by the complainant or the respondent pursuant to the applicable standard of review. Instead,
all the relevant elements could be viewed as soft-factors to be weighed and balanced in order
to come to an overall conclusion on whether or not a measure is discriminatory and thus
illegal.

I read this as saying that all the various elements should be considered, in terms of their degree, and then weighed and balanced against each other.  Thus, for example, the degree of disparate impact (e.g., 95% vs. 60% disproportionate disadvantage on imports), the amount of evidence showing discriminatory intent (e.g., statements of legislators, lack of connection between the measure and its purported objective), and the degree of competition between the products/services/investors at issue, should be taken into account. 

On this point, I think the tendency to separate out the various elements can sometimes obscure the big picture.  I see the "flexibility" aspect of his proposal as designed to address this problem.

Here's a little more detail on how he thinks the analysis should go:

The first analytical step should be to determine whether the measure differentiates directly on the basis of origin or on the basis of other criteria. All forms of de jure differentiations which affect the competitive opportunities to the detriment of foreign market participants constitute a strong factor pointing towards illegal discrimination. However, the respondent must have the opportunity to justify the measure by proving its legitimate policy objective and a strong nexus between the measure and the objective under scrutiny.

...

If a complainant challenges a measure which differentiates on a basis other than origin (de facto discrimination), then the analysis needs to focus strongly on the effect of the measure in a specific market situation.

...

Future non-discrimination provisions in international economic agreements should follow these examples, prompting the adjudicating bodies to assess the approximate extent of the competitive relationship by focusing on the economic theory of demand substitutability.

...

Once the approximate extent of the competitive relationship between the foreign and domestic market entity has been established, the question becomes whether there is less favourable treatment of the foreign entities. For this purpose, the adjudicating bodies need to assess the effect of the measure, both qualitatively and quantitatively.

...

A final element which may be taken into consideration is the regulatory purpose of the measure under scrutiny. Importantly, the regulatory purpose should have its own value and should not be incorporated into the analysis of the previous elements.

This last part was a little hard to summarize, so perhaps at this point, I should just suggest checking out the paper itself.

Grand River Enterprises: Discussion of National Treatment at the Hearing

Following up on some previous posts about the NAFTA Chapter 11 Grand River Enterprises dispute, the hearing in the case, held in early February, offered some interesting discussion of the National Treatment issue.

Let me first turn to Luke Peterson of the Investment Arbitration Reporter for some background:

The individual claimants, Jerry Montour, Jerry Hill, and Arthur Montour Jr., profess to be members of Native American (indigenous) tribes and seek at least $175 Million (US) for losses alleged to have been sustained by themselves and their Canadian enterprise, Grand River Enterprises Six Nations, LTD.

...

The claimants signaled their intent to pursue a NAFTA arbitration in 2003, alleging that a so-called Master Settlement Agreement (MSA) consummated between forty-six US states and four major tobacco companies impacted negatively upon the smaller-scale tobacco business of the claimants (who were themselves not party to the MSA).

The MSA was the culmination of a bid by US states to sue the major tobacco companies for tobacco-related medical costs borne by state health care budgets. Under the terms of the MSA, the four major tobacco companies were obliged to make payments in perpetuity into a central account which would then be disbursed to individual states where the companies’ cigarettes are sold.

As part of this settlement arrangement, the major tobacco companies sought concrete guarantees that smaller tobacco firms would not capitalize on the fact that only the largest tobacco companies were targeted by the US states.

Accordingly, a parallel system of escrow payments was imposed upon non-parties to the MSA, so as to ensure that they did not gain market share compared with the major tobacco companies operating under the financial strictures of the MSA.

It is this system of escrow payments – as well subsequent legislative efforts by US states to close what the US Government characterize as regulatory “loopholes” - which drew the ire of the claimants in the NAFTA arbitration. ...

It's a complicated set of facts.  Although that excerpt leaves out some important details, hopefully it was enough to make sense of the legal discussion here.  I'm not trying to apply the law to the facts, but rather just talking about the legal standard in the abstract.  For more, the various submissions are here.

Let me turn now to the hearing transcript.  For those of you scoring at home, the lawyers quoted below are Mark Feldman and Alicia Cate of the U.S. State Department's NAFTA/CAFTA-DR Arbitration Division, and Todd Weiler on behalf of the claimaints.  Also, I should note that I'm not sure I've mentioned every relevant National Treatment passage here, but I think got the main ones.

On to the substance.  I'll first note a brief discussion of intent, at p. 55 of the day 2 transcript.  There was a distinction drawn between "intending to discriminate" and "intending the result," which I'm not quite sure I followed.  If the "result" is "discrimination," I don't know if I see a real difference here.  (There's a bit more on intent at p. 20 of the day 3 transcript.)

But the main issue I want to focus on is the nature of the NAFTA Chapter 11 National Treatment obligations, in relation to concepts such as "nationality based" discrimination, "best treatment," treatment of "groups" versus treatment of "indviduals," "proportionality," and "rule of reason."  I'll quote some key passages and then talk about them.

From Day 5, pp. 74-75:

MS. CATE
...
7 I would like to focus on the most
8 glaring flaw of Claimants' Article 1102 claim,
9 which is their failure to even attempt to show
15:00:27 10 less favorable treatment, and in particular less
11 favorable treatment by virtue of their
12 nationality.
13 The parties to this dispute agree that
14 discriminatory intent is not a requisite condition
15 here. Where the parties to this dispute disagree
16 is with respect to whether the test includes less
17 favorable treatment accorded on the basis of
18 nationality. However, the three NAFTA parties as
19 well as Tribunal's interpreting Article 1102 of
15:00:54 20 NAFTA have come to the same conclusion. What is
21 required is that less favorable element includes a
22 showing by the Claimant of discrimination whether
PAGE 1789
1790
1 de jure or de facto on the basis of nationality.

...

14 The NAFTA parties often file
15 interpretive submissions under NAFTA Article 1128
16 and have done so in a uniform and consistent
17 manner demonstrating both subsequent agreement and
18 subsequent practice on the issue whether Article
19 1102 requires showing by the Claimant of
15:02:00 20 discrimination on the basis of nationality.

...

2 MS. CATE: Claimants must therefore
3 demonstrate that a measure, either on its face or
4 as applied favors nationals over non-nationals.
5 Based on legal argument made on day two
6 of this hearing, it is clear that Claimants and
7 the United States agree on the following: You
8 don't need to look for specific intent, that the
9 result is manifest in the facts.
15:05:24 10 Claimants have not even attempted to
11 make this showing of less favorable treatment on
12 the basis of nationality, nor could they on the
13 facts of this case.

So for the U.S., the discrimination to be shown under a NAFTA Chapter 11 National Treatment claim is based on "nationality":  "Claimants must therefore demonstrate that a measure, either on its face or as applied favors nationals over non-nationals."

By contrast, here's the view of the claimants.  From Day 7, pp. 15-16

4 MR. WEILER: One question that did come
5 up yesterday which I thought would be important to
6 cover is the question of treatment for whom.
7 The Respondent takes the position that
8 it's about a de facto class of investors,
9 Canadians, that its treatment to Canadians as
08:53:16 10 opposed to treatment to the investor, and I would
11 refer you to the Pope & Talbot Tribunal's very
12 lengthy consideration, very detailed
13 consideration, 37 paragraphs, thinking about this
14 particular issue, and I think its conclusions are
15 very powerful. The NAFTA plainly contemplates a
16 single investors invoking the national treatment
17 requirements to obtain damages from a party where
18 particular governmental measures have accorded its
19 investment less favorable treatment.
08:53:50 20 The Canadian Government took a position
21 in that case very similar to the Respondent in
22 this case. That position is, again, that it's
SHEET 15 PAGE 2473
2474
1 somehow a weighing of groups of investors, that it
2 is all Canadian investors or it's all foreign
3 investors. We would submit that that's not the
4 test, and we would submit that there's good reason
5 for that.
6 We think that Paragraph 72 of the Pope
7 & Talbot Tribunal is right on spot, simply to
8 state this approach is to show how unwieldy it
9 would be and how it would hamstring foreign-owned
08:54:26 10 investments seeking to vindicate their 1102
11 rights.

