Canadian Corporation Uses NAFTA to Sue the U.S.: The Loewen Group, Inc. v. The United States

?? Breifing Paper

Canadian Corporation Found Liable in Mississippi Courts Uses NAFTA to Claim Legal System Violated Its Rights

Wants U.S. Taxpayers to Reimburse it for the Verdict and Subsequent Business Set-Backs

The Loewen Group, Inc. v. The United States

For the first time, the United States is being sued by a private corporation for cash damages under the "investor-to-state" provisions of Chapter 11 of the North American Free Trade Agreement (NAFTA). In 1995, Canadian-based Loewen Group, a major funeral conglomerate, was the defendant in a Mississippi lawsuit involving allegations of fraudulent and malicious business practices. After a trial highlighting how the conglomerate had set out to ruin a local small business, the jury found Loewen liable and awarded huge damages to the plaintiff, a local funeral home and insurance operator. Loewen ultimately settled the case for $150 million. Now, Loewen is claiming that the Mississippi state court award constituted a violation of the investor rights and protections granted by NAFTA. Loewen is seeking hundreds of millions of U.S. taxpayer dollars in compensation.

The U.S. government has not released any information relating to this NAFTA case. Indeed, the public might never have learned of its existence if not for a short paragraph on the suit contained in Loewen's mandatory SEC filings. Under NAFTA, Loewen is required to notify the U.S. government it is planning to sue 90 days before it actually initiates the case in a dispute settlement venue. This allows a "cool down" period for parties to consult and possibly settle the claim. Loewen registered its case in the Additional Facility of the International Centre for the Settlement of Investment Disputes (ICSID), a unit of the World Bank, on October 30, 1998. This means that the U.S. government knew about the suit as early as July 30, 1998. Given that the U.S. government never informed the public, they could very well have settled the case with the company without anyone even discovering the claim existed. This raises disturbing questions concerning the existence of additional cases that may have already been settled outside the public eye.

Background: The State Court Case Against Loewen

The 1995 Mississippi case, the outcome of which Loewen claims a NAFTA violation, involved a dispute between Loewen and a local Biloxi businessman named Jeremiah O'Keefe. O'Keefe alleged that Loewen,? as part of a strategy to dominate the local funeral market,? had committed various unlawful anti-competitive and predatory acts designed to drive O'Keefe's local funeral and insurance companies out of business. According to O'Keefe's allegations, Loewen refused to honor a contract that guaranteed O'Keefe exclusive rights to provide funeral/insurance services and entered into a legal settlement over a previous contract dispute with O'Keefe that Loewen had no intention of honoring.

A Mississippi jury agreed with O'Keefe. Outraged by Loewen's behavior, the jury assessed compensatory damages of $100 million and punitive damages of $400 million against the company.(1) According to one juror, "The Loewen group clearly violated every contract they signed with O'Keefe. . . . If there ever was an indefensible case, I believe this was it."(2)

The Supreme Court rejected Loewen's demand that it be exempted from a long-standing state law concerning appeals in civil lawsuits. The law requires that losing defendants who wish to pursue an appeal without beginning to pay damages to the plaintiff post a bond worth 125% of the damages owed. The purpose of the law is to prevent defendants from using the lengthy appeals process to hide assets or otherwise evade liability. Loewen ultimately settled the case for $150 million.

The Loewen-O'Keefe dispute arose in the context of the increasing monopolization of the U.S. funeral markets by a handful of conglomerates. This phenomenon has drawn public attention to subsequent consumer abuses and anti-competitive business practices in the industry. In February 1998, "60 Minutes" reported on consumer price gouging that resulted from the monopolization by conglomerates of local funeral markets in Florida. Indeed, in a recent Philadelphia case, Loewen paid $30 million to settle a breach of contract suit similar to that pressed by O'Keefe.(3)

Loewen's NAFTA Lawsuit

The Loewen Group claims that, in its case, the workings of the civil justice system in Mississippi violated international legal norms of "fairness," discriminated against the Canadian-based corporation and attempted to "expropriate" or seize Loewen's assets without compensating the company -- all violations under NAFTA's investor protections. Loewen claims that the purported violations of NAFTA investor benefits constituted a "denial of justice," that the conduct of the trial judge, the size of the jury award, the courtroom strategy of the plaintiff's attorneys and the ruling of the Mississippi Supreme Court all contributed to these violations of the investor rights newly provided to Loewen under NAFTA.

Specifically, Loewen is claiming:

That the standard Mississippi 125% bond requirement effectively "expropriated" or seized its assets without providing compensation. NAFTA's Chapter 11 provides an expansive "regulatory takings" mechanism allowing private companies to demand compensation for government actions undermining a corporation's ability to profit.

That its right to appeal was effectively foreclosed by the 125% bond requirement. Loewen argues that the Mississippi Supreme Court "denied it justice" in violation of NAFTA by not exempting it from the state law requirement. That is, Loewen is arguing that it had a right to a lower bond requirement --? a right that can be enforced under NAFTA.

That the jury award is not "proportional" to the amount sought by the plaintiff. Loewen is in effect arguing that the very civil justice system? allowing jury trials ? violated the company's NAFTA-guaranteed rights to fair and equal treatment and non-discrimination.

