Tantamount To, Equivalent To

One of the most controversial provisions in trade and investment agreements is the following provision, taken from CAFTA: "Article 10.7.1: No Party may expropriate or nationalize a covered investment either directly or indirectly through measures equivalent to expropriation or nationalization (“expropriation”)..." CAFTA goes on to say:

The Parties confirm their shared understanding that:...
3. Article 10.7.1 addresses two situations. The first is direct expropriation, where an investment is nationalized or otherwise directly expropriated through formal transfer of title or outright seizure.
4. The second situation addressed by Article 10.7.1 is indirect expropriation, where an action or series of actions by a Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure.

(a) The determination of whether an action or series of actions by a Party, in a specific fact situation, constitutes an indirect expropriation, requires a case-by-case, fact-based inquiry that considers, among other factors:

(i) the economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred;
(ii) the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and
(iii) the character of the government action...

Virtually every NAFTA investor-state case has claimed that certain policies were "tantamount to" an expropriation (the language was changed to "equivalent to" in the post-NAFTA period). We did a report that touched on some of these issues back in 2005. As we wrote then:

NAFTA’s investment rules give foreign investors new rights that go significantly beyond the rights available to U.S. citizens or business under the Takings Clause of the Constitution. In the 1993 Concrete Pipe case, the U.S. Supreme Court held that “our cases have long established that mere diminution in the value of property, however serious, is insufficient to demonstrate a taking.” In contrast, NAFTA Chapter 11 tribunals have defined compensable takings as “the incidental interference” with the use of property that need only cause a “significant” or “substantial” impairment of an investment. Thus, in the Metalclad case, a municipality’s denial of a construction permit to a U.S. company seeking to expand an existing toxic waste facility on land it had purchased was found to be an indirect expropriation requiring compensation under NAFTA. Rather than fixing the problems caused by NAFTA’s loose rules and troubling case history, the USTR has merely made cosmetic changes in the new FTA’s foreign investor protection provisions. For instance, one “fix” the USTR attempted in CAFTA was to eliminate the phrase government actions “tantamount to” an expropriation that appears in the NAFTA text as activity requiring compensation. However, that change is merely cosmetic. The new FTAs still require compensation for “indirect” expropriations, which is the operative term NAFTA panels have relied on in finding regulatory takings. Indeed at least two NAFTA panels have held that the “tantamount to” clause in NAFTA is redundant and does not expand upon the scope of NAFTA’s terms requiring compensation for direct and indirect expropriation. The Bush administration could have conformed the new FTAs to U.S. law which, among other things, requires the demonstration of a near total takings of the property as a whole before a regulatory takings is found, but failed to do so. The end result is that foreign firms are still being granted substantive and procedural legal rights that go beyond what is provided in the U.S. Constitution as interpreted by the U.S. Supreme Court.

These provisions not only expose governments to liability that they often would not have under domestic law with domestic investors, but can also chill policy initiatives. As we said in our report:

A March 16, 2002, article in the Toronto Globe and Mail surprised Canadian health officials who were preparing to issue a new regulation on cigarette labeling. The newspaper reported that Philip Morris, the U.S. tobacco giant, was considering a Chapter 11 investor-state suit under NAFTA because of a proposed public health rule that would ban the words “light” and “mild” from cigarette packaging, terms that have misled smokers into believing that they were using a safer product.

In a submission to the Canadian government, Philip Morris argued that the proposed ban of the descriptors “light” and “mild” would be “tantamount to an expropriation” of its tobacco trademarks containing those words in violation of NAFTA Article 1110, because it had invested millions “developing brand identity and consumer loyalty.”...

While Philip Morris has told Public Citizen that it is not moving forward with the threatened NAFTA case, the Canadian public health legislation is not moving forward either. A spokesperson for Physicians for a Smoke Free Canada thinks that the Philip Morris threat as well as threatened domestic court action has played a role in stalling passage of this important public health policy.

In the recent Glamis case, a NAFTA tribunal ruled against a claim that U.S. and California mining policy was "tantamount to" an indirect expropriation, because basically the company's bottom-line wasn't found to be hurt enough (besides the fact that the corporation still had the dang mining rights). A related concern was that Glamis hated a ton of small government actions, which taken on their own were not significantly costly impediments to their mining operation, but which the company argued taken together represented a sort of conspiracy that could be considered tantamount to an indirect expropriation. The tribunal disagreed, and didn't think it was correct to look at all the actions as a unified whole in any case.

In the recently launched case by Railroad Development Corporation (a U.S. company) against Guatemala, the company is claiming that a series of government measures was "equivalent to" an expropriation, even though no formal expropriation occurred. While neither side acted particularly angelically in this case, the ability of corporations to launch cases for indirect expropriation is of significant public-interest concern.

(Say the Berger administration had acted less shadily, and instead issued a lesivo declaration to get out of a contract with a multinational firm that was sitting on a railroad without developing it. Say we were in the middle of a global recession, and that railroad was a way to directly and indirectly employ loads of unemployed folk. Under CAFTA, that multinational could launch a case against the government for "a measure equivalent to an indirect expropriation."... Now, as I understand the history of lesividad, it would be declared when the public purse was damaged in a particular way... one wishes we had the tool here to deal with Citi and AIG!)

Going back to the actual RDC case and away from the hypothetical, the company could apply the Glamis standard and claim that it has suffered major setbacks after the lesivo declaration that almost completely destroyed the value of their  Guatemalan investment. However, as the company noted, the final court approval of the declaration never occurred, and the damage to their investment came mostly from the negative public relations fallout of the public thinking than an actual expropriation would be imminent. Whether a tribunal would fault the government for all the subsequent fallout is an interesting question, and one we'll continue to watch.