Thus, the claimants don't like the "group" test, that is, "a weighing of groups of investors, that it is all Canadian investors or it's all foreign investors."  Instead, they argue, it's about the "best treatment," in the sense that individual foreign investors should get the "best treatment" available to any other investor:

3 MR. WEILER: The national treatment
4 test, the 1102 test, is essentially an equal
5 opportunity test. The question is whether or not
6 an individual who qualifies by nature of
7 nationality to be able to ask for the test, to ask
8 for the treatment, that national says, I deserve
9 the best treatment that someone else is getting.

This part will likely be familiar to people who have come across the individual versus group approach to national treatment at the WTO.  Basically, the question is whether you compare (1) the treatment given to foreign investors as a whole to that given to domestic investors as a whole (the group test), or (2) the treatment of an individual foreign investor to that given to another investor (possibly a domestic investor, possibly any investor).

The claimants also add some additional elements:

12 MR. WEILER: The next step after that
13 is, since we know that they're getting better
14 treatment -- the test ends up becoming a balancing
15 requirement -- or you can call it balancing
16 proportionality, you can call it a rule of reason,
17 whatever language you want to use -- we see it in
18 constitutional law and we see it in trade law, we
19 see it in many places.

So, for the claimants, there is also "proportionality" and "rule of reason" as well.

I'm not sure how all of these standards -- best treatment, proportionality, rule of reason -- fit together precisely.  Are they alternative approaches?  Different versions of the same test?  All apply together?  I've always thought that standards such as proportionality and rule of reason could be used as elements to prove intent (e.g., if the measure does not accomplish what it is purported to, this is evidence of protectionist intent), but I don't think that is what is meant here.

And finally, one more quote, from p. 41 of the same day:

4 MR. FELDMAN: This is from Corn
5 Products versus Mexico. The Tribunal in that case
6 found while the existence of an intention to
7 discriminate is not a requirement for breach of
8 Article 1102 and both parties seem to accept it's
9 not a requirement, where such intention is shown
10:58:50 10 that's sufficient to satisfy the third
11 requirement, that being nationality based
12 discrimination, but the Tribunal would add even if
13 intention to discriminate had not been shown, the
14 fact that the adverse effects of the tax were felt
15 exclusively by the HFCS producers and suppliers,
16 all of them foreign owned to the benefit of the
17 sugar producers, the majority of which were
18 Mexican owned, would be sufficient to establish
19 that the third requirement of less favorable
10:59:20 20 treatment was satisfied.
21 So through an analysis of the facts on
22 the ground, if it becomes clear there is, in fact,
SHEET 41 PAGE 2577
2578
1 a nexus of the treatment at issue and the
2 nationality of the Claimant, then the Claimant can
3 show, in fact, there has been nationality based
4 discrimination, but Claimants make no attempt to
5 argue that in this case and with the facts on the
6 ground, they cannot because as we've heard in
7 written submissions and oral testimony in this
8 hearing, these measures do not discriminate on the
9 basis of nationality.

Again, the U.S. focus is on "nationality."  As they put it here: "So through an analysis of the facts on the ground, if it becomes clear there is, in fact, a nexus of the treatment at issue and the nationality of the Claimant, then the Claimant can show, in fact, there has been nationality based discrimination."

Now for a few brief comments.

First, it would be great if this issue could get resolved one way or the other.  In my view, it's a bad thing to have so much confusion surrounding a core legal standard such as National Treatment.  Too much uncertainty regarding the scope of international trade and investment rules is bad for the system.

Second, I'm going to quote what I said in an earlier post:

I think I understand the claimants' argument here, but I just want to be sure, so let me take an extreme situation to illustrate the impact of this approach.  Let's say you have 10 foreign investors and 10 domestic investors (all in "like circumstances").  Country A adopts a measure that is non-discriminatory on its face.  However, as it turns out, certain investors do worse than others under the measure.  In particular, 9 domestic investors and 1 foreign investor receive less favorable treatment than the other 9 foreign investors and the other 1 domestic investor.  Thus, most foreign investors do better under the law than most domestic investors.  But that 1 foreign investor who did badly brings a NAFTA Chapter 11 claim alleging a violation of national treatment.  As I understand it, the argument here would be that this 1 foreign investor should succeed on its national treatment claim because it is worse off than at least one competitor.

Let me just add that if an individual comparison forms the basis for the National Treatment standard, it's a pretty broad one (that is, there will be a lot of violations found).  The same probably goes for a standard based on "proportionality" or "rule of reason."

Finally, what is "nationality" based discrimination?  It seems to me you could have "nationality" based discrimination on the basis of one or both of "intent" and "effect."  Along these lines, on day 3, there was a bit of discussion about whether the NAFTA text supports a view of National Treatment as "nationality" based.  The following quote is on p. 20, and is from Todd Weiler:

1 And that is something that the Tribunal
2 will have to weigh based on all the evidence they
3 have. So the one thing that's pretty -- that is
4 clear though from the case law, to the extent that
5 you feel they want to be guided by it, is that
6 intent to discriminate on the basis of nationality
7 is not in the text and it's not in the case law.
8 It's probably because it's not in the
9 text. Though my friends, and my friends from the
10 other NAFTA parties in the cases that I've been
11 involved in, will continue to say that it is
12 discrimination on the basis of nationality. Thus
13 far, it appears that the vast majority of
14 Tribunals don't agree with them. And I would
15 submit you shouldn't agree with them either
16 because it's not on the face of the text. The
17 text doesn't require it.

It's not clear to me exactly what the argument is here.  Is it that "intent to discriminate on the basis of nationality" is not in the text?  Or is it that "discrimination on the basis of nationality" is not in the text?  While you might find that either intent or effect is not required by the text, I'm not sure how you get around "nationality," in some sense, being required, given that the title of Article 1102 is "National Treatment.  But what exactly "nationality" based discrimination means is open for debate. 

Merrill & Ring v. Canada: More About NAFTA Ch. 11 Non-Discrimination Standards

Continuing with my occasional (although becoming somewhat frequent) posts on NAFTA Chapter 11 non-discrimination standards, there is a new decision to talk about: Merrill & Ring v. Canada.  The basic facts, from the Tribunal:

26. This case concerns a claim by the Investor in respect of the implementation of Canada‘s Log Export Regime to the Investor‘s timber operations in British Columbia and the requirement that any of its exports be subject to a log surplus testing procedure, among other regulatory measures.

Luke Peterson of the Investment Arbitration Reporter describes the case as follows:

The U.S. firm had contended that Canada imposed restrictions on the export of logs from Canada to the United States, and that these restrictions obliged the company to sell its products in Canada for less than they could fetch if exported to the United States. The claimant also objected to the administration of the log export regime which was viewed as exerting unfair, un-transparent and discriminatory effects.

With regard to the national treatment claims, the investor's arguments are at paras. 60-68 and Canada's arguments are at 69-78.  Here are some key extracts the Tribunal's summary of the investor's arguments (much of the focus was on "in like circumstances"):

61. It is argued in this connection that the Investor is in "like circumstances" with log producers that export logs from other parts of Canada and from other parts of British Columbia, as is also in "like circumstances" with other log exporters in that province, including those located in coastal areas. All these other log exporters are either not subject to the Log Export Control regime as practiced by Canada in British Columbia or subject to less restrictive regulatory measures.

62. This different treatment is, in the Investor‘s argument, particularly evident with respect to the unavailability of standing exemptions for its operations. Those benefiting from such exemptions have a significant advantage in treatment as opposed to those that have been excluded, such as the Investor. These advantages result from the fact that the producer knows in advance that it will be able to export its logs and can thus enter into supply contracts with its customers, for which it will be able to obtain the best market price, it is not subject to the surplus test and thus free from "blockmailing", and its products will not be subject to the exposure to the natural elements resulting in deterioration and infestation.

...

