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September 03, 2010

Not enough canola to remove the bitter NAFTA taste

Seemingly from the annals of fake corporate names like Globochem and Brawndo, a company named Chemtura recently was ruled against in a NAFTA investor-state case brought against Canada.

Their claims? That Canada had failed to accord "fair and equitable treatment" to - and had indirectly expropriated - their investment. A panel convened under UNCITRAL sided against Chemtura.

But before we crack open the champagne...

  1. Chemtura's case was undermined by several revealing internal documents that may not be available in other cases, Part I. Chemtura (and its predecessor companies) are in the business of marketing pesticides to canola seed growers (among many other things). In the Canadian market, they had used lindane, a chemical thought to contribute to cancer and restricted in the U.S. and in many other countries around the world. Chemtura was also involved in marketing alternative chemicals to lindane in the U.S. market. In 1997, a Chemtura subsidiary got wind of lindane-treated canola seed coming into the U.S. from Canada, and contacted the U.S. EPA to put the smack down on the practice. The EPA did take some actions, which snowballed eventually into Canada reconsidering whether it shouldn't also ban or phase out lindane treatments, which in turn affected, you guessed it, Chemtura's Canadian lindane operations. It was difficult to challenge Canada's actions since they snowballed from a series of actions initiated by the company's own U.S. affiliate. (See page 28 of this.)
  2. Chemtura's case was undermined by several revealing internal documents that may not be available in other cases, Part II. In 1998, Chemtura had sent an internal communication that arguably revealed a kind of double speak: one the one hand, the company publicly agreed to voluntarily withdraw Lindane from the Canadian market. Privately, they were lobbying for expedited Canadian approval of a lindane alternative that they were using in the U.S.... perhaps as a quid pro quo. This internal communication weakened Chemtura's argument in the NAFTA case when the company tried to paint itself as a victim of regulators. (see page 53 of the decision - linked above and here.)
  3. Better to follow than to lead. I would also just note that Canada was, in this case, taking and facilitating a series of steps to move past lindane that a great many countries had already taken going back to 1968. Canada was a laggard in this regard, and it would have been difficult for the tribunal to side with an investor against a policy of such international pedigree. Countries that are innovators in the field of environmental protection would not have similar "cover."
  4. The tribunal embraced a troubling notion of customary international law. Historically, the notion of "customary international law" has been a pretty limited one, essentially designed to capture the standard behavior of governments. Under NAFTA and other pacts with investor-state dispute resolution, however, unelected tribunalists have expanded the notion of "customary international law" to include stuff that investor-state tribunalists (rather than governments themselves) say. While siding with Canada, the Chemtura tribunal embraced this troubling notion of customary international law (see page 31-32).
  5. Democracies get judged on how quickly they help out corporations relative to other democracies. While ultimately siding with Canada, the tribunal analyzed how quickly Canadian regulators approved company's pesticides relative to their U.S. counterparts to help determine whether Canada was violating Chemtura's NAFTA rights. (See page 67). While a minor part of the overall decision, this is a troubling precedent, and could incentivize corporations to launch investor-state cases when regulatory approvals occur less quickly than they would like.
  6. Many troubling aspects of NAFTA's expropriation doctrine affirmed. As my colleague Matt Porterfield has written, one of the most troubling aspects of NAFTA investor-state decisions is that, in variance with U.S. and most countries' domestic takings doctrine, NAFTA allows corporations to challenge as expropriations regulations that do not destroy/transfer nearly 100 percent of the value of an entire real property asset or interest. The Chemtura tribunal refused to endorse a break from past NAFTA tribunals, which have allowed an expansive definition of property interests, "conceptual severance" (i.e. a subpart of the property is treated as the whole for expropriation analysis), and less than 100 percent value diminution to constitute an expropriation. For instance, the Chemtura tribunal stated that "elements such as goodwill, customers or market share, or those covered under the more generic heading of the Claimant's "lindane business" in Canada, are part of the overall investment..." Such concepts would not typically be considered "property" under U.S. law for takings analysis. These "elements" could have been deemed to be expropriated, even if the rest of Chemtura's Canadian interests survived. And the fact that "net sales of lindane-based products represented approximately [only] 10 percent of" Chemtura's Canadian sales appeared to be the basis of the tribunal's conclusion that the government measure did not constitute a substantial enough deprivation to qualify as an expropriation... rather than how the matter would be analyzed under U.S. law, which has typically been to categorically reject any takings claim below the 95% destruction threshold. If lindane had constituted half of Chemtura's Canadian business, would the tribunal have made a different determination on this point? (pages 71-78)

The tribunal did make a very important statement, however:

"Irrespective of the existence of a contractual deprivation, the Tribunal consideres in any event that the measures challenged by the Claimant constituted a valid exercise of the Respondent's police powers. As discussed in detail in connection with Article 1105 of NAFTA, the PMRA took measures within its mandate, in a non-discriminatory manner, motivated by the increasing awareness of the dangers presented by lindane for human health and the environment. A measure adopted under such circumstances is a valid exercise of the State's police powers and, as a result, does not constitute an expropriation."

This a nice statement, although unfortunately it will not be a binding precedent on future investor-state tribunals, and Canada still had to shoulder half of its legal costs ($3 million Canadian). Policymakers should go a step further and state - in the trade pact text - that non-discriminatory policies that governments take for health and environmental protection cannot be interpreted as violating ANY trade pact terms.

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