The Right and US Trade Law: Invalidating the 20th Century
IV. A Shield Becomes a Sword
The first Chapter 11 lawsuits against national governments were pioneered by entrepreneurial spirits from obscure law firms, starting with a Toronto lawyer named Barry Appleton, who won the first claims victory for the Ethyl Corporation in 1996, suing Canada for its ban on the US company's gasoline additive. Appleton has since opened offices in Washington (his man in DC is a Reaganite lawyer who held high posts at the White House, Treasury and Agriculture). Appleton regularly sues the Canadian government and occasionally issues patriotic warnings that Canada will be flirting with Chapter 11 claims if it goes forward with various actions. Some of his public alerts sound quite fanciful. Canadian hockey and baseball teams, he suggested, can sue the United States because American cities subsidize rival teams with taxpayer-financed stadiums.
The problem is, Appleton might be right. Nobody knows for sure, including the three NAFTA governments. This twilight zone where aggressive lawyers search for big scores should endure for many years, because NAFTA specifies that no arbitration rulings will be regarded as binding precedent for future cases. Thus, even if Methanex and others lose, a troubled company willing to pay for smart lawyers can still take a shot at winning big bucks in NAFTA's legal lottery.
The pillars of the American bar have decided to play too. Huge and imaginative cases are being filed by some of America's premiere law firms, evidently persuaded that NAFTA's novel legal doctrines are perfectly sound or at least worth a shot. Jones, Day is handling the Methanex case and also a claim by Loewen for $725 million that seeks to override a Mississippi jury verdict against its predatory business practices. Hogan & Hartson has UPS's claim against subsidy by the Canadian postal system. Baker & Botts represents Waste Management against Mexico. White & Case is working for Mondev, a Canadian developer that accuses the City of Boston of violating a contract for a shopping center project (Mondev first sued in state courts but lost and was turned away by the US Supreme Court, so, what the heck, it's trying NAFTA for $50 million).
I asked Christopher Dugan, lead lawyer for Methanex, why the company did not pursue its complaint in US courts. One reason, of course, is that American judges would not accept many of its arguments, since they are derived from the looser criteria in NAFTA and international law, not US law. Dugan, however, gave a different explanation. "We wanted an impartial tribunal,"he said. "If you look at it, foreign investors do have a substantial reason to avoid the US judicial process. NAFTA does clearly create some rights for foreign investors that local citizens and companies don't have. But that's the whole purpose of it." This sounds bizarre, considering the original pretext for creating Chapter 11--that US investors could not trust Mexican courts for fair treatment. Now, it seems, US courts cannot be trusted either.
But Dugan's remark also illustrates why NAFTA's investor protections pose a threat to US jurisprudence. Domestic businesses, not to mention mere citizens, will rightly complain that NAFTA effectively puts them in a subordinate legal position, since they cannot assert the same expanded definition of property rights to challenge US regulations. One obvious solution, which "regulatory takings" advocates will doubtless recommend, is that the Supreme Court reconcile these different legal standards by issuing a precedent-setting revision in constitutional law. Epstein might win through this backdoor what he has not achieved in straightforward argument.
Meanwhile, the Chapter 11 lawsuits may be more valuable to multinationals as political weapons used to intimidate governments with the mere threat that they might file for huge damage claims. Howard Mann, a Canadian lawyer who advises environmental groups on the subject, described the impact: "What you see now is the big law firms talking about Chapter 11, not just as a shield but as a sword against government action."
The sword is already in use. Carla Hills, the US Trade Representative who oversaw the NAFTA negotiations for Bush I and now heads her own trade-consulting firm, was among the very first to play this game of bump-and-run intimidation. Her corporate clients include big tobacco--R.J. Reynolds and Philip Morris. Sixteen months after leaving office, Hills dispatched Julius Katz, her former chief deputy at USTR, to warn Ottawa to back off its proposed law to require plain packaging for cigarettes. If it didn't, Katz said, Canada would have to compensate his clients under NAFTA and the new legal doctrine he and Hills had helped create. "No US multinational tobacco manufacturer or its lobbyists are going to dictate health policy in this country," the Canadian health minister vowed. Canada backed off, nevertheless.
A former government official in Ottawa told me: "I've seen the letters from the New York and DC law firms coming up to the Canadian government on virtually every new environmental regulation and proposition in the last five years. They involved dry-cleaning chemicals, pharmaceuticals, pesticides, patent law.Virtually all of the new initiatives were targeted and most of them never saw the light of day."
Maybe this leverage is what corporate lawyers had in mind all along. A major multinational might be reluctant to sue the host government in a country where it is heavily invested, since its relationship would be ruptured. But the company can invoke the threat of NAFTA litigation to intimidate bureaucrats and political leaders. "One or two cases and suddenly the business guys understand, Oh my God, look what we have here," said John Audley, a former EPA official for trade issues. "This thing either scores us a healthy compensation or gets changes in the regulation or both. This thing is a winner."
While the legal thicket surrounding Epstein and NAFTA's Chapter 11 seems fiendishly complicated, the core meaning is not fundamentally an argument over legal doctrine. It involves a profound assault on community and small-d democracy, as we know it. The point was made by Lois Schiffer, Clinton's assistant attorney general for environmental law and one of many who foresee grave damage if the revised version of property rights should prevail, at home or abroad. "We live as a community, not as individual, selfish people," Schiffer said. "Everybody benefits from good environmental regulation, but I can't clean up a river all by myself. I mean, it takes me and all the other people who live on the river to accomplish that. It's a real community enterprise. People who talk about it in other ways are trying to disaggregate those communities."