Brad DeLong's Semi-Daily Journal (2004)

Maybe Mr. Liptak's as dumb as a sack of hammers.

And maybe the Political editor at the Times doesn't know a thing about the mechanics of NAFTA. And maybe the political, business and international editors at the Times are too shy to ask each other for help with stories a little out of their core areas.

And maybe Times fact-checkers figure Chief Justice Marshall is familiar with NAFTA and the mechanics of international trade law and give him a pass.

I have other problems with this particular provision of Nafta, but maybe a proponent like yourself could address Mikva's comment that the Congress, knowing what was here in this treaty, would never have passed it.

Hard to address a quote without full context.

But I can say:

(i) Among the Treasury bureaucracy in 1993, this clause was completely standard--the creation of a forum in which foreign investors who think they have been shafted by a national court system can have their case heard was thought to be a very good idea, and this was the standard way to handle it.

(ii) We expected (and continue to expect) U.S. citizens to win many more cases before these NAFTA treatment tribunals against the Mexican government than Mexican (and Canadian) citizens to win against the American government.

(iii) U.S. courts remain autonomous, remain independent, remain sovereign in their judgments--it's just that the U.S. government has to pay weregild when a NAFTA tribunal decides that things have gone off the rails.

http://www.thenation.com/doc.mhtml?i=20011015&s=greider

Brad-
Does the Methanex case (discussed in this article) count as an unsuccessful case against the US?

And is either article wrong in stating that damage awards based on environmental regulations represent a (mild) threat to US sovereignty?

Or is the Greider piece out of date and have none of those fears been borne out?

Methanex alleges that California Governor Grey Davis banned MTBE not because it was environmentally harmful but in order to do a favor for Archer Daniels Midland. Normally one would expect Greider to be opposed to state governors doing favors to enrich big companies--or at least to mention the issue.

IIRC, The NAFTA tribunal ruled against Methanex, but I could be wrong...

I was wrong. It's still in process:

http://www.naftaclaims.com/disputes_us/disputes_us_6.htm

Judges have big egos. They don’t like their decisions reviewed by anybody, let alone an international tribunal. They can’t come out and actually say that, so they wrap their whining in the cloak of sovereignty. It sounds like Chapter 11 is a greater benefit to the US than others. But suppose a foreign country loses big to the US and refuses to pay, pleading poverty?

People on the American left (rightly) question whether American exceptionalism on security issues undermines American interest internationally by giving everyone else a sense of grievance. But the same point arises against the protectionist left in a case like this. What would Americans think if a foreign court (with a pecuniary interest in the outcome) levied hundreds of millions of dollars in punitive damages in a commercial case, totally disporoportionate to any plausible notion of compensation.

Surely the substantive point is whether disproportionate punitive damages in contract cases (especially where local juries have an incentive to make the foreign investor pay) are fair.

Gareth:

That's an easy one for me. In the event a foreign court issued an unfair, biased ruling in a commercial dispute between a local company and a US one, Americans would be glad there's an unbiased international arbirtation body out there written into the trade agreement that will slap the offending government with a stiff fine much larger than what the foreign company received in the biased case. So that the foreign government will see to it that its courts don't behave idiotically next time, or they'll drop the charade and scrap the trade agreement they never meant to adhere to in the first place.

So let me get this straight. The O'Keefe family walks off with 23 times the maximal value of a deal because of some dispute about the terms of a contract and the U.S. taxpayers are left on the hook for that $175 million? Great thinking, Einstein!

It's nice to know that corporate socialism is alive and well, but that it doesn't interfere with the sovereignty of the U.S.A.

john c. halasz: What would you propose as a remedy? Should the US withdraw from NAFTA? Or should we try to renegotiate the treaty to eliminate or modify chapter 11? Courts err all the time, that’s why we have appellate review. In this case the Loewen Group claims it was coerced into an unfair settlement because of the $675 million bond it would have to put up pending appeal. We really don’t know if that bond was unreasonable; it’s hard to tell from NYT article as they (as usual) leave out important factual and legal information. If the Loewen Group really was likely to prevail on appeal because trial court made obvious and serious legal and factual blunders, then one would think they could borrowed the money for the bond. Or given that the US Treasury could ultimately be responsible, it would have been prudent for the US to post the bond for them, so a US appellate court would have the opportunity to correct the error of the Mississippi trial court. It seems to me (without doing further research) that on the whole, chapter 11 of NAFTA is a good deal for the US (assuming NAFTA as a whole is also a good deal). A Mexican court (say) is less likely to try and really stick it to a US company if the Mexican government might have to cough up the money later. I trust US courts (flawed as they are) to make fair decisions more than I trust Mexican courts. If fact I don’t trust Mexican courts at all. If the NAFTA International Tribunal should turn out to have a systematic bias against the US, then we could consider a withdrawal. But there are far too few cases to conclude anything like that. In the meantime we should just live with the situation as is and ignore the whining by law professors and judges.

