Global Policy Forum | April 1997
NAFTA & environmental laws: Ethyl Corp. v. Government of Canada
by Michelle Sforza and Mark Vallianatos
Ethyl Corporation’s $251 million lawsuit against a new Canadian environmental law is sure to set off alarm bells throughout the public interest world. The suit, brought under the terms of the North American Free Trade Agreement, demonstrates how present and future international economic pacts could pose a danger to environmental regulations and other safeguards.
In early April, the Canadian Parliament acted to ban the import and interprovincial transport of an Ethyl product — the gasoline additive MMT — which Canada considers to be a dangerous toxin. Ethyl (the company that invented leaded gasoline) responded on April 14 by filing a lawsuit against the Canadian government under NAFTA. Ethyl claims that the Canadian ban on MMT violates various provisions of NAFTA and seeks restitution of $251 million to cover losses resulting from the "expropriation" of both its MMT production plant and its "good reputation."
MMT is a manganese-based compound that is added to gasoline to enhance octane and reduce engine "knocking." Canadian legislators are concerned that the manganese in MMT emissions poses a significant public health risk. In addition, automobile manufacturers have long argued that MMT damages emissions diagnostics and control equipment in cars, thus increasing fuel emissions in general. Ethyl is the product’s only manufacturer.1
The Environmental Defense Fund (EDF), which tracks the use of MMT, reports that the additive is used only in Canada. The United States EPA has banned its use in the formulated gasoline, which includes approximately 1/3 of the U.S. gasoline market. An EDF survey of the remaining producers reports that none use the additive.2 California has imposed a total ban on MMT. Canadian legislators wanted to ban the use of MMT in order to protect the Canadian public. Because they could not do so under Canadian Environmental Protection Act (CEPA) provisions, they chose the best available alternative: banning MMT’s import and transport.3
NAFTA requires member countries to compensate investors when their property is "expropriated" or when governments take measures "tantamount to expropriation." Ethyl claims that the MMT ban constitutes such an expropriation. The company argues that the ban will reduce the value of Ethyl’s MMT manufacturing plant, hurt its future sales and harm its corporate reputation. The case will be an important test of how expropriation is to be defined in NAFTA and future agreements.
A key provision of NAFTA makes the lawsuit possible. Under NAFTA’s investment chapter, for the first time in a multilateral trade or investment agreement, corporations are granted "private legal standing" or the ability to sue governments directly and to seek monetary damages. This "investor-to-state" dispute resolution mechanism diverges from dispute resolution systems in previous international economic agreements in two ways: First, previous agreements allow only national governments to bring suits. Second, these agreements do not allow for monetary compensation. The most a government can do if it is successful in a suit is impose tarriffs on the violating nation.
This lawsuit is the third, and largest, under NAFTA’s investor-to-state dispute mechanism. According to an official at the International Centre for the Settlement of Investment Disputes (ICSID), the institution that arbitrates most of the world’s investment complaints, the $251 million Ethyl seeks is higher than any amount requested in an ICSID investor-to-state proceeding.4
The Ethyl suit raises a host of issues that should be of concern to policymakers particularly since the U.S. is negotiating the expansion of NAFTA as well as a new multilateral investment agreement (MAI) that would apply NAFTA-like standards worldwide. The Ethyl case could set a precedent where, under NAFTA and similar agreements, a government would have to compensate investors when it wishes to regulate them or their products for public health or environmental reasons. If Ethyl wins its case, a precedent will be set whereby the legal right of corporations to be compensated when public health regulations affect a company’s bottom line is given the same weight as the public’s right not to be harmed by industrial toxins. This could send the message to investors that seeking compensation from the public for the cost of complying with environmental regulations constitutes a legitimate business strategy. Thus, in pacts like NAFTA, groups opposed to strong environmental regulation may find an effective mechanism for advancing the radical "takings" agenda for which they have not been able to build public or legislative support.
Effective limitations on the frequency and impact of lawsuits are removed when investors are granted the right to sue national governments on their own behalf. When governments are the only entities that have legal standing to bring a case against a regulation or other law under an international agreement, political and diplomatic pressures reduce the likelihood that frivolous lawsuits will be initiated. The investor-to-state dispute resolution clause in NAFTA (and in the proposed MAI) removes this limitation, allowing corporations and individual investors to sue directly and to seek monetary compensation. The Ethyl suit is an example of this new dispute resolution mechanism in operation.
