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When arbitrators appointed under the North American Free Trade Agreement (NAFTA) purported to dismiss the case filed against Uncle Sam by the Loewen funeral home chain, they seemed to feel guilty about it. Yes, the panel wrote in its ruling last summer, the Loewen Corp. was the victim in a Mississippi court of “a manifest injustice as that expression is understood in international law.” And yes, they wrote, the United States may be held directly liable for violating NAFTA’s guarantee of “full protection and security” to foreign investors. But the panel said that NAFTA gave it no jurisdiction over an investor, like Loewen Corp., founded in Canada and reincorporated in the United States. Anyway, the panel added, undue intervention in domestic matters by international arbitrators might imperil the “viability of NAFTA itself,” presumably by undermining domestic political support. The arbitrators may regret being quite so forthright. Because-oops-according to the claimants, the panel simply forgot that there is also an individual claim asserted by Loewen Corp. founder Raymond Loewen. There would seem to be no jurisdictional objection to Ray Loewen, who remains a Canadian citizen. The panel is reconvening. “The arbitrators really put their foot in it,” said Professor Todd Weiler of the University of Windsor Law School. “They basically said, ‘We’d like to do the right thing but we can’t.’ Well, now it looks like maybe they can. The U.S. is scared.” If it is afraid, the Justice Department isn’t showing it. “Loewen has already lost,” spokesman Charles S. Miller said. On this view, the tribunal needs only to clarify that Loewen’s individual claim has been dismissed. Whatever the arbitrators decide, they are sure to be condemned. An affirmation of the U.S. victory would anger many investment lawyers around the world who saw Loewen’s loss as proof that the United States will not abide by the rules it imposes on others. Only last year, American investor Ronald Lauder won $350 million from the Czech Republic under a bilateral investment treaty with similar rules on dispute resolution. In a poll on the “OGEMID” Internet forum, which serves the investment-arbitration community, an overwhelming 28 of 31 respondents criticized the initial Loewen ruling. Ordinarily cautious experts, posting online, called the initial Loewen ruling “preposterous,” “quite wrong” and “completely appalling.” On the other hand, a last-ditch victory by Ray Loewen might undermine American political support for NAFTA. Two years ago, Senator John Kerry, D-Mass., now a presidential front-runner, sponsored a bill that would weaken investor rights under NAFTA by allowing the investor’s country to block its claim. Kerry warned that the United States might face billions of dollars a year in claims. Defenders of the NAFTA dispute resolution system regard Kerry as alarmist. They say all nations benefit from strong investor protection, perhaps the United States most. They note that this country has yet to lose a penny. So far, NAFTA has seen two decisions come down against Canada and two against Mexico, for a total of $23 million in liability. The Loewen case began in 1995 when a Mississippi funeral home owner sued the then-Canadian company on a contract claim worth less than $10 million. In the arbitrators’ judgment, the plaintiff’s lawyer appealed to xenophobic sentiment. He persuaded the jury to punish the foreign company with a $500 million verdict. Under state law, Loewen needed to file a $625 million bond if it wished to appeal. Instead, in January 1996, it settled for $175 million. The New Yorker ran an article on the trial called “The Burial.” But legally, the case was far from dead. In 1999, Loewen Corp. and Ray Loewen filed the first case under NAFTA Chapter 11, which allows foreign investors to sue countries for denying them “fair and equitable treatment.” Loewen Corp. claimed $725 million in damages against the United States. As a 15% owner of Loewen Corp., Ray Loewen can personally claim more than $100 million. In essence, the U.S. judicial system is on trial. After filing, Loewen Corp. went bankrupt. That would be a footnote, except that someone decided that the company should reorganize under U.S. law for business reasons. Becoming American proved fatal to the company’s NAFTA claim. The panel that ruled on the claim is as high-powered as they come. Its junior member is Abner Mikva, retired chief judge of the U.S. Circuit Court for the District of Columbia. He’s outranked by Anthony Mason, former chief justice of the Australian Supreme Court, and Michael Mustill, who served as a law lord in the English House of Lords. The primary ground for its ruling was jurisdictional. The panel found that it lacked power over a company currently incorporated in the United States, a logic that seems not to apply to Ray Loewen’s personal claim. Moreover, many experts maintain that under customary international law only the party’s nationality at the time of filing matters. The panel, they say, was both absent-minded and wrong. As a backup ground for its decision, the panel cited exhaustion. Investors must exhaust their domestic remedies before they invoke NAFTA, and the panel ruled that Loewen had not. Why hadn’t Loewen appealed to the U.S. Supreme Court instead of settling? The “central difficulty in Loewen’s case,” the panel