That its current and projected financial difficulties have been caused by this "illegal" denial of justice under NAFTA. The company will seek compensation from the U.S. government in taxpayer dollars for the value of the settlement and for subsequent plunge in the value of its stock and other business setbacks,? which Loewen claims stemmed from the lawsuit.

How the Case Will Be Heard

No U.S. court will ever rule on whether the O'Keefe case violated new investor rights established under NAFTA. While the U.S. debate around NAFTA focused on jobs, one of the agreement's most dramatic aspects is its internal binding dispute resolution system. NAFTA has empowered Loewen to pursue its case before an international NAFTA tribunal -- not in U.S. court --? where the proceedings are conducted in secret and the records are not publicly accessible. Since the tribunal's decision will be final and binding, the U.S. government has no recourse to appeal (outside of the tribunal's own limited appellate process).

Under NAFTA rules, Loewen has registered its case at the Additional Facility of ICSID. Under NAFTA, the panel will be made up of three arbitrators, one appointed by Loewen, one by the U.S. and one appointed by the ICSID Secretariat. There will be no role for public participation in the legal proceedings. Amicus curae briefs will not be accepted. Despite having an obvious interest in upholding the laws and verdict at stake in Loewen's suit, neither the State of Mississippi nor the plaintiff's lawyers --? none of which have even been notified of Loewen's NAFTA claim --? can participate in the defense. U.S. courts, however, are required under NAFTA to enforce any judgment against the United States.

The NAFTA "investor-state" dispute settlement mechanism has not gone untested. Since it became operative in 1996, four known claims for damages have been initiated by U.S.-based corporations against the Canadian and Mexican governments. All of these cases involve challenges to environmental and public health regulations. The actual number of Chapter 11 cases could in fact be much higher, however, since neither the plaintiff corporation nor the defendant government is required to make the suits public. While one of the arbitration venues designated by NAFTA publishes a list of its registered cases --? the International Center for the Settlement of the Investment Disputes (ICSID) --? the other venue, the United Nations Center for International Trade and Law (UNICTRAL), does not.

One of the cases, Ethyl Corp. v. Canada, has been settled. In April 1997, five days after Canada enacted a public health law banning the import of its MMT gasoline additive, the U.S.-based Ethyl Corp. slapped the Canadian government with a $251 lawsuit, charging the law was a "regulatory taking" that effectively seized its Canadian assets. In August 1998 the Canadian government agreed to pay Ethyl $13 million in damages and to cover the company's legal costs rather than risk a politically embarrassing defeat in a NAFTA tribunal. Under the settlement, Canada was forced to publicly proclaim that MMT is "safe" ? in direct contradiction of the view of its national environmental protection agency ? (and of the U.S. EPA, which has banned its use in reformulated gasoline and is conducting extensive tests on the health effects of low-level exposure through automobile emissions).

The other known pending cases, Metalclad Corp. v. Mexico and S.D. Myers, Inc. v. Canada, are in various stages of arbitration. Both involve environmental regulations that the corporations argue violated their rights to invest and profit as guaranteed by NAFTA.

Threat to U.S. Civil Justice System

Loewen's attempt to use NAFTA to escape the Mississippi jury's verdict (and subsequent settlement) threatens the very core of our nation's civil justice system. If this NAFTA challenge to a state civil jury verdict is successful, it would create a legal precedent that other corporations will try to exploit to escape liability for their wrongful acts. The potential implications are tremendous. Under the theories advanced by Loewen, almost any type of civil verdict or court rule imposing a requirement on a corporate defendant could be challenged as "NAFTA illegal." This could pave the way?for efforts to overturn jury verdicts in products liability cases, such as cases involving defective cars or dangerous drugs and medical devices. It could even mean attacks on punitive damages awards in employment discrimination cases or actions based on consumer fraud. Because the definition of "foreign" corporation is broad, a large number of companies could use Chapter 11 of NAFTA to bring attacks on civil verdicts.

If Loewen is successful in attacking the punitive damages award as illegal under NAFTA, it could mean the end of punitive damages against corporations covered by the trade deal. U.S. and multinational corporations have lobbied Congress for decades to try to pass federal legislation to cap or eliminate punitive damages, but have been unsuccessful. Through NAFTA, corporations could try to create a kind of "back door" immunity from punitive damages where they have been unsuccessful in the legislative arena. Similarly, important tools in civil courts, such as the requirement to post a surety bond on appeal, could be lost in the Loewen challenge.

If this challenge is successful, it would mean U.S. taxpayers -- not corporate defendants --? could end up footing the bill when a corporation is found liable by a jury for injury to others, wiping out both the concept of fairness and the deterrent effect of our liability system.

The Importance and Implications of Loewen's NAFTA Suit

End Notes

1. The jury had initially assessed $100 million in compensatory damages and acted to award $160 million in punitive damages. Loewen requested that the jury be ordered to reconvene to undertake additional deliberations on punitive damages, hoping that a new round of oral arguments could convince the jury to lower the amount. Instead, the jury came back with an award of $400 million in punitive damages against the company.

2. Interview with Robert Bruce, juror, 11/24/95.

3. Provident American Corporation, et al. v. The Loewen Group, Inc., et al. (U.S.D.C. Ed. Pa. CA No. 92-1964). The firm recovered $30 million for a claimed 10 year verbal contract case.