64. ... the Investor asserts that treatment ought to be compared with that accorded to domestic investments in the same economic or business sector, which is to be broadly understood, including in particular the requirement to provide for competitive opportunities. It is argued in this respect that in view of NAFTA‘s objective of promoting conditions of fair competition in a free trade area, the equality of competitive opportunities is an essential element of the national treatment standard. ...

65. In the Investor‘s submission, the concept of "like circumstances" does not mean that circumstances need to be identical and that even if the standard laid down in the Methanex decision is followed, so as to compare an investor with a domestic investor in an identical product market, in the instant case the test is satisfied because the product market for all comparisons is that of log producers.

...

67. The fact that the Investor is in "like circumstances" with log producers in Alberta, but subject to a restrictive regulatory export regime which does not apply to the latter, should be enough to establish that national treatment has not been observed. In addition, the Investor, as a producer in the British Columbia coast, is subject to stricter harvesting and sorting requirements than those that apply in the British Columbia interior. The Investor also asserts to be in "like circumstances" with producers in the British Columbia coast, many of which are subject to the more lenient conditions of provincial regulations. ...

The Tribunal's reasoning is at paras. 79-94.  I'm not going to go through all of the reasoning; rather I'll just quote some parts I found interesting and talk a bit about them.

First up, the role of intent:

80.  The Tribunal in S.D. Myers related "treatment" to a requirement of a practical impact on the investment and not merely a motive or intent so as to produce a breach of Article 1102. While motive or intent cannot be excluded from the scope of Article 1102 beforehand, it is not an issue that arises in the instant case.

I always like talking about intent in the context of non-discrimination, and I was glad to see that this Tribunal would not exclude intent entirely.  But nothing going on with the issue in this case, unfortunately.

Next, an important issue related to the relevance of different levels of government in the context of "in like circumstances":

81. An additional issue concerning treatment that the Tribunal also needs to consider is whether the treatment accorded to the Investor by the national government can be compared to that accorded under British Columbia jurisdiction. Canada argues in this respect that Article 1102(3) specifically distinguishes the treatment accorded by a state or province from that of the national government and, thus, the two cannot be compared.

82. Despite the fact that, on occasion, concurrent jurisdictions relating to the same activity might make that distinction difficult, as in some respects the instant case appears to reflect, the Tribunal considers the argument made by Canada correct.  Treatment accorded to foreign investors by the national government needs to be compared to that accorded by the same government to domestic investors, subject to meeting the requirement to be in "like circumstances", just as the treatment accorded by a province ought to be compared to the treatment of that province in respect of like investments.

I'm not sure yet what I think about this aspect of the reasoning.  I suppose it depends in part on what exactly the claim is.  If the claim relates entirely to the actions of the national government, then I think I agree that sub-national government actions would not be relevant.  But if it is the overall treatment resulting from the actions of various levels of government, it might not be so easy to separate out the different actions.  The issue came up again later in the reasoning:

89. Having decided that the proper comparison is between investors which are subject to the same regulatory measures under the same jurisdictional authority, which in the instant case is the comparison between foreign and domestic investors subject to Notice 102 and the national jurisdiction of the Canadian government, the Tribunal must now determine which is the appropriate comparator for the purposes of the treatment accorded to investors "in like circumstances" under Article 1102.

90. To the extent there are investors in identical circumstances to be compared, this makes it unnecessary to resort to the Methanex alternative choice noted above of finding investors in the most like circumstances. Such identically situated investors are those log producers operating on lands under federal jurisdiction in British Columbia and subject of course to the same requirements under Notice 102. ...

91. Canada has persuasively argued that the Investor must be compared to other log producers subject to Notice 102 and not to producers in other provinces, notably Alberta, or to producers that are operating under the provincial regulations. As some of the Investor‘s operations are located in provincially regulated lands, these ought to be compared with those operations of similarly located log producers, whether in respect of the surplus test or of harvesting and sorting requirements. Some sub-categories of provincially regulated operations, such as producers in remote areas of British Columbia, which is also the case of some of the Investor‘s operations, ought to be compared within that sub-category.

...

93. ... In all the comparisons that are made within the appropriate category, the treatment the Investor is accorded is identical to that accorded to domestic investors in the same category. ...

The basic idea, if I follow this correctly, is that the companies subject to particular regulations (e.g., federal or provincial) should be grouped together, and compared within the category (federal to federal, provincial to provincial).  I see the argument, but I'm not sure I'm convinced that companies that fall into different regulatory categories are never in "like circumstances."  However, I have a hard time reaching a firm conclusion on the point in the context of this case, mainly because this is in part a factual question and I'm not all that clear on the facts here.  I can imagine a situation where it is the overall regulatory regime, including both national and sub-national laws, that is at issue, and thus the categories might not be relevant for the comparison.  But I'm not sure this case matches that situation.

Now a bit of talk about whether to look at the "best treatment" available:

93. ... In all the comparisons that are made within the appropriate category, the treatment the Investor is accorded is identical to that accorded to domestic investors in the same category. Here, there is no issue as to which is the best treatment available to an investor, such as was discussed in Pope & Talbot, since the treatment here is the same in each category of comparison.

This "best treatment" point is another issue I would have liked to have seen discussed, as it is important for the scope of the national treatment standard.  Nothing got resolved here -- it will have to wait for another case.

Finally, the last paragraph, which for me was the most interesting part:

94. The Tribunal turns lastly to the issue of whether the purpose of Article 1102 is to prevent nationality-based discrimination as discussed in Feldman. In that case, the Tribunal concluded that the concept of national treatment in Article 1102 "is designed to prevent discrimination on the basis of nationality, or by 'reasons of nationality‘". While nationality-based discrimination would make a finding of breach of national treatment unavoidable, some argue that this is not the only aim of the concept of national treatment under Article 1102. They would say that, even in the absence of discrimination, a differentiated treatment which is arbitrary and unjustified might qualify as a breach of national treatment. Thus discrimination might entail considerations other than nationality. However, in the instant case there is not the slightest evidence that any of the measures discussed might be based on considerations of the nationality of the Investor. As concluded above, nor is there any differentiated treatment on other grounds among the appropriate categories of comparison. Accordingly the Investor‘s Article 1102 case must fail.

Parsing the things people say about non-discrimination can be extremely difficult.  I've been reading some old GATT cases recently, and I often find myself thinking, "What did they mean by that?"  Sometimes the same phrase can be used by different people to refer to different conceptions of national treatment.  Also, the different conceptions can be hard to define.  As a result, it's not always clear what a panel/tribunal has in mind.

Here, the Tribunal was somewhat clear in distinguishing between two approaches to national treatment, but I do have some questions nonetheless.

First, the Tribunal refers to "nationality-based discrimination."  I'm not sure everyone uses this term in the same way.  It could mean: (1) de jure discrimination based on nationality, or (2) de facto discrimination where there is evidence of intent and effect, or even (3) de facto discrimination where there is a clear disparate impact, or possibly even (4) something else entirely.  It's not clear to me what exactly the Tribunal had in mind here.

Second, the Tribunal also mentions "differentiated treatment which is arbitrary and unjustified."  It notes that some people would find a national treatment violation in this situation.   I think what is meant here is that an individual investor gets really bad treatment in comparison to the treatment received by some other investor (domestic or foreign).  This constitutes a violation even though none of the standards for "nationality-based discrimination" are met.  Here, my question is, is this basically the same standard as an "individual product" approach in GATT/WTO jurisprudence, where any less favorable treatment for a particular foreign product, as compared to an individual domestic product, leads to a finding of violation?  Or is it something different?

Moving to the conclusion, the Tribunal rejected the claims under either standard.  With the nationality-based argument, it said there was no evidence; on the "differentiated treatment" point, it went back to its "categories" reasoning.  As a result, it didn't have anything more to say about all this.

Summing up, it seemed to me that this Tribunal went with a narrow legal standard for national treatment, under which it is difficult to prove a claim of violation.  The key was its reliance on the different categories as part of the "in like circumstances" analysis.  This provided a good route for the panel to reject the claim, without having to get into some of the other national treatment issues noted above.

