NAFTA TRIBUNALS

Read Adam Liptak's front page Sunday NYT article on the tribunals created by Chapter 11 of NAFTA. For more info, go to State's website on NAFTA investor-state arbitration, here.

International war crimes tribunals receive more attention from the press. U.S. Supreme Court citation of foreign precedent in such areas as gay rights receives a lot of attention from conservatives who decry the importation of "foreign law" to American soil. But in terms of the development of the law, NAFTA chapter 11 tribunals are at least as significant in the long run, and perhaps even more so. I want to say more about this later. Off to class. . .

MORE: In his reaction to this article, I think Brad DeLong is only half right (via Dan Drezner). DeLong writes:

Somehow Adam Liptak never finds the space to state the obvious: these NAFTA tribunals are not review courts, not appeals courts. They do not set aside judgments. Nobody who wins a case in the U.S. has anything to fear from these NAFTA tribunals. No Mississippi court has anything to fear from these NAFTA tribunals--the awards it makes stand, and the flow of this year's campaign contributions to judges from lawyers who have won verdicts over the past decade continues as well. All these tribunals do is to give some possibility of recourse to those foreign investors ground fine by the wheels of America's courts if and only if they can persuade judges like Mikva, Mason, and Mustill that injustice has been done.

Now he is right in the sense that these tribunals "do not set aside judgments." But I'm not sure what he means when he says that they're not "review courts." They do, in fact, have the power to examine state court proceedings based on certain standards of how investors should be treated -- as DeLong himself notes at the end of the quote. The tribunal in Loewen (PDF file) held that the investor protection provisions of NAFTA also apply to the results of court proceedings. At least as things stand now, this means that when Canadian or Mexican investors are involved in a court proceeding in the U.S., neither state nor federal courts have the last word in the dispute. Sounds like "review" to me.

Imagine, for example, that the tribunal had ruled in favor of those challenging the court judgment in Loewen. According to the terms of NAFTA, states [As in: signatories to NAFTA, not individual states like Mississippi] are supposed to be bound by the judgments of these tribunals; otherwise, what's the point of the treaty? If this process isn't "review" of state and federal court judgments, I'm not sure what is.

Now Brad's main point still stands. Even if the tribunal ruled in favor of Loewen, a lot would have to happen before he got any money, and if you're a betting man, the odds are probably against his ever seeing a dime resulting from the tribunal's judgment.

One bump along the road is sovereign immunity and whether or not NAFTA can be read to abrogate it. The arguments offered by companies who have brought suit before the tribunals are broad on this score. As John Echeverria at GELPI (full disclosure: he's Anita's boss), writes (in "The Real Contract on America," The Environmental Forum, July/August 2003, PDF file here):

Chapter 11 ostensibly dispenses with sovereign immunity altogether, apparently permitting recovery of money damages against the United States to the full extent of the rights of action created by Chapter 11. This, at least, is the interpretation embraced so far by firms that have sued under Chapter 11 and the panels hearing the claims. If this is the correct reading, it would mean that Chapter 11 confers significantly greater rights on foreign investors than U.S. investors possess under U.S. law. For example, all investors, domestic and foreign, can sue in U.S. courts under the Equal Protection Clause and the Due Process Clause for injunctive relief. However, if Chapter 11 is as broad an abrogation of sovereign immunity as supporters contend, foreign investors (but not domestic investors) can also sue for monetary relief on equal protection or due process claims in Chapter 11 proceedings.

One plausible alternative view is that NAFTA cannot actually be read as effecting such a sweeping abrogation of sovereign immunity. The Supreme Court has repeatedly said that Congress can abrogate sovereign immunity only by doing so in express terms. Congress arguably did not effect an express waiver when it approved NAFTA. A waiver of immunity might possibly be inferred from the language of Chapter 11, but Congress merely approved NAFTA and did not actually adopt it as a U.S. statute. The federal legislation implementing NAFTA states that, in the event of a conflict between NAFTA and any provision of U.S. law, U.S. law is to prevail. Because sovereign immunity is a basic, longstanding feature of U.S. law, this provision arguably means that NAFTA cannot properly be viewed as an effective abrogation of immunity. It remains to be seen whether this alternative view prevails, but in the meantime Chapter 11 continues to be implemented under the quite radical premise that it does away with sovereign immunity completely.

We know two important things about law. First, law develops. So the investors' arguments may influence the course of the law; indeed, given the waxing of pro-property rights arguments and the growing consensus of economic and political elites on the desirability of globalization (whatever that means), one should expect victories on the part of investors.

Second, as law is developing, the threat of a lawsuit can affect behavior. The whole point of investor-state arbitration is to make interference with investors more costly for states; the threat of lawsuits is part of that threat.

Now it is true that the chilling effect on regulation can be overstated at this stage. Jack Coe writes:

The staggering numbers accompanying the Chapter 11 prayers for relief, though making for sensational headlines, are misleading. The specter of chilling effect is more accurately assessed by considering net damages awarded rather than damages sought. Approximately fifteen Chapter 11 cases have come to a conclusion. Two have settled, five seem to have been abandoned by the claimants, and eight have reached an adjudicated outcome. Only Metalclad and Myers have ended in awards of arguably significant compensation. In Metalclad, the recovery (approximately $ 17 million) constituted less than 20 percent of what the claimant sought, left the claimant to pay its own costs (estimated to be approximately $ 4 million) and was conditioned on transference to Mexico of title to the investment (comprising a ready-to-operate landfill). The claimant's recovery, moreover, was delayed, and ultimately somewhat reduced, through post-award proceedings in a domestic court; the investor's additional costs of defending the award in those proceedings were not awarded by the trial court. S.D. Myers' $ 6 million (Can.) recovery, presently being contested in a Canadian court, has similarly hollow features.

In Azinian, Mondev, ADF and Loewen, after costly proceedings, the respective claimants recovered nothing, while having to bear their own costs. Waste Management, moreover, was made to initiate its claim afresh after its first effort was dismissed on jurisdictional grounds. As to Methanex, though pending, it is not clear that the claim will enjoy success; it would appear that a recent jurisdictional ruling has lessened the claimant's odds of recovering. In Ethyl, Canada settled for $ 13 million, perhaps shielding itself from a greater award and appreciable costs. Relatively small recoveries were granted in Pope & Talbot and Feldman. Taken as a whole, these results should do little to embolden potential claimants or to restrain regulators. (Taking Stock of NAFTA Chapter 11 in Its Tenth Year: An Interim Sketch of Selected Themes, Issues, and Methods, 36 Vand. J. Transnat'l L. 1381, 1438-1439; footnotes omitted)

Still, this interim data is hard to evaluate; takings cases against states and localities aren't all that easy to win, either, but that doesn't keep people from trying. And as John Echeverria notes (see here, again), there are lots of reasons to be worried about the development of the law in this area.

So while I think DeLong highlights a potentially misleading aspect of Liptak's column, he also creates the false impression that there are no reasons to worry about NAFTA tribunals. States and localities involved in litigation with private investors would be ill advised to ignore NAFTA tribunals, and they would be well advised to read Liptak's article.