From the Office of Senator Kerry

Tuesday, May 21, 2002

Mr. President, the amendment I am offering addresses an issue of international trade that has raised the eyebrow of mayors, state legislators and attorneys general throughout the nation. The amendment will address the concerns raised by these groups with respect to Chapter 11 of NAFTA. Chapter 11 of NAFTA is designed to provide foreign investors with the means to seek compensation when a government takes action to decrease the value of the investment - either through direct physical seizure of property or an indirect regulatory action. This process is likely to be the model upon which investment provisions of future trade agreements are predicated.

First, it is entirely appropriate that future trade agreements include provisions relating to investment. Having an investor-state dispute settlement process in a trade agreement is vital to ensuring that U.S. investors are able to invest abroad with confidence. Private American investment abroad means business expansion and jobs here at home.

But I believe that this TPA bill merits some improvement, especially with regard to its section on investment. I am not the only one who believes this. Long before this bill came to the floor, this issue was flagged by the U.S. Conference of Mayors, the National Council of State Legislatures, the National Association of Attorneys General and countless other state and local government entities.

Including, I might add, the Attorney General of the Chairman’s home state of Montana. On May 14, he wrote “I applaud [the Baucus amendment], but remain concerned that the amendment would not be adequate to protect U.S. sovereign interests and preserve the authority of the U.S. government at all levels to enact and enforce reasonable measures to protect the public welfare.”

All of these folks have grown increasingly concerned about the effect that NAFTA's investor-state dispute settlement process has had on their ability to promulgate legitimate public health and safety laws.

Furthermore, even the National Association of Manufacturers - no supporter of this amendment - concedes "investment provisions, such as in NAFTA Chapter 11, merit improvement."

So, we can begin with the stipulation that there is nearly universal agreement that NAFTA Chapter 11 is an imperfect model to base future investment agreements upon.

Why is this so important, and why hasn't the Senate dealt with this issue in the past?

WHY IS THIS AN ISSUE? When we debated NAFTA, not a single word was uttered in discussing Chapter 11. Why? Because we didn't know how this provision would play out. No one really knew just how high the stakes would get.

There are now $3.5 billion in claims against the United States under Chapter 11. It is states and local governments who are on the hook for that money. And that is only the beginning.

Steadily, foreign investment in the United States is increasing. This trend will be accelerated as a new Free Trade Area of the Americas is developed.

A recent report by Taxpayers for Common Sense and Tufts University suggests that, without changes to the Chapter 11 model, claims against the United States will average $32 billion annually. That's just in terms of claims. It does not even address the millions of dollars that the federal government will spend defending against these cases.

GROUPS SUPPORTING THE KERRY AMENDMENT It is in our national interest to improve the Chapter 11 process. It is in our financial interest, as the Taxpayers for Common Sense report shows. It is in our sovereign interest, and it is in the interest of public health and safety.

And so, Mr. President, I ask unanimous consent that the letters of support for my amendment from the National Conference of State Legislatures, the Conference of Mayors, the National League of Cities, the Conference of Chief Justices, Taxpayers for Common Sense, the Consumers Union and the League of Conservation Voters all be made part of the Record.

The importance of this amendment has been captured eloquently by two attorneys general, in particular. I ask that the letters of the Attorneys General of New York, California and Montana be included in the Record.

The Attorney General of New York has written “The rights granted foreign investors under H.R. 3005 could go far beyond the carefully fashioned taking and due process jurisprudence articulated by the U.S. Supreme Court under the Fifth and Fourteenth Amendments. The purported protections in the proposed bill for environmental and health laws are completely inadequate. I therefore urge that bill be amended to include ... provisions which, I understand, are being proposed by Senator Kerry and are intended to avoid the problems caused by Chapter 11 of NAFTA.”

And the Attorney General of the Chairman’s home state has also written persuasively on this matter. Montana’s Attorney General, Mike McGrath, wrote “I frankly believe an overwhelming majority of the American people and Montanans would react with outrage to the idea that an otherwise final and definitive ruling of our domestic courts would be reviewed by foreign arbitration panels and could provide the basis for monetary claims against United States taxpayers.”

But that is already happening. And this problem will get worse if we do not take steps to limit the reach of these panels to ensure that legitimate U.S. public health and safety laws are not subject to international review. Let us review some of these cases. CASES PENDING BEFORE NAFTA CHAPTER 11 The number of cases currently pending against the United States before NAFTA arbitral panels is relatively small. Some people will come down here and argue that the number is so small we should ignore it completely. That's wrong. Our mayors, attorneys general, state chief justices and countless other state and local government organizations certainly think that's wrong. That's why they all support my amendment. The cases pending against the United States represent a significant attack on U.S. legal principles and practices. I'd like to go through a few of them.