GATT Article I:1 (MFN) and "Conditions" for Lower Tariffs

From a recent article in The Australian:

China yesterday raised the prospect of tariffs and new policies to stem growing uncertainty in its steel industry, which faces iron ore price hikes of up to 90 per cent this year.

China's Commerce Ministry said yesterday it was preparing a "new policy" to deal with the issues and would support its world-leading steel sector in its bid to keep the iron ore price -- which has recently hit record spot levels -- lower and less volatile.

Ministry of Commerce spokesman Yao Jian told media in Beijing that commerce and industry ministries would provide necessary support to steelmakers, which could include trade measures and policies.

He repeated China's mantra that its position as the world's largest buyer of iron ore meant it should get lower prices.

China wants to stick with annual price contracts, but the world's main iron ore producers want to move to a quarterly system more closely aligned with market spot prices.

Analysts predicted the government would introduce preferential tariffs for long-term contracts.

...

"There are not many or radical measures the Commerce Ministry can take, without possibly violating WTO regulations," one analyst close to the China Iron and Steel Association, who asked not to be named, told The Australian .

"My personal guess is that since the ministry stressed that it strongly supports long-term prices, it may issue preferential tariffs for long-term contracts," the analyst said.

So if I understand this correctly, China might grant lower tariffs on iron ore imports where long-term contracts with suppliers have been signed.

This proposal has me thinking about the scope of GATT Article I:1, which I just recently taught a class about.  Article I:1 states:

With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, and with respect to all matters referred to in paragraphs 2 and 4 of Article III, any advantage, favour, privilege or immunity granted by any WTO Member to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other WTO Members.

One of the issues we discussed was the meaning of "unconditionally" towards the end of the provision.  We talked about cases such as Indonesia - Autos, Canada - Autos, EC - Tariff Preferences and Belgium - Family Allowances.  In all of those cases, there were circumstances under which some entities paid a lower duty than others.  These different circumstances could be thought of as "conditions" -- if certain conditions are fulfilled, a lower tariff rate applies.  Without going into too much detail, there seems to be a split among the various panels as to how the differential application of tariffs should be considered in this context.  In Canada - Autos, the panel seemed to think the issue was purely whether discrimination exists, and rejected an argument relating to "conditions."  (See paras. 10.18-50)  (The recent Colombia - Ports of Entry panel cited to Canada - Autos and took the same approach.  See paras. 7.358-366)  By contrast, the EC - Tariff Preferences panel appears to have taken the view that the existence of any "condition," in and of itself, violates Article I:1 (although it talked about non-discrimination as well).  (See paras. 7.58-60)  It's less clear what the Indonesia - Autos and Belgium - Family Allowances panels thought of this issue.  Arguably, their statements could be taken either way.  (See paras. 14.143-147 of Indonesia - Autos and para. 3 of Belgium - Family Allowances).

Getting back to the iron ore example, let's say that China grants lower tariffs for iron ore imports where there are long-term contracts.  In a sense, long-term contracts could be deemed a "condition" for the lower tariffs.  Thus, under one view, such a measure would violate Article I:1 for that reason alone.

In the alternative, taking the Canada - Autos / Colombia - Ports of Entry approach, you could look at whether establishing lower tariffs on this basis has a discriminatory effect on certain countries.  I'm not sure where all of China's iron ore imports come from, and what the impact on specific countries would be, so the result under this approach is more uncertain. 

Discrimination Arguments in the AbitibiBowater NAFTA Chapter 11 Claim

Taking a quick break from the big picture questions in the Great Trade Debate, I'm going to bring up a very narrow and technical trade issue:  How to apply a non-discrimination standard in the NAFTA Chapter 11 context.

As was widely reported last week, AbitibiBowater is going ahead with its NAFTA Chapter 11 claim in relation to an expropriation of certain of its assets by the Canadian Province of Newfoundland.  When there's a big NAFTA Chapter 11 case going on, I always go straight to the non-discrimination aspects.  I recognize, of course, that often the other claims are more important (as is likely in this case), but non-discrimination is what interests me, and here the claims raise some fundamental issues as to how non-discrimination is to be established.  Here's a short statement of the argument, from the Notice of Arbitration and Statement of Claim (obviously, more detail will be coming in the briefs):

96. NAFTA Chapter Eleven prohibits discrimination against investors of the other State Parties, vis-a.-vis both nationals or investors of other States. Under Article 1102(2), "[e]ach Party shall accord to investments of investors of another Party treatment no less favorable than it accords, in like circumstances, to investments of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments." The same principle is found in Article 1103(2), but in reference to "investment of investors of any other Party or of a non-Party." 

97. In effect, these NAFTA provisions make it illegal for Canada, through the Province, to discriminate against a U.S. investor's activities in Canada, whether by comparison to a local investor or to an investor from any other country. The Act undoubtedly breaches NAFTA's non-discrimination guarantees, by explicitly targeting and singling out the Canadian operations of AbitibiBowater, a single foreign investor, rather than serving as a measure of general applicability. Although the Province may have a right under NAFTA to expropriate in the public good subject to certain conditions, it cannot discriminate as between the owners of such assets by unilaterally imposing acts of retaliation on one investor, while treating other investors more favorably. Certainly, AbitibiBowater is not the first employer in the Province to close a facility in hard economic times. Where the Province has not attempted in other cases to penalize companies by unilaterally seizing their remaining assets and cancelling their remaining legal rights, it is clearly discriminating against AbitibiBowater. 

98. Discrimination is also apparent in the Province's approach to compensation for the expropriation. The Act limits AbitibiBowater's rights to be made whole while the Province has publicly stated that it plans to insulate AbitibiBowater's lenders and independent business partners from any adverse effects on their business interests. Discrimination is further apparent, as previously discussed, in the Act's attempt to preclude AbitibiBowater from accessing the courts or continuing with pending claims, while all other investors in the Province still retain the full panoply of judicial options as recourse for any ill treatment.

I think this argument can be loosely summarized as follows:  The Province's actions in relation to the expropriation discriminate against AbitibiBowater, and AbitibiBowater is foreign (partly at least), hence the actions discriminate against a foreign investor, in violation of Article 1102 (and also discriminate among investors of different countries, in violation of Article 1103).  I think that's a reasonable characterization of the argument, but feel free to correct me.  I'm not trying to frame it in an unfair way; it's just hard to get the wording exactly right.

I've talked about this issue a number of times, on this blog and elsewhere (e.g., here and here).  I'm very curious to see how this NAFTA Chapter 11 tribunal addresses the argument, as it is extremely important for defining the boundaries of non-discrimination in the investor-state context.  Some questions that I would very much like to see answered (focusing on National Treatment, rather than MFN, but the issues are similar):

-- Under Article 1102, is it the treatment of an "individual" investor that is most important, or is it the overall treatment of the "group" of foreign and domestic investors that is the key?  And if the latter, how do you identify that "group" here?  Perhaps along the same lines as defining the group, what are the "like circumstances" here?

-- With regard to the "individual" investor theory, is it the case under this approach that any time you single out a particular foreign investor with some kind of negative government action you have violated the NAFTA Chapter 11 National Treatment provisions?

-- There has been a lot of talk about "individual" versus "group" theories of non-discrimination in the WTO context.  Will the parties and the tribunal cite to the various WTO-related journal articles and cases?  Or are the situations too different for the WTO arguments to be relevant?  And is the NAFTA Chapter 11 jurisprudence extensive enough at this point that the parties will be too busy arguing about what it all means, and thus will not bother with insights from the WTO?

More on the Wisconsin Diploma Privilege

Following-up on this post, we may eventually get a decision related to whether Wisconsin's "diploma privilege" violates the dormant commerce clause.  From the National Law Journal:

A federal appeals court has rekindled a challenge to a Wisconsin rule that allows graduates of the state's two law schools to become licensed attorneys without taking the state bar examination.

