No Methanext Time

As @jonathanweisman reports, Wikileaks has leaked the investment chapter of the Trans-Pacific Partnership. In response, critics and proponents of the Obama trade deal have trotted out their favored arguments against and for the deal’s investor state provision, which allows foreign investors to directly sue states. Some of the arguments on the pro side, such as the fact that the US has never lost a case, that 3,200 of these treaties already exist without the world imploding, and that the US is already sued a lot in domestic courts, are difficult to counter.

However, one argument raised in the piece seems less compelling. From the NYT,

[In 1999] California banned the chemical MTBE from the state’s gasoline, citing the damage it was doing to its water supply. The Canadian company Methanex Corporation sued for $970 million under Nafta, claiming damages on future profits. The case stretched to 2005, when the tribunal finally dismissed all claims. To supporters of the TPP, the Methanex case was proof that regulation for the “public good” would win out […] as long as a government treats foreign and domestic companies in the same way, defenders say, it should not run afoul of the trade provisions. “A government that conducts itself in an unbiased and nondiscriminatory fashion has nothing to worry about,” said Scott Miller, an international business expert at the Center for Strategic and International Studies, who has studied past cases. “That’s the record.”

This narrative about Methanex may pass muster in the court of the public opinion, but it has not fared as well in the courts of investment treaties.

The quirk about investment treaties is, there is no binding precedent. So it’s a fairly unpredictable legal system where different ad hoc tribunals come to different conclusions on similar matters and legal provisions. So the pro-regulatory reading of Methanex (which is not the only reading of the award, BTW, as I show below) has not been consistently followed in subsequent cases. Not even, as it turns out, by its creators (who are, as an additional quirk, also not bound by their previous decisions either). The rub? Citing any one case as support for a favored proposition is a pretty merit-less exercise.

To examine Methanex’s legacy, I pulled together the 32 finalized arbitration awards since that time that cite the decision. Although not binding, past cases do influence later ones, as evidenced through citation. Although not a random sample of the 137 cases in my dataset (which features all public and finalized merits cases from the first award in 1990 to the end of 2013), it is a nice cross-section of a good chunk of awards.

The Methanex decision was rendered by an ad hoc tribunal led by UK arbitrator VV Veeder, who was joined by Michael Reisman of Yale Law School (selected by the US) and Canadian lawyer J. William Rowley (selected by the investor). I will first highlight its conclusions on expropriation, which are the ostensible basis for some of the claims by Miller above. (Later on, I will address a few other aspects of the case.)

The tribunal dismissed Methanex’s claim of expropriation under NAFTA’s Article 1110, writing that:

…as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation… No such commitments were given to Methanex… the Tribunal concludes that the California ban was made for a public purpose, was non-discriminatory and was accomplished with due process. Hence, Methanex’s central claim under Article 1110(1) of expropriation under one of the three forms of action in that provision fails. From the standpoint of international law, the California ban was a lawful regulation and not an expropriation… Part IV – Chap. D – paras. 7, 9, 15)… Nor has Methanex established that the California ban manifested any of the features associated with expropriation… Methanex claims that it lost customer base, goodwill and market share… In the view of the Tribunal, items such as goodwill and market share may, as Professor White wrote, “constitute [] an element of the value of an enterprise and as such may have been covered by some of the compensation payments”… Hence in a comprehensive taking, these items may figure in valuation. But it is difficult to see how they might stand alone, in a case like the one before the Tribunal. (Part IV – Chap. D – paras. 16-17)

Some critics of investment treaties, such as Professor M. Sornarajah, celebrated the Veeder decision at the time. He claimed that it constituted a “redefinition of regulatory takings as not amounting to expropriation”. He argued that early investment treaty cases (such as Santa Elena v. Costa Rica) attempted to require compensation for regulatory changes, but that “It is unlikely, in the light of Methanex, that this particular seed will see any flowering… One may argue from this episode that the existing system contains its own corrective mechanism.” (p. 343)

There are actually different ways to read Veeder’s comments on expropriation. One, which was captured in the comments by Miller in the NYT and by Sornarajah, is the “qualitative Veeder”. Under this reading, a government measure is scrutinized qualitatively for whether it has a public purpose. If it does (or meets a similar qualitative test), it is not an expropriation. But there is also a reading I will call “quantitative Veeder”. In this approach, a tribunal first looks to the extent of deprivation. If it is not substantial, the analysis ends. If it is, this it is only excused if EACH AND ALL of the following conditions are met: for a public purpose, non-discriminatory, through due process and good faith, upon payment, and no specific promise made.

