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TransCanada is suing the U.S. over Obama’s rejection of the Keystone XL pipeline. The U.S. might lose.

- January 8, 2016
A depot used to store pipes for Transcanada Corp’s planned Keystone XL oil pipeline is seen in Gascoyne, North Dakota in this November 14, 2014 file photo. REUTERS/Andrew Cullen)

On Jan. 6, TransCanada went to court to claim that the Obama administration’s failure to approve the Keystone XL pipeline violates U.S. obligations under the North American Free Trade Agreement, or NAFTA. The company is asking for $15 billion in compensation from U.S. taxpayers.

This mixes two challenges confronting President Obama and Democratic politicians in recent years. Environmentalists have turned the ecologically questionable tar sands pipeline into a no-fly-zone in domestic politics. Meanwhile, labor and other groups have made opposition to NAFTA-style deals essential for their electoral support. In the face of this pressure from the left, even one-time advocates of both the pipeline and trade deals like Hillary Clinton have reversed course on both.

[The Senate failed to override Obama’s veto of the Keystone pipeline. Here’s why.]

The U.S. has never lost an ISDS lawsuit. Keystone might break the winning streak. 

A bit of background before moving into what TransCanada’s case could portend. NAFTA (much like the proposed Trans-Pacific Partnership, or TPP) allows foreign investors to bring direct legal challenges against a wide range of host state regulations. These cases are heard outside of national courts, by panels of three arbitrators selected by the litigating investor and government. These arbitrators lack the formal power to overturn host state policies, so instead order the payment of cash compensation that can then be enforced in national courts.

While the U.S. has never lost a NAFTA case, Canada and Mexico have — along with dozens of other countries under similar trade and investment pacts. This investor-state dispute settlement (ISDS) system has become increasingly controversial.

[Investors have controversial new rights to sue countries. Here’s why this matters for the U.S.]

Could the Keystone NAFTA case end the US’ winning streak? I predicted the possibility four years ago.

All else equal, the case would seem like a good bet for the investor. As detailed in TransCanada’s initial NAFTA filing, after initial enthusiasm, the U.S. sent wildly mixed messages about whether the pipeline would be approved – delaying the review process far beyond the average length of time. The U.S. has approved other pipelines, and admitted that this process was different in its degree of politicization. Even critics of Keystone XL (including Obama) admit that blocking the pipeline will have a limited impact on climate emissions, and others note that the campaign was motivated primarily by social movement politics. This is far from the dispassionate, consistent regulatory process that investment arbitrators tend to favor.

In short, TransCanada has a decent legal claim that the U.S. discriminated against its pipeline in an arbitrary manner. Formally speaking, the company’s claim is that the U.S. violated NAFTA’s national treatment, most-favored nation treatment, expropriation, and fair and equitable treatment obligations. To fully cover its bases, TransCanada is also launching a constitutional claim in U.S. courts.

…except for the fact that the U.S. uses not just law but all forms of influence. 

But all else is not equal. First of all, the U.S. is the respondent. The State Department’s defense lawyers are widely regarded as the best in the business. They are among the architects of the ISDS system, and can be expected to use every available defense.

Moreover, the U.S. brings considerable informal political pressure to bear. For instance, Abner Mikva, a former judge appointed as a NAFTA arbitrator by the U.S. in a close case, claims to have been politically pressured to side against the investor.

[The TPP has a provision many will love to hate: ISDS. What is it, and why does it matter?]

Such formal and informal tactics amount to what Lawrence Helfer and Anne-Marie Slaughter call a “system of constrained independence of international tribunals,” or what Karen Alter labels “altered politics” — where states combine litigation, bargaining and leverage to influence courts and other legal actors.

Moreover, international adjudicators have shown increased reluctance to rule that economic liberalization commitments always trump public interest policies.

In my own interviews with arbitrators, I have found evidence to support either the argument that TransCanada’s case is a sure dud or a winner. On the one hand, arbitrators do express awareness of their political context, and a desire to avoid second-guessing complex domestic regulation.

On the other, they are also sensitive to the charge that the system is rigged in favor of developed nations. Finding against the U.S. could enhance the system’s legitimacy with the developing nations that are overwhelmingly the targets of ISDS cases. This unpredictability — both legally and politically — has led some scholars to call the cases “crap shoots.”

But winning the case isn’t the only way for TransCanada to win on the issue. 

TransCanada may not need to actually win for the case to serve a useful function. Over a third of launched ISDS cases end in settlement. The threat of cases can sometimes get governments to rethink their regulatory stance, as John Oliver’s crackpot comedic investigators showed in their exposé of the effect of tobacco company threats against public health measures in Africa.

TransCanada needn’t look so far from home for a template. Within days of being swept into office late last year, Canada’s Trudeau government threatened to sanction the U.S. if it did not remove country-of-origin labels (COOL) on beef. Canada and Mexico had won a World Trade Organization case against the labels, and knew that they had allies in Congress who wanted to get rid of COOL for their own reasons. The sanction threat was enough to get Congress to repeal the labels, and then some.

In an example of what I’ve called “chilling inflect,” Congress went beyond what the WTO required — all while using the political cover of compliance obligations.

Will this lawsuit affect the U.S. primaries?

While the NAFTA case’s benefit for TransCanada is uncertain, the harm to Canada’s image among U.S. liberals is not. The Canadian government already created some ill will when it leaked private conversations with 2008 Obama campaign advisor Austan Goolsbee that suggested the candidate’s criticism of NAFTA was disingenuous. This later proved right.

With TransCanada’s latest move, left-leaning congressional TPP opponents will use the case as symbolic kindling in their argument against the pact, which includes Canada. Former Maryland governor Martin O’Malley — who is challenging Hillary Clinton from the left — is already making this point. This opportunistic use of litigation horror stories has its tactical risks, especially since this is a NAFTA case and NAFTA will not be phased out, whether or not there’s a TPP.

Nonetheless, this obscure legal case is unlikely to directly swing many votes. Polls show the public generically supports trade, although there is little data on how they respond to non-traditional trade issues like ISDS.

The case’s impact on the election — if any — is likely to be indirect, primarily affecting congressional races. Some Democratic-leaning constituencies, for instance – including labor unions — have pledged to work to turn out the vote based on how strongly candidates oppose the TPP. To the extent TransCanada’s latest action provides them with a more salient hook, these pressure tactics will be easier to employ.

Todd Tucker is a Gates Scholar at the University of Cambridge and is writing a book on investment arbitration. Follow him on Twitter @toddntucker.