The U.S. Court of Appeals for the 7th Circuit on July 9 remanded a class action launched by two graduates of out-of-state law schools who allege that Wisconsin's "diploma privilege" rule is unconstitutional.

...

Wisconsin admits graduates from Marquette University and the University of Wisconsin Law School to practice without requiring them to take the Wisconsin bar exam. Only one other state, New Hampshire, admits graduates who haven't taken a bar exam — in that case, attorneys who have completed a special program at New Hampshire's only law school, Franklin Pierce Law Center.

Wisconsin requires graduates from outside the state to take the state bar exam in order to practice. It also permits bar admission without an exam for attorneys who have practiced for at least five years in another state.

...

The[] lawsuit alleges that the diploma-privilege rule unfairly restricts the mobility of out-of-state graduates in violation of the commerce clause in Article 1 of the U.S. Constitution.

...

Without addressing the merits of the arguments, the appeals panel held that the validity of the parties' arguments remained unclear because of the lower court's dismissal. Evidence was necessary to determine whether the diploma privilege creates an arbitrary distinction between in-state graduates and out-of-state graduates, it said. Such a determination, the court concluded, would help the courts weigh the burden on interstate commerce.

Judge Richard A. Posner wrote the opinion. Also on the panel were judges Kenneth F. Ripple and Diane P. Wood.

Here's an extract from the decision:

For suppose—a supposition not only consistent with but actually suggested by the scanty record that the plaintiffs were not allowed to amplify—that Wisconsin law is no greater part of the curriculum of the Marquette and Madison law schools than it is of the law schools of Harvard, Yale, Columbia, Virginia, the University of Texas, Notre Dame, the University of Chicago, the University of Oklahoma, and the University of Northern Illinois (which happens to be within a stone’s throw of Wisconsin, as are the three law schools in Minneapolis). That would suggest that the diploma privilege creates an arbitrary distinction between graduates of the two Wisconsin law schools and graduates of other accredited law schools. And it is
a distinction that burdens interstate commerce. Law school applicants who intend to practice law in Wisconsin have an incentive to attend one of the Wisconsin law schools even if, were it not for the diploma privilege, they would much prefer to attend law school in another state.

Cash for Clunkers and MFN

Over at Opinio Juris, Roger Alford notes that the "Cash for Clunkers" program has seemed to favor non-U.S. car-makers such as Toyota and Honda over the U.S. car-makers (with the caveat that some Toyota and Honda cars are made, in part at least, in the U.S.):

consumers are showing a preference for imported cars when they purchase under the program, with Toyota (17%) and Honda (14%) leading the way. The top ten sellers under the program are Ford Focus, Honda Civic, Toyota Corolla, Toyota Prius, Ford Escape, Toyota Camry, Dodge Caliber, Hyundai Elantra, Honda Fit, and Chevy Cobalt. In other words, six of the top ten sellers are foreign cars (although the Camry is built at home and abroad).

He notes that the preference for imports is fine under WTO rules because "You can favor imports, but not disfavor them."

The underlying data is here.  After looking at this data, I wondered whether any country could make an MFN claim:  Are there particular countries that are worse off than others under the program?  I suppose what you would have to do is compare the break-down of purchases under the program with the breakdown of purchases more generally, to see whether there is a disparate impact on any particular country.  Of course, a disparate impact of this sort, if it existed, is not necessarily sufficient to find a violation of GATT Article I:1.  There are a number of competing views out there on how different aspects of non-discrimination standards should be applied, and the likelihood of finding a violation depends in part on which approach you take.  (How big the disparate impact is may also be relevant).

U.S. Beverages Taxes

Taxes on beverages have a long and interesting history in GATT/WTO dispute settlement.  I hope Congress keeps this in mind as they consider taxing soda and alcoholic beverages to help pay for health care reform.  See here, here and here for details.  The last article notes that the soda tax "wouldn’t apply to diet soda or real juice."  And with alcohol, there would be separate taxes on beer, wine and hard liquor.  So, it sounds like there will be lots of distinctions made between similar products, which always runs the risk of triggering a discrimination claim.  As well-known blogger Ann Althouse put it in relation to the soda tax:

It's just sugar. Lots of things are full of sugar. Why single out the watery versions of sugar? And why be so sure that diet soda is not worse? Quite aside from the strange chemicals, diet soda seems to free many people to pig out on other fattening foods. Our terrible obesity problem correlates with the consumption of diet soda, not sugar.

I doubt she was thinking about international trade obligations when she wrote that, but it's not too difficult to imagine how this point could be used as part of the basis for a WTO claim.

NAFTA Non-Discrimination: The Corn Products Decision

Turning back to non-discrimination under NAFTA Chapter 11, which has become a recent obsession of mine, in addition to Grand River Enterprises, there is another NAFTA Chapter 11 case dealing with non-discrimination standards that is worth talking about:  The Corn Products case (discussed on this blog by Luke Peterson just the other day).  The nice thing about this one, in contrast to Grand River, is that there is an actual decision, which was just recently released publicly.  Luke's general summary of the case is here.  I'm going to focus on the non-discrimination parts, although there is a lot more of interest in there.

At the outset, the decision sets out the following legal standard for non-discrimination:

117. First, it must be shown that the Respondent State has accorded to the foreign investor or its investment "treatment ... with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition" of the relevant investments. Secondly, the foreign investor or investments must be "in like circumstances" to an investor or investment of the Respondent State ("the comparator"). Lastly, the treatment must have been less favourable than that accorded to the comparator.

I'm interested in the last part:  "less favourable treatment."  I should note, however, that the reasoning blurs this aspect with the second one, "in like circumstances."  As the arbitrators themselves say in para. 118, "there is a close relationship between whether the State intentionally discriminated on grounds of nationality and the test of like circumstances."  To deal with this, what I'm going to do is just quote the key portions, regardless of which factor they were discussed under, then talk about them all together.  Here's the quote:

132. The present case might be analogous to GAMI if HFCS had been produced in equal (or nearly equal) volume by Mexican-owned and US-owned firms. In that circumstance, a measure designed adversely to affect the market for HFCS in order to protect the position of the sugar industry could not have been held to violate the requirement of national treatment. But the uncontradicted evidence in this case was that production of HFCS in Mexico was wholly concentrated in foreign-owned enterprises (predominantly CPI, which had of the HFCS share of the market for soft drink sweeteners), whereas production of sugar was largely carried out by Mexican nationals (with the Mexican State itself owning a substantial part of sugar production). Thus, the effect of what was, in substance, a special tax on HFCS was the distortion of the market in favour of domestic suppliers and to the disadvantage of the foreign investors protected by Chapter XI of the NAFTA.
...

136. Moreover, in marked contrast to Methanex and GAMI, the present case - concerns a measure the purpose of which was to affect the competition between the products produced by the foreign and domestic investors and to afford a considerable competitive advantage to the latter. The competition between the two products - HFCS and sugar - was at the heart of the measure adopted. By contrast, in Methanex, it was not the competition which concerned those taking the measure but the environmental effect of one of the products. In GAMI the competition between the products was largely irrelevant. In these circumstances, the Tribunal cannot escape the conclusion that the producers of like products which were directly competitive were in like circumstances as regards a measure designed expressly for the purpose of affecting that competition.

137. It is also relevant that, again in contrast to GAMI and Methanex, nationality was a highly pertinent factor in the imposition of the tax. In saying that, the Tribunal does not endorse the submissions made by CPI based upon the remarks of individual members of the Mexican Congress about the purpose of the legislation. We have doubts about the extent to which such comments can legitimately be treated as evidence of the intent of the Legislature as a whole, let alone of the State itself, in imposing a measure of this kind, although we do not need finally to decide that point. Rather, it is the countermeasures justification advanced by Mexico which we consider important. If the HFCS tax was intended as a countermeasure targeted against the United States, it had to have been crafted in such a way that it bore especially heavily upon US interests, otherwise it would have had no chance of being effective or of being a lawful countermeasure. As counsel for Mexico said in the course of the oral hearing, "the model Countermeasure is one that causes pain". But that pain has to be caused to the State against whom the countermeasure is targeted, in this case the United States. While the Tribunal will consider whether the HFCS tax amounted to a lawful countermeasure in the next Part of the Decision, we must at this stage say that the very fact that such a justification has been advanced amounts to a recognition by Mexico that HFCS producers and suppliers were targeted, in part at least, because of the extent of their links to the United States.