Tribunals have variously adopted the qualitative and quantitative Veeder interpretations. On the qualitative side, a few tribunals excused policies categorically because they were public, even when they severely hurt investments (Saluka v. Czech Republic (2006) on a forced administration of a bank, Continental Casualty v. Argentina (2008) and Suez/AWG v. Argentina (2010) and Total v. Argentina (2010) on Argentina’s 2001-02 crisis measures, EDF v. Romania (2009) on the elimination of duty free shops at airports out of concerns about corruption, Merrill v. Canada (2010) on a logging regime, Chemtura v. Canada (2010) on lindane deregistration, Iberdrola v. Guatemala (2012) on electric utility regulations).

A few other tribunals took an assorted number of other qualitative approaches, although not all consistently in a pro-regulation direction. Biwater v. Tanzania (2008) found that political acts were expropriatory (even if they did not reduce value but merely impaired rights), while contractual acts were not expropriatory (even if they sharply reduced value). Other tribunals also found that total deprivation could be excused if it was pursuant to contractual behavior (Bayindir v. Pakistan (2009) on a highway contract, Suez/AWG v. Argentina (2010) on Argentina’s water concessions, Ulysseas v. Ecuador (2012) on an electricity generation contract). Still others found that a regulatory action can’t be an expropriation if a country allows judicial appeal of it (EDF v. Romania on financial police seizing a company’s assets). In sum, all of the cases that took a qualitative approach found in favor of the state (with the partial exception of Biwater, which did not end up ordering any compensation.)

Despite this, the “quantitative Veeder” had a stronger pull in the case law, not least from his own co-arbitrator in Methanex. Without citing the earlier Methanex award he signed two years prior, Rowley argued in Vivendi v. Argentina (Vivendi II, 2007):

“the Treaty directs the Tribunal first to consider whether the challenged measures are expropriatory, and only then to ask whether they can comply with certain conditions, ie public purpose, non-discriminatory, specific commitments, et cetera. If we conclude that the challenged measures are expropriatory, there will be violation of Article 5(2) of the Treaty, even if the measures might be for a public purpose and non-discriminatory, because no compensation has been paid. Respondent’s public purpose arguments suggest that state acts causing loss of property cannot be classified as expropriatory. If public purpose automatically immunises the measure from being found to be expropriatory, then there would never be a compensable taking for a public purpose. As the tribunal in Santa Elena correctly pointed out [ed. note: the very case Sornarajah disliked relative to Methanex], the purpose for which the property was taken “does not alter the legal character of the taking for which adequate compensation must be paid.” (para. 7.5.21)
This and other tribunals have taken similar analytical approaches and found expropriations (Fuchs v. Georgia (2010) on pipeline development; Tza Yap v. Peru (2011) on tax collection; Unglaube v. Costa Rica (2012) on park and turtle protection; Burlington v. Ecuador (2012) on oil policy and potential environmental impacts). Others used the same test and did not find expropriations (Firemans Fund v. Mexico (2006) on bank bailouts; ADM v. Mexico (2007)/ CPI v. Mexico (2008)/ Cargill v. Mexico (2009) on HFCS taxes; BG Group v. Argentina (2007)/ National Grid v. Argentina (2008)/ El Paso v. Argentina (2011)/ and Mobil v. Argentina (2013) on utility regulation and crisis measures; Glamis Gold v. USA (2009) on gold mining and conservation; Grand River v. USA (2011) on Native cigarette sales).
In sum, cases that followed the quantitative reading of Veeder were more likely to find expropriations. But more striking is how – whichever approach tribunals took to expropriation – they were easily able to shuffle over to find violation of other treaty provisions. More on this below.
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There were two other aspects of Methanex’s legacy worth scrutinizing.
First, on the issue of discrimination. The Methanex tribunal analyzed claims that US regulations violated NAFTA’s obligations for governments to accord national treatment (non-discrimination) and fair and equitable treatment (FET), and let the US off the hook on both accounts. However, neither of these approaches became influential. First, the NAFTA national treatment provision doesn’t exist in most investment treaties. Second, Methanex analyzed FET primarily through an “intent to discriminate” lens. The subsequent case law has not followed this emphasis, and indeed, investment treaty tribunals almost never find against a state because they treated domestic companies better than foreigners. (As it turns out, this ends up being hard to prove.)
Instead, virtually all of the action is on (non-discrimination involving) fair and equitable treatment (invoked in virtually every case and successful over half the time, by my calculations). This notoriously imprecise provision has been stretched and pulled to mean a wide range of obligations. Very few of these interpretations have anything to do with countering discriminatory behavior, as legal scholar Jonathan Bonnitcha has documented. For instance, the Lemire v. Ukraine (2010) tribunal found that FET could involve the right to expect that, once a radio operator got one frequency, that they would be able to get more. So, as to the point made by Scott Miller in the NYT quote above, the treaties are about much more than discrimination.
The end result is that claimants unable to prove expropriation or discrimination are able to win under the looser FET standard, something that Sornarjah himself predicted. This happened in Saluka v. Czech Republic, BG Group v. Argentina, National Grid v. Argentina, Suez/AWG v. Argentina, El Paso v. Argentina, and Mobil v. Argentina. Teco v. Guatemala (2013) did not deal with an expropriation claim specifically, but found a FET violation and cited various of the Methanex considerations. Continental Casualty v. Argentina and Total v. Argentina (written by the same chair Giorgio Sacerdoti), left open whether a security swap part of the claim (that was found to violate FET) might not also violate expropriation rules – an approach also taken in Anatolie Stati v. Kazakhstan (2013) and Ioan Micula v. Romania (2013).
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Second, Methanex took a curious stance on the jurisdiction of NAFTA tribunals (one that probably fueled Sornarajah’s qualitative reading of Veeder:

