The Right and US Trade Law: Invalidating the 20th Century -- INVESTOR PROTECTIONS IN NAFTA ARE ONE MANIFESTATION OF A BROAD, BACKDOOR EFFORT TO RESTORE THE PRIMACY OF PROPERTY AGAINST SOCIETY'S BROADER CLAIMS

Article excerpt

I. Beyond the Law

The case of Methanex v. United States originated in California in the mid-1990s, when people began to notice a foul taste in their drinking water, a smell like turpentine. Santa Monica had to shut down half its supply wells and purchase clean water from elsewhere. The contamination turned up in thirty public water systems, Lake Tahoe and Shasta Lake, plus 3,500 groundwater sites. The source was quickly identified as methyl tertiary butyl ether (MTBE), a methanol-based gasoline additive that creates cleaner-burning fuel, thus reducing air pollution. But even small amounts of MTBE leaking from storage tanks, pipeline breaks or car accidents made water unfit to drink--and extremely difficult to clean up. A study team from the University of California, Davis, added that in lab tests on rats and mice, MTBE was also carcinogenic, raising the possibility of human risk.

The state government acted promptly. In 1997 the legislature authorized a ban on MTBE if further investigations confirmed the health risks. In March 1999, after more research and lengthy public hearings, Governor Gray Davis issued an executive order to begin the phaseout. Other states were acting too. The oxygenating additive is used in one-fourth of the US gasoline supply, especially in pollution-prone big cities, so New York, New Jersey and other places were also discovering MTBE's unintended consequences for clean water. Up to this point, the story sounded like an alarming but fairly conventional environmental problem.

Then, four months after Governor Davis's order, a Canadian company from Vancouver, British Columbia, filed a daring lawsuit against the US government, demanding $970 million in compensation for the damage California was inflicting on its future profits. Methanex Corporation, which manufactures methanol, principal ingredient of MTBE, claimed that banning the additive in the largest US market violates the foreign-investment guarantees embodied in Chapter 11 of the North American Free Trade Agreement. Under Chapter 11, foreign investors from Canada, Mexico and the United States can sue a national government if their company's property assets, including the intangible property of expected profits, are damaged by laws or regulations of virtually any kind. Who knew?

The company did not take its case to US federal court. Instead, it hired a leading Washington law firm, Jones, Day, Reavis & Pogue, to argue the billion-dollar claim before a private three-judge arbitration tribunal, an "offshore" legal venue created by NAFTA. Each side--the plaintiff company and defendant government--gets to choose one of the three arbitrators who will hear the case, then they jointly select the third, who presides. The proceedings are in secret--no public notice whatever--unless both sides agree to disclose the case. Sacramento had difficulty finding out what was happening, though it was California's environmental law that was under attack.

Methanex and the other controversial corporate claims pending before NAFTA tribunals are like a slow-ticking time bomb in the politics of globalization. As nervous members of Congress inquire into what they unwittingly created back in 1993, environmentalists and other critics explain the implications: Multinational investors can randomly second-guess the legitimacy of environmental laws or any other public-welfare or economic regulation, including agency decisions, even jury verdicts. The open-ended test for winning damages is whether the regulation illegitimately injured a company's investments and can be construed as "tantamount to expropriation," though no assets were physically taken (as is the case when a government seizes an oil field or nationalizes banks).

NAFTA's arbitrators cannot overturn domestic laws, but their huge damage awards may be nearly as crippling--chilling governments from acting once they realize they will be "paying to regulate," as William Waren, a fellow at Georgetown law school, puts it. …