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A small deal between a local business and a foreign investor goes sour. The local business files suit. Pressing their home court advantage, the locals hire a flamboyant lawyer who allegedly peppers his arguments with naked appeals to xenophobia. He wins an attention-getting judgment — $500 million — that is wholly out of proportion to the size of the soured deal. Adding injury to insult, a local rule requires the foreign investor to post bond of $625 million in order to appeal. Out of cash and out of town, the foreigners settle and then go hunting for an investor protection arbitration to salve their wounds. Where in the underdeveloped world did this occur? Mississippi. Which investor protection statute was invoked? The North American Free Trade Agreement. Who is the defendant in the arbitration? The United States of America. The little-noted Chapter 11 of NAFTA accords foreign investors the same sorts of arbitration rights that have become standard in bilateral investment treaties like those invoked by Ronald Lauder against the Czech Republic. Under NAFTA, a state can be held liable to a foreign investor if it, directly or indirectly, expropriates an investment or takes an action that amounts to an expropriation. Just as the principles of state-investor arbitration have evolved to protect Western investors in the Third World, Chapter 11 of NAFTA was designed to protect American and Canadian investors in Mexico. But the treaty’s drafters didn’t account for Christopher Dugan of Jones, Day, Reavis & Pogue’s Washington, D.C., office. “If it’s applicable to Mexico, why not to the U.S.?” asks Dugan. “As a matter of simple justice and equity it makes sense.” In 1998 Dugan filed an arbitration claim on behalf of The Loewen Group Inc. It was the first NAFTA claim against the United States. A vast funeral home chain, Vancouver, Canada-based Loewen got into a contract dispute with a local operator in the Mississippi Delta. After a $500 million jury verdict, Loewen settled for $175 million. Then, Loewen went to Dugan, who invoked NAFTA, claiming that because of its nationality, Loewen had been denied fair and equitable treatment in the Mississippi courts. In January 2001 a three-member panel that included Abner Mikva, the former federal appellate judge, ruled that the claim was arbitrable. A hearing on the merits of the case was held last October. NAFTA’s Chapter 11 has many enemies, because it appears to give foreign companies a tool, outside of the political process, with which to undermine controversial policies. To its foes, NAFTA’s Chapter 11 is nothing short of a pot shot at the democratic institutions of the United States. In the Loewen case, the policy at stake is the regulation of torts through the award of massive punitive damages. In a case coming from California, Methanex Corporation v. U.S., the issue is environmental protection. In that dispute, the Canadian producer of methanol, Methanex Corporation, claims that California governor Gray Davis banned MTBE, a methanol product, solely because he received donations from the Archer Daniels Midland Company, which stood to gain from the decision. Environmentalists say that Davis banned the product because it’s dangerous. NAFTA cases so clearly involve public policy that they have started to erode the traditional secrecy of arbitrations. Barton Legum, an attorney with the Office of the Legal Adviser of the U.S. State Department has written that in democratic states, “conducting arbitrations implicating the public interest in conditions of secrecy is unacceptable.” The U.S. State Department now posts NAFTA filings online and, in another innovation, NAFTA arbitrators have accepted amicus briefs. Still, the hearings continue to be held behind closed doors. Even if NAFTA arbitrations were fully public, the more basic question of sovereignty would remain: What business do arbitrators have resolving debates over U.S. tort or regulatory reform? The internationalist’s answer is that treaties inevitably entail a diminution in sovereignty, and the United States must live by the same rules it imposes on others. On July 31, in a spontaneous move, the NAFTA Free Trade Commission, composed of U.S. trade representative Robert Zoellick and his Canadian and Mexican counterparts, stated that NAFTA’s Chapter 11 should be construed narrowly. Investors’ lawyers argue that this interpretation does not bind arbitrators, because it bypasses the democratic treaty amendment process. “They’re changing the rules in mid-game,” complains Henri Alvarez of Fasken Martineau DeMoulin, whose firm is Canadian counsel to Loewen’s founder, Raymond Loewen. Loewen still has a good shot at winning — and that scares investors’ lawyers like David Rivkin of Debevoise & Plimpton, chair of the International Bar Association arbitration section. “If Loewen wins,” he says, “it might trigger a backlash against state-investor arbitration, which in the long term would be bad for investors.” While the arbitrators deliberate, Hollywood is moving ahead. According to Variety, Warner Brothers plans to shoot a film about the 1995 Loewen trial, centered on the character of Willie Gary, the heroic sharecropper’s son who was the victorious plaintiffs’ lawyer. The film is projected as a collaboration between Jonathan Harr, author of “A Civil Action,” and Ron Howard, director of “A Beautiful Mind.” Call it “A Beautiful Civil Action” — with Loewen determined to add a postscript.

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