Norman S. Kinsella: Intellectual Property and Tech Law

This is an article I published in the Philadelphia Lawyer, p. 20 (Fall 1997) (PDF), about the now-defunct Multilateral Agreement on Investment, or MAI. At the time I was in favor of it and somewhat naively optimistic that a fairly universal pro-private property rights agreement might be adopted. Sigh.

For more background on related matters, see my book International Investment, Political Risk, and Dispute Resolution: A Practitioner’s Guide (Oxford University Press, 2005) and my Online Appendix XVII, “Online Resources”.

The Re-emerging International Framework for Protection of Investment

By Stephan Kinsella¹

(version submitted to The Philadelphia Lawyer, September 1997 issue)

We’ll take and take until not even the nails in their shoes are left.  We will take American investments penny by penny until nothing is left.

                                                                                                 —Fidel Castro, 1960² 

Less than seventy-five years after it officially began, the contest between capitalism and socialism is over: capitalism has won.

                                                                                        —Robert Heilbroner, 1989³ 

American entrepreneurs are, by and large, used to operating within a relatively fixed and predictable background of overarching state and federal laws.  If something goes wrong with a business transaction—e.g., one party breaches a contract or intentionally defrauds or harms another—the wronged party that he can very likely resolve the matter in some court, according to some applicable law, whether federal or state.

Similarly, if an investor’s property rights are damaged or otherwise taken by the government, the investor can obtain redress, typically in the form of compensation, in court.  In the West, though protection of property rights is far from perfect, it is largely taken for granted that the government is constitutionally prohibited from taking one’s property (including investments) without due process and just compensation.  Thus, trade and investment flourish in western countries, since both contractual and property rights and protected.

International trade, and investment in foreign countries (known as foreign direct investment), require protection as well.  With respect to foreign trade—for example, trade between an American company and a foreign company—the parties cannot simply assume that they are both subject to jurisdiction in the courts of the same nation.  Despite this seeming difficulty, however, foreign trade has been able to thrive since disputes can be settled, and contracts enforced, even between parties of different nations.  This has long been possible with the international Law Merchant, in which disputes between merchants of different countries are settled in neutral, largely private arbitration proceedings.

Today, for example, private arbitration is frequently conducted in accordance with the rules of the International Centre for the Settlement of Investment Disputes (ICSID), the International Chamber of Commerce (ICC), or the American Arbitration Association (AAA).  In addition, dispute resolution and other aspects of foreign trade are buttressed to some extent by the foreign trade framework established by multilateral agreements such as the General Agreement on Tariffs and Trade (GATT), and its successor, the World Trade Organization (WTO).  Thus, private parties have been and continue to be able to rely on and enforce the contracts necessary for foreign trade.

Foreign direct investment is another matter.  Companies investing in other countries are not able to rely on private measures such as arbitration agreements to ensure that the host state (the state hosting foreign investment) does not interfere with investments.  States have sovereignty over property within their territory, and thus foreign investment is always subject to the threat of expropriation by the host state.  Investing in foreign regimes is thus said to be subject to “political risk,” especially in those states with a history of hostility to capitalism and property rights, such as the former communist states and other developing economies. [click to continue…]

1.  LL.M., University of London; J.D., M.S., B.S., Louisiana State University.  The author is a member of the Intellectual Property Department and International Law Practice Group of Schnader Harrison Segal &amp; Lewis in Philadelphia, and co-author <i>Protecting Foreign Investment Under International Law: Legal Aspects of Political Risk</i> (Dobbs Ferry, New York: Oceana Publications, 1997).  Email: nskinsella@shsl.com; http://www.shsl.com.  The views expressed herein are those of the author alone, and should not be attributed to any other person or entity.   [↩]
2.  New York Times, 21 August 1960, § 3(F), p. 1, quoted in Eric N. Baklanoff, Expropriation of U.S. Investment in Cuba, Mexico, and Chile 112 (1975). [↩]
3.  Robert Heilbroner, “The Triumph of Capitalism,” The New Yorker, Jan. 23, 1989, p. 98.  The superiority of capitalism over socialism had been rigorously proved back in 1920 by the great Austrian economist Ludwig von Mises.  See Ludwig von Mises, Economic Calculation in the Socialist Commonwealth (1990) (1920); see also Ludwig von Mises, Socialism: An Economic and Sociological Analysis (J. Kahane trans., 3d rev’d ed. 1981) (1922).  Mises’s ideas were initially thought to have been refuted by socialist economists, in what is known as the “socialist calculation debate.”  The false conclusion that the socialists won the debate by disproving Mises’s claims was perpetuated in the following decades by economists such as Heilbroner.  See, e.g., Robert Heilbroner, Between Capitalism and Socialism (1970), pp. 88-93, in which Heilbroner claimed that Mises was wrong, that socialist economic calculation was possible, and that the “superior performance” of socialism would “soon reveal the outmoded inadequacy of a free enterprise economy.”  Despite decades of unjust and unfortunate neglect, Mises has finally been vindicated by the universally acknowledged failure of socialism as a viable economic system.  See Gertrude E. Schroeder, “The Dismal Fate of Soviet-Type Economies: Mises Was Right,” Cato J., v. 11, no. 1 (Spring/Summer 1991), p. 13; “Labor Party leader flips on policy,” Philadelphia Inquirer, Apr. 8, 1997, p. A2 (describing the British Labor Party’s endorsement of privatization of state-owned enterprises and recent elimination of a Marxist clause in its constitution advocating common ownership of the means of production).  Even Heilbroner now admits: “It turns out, of course, that Mises was right.”  Robert Heilbroner, “After Communism,” The New Yorker, Sept. 10, 1990, p. 91, 92.  See also Mark Skousen, “‘Just because socialism has lost does not meant that capitalism has won’: Interview with Robert L. Heilbroner,” Forbes, May 27, 1991, p. 130.  For further discussion of the socialist calculation debate, see Murray N. Rothbard, “The End of Socialism and the Calculation Debate Revisited,” 5 Rev. Austrian Econ. 51 (1991); Don Lavoie, Rivalry and Central Planning: The Socialist Calculation Debate Reconsidered (1985); David Ramsay Steele, From Marx to Mises: Post-Capitalist Society and the Challenge of Economic Calculation (1992). [↩]

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