If claims like Ethyl’s are successful and proliferate, the costs to governments could be burdensome. Under investor-to-state dispute resolution, corporations can request compensation for actual and future earnings losses as well as for the cost of repairing their "tarnished images." Damage claims can therefore be very high, as in the Ethyl case. In addition, multiple investors can consolidate their suits, thereby multiplying a government’s potential liability.
If such cases were to become commonplace, governments would have to give due consideration to the potential fiscal costs before passing needed regulations. The threat of suits like Ethyl’s could be used to pressure lawmakers who are considering new regulations. Ethyl submitted an intent to file suit six months before the MMT ban was passed in the Canadian legislature. Ethyl hoped that the threat of a lawsuit would deter policymakers from passing the bill. While Ethyl failed in this instance, the ability of investors to use their private legal standing to credibly threaten major suits could lead to successful efforts in the future to intervene in the democratic decision-making process and alter the outcome of legislative debate.
Ethyl also claims that the legislative debate itself constituted an expropriation of its assets because public criticism of MMT damaged the company’s reputation. Thus, Ethyl is using NAFTA to file what is, in effect, a SLAPP-suit against the Canadian Parliament. Far from worrying about the implications of such actions, U.S. trade officials have argued that the ability of investors to use legal threats to influence legislative debates is a healthy innovation that will prevent governments from passing laws that violate international agreements.5
In cases like Ethyl’s, international panels, not domestic courts, will have ultimate legal authority. No Canadian court will rule on whether the MMT ban violated NAFTA. Under NAFTA, Ethyl can pursue its case before an international tribunal where the proceedings are conducted in secret, the records are not publicly accessible and the decision is legally binding. The panel will be comprised of one person chosen by Ethyl, one by the Canadian government, and the third jointly by the first two appointees. If it loses, the Canadian government will have no recourse to appeal in domestic courts. Claims that go to international arbitration are often expedited; lawyers for Ethyl predict that the case will be settled by the end of the year.
The Ethyl case suggests that critics of NAFTA and GATT may have been correct in arguing that these agreements could pose a threat to national sovereignty. The likelihood that NAFTA, and other agreements like it, could restrict the ability of democratically elected governments to legislate on such matters as public health and safety and environmental protection was downplayed by many advocates of the agreement. Yet the Ethyl case suggests that critics’ concerns were not misplaced. Indeed, as Ethyl’s attorneys recently argued: "[T]he potential for lawsuits under this [investor-to state dispute resolution] process is far-reaching since it could be used by more than 350 million individuals and corporations throughout the NAFTA countries."6 Under the proposed MAI, which will cover investors from 29 of the world’s industrial countries, the numbers would of course be higher.
1. While automobile manufacturers may be legitimately concerned with clean air standards, their primary opposition to MMT is that they must bear the costs of repairing the cars’ damaged pollution control systems.
2. Ivanovich, David. "Collision Course Slow Start for Gas Additive MMT’s Effect on Air, Cars Debated," Houston Chronicle, April 16, 1996; EDF, personal communication, 4/22/97.
3. Because adequate data on the health risks of long-term exposure to lower-level manganese emissions was not available, Health Canada could not consider MMT a health risk under CEPA provisions. In addition, the fuel standards established in CEPA are not sufficiently broad to cover a ban on substances that may damage pollution control systems in cars, even if such damage leads to increased emissions. The Canadian Minister of the Environment reports that certain key provisions of CEPA are being rewritten, and may allow a future ban on the use of MMT (personal communication 4/19/97).
4. ICSID staff, personal communication 4/22/97.
5. U.S. Department of Treasury Staff, Briefing on the MAI and the Financial Services Agreement to the Senate Committee on Banking, Housing and Urban Affairs, 4/21/97.
6. Appleton & Associates, "First-Ever Lawsuit Against Canadian Government Using NAFTA Investor-State Process Brought," press release dated October 9, 1996.