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In our own back yard (continued)


DESPITE THE groundbreaking nature of the Mondev case, the Boston media have all but ignored it. Itís not really their fault: because of the commercial arbitration protocols provided in NAFTA, the case is highly secret. " A lot of us have been trying for a long time to get more information on these cases, " notes Howard Mann, an international-law expert and associate at the Canada-based International Institute for Sustainable Development.

It wasnít until 1996, two years after NAFTA became law, that multinational corporations in the US and Canada even became fully aware of Chapter 11. Not unlike the bankruptcy-law provision of the same name, NAFTAís Chapter 11 provides a sort of last recourse for down-and-out companies seeking to get back on their feet. The difference is that NAFTA protects foreign investors from what they consider unfair regulatory treatment on the part of host nations, and in this way grants unparalleled remedies for aggrieved corporations that havenít necessarily gone bankrupt unparalleled in American bankruptcy law.

For example, suppose a Canadian lumber company with a foreign branch in Oregon doesnít like a state environmental law. Under NAFTA Chapter 11ís broad property-rights standard and very loose definition of " investment, " the company might be able to sue the US government directly over Oregonís law for actions " tantamount " to expropriation. Thatís roughly analogous to what happened with the first NAFTA Chapter 11 case, though the countries were reversed: the US-based Ethyl corporation sued Canada over an environmental ban on Ethylís product, the gasoline additive MMT. Canada settled the case in 1998, consenting to withdraw the regulation and pay a $13 million settlement to Ethyl ó an action that, not surprisingly, sparked a grassroots backlash in British Columbia and other provinces. In the wake of Ethylís success, other US companies, along with Canadian corporations such as Mondev, filed similar suits.

As might be expected, these cases captured the interest of publicity-rousing environmental groups. The Ethyl case and its US analogue, a $1 billion suit by the Canadian corporation Methanex over a California state plan to phase out use of the gasoline additive MTBE, have led to widespread cries that NAFTAís Chapter 11 inverts the " polluter pays " principle ó establishing instead a " pay the polluter " standard. The Mondev case, by contrast, is concerned with the specialized legal concept of sovereign immunity; it doesnít lend itself to such easy sloganeering. " An urban-renewal project doesnít have quite the same public interest as protecting the groundwater, " observes Robert Stumberg, director of the Harrison Institute for Public Law at Georgetown University and a close Chapter 11 watcher. " And also, sovereign immunity is one of those fundamental but arcane funny legal concepts thatís not cuddly like protecting public health. "

But the principle threatened by the Mondev suit is at least as important in its way: the case challenges the rights of Massachusetts within the federal system. One section of NAFTA explicitly requires the US, Canada, and Mexico to ensure that " state and provincial governments " comply with the agreement, and to take " all necessary measures " to ensure that state laws donít conflict with it. According to Mondev International, one conflicting law is the Massachusetts Tort Claims Act, the provision that the Supreme Judicial Court used to kill the Lafayette Place Associates suit.

That law provides for " sovereign immunity, " a controversial legal concept with origins in English common law that was retained by the American colonies and, later, the states. Originally, it held that " the king can do no wrong " ; when kings became a thing of the past, immunity was transferred to state governments. In the 1999 US Supreme Court ruling Alden v. Maine, the 5-4 majority upheld and even strengthened state sovereign immunity, arguing that the federal Fair Labor Standards Act could not force states to be sued without their consent. " The immunity of a sovereign in its own courts has always been understood to be within the sole control of the sovereign itself, " wrote Justice Anthony Kennedy in the majority opinion.

According to the court majority, sovereign immunity isnít just an ancient defense of arbitrary rule. Kennedy argued that state governments would face possible financial hardship if such suits were unconditionally allowed: " It is indisputable that, at the time of the founding, many of the States could have been forced into insolvency but for their immunity from private suits for money damages. " But in a blistering dissent, Justice David Souter argued that there was no real consensus on the meaning or scope of sovereign immunity at the time of the founding.

Whether the Boston Redevelopment Authority should have been granted sovereign immunity in the original case over the Hayward Place property is a tangled legal question. But no matter what you think of sovereign immunity, itís indisputable that NAFTA provides Mondev with the chance to circumvent a democratically enacted Massachusetts law ó a privilege that neither Massachusetts citizens nor American corporations have and that Mondev retains solely by virtue of being a foreign corporation. Mondev canít use NAFTA to get the Massachusetts sovereign-immunity statute overturned, but if it wins its case it will have effectively placed itself above, or beyond, the law. Because NAFTA makes this result possible, it weakens a stateís ability to govern within its borders, thus shifting the federal balance of power between state and national government.

As profound as these implications are, itís difficult to organize around an issue as esoteric as sovereign-immunity law, which is one reason the case has been so invisible. Another is the lack of information. Unlike the Methanex case, this one isnít open to the public; indeed, " itís shrouded in mystery, " according to Stumberg. Though the US government ó itself vulnerable to complaints about secrecy ó tries to make each NAFTA case public, this canít be done without the agreement of the investor who filed the complaint, because all aspects of NAFTA arbitration require agreement between the disputing parties. Mondev has not consented to a public case, which means that although evidence has been submitted, the only widely available document is Mondevís original notice of arbitration (see www.naftalaw.org).

But none of this makes the case any less significant. Among other distinctions, Mondev happens to be the first NAFTA case to turn the Supreme Courtís refusal to hear an appeal into a cause of action against the United States. Mondev claims that the Supreme Court failed to correct a previous NAFTA violation by the Massachusetts Supreme Judicial Court. Indeed, Mondevís suit and another pending NAFTA case against the US, the Loewen Group case, both arose from the everyday workings of the US judicial system. In the Loewen matter, a Canadian funeral-home corporation operating in Mississippi lost a jury verdict and objected to the amount it would be required to pay to file an appeal. The Loewen Group claimed the appeal bond was so large that it effectively prevented the company from appealing at all, which violated the terms of NAFTA. " Before NAFTA, no one would have thought that there was any way to attack the normal operations of the judicial system, " observes Robert Benson, a professor at Loyola Law School in Los Angeles.

Though itís not the central claim of Mondevís case, invoking NAFTA to challenge the US Supreme Courtís refusal of appeal has staggering implications. The Court decides, on average, some 50 cases per year; it turns away thousands. Will each refusal that involves a Canadian or Mexican company become potential grounds for a NAFTA claim? And if a mechanism like Chapter 11 is extended throughout the hemisphere under the Free Trade Area of the Americas agreement, will that right also be extended to Brazilian corporations, Argentinean corporations, and companies from all other FTAA countries?

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Issue Date: August 30 - September 6, 2001






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