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NAFTA “Investor-to-State” Provision Creates Giant Loophole for Companies to Evade Justice

Nov. 24, 1998

NAFTA “Investor-to-State” Provision Creates Giant Loophole
for Companies to Evade Justice

Statement by Lori Wallach
Director, Public Citizen’s Global Trade Watch

Five year ago, a broad range of critics in the U.S., Mexico and Canada tried to warn that adoption of the North American Free Trade Agreement (NAFTA) would cause diverse damage to the standards of living, food safety and environment in North America. We argued that NAFTA was not so much about trade as about creating powerful new rights for corporations and investors at the expense of the public interest and democratic governance.

Today, we unveil NAFTA’s fifth birthday bombshell, an example of NAFTA damage that goes well beyond the harshest predictions of NAFTA’s critics. The food safety dangers, job losses, and environmental crime we predicted all sadly came true. Now, we have an outrageous example of NAFTA’s direct attack on democracy with potential implications that are boundlessly alarming.

Loewen, a Canadian funeral conglomerate owning over 100 U.S. funeral homes and numerous cemeteries has made the first use in history of NAFTA provisions that allow a corporation to directly sue a NAFTA government for cash damages to compensate for a government’s failure to deliver to a private investor all of the new benefits for foreign investors that NAFTA established.

This case is not before any U.S. court, but will be heard by a NAFTA tribunal without any of the due process, conflict of interest or openness guarantees of the U.S. system. Indeed, notice of this case was filed 90 days ago with the U.S. government, but it was only revealed because the plaintiff mentioned it in a Securities and Exchange Commission filing. Briefs on the case, its hearings, any rulings and even its potential settlement will occur in total secrecy.

None of the issues involved in this case are remotely related to international trade. None of the issue relate to laws that discriminate against foreign companies or “protectionist” barriers to business.

Rather, Loewen’s claim is that the very operation of the civil justice system in the state courts of Mississippi infringes on new rights foreign investors were granted under NAFTA. Specifically, Loewen lost a jury trial in Mississippi over its conduct towards a local family business. Prior to the case going to trial, Loewen had rejected a $3 million settlement offer from the O’Keefe family which operated several funeral homes in Biloxi. The jury, as we will hear today from its foreman, was outraged by Loewen’s conduct and rewarded $100 million in damages. Oddly, Loewen then asked for jury consideration of punitive damages and was hit with $400 million in further liability. Loewen decided to appeal. In Mississippi, as in many other U.S. states, a surety bond is required at appeal to avoid defendants from declaring bankruptcy or otherwise moving assets to become judgement proof. Loewen went to the Mississippi Supreme Court arguing that the surety bond requirement was unfair and lost. Loewen ultimately accepted a second settlement offer at $100 million. Loewen’s practices in other states have resulted in large court settlements and mandatory divestiture of some funeral homes.

End of case? No. Thanks to NAFTA, Loewen has a new tool to demand a massive tax payer-funded reimbursement for the punishment a U.S. jury meted out for its bad behavior. Loewen claims that the very operation of the Mississippi Supreme Court, a Mississippi trial judge and Mississippi lawyers are “tantamount to” an “indirect expropriation” of Loewen’s assets. This claim uses a broad NAFTA provision (Sec. 1110,) that grants compensation for “regulatory” taking — that is government action falling short of seizure of property but that might affect an investment’s value or profitability.

Now, all of this might simply sound like a trade lawyer getting overly creative with NAFTA. Except, this very NAFTA provision has already resulted in a successful challenge of a health safeguard in Canada. In August, Canada revoked its ban on MMT, a gasoline additive banned by many countries and U.S. states after MMT’s producer, the U.S. Ethyl Corporation, sued Canada for $250 million in lost expected future profits. Canada ultimately agreed to pay $14 million in profits lost to date and sign an apology declaring MMT safe for Ethyl’s use in advertising. Another corporate suit using this NAFTA provisions has been taken by the U.S. Metalclad Corporation demanding compensation from Mexico because land zoning rules halted plans for a toxic waste plant on an ecologically sensitive site.

It is hard to imagine that the narrow margin of U.S. Congress people who passed NAFTA in 1993 would have done so had they understood the powers it conferred upon investors and how these powers would be used by corporations to attack basic public interest laws, evade the very U.S. system of justice and tear down the everyday workings of the courts in an American state.

If Loewen is successful in winning its case or compelling the government to settle ? as in the Ethyl case ? American taxpayers will have to shell out millions in compensation. And the case would set a chilling precedent that could embolden every corporate criminal seeking to evade justice. Perversely, these same provisions are at the core of the Clinton Administration’s attempt – even in the absence of negotiating authority — to expand NAFTA to the entire western hemisphere ? as the Free Trade Area of the Americas (FTAA) agreement ? and to the whole world ? as the Multilateral Agreement on Investment (MAI). The Loewen case provides the latest example of why the U.S. should repeal NAFTA, not inflict it on other countries.