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Children’s cereal company v. Mexico & the corporate use of investor-state dispute settlement to influence policymaking

CCSI | 30 November 2021

Children’s cereal company v. Mexico & the corporate use of investor-state dispute settlement to influence policymaking

By Nora Mardirossian and Lise Johnson

In September, a children’s cereal company threatened to sue Mexico over its adoption of a food packaging regulation. The details of the claim, including the identity of the company, remain unknown. What we do know about the case sheds light on a trend of corporate use of investor-state dispute settlement to block public health measures, shape the rules that govern their conduct, and potentially frustrate sustainable development and the realization of human rights.

Corporate Efforts to Stop Food Labeling Regulation in Mexico

The food industry’s marketing of ultra-processed foods has had incredible success in Mexico. Preschoolers there now receive about 40% of their calories from ultra-processed foods. As the Mexican diet has shifted towards products high in sugar, salt, and fat over the past 40 years, non-communicable diseases associated with unhealthy diets are now among the main causes of mortality in the country. Meanwhile, diet-related chronic diseases have exacerbated vulnerability to COVID-19, contributing to over 284,000 confirmed COVID deaths as of October 25, 2021.

In response to these diet-related health concerns, in March 2020, Mexico amended a food packaging regulation called NOM-51. The amendment provided that, as of April 2021, certain unhealthy products would be prohibited from putting children’s characters, animations, and other marketing materials on their packages – images specifically designed to appeal to and establish unhealthy habits among young children.

Academics, public health advocates and experts, and civil society organizations supported these new research-backed labeling rules. Similar labeling requirements adopted in Chile have succeeded in reducing purchases of sugary beverages. In contrast, Mexico’s previously adopted, softer, and industry-backed strategy toward displaying nutritional information in the form of “Guideline Daily Amounts” (GDAs) had produced disappointing results.

To adopt NOM-51, proponents had to overcome intense pressure from the food industry. According to a report by scientists from Mexico’s National Public Health Institute, “Efforts by academia and civil society to change the GDA were consistently blocked to protect the interests of the transnational food industry with common strategies used to interfere in public health policies. These strategies have been widely documented and include aggressive lobbying, marketing, manipulating public opinion, discrediting scientific findings, exaggerating the economic importance of the industry, funding professional health organizations, and threatening the integrity of decision-making processes, among others.” Another group of researchers also recognized corporate political activity of the food industry as “one of the principal obstacles to the development of public health policies.”

Yet, even after successfully adopting the new measure, the battle is not over. Having lost two challenges against NOM-51 before Mexican courts, food industry players with a vested interest in the status quo are now employing another tactic to pressure the government to abandon its public health measures.

Cereal Company v. Mexico and the Sustainable Development Stakes of ISDS

In September 2021, an “unidentified manufacturer of children’s cereals” reportedly notified Mexico that it would invoke protections under the US-Mexico-Canada Free Trade Agreement (USMCA) to challenge the NOM-51 before an arbitral tribunal.

Investor-state arbitration, often referred to as investor-state dispute settlement or ISDS, is a mechanism established under free trade agreements (FTAs) and other international treaties that allows private investors to sue governments directly, alleging that governments have violated their treaty obligations by unduly interfering with companies’ business plans and profits. While not much is known about the threat, some generalizations can be made about the stakes. One is that, on average, ISDS claims cost governments USD 5 million per case to defend; another is that, from 2017 to 2020, tribunals ordered governments to pay an average of USD 315.5 million each time they were successfully sued. The threat of ISDS alone can make governments less willing to adopt, maintain, or implement public interest measures. ISDS claims, especially if they are successful, can significantly raise the costs of policy action, with both budgetary and distributional implications. ISDS, therefore, gives companies a powerful additional tool in their arsenal to thwart health measures that threaten their growth and profitability.

Moreover, this single threatened claim against Mexico can send a powerful cautionary signal to other countries; Mexico’s law, as noted above, was inspired by a similar law in Chile, and also finds parallels in the front-of-pack labeling rules of other Latin American countries such as Colombia, Peru, Uruguay, and Brazil. Now, these and other countries considering adopting and enforcing these similar laws might think twice.

This ISDS strategy isn’t new. The food company in the present case may be borrowing from the tobacco industry’s playbook. In order to halt diffusion of standardized or plain packaging requirements shown to be effective in reducing smoking, tobacco companies employed a multi-pronged strategy in the early 1990s that included framing the packaging measures as breaches of investment treaties, and threatening legal suits and reputational harm to those governments that adopted such measures. Tobacco companies warned that the packaging rules would give rise to ISDS claims and “legal challenges that would cost ‘millions in legal fees’ and procedural costs. They also stressed that losing in arbitration would result in ‘billions in compensation.’”