wrote, was that “Loewen failed to present evidence disclosing its reasons.” The panel complained that “we are simply left to speculate on the reasons which led” Loewen to settle. Critics see three flaws in this reasoning. First, if the panel thought such evidence was crucial, it had the power to ask for it. Second, such evidence had in fact been submitted: Loewen Corp. had filed two affidavits explaining the company’s conviction that it had no choice but to settle. Finally, some say, there is the matter of common sense. “In what world does the Arbitral Tribunal live?” Swiss arbitrator Jacques Werner thundered in the Journal of World Investment. “When a party is within one day of having its assets seized, the option to appeal to the U.S. Supreme Court has at best a very remote chance of succeeding, and there is a window of opportunity to settle the case for one-third of the amount of the verdict, the reasons for settling the case for anyone having some experience of real life are self-evident.” The arbitrators’ conclusion rests entirely on their points about jurisdiction and exhaustion. But most of the opinion is devoted to a condemnation of Mississippi justice. The panel clearly found unfairness to the investor and recognized its power (if it had jurisdiction) to redress that unfairness. One observer has called this long hypothetical “the mother of all dicta.” Others fear it will go down in history as “the dicta that ate NAFTA.” It’s not often that a ruling is so unclear that the winner asks for clarification. But in August 2003, two months after the ruling was issued, “[t]o avoid any doubt on the subject,” the United States asked the tribunal to issue “a supplementary decision clarifying its disposition” of the individual claim filed by Ray Loewen. U.S. lawyers might have feared that the June 2003 award would not withstand a challenge in federal court. Under the U.S. Arbitration Act, a federal court may vacate an arbitral award “where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final and definite award upon the subject matter submitted was not made.” An unfair award will usually survive under this standard, so long as it’s complete. An incomplete award is vulnerable. The panel agreed to the U.S. request and ordered a new round of briefing, which concluded in January. Ray Loewen’s lawyers reargued the case. The United States denounced them for rearguing the case. To everyone’s relief, no new hearing was held. It’s unclear whether the panel is reconsidering or merely clarifying. The suspense is mounting in the international business community. A supplementary ruling is expected at any time. Werner, the most outspoken critic of the ruling, argues that Loewen’s loss saps the world’s confidence in a fair system of investment arbitration. “This was a lost opportunity to show that the rule of law applies equally to the world’s most powerful country,” he said in an interview. Jeremy Carver, head of international litigation at Clifford Chance, often cheers for states against investors. He argued that Loewen Corp. built litigation risk into its calculus: “Any investor who goes to the U.S. knows that it’s litigious.” Carver said a Loewen victory might lead to “legal and social chaos.” It “would open the floodgates,” he warned, for any foreigner from a nation that has signed a treaty with investor protection, “to reopen decisions of U.S. courts he dislikes.” Jan Paulsson of London’s Freshfields Bruckhaus Deringer responded that he’ll believe in the floodgates when he sees the flood. But if such outrageous denials of justice are routine, then, yes, they should be routinely righted, he said in an interview from Paris. There is reason to be skeptical that the Loewen scenario will often recur. Jackpot verdicts are common, to be sure. But so are verdict reductions on appeal. What made Loewen uniquely unjust, in the panel’s view, was the combination of a xenophobic jury argument, a jackpot verdict and a massive appeal bond requirement. Onerous appeal bond rules are on the wane throughout the United States [NLJ, Feb. 16]. Though Paulsson favors investor protection, he said that, on balance, the award advances the rule of law. Paulsson, who is writing a book on denial of justice under international law, praised the panel for affirming that it is appropriate for arbitrators to correct denials of justice by national courts. In recognizing this principle, Paulsson said, the panel may help to revive a tradition that thrived in international cases before World War II. A long shot What will it take to bury the claim forever? If the panel is reconsidering its ruling, Ray Loewen’s odds of prevailing appear long. Even if the panel asserts jurisdiction, he must persuade it to reaxamine its conclusion on exhaustion in light of overlooked evidence. Werner, for one, predicted that the ruling against Loewen will stick. “The arbitrators put so much intellectual capital into this decision, I don’t see them turning around,” he said. “And I really don’t see any U.S. court declaring that the U.S. courts breached the most basic standards of fairness.” If Loewen loses, his only recourse will be a challenge in the U.S. District Court for the District of Columbia. The standard of review is exceedingly strict. Michael D. Goldhaber is a reporter with American Lawyer Media. His e-mail address is [email protected].

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