138. That factor is also decisive for the third part of the test set out in paragraph 117, above. It demonstrates an intention on the part of Mexico to treat CPI differently because of its nationality. While the existence of an intention to discriminate is not a requirement for a breach of Article 1102 (and both parties seemed to accept that it was not a requirement), where such an intention is shown, that is sufficient to satisfy the third requirement. But the Tribunal would add that, even if an intention to discriminate had not been shown, the fact that the adverse effects of the tax were felt exclusively by the HFCS producers and suppliers, all of them foreign-owned, to the benefit of the sugar producers, the majority of which were Mexican-owned, would be sufficient to establish that the third requirement of "less favourable treatment" was satisfied.

I found the discussions of both intent and effect to be very interesting.  Both are somewhat controversial in the WTO context.  Here, it is interesting to compare the arbitrators' views to those taken in WTO decisions.

With regard to intent, the arbitrators were not afraid to talk about the purpose of the measure.  In this regard, they said that evidence of discriminatory purpose was sufficient to prove "less favourable treatment."  This seems to me to go further than WTO panels/Appellate Body have.  There has been some talk about purpose there, but I can't recall them going as far as saying intent alone was sufficient to show less favorable treatment.  On the other hand, the arbitrators here made clear that they were skeptical of evidence that was based on statements by individual legislators.  This sounds a lot like some of the statements in the Japan and Chile Alcohol cases. 

As to effect, the arbitrators seemed to view the required effect as something based on an overall comparison of all foreign investors with all domestic investors in "like circumstances."  To me, this approach seems to be parallel to what I see as the trend in WTO dispute settlement, and is at odds with the view that the treatment of an individual foreign investor or foreign product is all that needs to be looked at.  As a result of this finding, the similar issues in the Grand River Enterprises case become even more interesting.  Will the Grand River arbitrators follow this approach?  Or will they go a different way?

A Trade in Services Dormant Commerce Clause Case

Someone is challenging Wisconsin's diploma privilege as a violation of the dormant commerce clause:

Wisconsin’s diploma privilege for graduates of the law schools at Marquette University and the University of Wisconsin may be in danger, at least if the Seventh Circuit reviews the merits of the privilege.

Two of the judges at oral argument on Tuesday called the state’s justification for the privilege “fiction.”

Christopher L. Wiesmueller, a graduate of Oklahoma City University Law School, and an attorney with Kuchler & Cotton Law Offices in Waukesha, is challenging the privilege as a violation of the dormant commerce clause, by treating the in-state law schools and their graduates more favorably than those from out-of-state.

It pretty clearly has a discriminatory effect, and it seems that the judges were not impressed by Wisconsin's justification.

The Latest from the Grand River Case

I've been blogging a bit about NAFTA Chapter 11 non-discrimination standards (see here and here) by following the parties' submissions in the Grand River Enterprises case.  The claimants' reply memorial is now available here.  There's not too much for me to discuss in this latest brief.  There's some talk about the role of intent and which investors are comparable, but not much on whether a "discriminatory effect" on foreign investors is required and how the existence of such an effect should be determined.  We'll see if the U.S. has anything more to say in its next brief.  See pages 53-67 for all the details.

More on NAFTA Chapter 11 Non-Discrimination

I did a recent post discussing NAFTA Chapter 11 non-discrimination standards, in the context of the Grand River Enterprises case.  In response, I got a number of helpful comments, which made clear to me that there was a lot I did not know about NAFTA Chapter 11 non-discrimination standards.  Rather than give up on the issue, though, I'm going to press ahead in the hopes of learning more!

To this end, let me turn now to the U.S. counter-memorial in the Grand River Enterprises case (my earlier post related to the Claimant's memorial).  Before doing so, though, for the sake of providing some background, let me briefly summarize the parties' positions.  The U.S. argues that the national treatment provision of Chapter 11 should focus on whether there is "a disproportionate benefit for nationals over non nationals."  That is, the overall treatment of foreign investors should be compared to the overall treament of domestic investors who are in "like circumstance."  By contrast, the claimants argue that the treatment of a single foreign investor as compared to any other investor is all that is relevant.  If any individual foreign investor is treated less favorably than a competitor, there is a violation.

Getting into the details a bit more, in its counter-memorial the U.S. argues the following in support of its position that, in Grand River Enterprises, there is no violation of national treatment:

... Claimants make no attempt to demonstrate that any alleged less favorable treatment has been accorded to NPMs on the basis of nationality, as required for any national treatment claim under Article 1102. As recognized by the Loewen tribunal, the national treatment obligation under Article 1102 proscribes only “nationality-based discrimination and . . . demonstrable and significant indications of bias and prejudice on the basis of nationality.”294 Similarly, as found by the S.D. Myers v. Canada tribunal, analysis under Article 1102 involves considerations of “whether the practical effect of the measure is to create a disproportionate benefit for nationals over non nationals,” and “whether the measure, on its face, appears to favour its nationals over non-nationals who are protected by the relevant treaty.”295 All three NAFTA Parties agree that the national treatment obligation under Article 1102 is intended to protect against discrimination against an investor or investment on the basis of nationality.

The U.S. cites two cases as support for its view, and also notes that the NAFTA Parties all agree with this view.

I don't know much about how these proceedings go, but it seems to me that so far we have just touched the surface of the issue.  We have the claimants citing cases in support of their view, and the U.S. citing cases in support of its view.  What would be great, at least from my perspective, is to have a good debate on the merits of the issue, including a discussion of the impact of the different approaches.  Perhaps that is coming in the next round of submissions or at the hearing.

Non-Discrimination under NAFTA Chapter 11

From the claimants' submission in the Grand River Enterprises NAFTA Chapter 11 case:

There is simply no room in the language of [the NAFTA Chapter 11 National Treatment and MFN] provisions for reading-in the requirement for an investor to either prove that the measures according less favorable treatment were imposed on the basis of his or her nationality; or to demonstrate that the impact of the measures fell disproportionately on investors of his or her nationality as opposed to those of the host state or another. The Investor’s burden under either Article 1102 or 1103 is to prove that more favorable treatment has been granted to another investor in like circumstances, than that which has been accorded to him.

(para. 239)

... determining whether treatment was more or less favorable does not involve a global comparison of treatment received by foreigners and domestic investors. For example, sometimes measures accord more favorable treatment to a ‘national champion’ enterprise, to the disadvantage of all others (domestic or foreign). Sometimes measures accord more favorable treatment to a chosen group of foreigners and/or domestic enterprises, to the disadvantage of all other competitors. When an individual investor claims ‘treatment no less favorable,’ the analysis is specific to the treatment being accorded to that claimant under the measure, vis-à-vis its competitors.

(para. 254)

I think I understand the claimants' argument here, but I just want to be sure, so let me take an extreme situation to illustrate the impact of this approach.  Let's say you have 10 foreign investors and 10 domestic investors (all in "like circumstances").  Country A adopts a measure that is non-discriminatory on its face.  However, as it turns out, certain investors do worse than others under the measure.  In particular, 9 domestic investors and 1 foreign investor receive less favorable treatment than the other 9 foreign investors and the other 1 domestic investor.  Thus, most foreign investors do better under the law than most domestic investors.  But that 1 foreign investor who did badly brings a NAFTA Chapter 11 claim alleging a violation of national treatment.  As I understand it, the argument here would be that this 1 foreign investor should succeed on its national treatment claim because it is worse off than at least one competitor.  Does anyone understand this differently?