These weren’t empty threats. Philip Morris challenged Australia and Uruguay’s packaging laws in arbitration. Although Philip Morris did not formally prevail in either of these cases, the challenges cost those governments nearly AUD 40 million in legal fees and succeeded in delaying or preventing similar measures in other countries to this day. For Philipp Morris and other tobacco companies, those spillover effects likely still constituted a ‘win.’ And it seems companies in other sectors - like sugary cereals - were taking note.

Reforming the ISDS System

State parties to the treaties giving investors the ability to use ISDS have opportunities and obligations to prevent abusive use of this powerful tool. At a minimum, states can ensure transparency around ISDS claims, including government efforts to respond to and settle those claims. They can also negotiate or amend treaties to limit the types of claims investors can pursue. Indeed, after Philip Morris sued Uruguay and Australia, subsequent treaties added provisions seeking to prevent similar ISDS cases in the future. When claims are filed, the home state of the investor also has the ability to clarify to tribunals that the type of claim the investor is advancing is not the type of claim the treaties were designed to support.

Beyond efforts to protect against or halt particular abuses presented by specific cases, states can take more holistic action to ensure that their FTAs and other treaties do not have systems such as ISDS that enable private interests to have undue influence over the law in ways that can be detrimental to both policymaking outcomes and trust in policy processes. This can be done through feasible actions to terminate treaties, or to excise ISDS from them.

Towards More Responsible Corporate Litigation Strategies and Tactics

Even if states do not reform the ISDS system, companies still have a responsibility to avoid abusing the system in ways which undermine human rights and achievement of the SDGs.

Companies’ roles in achieving the SDGs and their responsibilities under the OECD Guidelines on Multinational Enterprises and the UN Guiding Principles on Business and Human Rights (UNGPs) are not just about what the companies produce, or how they produce it. They also extend to other dimensions of corporate activities, including how companies use ISDS and other litigation and arbitration tools to shape the rules of the game. The various ways companies influence policymaking and enforcement, by acting alone and collectively through trade associations, can have major impacts on environmental, health, and other social outcomes. These activities may be a key determinant of whether the world will, or will not, effectively meet the Sustainable Development Goals.

Companies have a role to play in achieving SDG 16, which includes providing access to justice for all and building effective, accountable and inclusive institutions at all levels. ISDS claims are at odds with responsible business conduct under the OECD Guidelines on Multinational Enterprises (Part II(A)(5)) because they empower companies to seek “exemptions not contemplated in the statutory or regulatory framework.” The UNGPs clarify the responsibility of companies (1) to “strive for coherence between their responsibility to respect human rights and policies and procedures that govern their wider business activities and relationships,” including “lobbying activities where human rights are at stake”, and (2) not to “undermine States’ abilities to meet their own human rights obligations, including by actions that might weaken the integrity of judicial processes,” which is an inherent impact of corporate ISDS claims. This is because they make use of “parallel and unequal systems of law” and sometimes revise the lawful decisions of domestic courts that are not deficient but are simply unfavorable to companies.

ISDS cases and their resolution can have potentially corrosive effects on policy processes, institutions, and democratic representation more broadly. Due to the scale and systemic nature of this form of corporate influence, there needs to be greater attention to companies’ use of ISDS as their privileged and powerful tool to influence the law. It is an issue that transcends the relevant policy context – whether related to nutrition, tobacco regulation, or other issues – and raises broader systemic concerns about corporate capture, undue corporate influence over the law, and inequality before the law.

In CCSI’s Four Pillar Framework, developed with the UN Sustainable Development Solutions Network, we have elaborated expectations for food companies’ due diligence of their own litigation activities. This includes the expectation that companies ensure that they do not initiate these legal battles to shape the rules in ways that frustrate sustainable development and the progressive realization of human rights, and direct their legal counsel to engage in responsible litigation practices in line with the company’s sustainability commitments and human rights responsibilities.

Law firms likewise have their own role to play. Those private sector firms, like the companies they represent, have responsibilities under the UNGPs. For law firms, this means, among other things, ensuring that they do not facilitate and drive efforts to distort the law in ways that undermine human rights. Law firms can ensure they act in accordance with those responsibilities when, for example, considering whether to advise clients to pursue ISDS claims, and deciding whether to represent the company in its ISDS claim.

Stakeholders within companies, as well as by external stakeholders such as policymakers, civil society, financers, and customers, all have a role to play in increasing scrutiny over and responsibility of this dimension of corporate conduct. Companies’ use of ISDS could and should, for instance, be integrated as a key factor in sustainability assessments or ESG ratings of those firms.

The Path Ahead for Mexico’s NOM-51

Food processing companies have clear responsibilities under international human rights law, and without upholding these, they undermine the realization of human rights and achievement of the SDGs. Challenging Mexico’s public health measure NOM-51 through ISDS constitutes an abuse of corporate power at the expense of children’s health.

Even while we await more details on this case, it is clear that this use of the ISDS system poses risks to sustainable development and human rights.

States have an opportunity to address these risks by reforming the ISDS system. Even if they do not take action, corporations should not abuse this system. They should respect countries’ public health laws; not seek to rewrite them.

 source: CCSI