"So why did Liptak write the article that he did?"
The flow of money for campaign contributions to the judges is dwarfed by the money flowing into the press. He who pays the piper, calls the tune.

The bonding provision is designed to prevent appeals. It certainly presents the appearance of unfairness. As I recall, the Texaco bankruptcy was filed because Texaco could not post an $11 billion appeal bond. The price of a bond is an element in any calculation of the value of an appeal. It probably strains the imagination of outsiders that the price of appeals is so high, particularly in courts where there is already a strong appearance of home cooking.

Mr. Halasz:

Yes. Exactly. The US government and by extension its taxpayers are on the hook for $175 million because American courts and law enforcement agencies stood back and let an American firm break the law by screwing over a Canadian company because it was Canadian.

That fine -- and the international arbitration panel that handed it down -- are there to ensure that next time some pissant state court wants to screw over foriegn investors as a favor to a local company, the DoJ and Commerce Department are going to put some people on an airplane to Mississippi in order to file friend-of-the-court briefs on behalf of the foreign investors if the investors are the ones in the right.

Wouldn't you hope for the Canadian and Mexican governments to do the same if an American firm was being screwed over in one of their courts? And if they didn't, wouldn't you want to be able to go to that international arbitration panel?

A. Zarkhov:

Well, I'm neither a lawyer, nor an economist, so obviously, I wouldn't have any particularly advanced thinking to offer on this particular, specialized issue. But from what I've read in the media reporting, NAFTA was basically a wash, neither a boon, nor a bust. And though I have no way of assessing the probability that cases such as this one would occur, (since media reports inevitably cherry-pick the most egregious instances)-, it does seem that "Chapter 11" left some large, under-thought loopholes, which does seem to me to be symptomatic of the way, under the guise of "free trade" agreements, corporate, which is to say, essentially private, interests can gain privileges by fixing in advance and freezing in rules, which do not necessarily have to do with direct matters of trade, but which pre-empt decisions more properly belonging to public-political policy processes, in which a wider distribution of interests can gain consideration. There may be overall efficiency gains in this, though equally there may be rigidifications and drawbacks, as decisions have a temporal dimension as the change in both states of affairs and knowledge alters considerations as to best practices. Not being Mexican, of course, I would not trust either the Mexican courts or the Mexican politicians- (I have enough trouble with my own country)-, but, at least in principle, the Mexicans should be "free" to enact what policies they would deem best, be it business regulation or "deprivatization", realizing that they neither should, nor can do so without cost. The same would go for the U.S.A., in the expectation that our government would not be in the business of offsetting private costs onto the public domain. And if there is a bilateral, or, in this case, a trilateral, agreement such an agreement remains in force so long as it is effectively an agreement. So in answer to your question as to what I would recommend, in an egregious case such as this one apparently is, it would seem to me to be a matter for political negotiation, though I would have no idea how to square that with requirements for legal formalism. As for "free trade" agreements in general, I would suggest that they establish some joint political body to oversee them, with the standby authority to negotiate politically over egregious miscarriages or violations such as this one, and that they be subject to term limits and thus to periodic renegotiation, in the light of the assessment of past effects and future prospects.

“The bonding provision is designed to prevent appeals.” More accurately the bonding provision is designed to prevent frivolous and dilatory appeals. Remember in general more than 90% of appeals do not prevail. An appeal is not supposed to be a “second bite at the apple.” How would you like to win a lawsuit against a company who had wronged you, and then have it appeal with the sole purpose of delaying payment? And then during the course of the appeal the company undertakes a very risky venture, which bankrupts the company. After you prevail against their dilatory appeal, the well is dry and you get nothing. This is the kind of abuse that bonding is designed to prevent.

john c. halasz: I’m not sure I understand what you wrote. But I think that the International Tribunal is doing exactly what you want: correcting an “egregious case.” That’s what the political process that begat NAFTA was supposed to do. As a citizen I ask: is chapter 11 on the whole better for the US? So far it seems yes. But if in future we find chapter 11 so flawed it works against the interests of the US, then we will have to fine-tune it. Remember the courts are governmental entities, and if they keep screwing up at great cost, then it’s up to the governments to fix their own broken court systems to stem the losses.

