Of All Things Made in America Why are We Exporting the Penn Central Test

Sanders, Anthony B. | January 1, 2010

Developing countries enter into bilateral investment treaties (“BITs”) in order to increase foreign direct investment (“FDI”). Ignoring this straightforward fact has led to a great deal of confusion in the assessment of BITs and their protection of regulatory takings. This article addresses the question of how a BIT should approach regulatory takings with the purpose of increasing FDI in mind. It explores the background of the United States Supreme Court’s Penn Central test and the test’s incorporation into the post-NAFTA round of U.S. BITs. Then, the article examines whether an uncertain and flexible test such as Penn Central is suitable for treaties that seek to provide foreign investors with incentives to invest in developing counties. The article argues that Penn Central is not appropriate for BITs because it does not provide a clear rule of law that will induce a foreign investor to send its capital overseas to a developing country. This is partly due to the greater need for clarity in public law than in private law. For this distinction the article employs the work of F.A. Hayek and “rules of just conduct” versus “rules of organization of government.” The article also addresses criticisms of the incentives BITs provide to foreign investors and to host governments and how those incentives counsel for clear regulatory takings rules. Whatever the merits there may be for a flexible regulatory takings rule when interpreting the Fifth Amendment’s Takings Clause, those reasons do not apply to BITs. The article acknowledges that BITs may not actually succeed in increasing FDI, as the empirical evidence on the question is mixed. However, if they do, then BITs with clear regulatory takings standards will be more successful than those with vague standards, such as Penn Central. Drafters of BITs can still take into account other objectives such as environmental protection, but should do so with clear rules of law so foreign investors can plan their investments accordingly.