Having concluded on the evidential record that no illicit pretext underlay California’s conduct and that Methanex has failed to establish that the US measures were intended to harm foreign methanol producers (including Methanex) or benefit domestic ethanol producers (including ADM), it follows on the facts of this case that there is no legally significant connection between the US measures, Methanex and its investments. As such, the US measures do not “relate to” Methanex or its investments as required by Article 1101(1). Accordingly, the USA succeeds on its jurisdictional challenge under Article 1101, as regards Methanex’s claim pleaded in its Second Amended Statement of Claim; and the Tribunal concludes that it lacks jurisdiction to determine Methanex’s substantive claims alleged under NAFTA Articles 1102, 1105 and 1110. (Part IV – Chap. E – para. 22)

The Methanex approach to jurisdiction has been an anomaly. Legal scholar Zachary Douglas, writing shortly after the Methanex award, prefaced an extensive critique of the imminent arbitrators with flowery flourish:

even when many beauties grace an award, one is still obliged to throw light upon the problematic parts of the decision, even where no offence can be taken… these issues will be explored now in the hope that they will cause no mischief in the future. (p. 46-47).

He argued (citing also to the Veeder tribunal’s earlier 2003 jurisdictional award) that it would be “rare” that a tribunal would ever find it had jurisdiction if a measure had to be directed legally specifically at the claimant. Rather, what a claimant bases its claim on is the harm caused by a government measure, not the government measure itself. At the jurisdictional stage, Douglas argued it would be more appropriate to defer to the claimant’s basic arguments as to the facts. Moreover, he  argued that no requirement of an intent to harm is necessary in international law, because claimants rarely have a “smoking gun” proving intent.

In the case law itself, the Methanex approach to jurisdiction has been called incorrect (BG Group v. Argentina, para. 227) or “distinguished to death”. Even in NAFTA cases, which continue to refer to the Veeder award as identifying a NAFTA “jurisdictional gateway” (see Grand River v. US, para. 76), tribunals have attempted to sidestep resolving the issue (Cargill v. Mexico, para. 175).

Perhaps the biggest nail in the coffin of the Methanex approach to jurisdiction comes from its authors themselves. Veeder and Rowley both served in the Apotex v. US tribunal (2014). The US State Department and Apotex had sparred over which of their cases better fits the earlier Methanex formulation, with the claimants denouncing what they see as opportunistic argumentation (“the US Rejoinder frustratingly continues the US’s previous silence on the content of the “legally significant connection” that it relies upon for its jurisdictional objection”, from claimant submission in Apotex v. US, para. 2). Veeder and Rowley all but abandoned their previous stance, refusing to offer a precise formulation but stating that “there is no reason to interpret or apply NAFTA Article 1101(1) as an unduly narrow gateway to arbitral justice…” (Part VI – para. 6.76).

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In conclusion, it is fine to argue in favor or against investment treaties. But it is pretty merit-less to point to individual cases as support for a position in a system that doesn’t use precedent, especially when these findings do not even bind their original authors.

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  1. Pingback: Business in Court(s) | Todd N. Tucker : Under Two Ceilings

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