Just don't do business in Mississippi...

The $175 million judgment was punitive damages.

The purpose of punitive damages is to PUNISH. This means that the results should be severe enough that the offending party, and others who hear of it, won't do it again.

If the guy who boosted your car stereo just had to pay to replace it, would it stop him from doing it again?

As to chapter 11, the basic criteria for sanctions seems to be "your action costs us money, so you need to pay us."

So you have a Canadian company suing the US over an MTBE ban in California and a California company suing over an MTBE ban in Canada.

You also have a decision (might be WTO, and not NAFTA, fuzzy memory) requiring that Mexican tuna caught with nets that kill dolphins must be labeled as "dolphin safe" in the US, along with dozens of decisions on things like zoning, where foreign developers have gotten paid for community attempts to preserve local habitats.

Chapter 11 seems to have been written by those folks who feel that any government regulation of a business is an illegal taking.

Certainly, there needs to be regulations in these sorts of agreements to prohibit government action primarily designed to disadvantage foreign products and services, but this appears to have been written to go way beyond that standard.

FWIW, I favor the ability of governments to take actions like those of the EU regarding genetically modified crops.

It should not be enough to show a loss, you need to show an effect that is primarily disadvantaging a foreign competitor.

Additionally, I think that these hearings should be public, and probably televised.

They are currently secret.

Brad mentions weregild, but doesn't weregild have some historical connection to the development of certain kinds of civil liability suits? I think that Blackstone says so, at least. But I'm not a legal historian. The main point is: legal development occurs incrementally. Incremental changes need to be watched very carefully. The "whining by judges and law professors" is worth paying attention to because they are in a better position (than non-experts) to understand the consequences of incremental changes.

Add the financial resources of multinational corporations to a standard of protection that may end up being understood by the tribunal judges to be higher than the protection afforded investors under U.S. law, and you have reasons to worry, I'd say.

One need only look at the recent ECHR ruling against Germany (with respect to agricultural lands) to note that transnational courts may attempt to interfere with government policy in the area of property rights. The parallel is not exact, of course, but it's worth thinking about.

Americans, whether left or right, don't care about any sovereignty other than their own. So it's OK for a Mississippi jury to award hundreds of millions of dollars in punitive (i.e., non-compensatory) damages in a commercial dispute, but it's not OK for Mexico to have its own environmental laws.

The whole point is that no one will invest in Mississippi if they think they have no recourse if a Mississippi jury steals their money. So the people of Mississippi are better off if foreign investors have a process.

Could this process be used as a Trojan horse by people who equate any regulation with "takings" (see R. Epstein). Perhaps. But is there any evidence that this has actually happened?

A. Zarkov is of course right that the putative purpose of the appeal bond is to prevent frivolous and dilatory appeals. But the tool is too heavy: it stops perfectly valid appeals as well. As in this case. Consequently, people are justified in seeing the requirement as unfair.

Brad DeLong vastly overstates the hostility of the NYT article from which he selectively quotes. By stringing together all the cautionary quotations in the article, he changes the tone from "viewing with concern" to "red alert." The actual article is much less alarmist than his post would suggest.

For instance, his point about the article not saying that the NAFTA courts sit in judgment over the U.S., not as appellate courts, is well taken. But the article never says they are appellate courts, and makes it clear that damages will be assessed against the United States and not against private litigants. And if DeLong thinks there is no effect on an elected Missouri judge when his unwise actions force the U.S. to pony up $750M, he's not thinking very deeply.

Finally, even if the tribunals cannot overturn American court judgments, it is shocking to many ordinary people that America can be held to account for the actions of her state officials by a non-accountable foreign tribunal -- and that shock is what makes the article news. That's "why Liptak wrote the article he did."

If this sort of nationalistic debate ranks high in US media nowadays, imagine when (or if) the first FTAA agreement-appeals start to pop up.

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