The Office of the Spokesperson of the United States State Department has good judgment when it comes to establishing the hierarchy of the statements it releases to the press and the public about its foreign policy actions. On August 25, 2014, the Office issued a media note that probably went unnoticed by many analysts outside the field of international arbitration. Despite the note’s concise and sober language, which would seem typical of a routine announcement, this was a description of yet another important legal victory for the US government in an international tribunal. The note reported that a NAFTA tribunal had dismissed the claims of two Canadian foreign investors who demanded potentially up to 1.5 billion USD in damages for to temporarily cutting off imports from their Canadian manufacturing plants. In any other area of US foreign policy, a favourable outcome like this would have probably merited more publicity. However, such favourable rulings in arbitrations established under the rules of NAFTA Chapter 11 have become so ordinary for the US government, that they no longer merit more than brief media note. Rather than news, they are chronicles of rulings foretold.
Just like the novel by Latin American writer Gabriel García Márquez, the chronicle of this ruling foretold starts at the end. The tribunal dismissed all claims of Apotex Holdings, Inc. and Apotex Inc., two Canadian pharmaceutical companies, against the US government. In addition to not receiving any compensation, the companies must pay costs of arbitration (which could reach up to 10 million USD) and all the legal fees of the US government. Had it won the arbitration the companies would have received billions of dollars in compensation for alleged losses they incurred on as a result of an import alert that the Food and Drug Administration (FDA) issued in 2009 to stop their products from coming into the United States and which was not lifted until 2011. However, the companies never had any chance of winning the arbitration.
Many academics, policymakers, non-governmental organisations and other observers of the North America relations have been historically critical of the Free Trade Agreement (NAFTA) and especially of the rules of Chapter 11, which aims at protecting foreign direct investment between the North American countries and which allows foreign investors to request an arbitration in an international tribunal against the governments of Mexico, Canada and the United States for impeding or damaging their investments. It is widely believed that the inclusion and implementation of Chapter 11 ‘opened the floodgates’ for foreign investors to sue national and sub national governments when the policies of the latter affect the economic interests of the former.
Many of these critics predicted that the functioning of Chapter 11 would result in many public policy decisions on social-oriented legislation being taken not by the public through their governments, but by businesspersons “in confidential proceedings [backed by tribunals] consisting in large part of foreigners”. According to these critics, many laws and regulations with a focus on social and public welfare, such as environmental protection and the maintenance of labour standards and the upholding of workers’ rights, would not be in the hands of the North American public or their governments, but be shaped, undermined or eliminated altogether in favour of foreign economic interests.
However, none of these critiques is well-founded. As the outcome of the case vs. Apotex United States demonstrates, the rules and arbitration mechanisms of Chapter 11 have strengthened, not weakened, the ability of North American national and sub national governments to create, maintain and improve public policies aimed at ensuring public welfare. Consistently, the tribunals established under Chapter 11 have endorsed the decisions of North American governments at all levels and/or have rejected the demands of foreign investors for alleged damages to their investments in Mexico, Canada or the United States. Between 1994 and late 2013, only 43 requests for arbitration have been filed against any North American government. That’s less than two per year against all North American governments combined (!).
What is more, to file a claim for arbitration does not mean that the outcome of such arbitration will be favourable to the claimants. Instead, the vast majority of the 33 arbitrations that had concluded by the end of 2013 had been favourable for governments, not claimants. In 22 of these cases the tribunals ruled against investors, and only eight ruled against governments. Furthermore, in cases where tribunals have ruled against governments, Chapter 11 provides them with the right to appeal, which has often resulted in lesser compensation for claimants or even dismissal of some claims.
The reason for the continuous failure of investors to obtain a favourable ruling is simple; however it has so far escaped to the critics as well as most claimants’ understanding, including Apotex, and it is that the rules and institutions of Chapter 11 were deliberately designed by the North American governments to preserve their sovereignty and support their decisions and own domestic policies on foreign investment.
Contrary to what many critics have argued for more than two decades, Chapter 11 tribunals have protected the interests of governments and therefore their citizens, above the private interests of foreign investors, as in the cases of:
- Canadian Cattlemen for Free Trade vs. United States in 2005 when the court refused to expand the interpretation of the term investment to include those made in the claimant’s own country (in this case, Canada) based on the argument that their businesses had been established and expanded in order to export to the rest of the North American market which NAFTA had created.
- Fireman’s Fund Insurance Company vs. Mexico in 2006, where the tribunal found that the US company had intended to use the rules of NAFTA’s Chapter 14 on Financial Services to sue the Mexican government under Chapter 11, thus contravening the principles of NAFTA, which states that no part of the Agreement can be construed to require any of the Parties adopt any policy or measure not explicitly stated in the agreement.
- Vito G. Gallo vs. Canada in 2007, where tribunal’s enquiries revealed a possible fraud against Canada and prevented the claimant demanding damages for an alleged investment which had never been made.
In each of these cases, as in most disputes arbitrated under the rules of Chapter 11, the courts have ruled in favour of the North American governments.
Lastly, it is worth mentioning that when it comes to the government of United States, the tribunals have never ruled against it. Not even once. The difference in the total success of the government of the United States, compared with near total success the governments of Canada and the México, does not entirely lie in having a better legal team. After all, in the Apotex case vs. United States, the pharmaceutical company counted among its legal advisors with Bart Legum, the former Head of the Adjudication Division of the Office of Legal Counsel of the Department of State of the United States. During his four years as head of the Division, Legum had represented and successfully defended the United States in all disputes filed under Chapter 11. Legum thus knew thoroughly the structure, strengths and weaknesses of the arbitration system. What Apotex and Legum did not have on their side this time were the NAFTA tribunals.
Legum probably knew that Apotex, as most of the investors who initiate a dispute against any North American government under the rules of Chapter 11, had little or no chance of winning the arbitration. With a record of zero disputes won by foreign investors, the best decision Apotex could have taken was to assume its losses and avoid a two-year legal dispute with the US government. However, rather than making a decision based on solid scientific research, Apotex decided to follow the popular belief that Chapter 11 favours investors. Apotex’s unfortunate decision thus became the beginning of the chronicle of a ruling foretold.
And those chronicles do not merit more than a brief and simple note from the US State Department.