I don't usually follow Chapter 11 cases very closely.  However, I read a news article about the case and it appeared there would be a de facto discrimination claim,  which are always of interest to me, so I decided to check out the submission.  This argument immediately jumped out at me.  We've been through this issue in the WTO context, and I am pretty sure that we have moved away from the approach the claimants set out here.  In several GATT cases and early WTO cases, there were findings to the effect that any less favorable treatment for individual foreign products would result in a violation of GATT Article III, regardless of the overall impact on foreign products as compared to "like" domestic products.  However, my sense is that the current WTO approach would focus on the overall impact on foreign goods versus domestic goods.  The Appellate Body's reversal of the panel's findings in the Asbestos case was a pretty clear statement on the matter.  And the panel in the EC - Trademarks/Geographical Indications case later made this even more explicit.  To me, the view expressed in these decisions seems to be that a discriminatory effect on imported products (as a whole) as compared to "like" domestic products (as a whole) is very important, or even required, for a finding of de facto discrimination.  Given the evolution of GATT/WTO jurisprudence, I'll be very interested to see what the Chapter 11 arbitrators have to say on the matter.

Discrimination Against Domestic Producers

In a comment posted here, Susan Aaronson says:

Does the WTO require that member states not discriminate among foreign and domestic producers in instances where foreign producers could be treated better than domestic producers? While the WTO requires that member states provide national treatment to foreign producers, it raises the question: why would repressive states provide broader or additional rights to their own citizens? Under national treatment rules, governments are not supposed to favor domestic producers over foreign producers once a good enters the market (there are some limited exceptions). But the WTO’s national treatment rules don’t explicitly require governments to treat domestic producers exactly the same as foreign producers. Repressive governments could, in theory, treat domestic producers worse than foreign producers.

I think the answer to the first part of the question is pretty clear:  WTO Members can discriminate against domestic producers.  Does anyone have other thoughts?

Taxing Big Engine Cars

I'm sure many of you remember the U.S. - Auto Taxes GATT dispute.  There were several U.S. measures at issue, one of which was a "gas guzzler" tax.  Car manufacturers were required to pay taxes on their automobiles based on the fuel efficiency, with higher taxes for less fuel efficient vehicles.  The EC claimed that because most automobiles subject to the tax were of EC origin, with very few of these of U.S. origin, "treatment under the measure was discriminatory."  Examining this claim under Article III:2, first sentence, the Panel used the "aim and effect" test to conclude that there was no violation.  (And no violation of Article III:2, second sentence either.) (See paras. 5.17-38)

Of course, in Japan - Alcohol, the Appellate Body abandoned the aim and effect test in the context of Article III:2, first sentence.  (While using some version of the test under Article III:2, second sentence.)  So how would Article III:2, first sentence be applied to this kind of measure today?   It's possible that we could find out.  The Economist reports that China has adopted its own version of the gas guzzler tax:

On August 13th the government announced a new “green” tax that will come into effect on September 1st. The new tax is meant to reduce fuel consumption and fight pollution. Rather than further raising the tax on fuel, which increased by almost 20% in June, the government is taxing gas-guzzling cars. By an amazing coincidence, most such cars are foreign-made.

Cars with engine capacities larger than 4.1 litres will now incur a 40% sales tax—twice the previous level. Cars with engines between 3 and 4.1 litres will be taxed at 25%, up from 15%. The tax on the smallest cars, with engines smaller than 1 litre, will fall from 3% to 1%. The 8% and 10% taxes on other cars will not change.

The government says the new tax will encourage a shift to more fuel-efficient cars. It will also help Chinese carmakers, as they tend to make cars with engines smaller than 2.5 litres. Foreign carmakers, which make most of the cars with larger engines, will suffer.

This would be a great case for helping to clarify the GATT's non-discrimination rules.   In particular, it could help answer the question of what role, if any, does an environmental purpose behind a measure play in the Article III:2, first sentence context; and what is the precise role of a discriminatory effect against foreign products.  (The same issues also arise under Article III:2, second sentence, although the answers are much clearer there).  And if a violation were found, we would then get into interesting issues under Article XX(g) and the chapeau.

Somewhat surprisingly, the Economist concludes the piece by saying that this measure, in contrast to the current Chinese auto tax measures being disputed at the WTO, "prevents any more pesky calls from Geneva."  I wonder if they are right about that.  There are certainly legal claims that can be made, although the chances of success are not entirely clear.  On the other hand, the most likely complainants, the EC and the U.S., may be reluctant to start a new trade/environment dispute right now.

Justice Kennedy for the Appellate Body?

If we can't stop internal domestic discrimination, how are we ever going to stop it in the international arena?  The recent U.S. Supreme Court decision in Davis v. Kentucky Department of Revenue dealt with the issue of explict tax discrimination against out-of-staters.  As explained on ScotusWiki:

At issue in Davis is a provision in Kentucky’s income tax law that taxes interest income from bonds issued by other state and local governments while providing an exemption for interest from Kentucky bonds. Two Kentucky taxpayers challenged the law, arguing that the tax discriminated against holders of out-of-state bonds and thus violated the Commerce Clause. Kentucky’s intermediate appellate court agreed. It held that the state’s scheme for taxing bond interest was unconstitutional, “as it obviously affords more favorable taxation treatment to in-state bonds than it does to extraterritorially issued bonds.”

So, the measure at issue is a Kentucky state law that gives a tax advantage to interest income on Kentucky government bonds as compared to other states' bonds.

The Supreme Court majority found that the Kentucky law did not violate the dormant commerce clause.  There were a number of separate opinions, discussing a bunch of issues, but of key importance seemed to be the following two points.  First, as a NY Times piece noted about the majority view:

All 49 other states had filed a brief urging the Supreme Court to overturn the Kentucky court and uphold the state preference. In his majority opinion, Justice David H. Souter cited the states’ unanimity as evidence of the enormity of what the court was being asked by the plaintiffs to do.

Basically, every state does this, and the Court was reluctant to overturn such an established practice.

In addition, there was the notion that this law involved a "public function" of government, as had a recent case, and for that reason did not violate the dormant commerce clause.

What interested me more, though, was Justice Kennedy's dissent.  He started it this way:

Eighteenth-century thinkers, even those most prescient, could not foresee our technological and economic interdependence. Yet they understood its foundation. Free trade in the United States, unobstructed by state and local barriers, was indispensable if we were to unite to ensure the liberty and progress of the whole Nation and its people. This was the vision, and a primary objective, of the Framers of the constitution. History, as we know, vindicates their judgment. The national, free market within our borders has been a singular force in shaping the consciousness and creating the reality that we are one in purpose and destiny. The Commerce Clause doctrine that emerged from the decisions of this Court has been appropriate and necessary to implement the Constitution’s purpose and design.

These general observations are offered at the outset to underscore the imprudent risk the Court now creates by misinterpreting our precedents to decide this case. True, the majority opinion, wrong as it is, will not threaten the whole economy or national unity on these facts alone. The explicit, local discrimination the Court ratifies today likely will result in extra, though manageable, accommodation costs and can be welcomed by existing interests ready to profit from it. This market perhaps can absorb the costs of discrimination; our jurisprudence, unless the decision stands alone as an anomaly, cannot.

Reactive institutions and adjusting forces—for instance mutual funds for state and municipal bonds issued within a single State—already are in place in response to the local protectionist laws here at issue and now in vogue. These mechanisms may allow the market, though necessarily distorted by deviation from essential constitutional principles, to continue to cope in a more or less efficient manner; and the damage likely will be limited to the discrete, and now distorted, market for state and municipal bonds. Many economists likely will find it unfortunate, and inefficient, that a specialized business has emerged to profit from a departure from constitutional principles. Even if today’s decision is welcomed by those who profit from the discrimination, the system as a whole would benefit from a return to a market with proper form, freed from artificial restraints. It does seem necessary, however, to point out the systemic consequences of today’s decision—if only to confine it and to discourage new experiments with local laws that discriminate against interstate commerce and trade.

And he concluded:

... today the Court weakens the preventative force of the Commerce Clause and invites other protectionist laws, thus risking further dislocations and market inefficiencies based on the origin of products and commodities that should be traded nationwide and without local trade barriers.

Wow!  If there had been more of this kind of talk when I was taking con law, I might have focused on that instead of trade law.  After reading this, I'd really like to see Justice Kennedy take on GATT Article III:4!

In addition to Kennedy, Scalia and Thomas also had interesting things to say.  From Scalia:

JUSTICE SCALIA, concurring in part.

I join all but Part III–B and Part IV of the opinion of the Court. I will apply our negative Commerce Clause doctrine only when stare decisis compels me to do so. In my view it is “an unjustified judicial invention, not to be expanded beyond its existing domain.”

I read this as saying he doesn't much like the dormant commerce clause doctrine, but he won't go so far as to get rid of it entirely.  Rather, he'll just keep it as narrow as possible, e.g., no state-imposed tariffs on out of state goods.

As for Thomas, it seems as though he would go further than Scalia in reversing the doctrine:

JUSTICE THOMAS, concurring in the judgment.

I agree with the Court that Kentucky’s differential tax scheme is constitutional. But rather than apply a body of doctrine that “has no basis in the Constitution and has proved unworkable in practice,” I would entirely “discard the Court’s negative Commerce Clause jurisprudence.” ... Because Congress’ authority to regulate commerce “among the several States,” U. S. Const., Art. I, §8, cl. 3, necessarily includes the power “to prevent state regulation of interstate commerce,” United Haulers, supra, at ___ (slip op., at 2) (THOMAS, J., concurring in judgment), the text of the Constitution makes clear that the Legislature—not the Judiciary—bears the responsibility of curbing what it perceives as state regulatory burdens on interstate commerce.

Thomas seems to say that it is entirely up to the (federal) legislature to address the problem of state protectionism.  Would he go so far as to say that tariff duties imposed by a state on products from other states are constitutional?

More commentary from SCOTUSBlog here.

Possible New Investment Treaty Rules for Non-Discrimination

From a Norwegian draft model BIT (MS Word document) that reader Perry Bechky pointed me to:

Article 3: NATIONAL TREATMENT

1. Each Party shall accord to investors of the other Party and to their investments, treatment no less favourable than the treatment it accords in like circumstances[FN2] to its own investors and their investments, in relation to the establishment, acquisition, expansion, management, conduct, operation and disposal of investments.

[FN2] The Parties agree/ are of the understanding that a measure applied by a government in pursuance of legitimate policy objectives of public interest such as the protection of public health, safety and the environment, although having a different effect on an investment or investor of another Party, is not inconsistent with national treatment ... when justified by showing that it bears a reasonable relationship to rational policies not motivated by preference of domestic over foreign owned investment.

Here are a few initial thoughts on this provision.

First, my sense is that perhaps the footnote would only apply to situations involving de facto discrimination.  De jure discrimination (i.e., explicit distinctions between foreign and domestic investors/investments) would be governed by the main text alone.  But I'm not absolutely sure about this.

Second, the substance of the footnote indicates that disparate impact/discriminatory effect on foreign investment/investors will not lead to a violation of national treatment rules in all instances.  Specifically, there will be no violation if the following conditions are met: (1) The measure pursues "legitimate policy objectives of public interest"; (2) the measure "bears a reasonable relationship to rational policies"; and (3) the "policies" at issue are "not motivated by preference of domestic over foreign owned investment."  The first two elements seem to overlap; I'm not sure exactly how they relate to one another.  The last element, the "motivation" behind the measure, involves intent.  However, it's not clear what kind of intent the drafters had in mind, subjective or objective.

Third, what happens if there is no discriminatory effect on foreign investors/investments as a whole?  Does that mean there cannot be a violation?  There are WTO cases that have found a violation where one individual foreign product is treated unfavorably even though there is no overall discriminatory effect against foreign products.  I wonder how the quoted provision would deal with the equivalent situation in the investment context.  The reference to "an investment or investor" makes me think the "individual" test might be applied.

Fourth, it sounds like the burden is on the defending party to show that the measure "bears a reasonable relationship to rational policies not motivated by preference of domestic over foreign owned investment."  So, the complainant first makes its claim of less favorable treatment, but the defending party can then respond with a defense of this kind.

Finally, I thought it was interesting that they put the footnote after "like circumstances."  There is some disagreement over which part of the national treatment provision is the key, with some emphasizing the "less favorable treatment" part and others focusing on the "like"-ness part.  By putting the footnote where they did, it seems that perhaps these drafters thought "like"-ness was the key.

Non-Discrimination: How Others Do It

The proper standard for non-discrimination has long been a vexing question in GATT/WTO law.  Is there anything to be learned from seeing how others do it?  Yesterday the U.S. Supreme Court decided a "dormant" commerce clause case, where non-discrimination is part of the legal standard (at least under the view of some people).  The following summary of the case and the various opinions is from Scotusblog. I focus here on the parts that apply the non-discrimination standard (there is more to the case as well).

The background of the case is as follows:

During the 1980s, the New York counties of Oneida and Herkimer faced, according to the Chief Justice, a “solid waste ‘crisis’” that included not only health and safety problems, but also “price fixing, pervasive overcharging, and the influence of organized crime.” ... In response, the counties enacted ordinances that required all of their solid waste to be delivered to processing sites owned and operated by the Oneida-Herkimer Solid Waste Management Authority, a corporation created by the New York state government. Buoyed by the Supreme Court’s 1994 decision in C & A Carbone v. Clarkstown, which invalidated a similar ordinance that required trash to go to a privately operated processing facility, trash haulers filed suit, alleging that the ordinance violated the dormant Commerce Clause.

In essence, the local government ordinance requires that waste be delivered only to a designated local government owned corporation. A prior Supremore Court case struck down a similar ordinance that required waste to go to a local private corporation.

The majority's opinion finding that the law does not violate the dormant commerce clause is summarized as follows:

Relying on the difference between the privately operated facility at issue in Carbone and the publicly owned Oneida-Herkimer facility, the Court today rejected the trash haulers’ challenge to the “flow control” regulations. In the majority’s view, Carbone could not be dispositive because it did not address the public-private distinction. And because governments have responsibilities – such as health and safety concerns – beyond those of private businesses, the majority posits that “it does not make sense” to subject laws that favor local government to the same level of scrutiny as laws that “favor[] in-state business over out-of-state competition,” as the latter often seek to achieve “simple economic protectionism.” Indeed, the majority emphasizes, “treating public and private entities the same under the dormant Commerce Clause would lead to unprecedented and unbounded interference by the courts with state and local government” – interference that is particularly inappropriate in the area of traditional local government functions such as solid waste.

Thus, the majority thinks this law is permissible because it discriminates in favor of a government-owned corporation rather than a private corporation, referring in this regard to the importance of "traditional local government functions." However, there was also a three person dissent, which held as follows:

Joined by Justices Stevens and Kennedy, Justice Alito would have invalidated the ordinances on the ground that they were “essentially identical” to those at issue in Carbone. In Justice Alito’s view, statements by the Carbone majority “reflect[ed] a clear understanding that the station was, for all purposes relevant to the dormant Commerce Clause, a municipal facility.” More importantly, however, Justice Alito rejects the majority’s public-private distinction as “illusory”: “The Court has long subjected discriminatory legislation to strict scrutiny, and has never, until today, recognized an exception for discrimination in favor of a state-owned entity.” Moreover, there is no justification for the exception that, in the dissent’s view, the majority is creating out of whole cloth today. Contrary to the majority’s assertion, discrimination in favor of a state-owned entity, Justice Alito posits, does serve “local economic interests” (such as providing jobs to local residents and business for local suppliers), while discrimination in favor of privately owned local entities may serve legitimate health and safety purposes. Thus, Justice Alito contends, the proper inquiry in dormant Commerce Clause cases looks not only at the goals of the challenged regulation, but also at “the means by which those goals are realized.” If the means are discriminatory, then the regulation must be subjected to strict scrutiny.

I think I side with the dissent on this one.  If you are going to apply a non-discrimination rule, why carve out an exception for discriminating in favor of a government-owned corporation?  That could be quite a big exception in practice.