METHANEX The most notorious case is the Canadian corporation Methanex's case against California's ban on MTBE. The details are well-known: In 1998, the Governor of California banned the fuel additive MTBE because it has a tendency to leak out of gasoline storage tanks at a much faster rate than other blended gasolines, such as ethanol. MTBE travels quickly through groundwater, contaminating drinking water and leaving it bad-tasting and foul-smelling.

MTBE is a known carcinogen in laboratory animals, and a suspected carcinogen in humans. Methanex, whose subsidiaries produce Methanol, the "M" in MTBE, filed a Chapter 11 claim on the grounds that the ban diminishes their expected profits.

Methanex claims that this public health law discriminates against the flow of capital, and therefore discriminates against the goals of NAFTA. I'm not sure that any of us would say that makes a lot of sense, but the arbitral panel has yet to agree. This case demonstrates exactly why we need to protect legitimate public health and welfare laws.

The Methanex case is the most expensive of any pending claim. Methanex is seeking compensation in the form of nearly $1 billion in damages. But it is California who would suffer. The state could lose that money out of education funds, highway funds or other grants from the federal government.

LOEWEN Less well-known, but perhaps more egregious is the case against a jury finding by a Mississippi court against the Loewen Group, a Canadian-owned funeral parlor chain. Loewen was sued by a Biloxi funeral home for unlawful, anti-competitive actions designed to drive up local insurance costs, forcing smaller funeral parlors into selling.

A Mississippi state court agreed with the Biloxi funeral home and awarded $500 million in damages. Loewen appealed to the state Supreme Court, which refused to reduce the bond amount needed to receive a stay. Instead of paying the bond, Loewen settled the case for "just" $175 million. It then proceeded to the NAFTA tribunal to file a claim. Loewen's Chapter 11 case is predicated on the argument that the trial court's refusal to vacate the verdict was tantamount to an expropriation. The case is now pending.

The message in this case is clear: Any time a foreign corporation dislikes the outcome of a U.S. jury trial, it can run to an international arbitration panel to have the ruling reversed. That's not what we wanted to have happen in NAFTA. Not by a long shot. But in order to prevent this kind of case from happening again we've got to make sure that we clarify our standards on expropriation.

MONDEV A final case I'd like to talk about is another one that has nothing to do with the environment, but everything to do with our sovereignty. The doctrine of sovereign immunity is centuries old in this country. Very basically, it holds that you cannot sue a government unless such a lawsuit is expressly permitted. However, a claim against an action taken by the city of Boston by Mondev International, a Canadian real estate developer, has challenged this concept before a NAFTA tribunal.

The Mondev case stems from a real estate deal made in 1978 between the city and this company. Mondev alleges that Boston reneged on the contract and it sued the city for breach of contract when the city did not complete a sale of a parcel of land. A Massachusetts Superior Court ruled in Mondev's favor, only to be overturned by the state supreme court and then, ultimately, the Supreme Court on the grounds of sovereign immunity.

For American companies, that would have been the end. But Mondev has turned to the NAFTA panels for redress, claiming that the Court's refusal to return a verdict favorable to Mondev represents an arbitrary and unprincipled decision. Now, a NAFTA panel will determine whether the firmly established legal precedent of sovereign immunity is one for which the United States must pay.

CHILLING EFFECT We have seen what effect there might be on existing U.S. law if these cases are decided against the United States.

What else might happen if we do not make these changes to the Chapter 11 model? Expensive litigation - and the mere threat of litigation - is having a chilling effect on the ability of state and local governments to promulgate public health and safety laws. Let’s consider the MTBE ban in California. Nine states followed California's lead. The United States Senate followed California's lead last month, by passing the energy bill, which contains a ban on MTBE. Based on the Methanex case, a claim could be made against any of those nine states. Or the federal government, if the MTBE ban is included in the conference report.

Chapter 11, as it currently stands, is being used to threaten governments from enacting public health measures. The Canadian government has sought to ban the use of the words "light," "mild," and "low-tar" from cigarette packaging. Phillip Morris recently issued a warning to Canada that "Under NAFTA, Canada must compensate foreign investors when measures expropriate ... investments in Canada."

So as we debate this issue today, Phillip Morris is using Chapter 11 essentially as blackmail to dissuade the Canadian government from implementing a public health measure, even though the measure is clearly not designed to be discriminatory.

DIFFERENCES BETWEEN KERRY AND BAUCUS Mr. President, now that we have documented the problems associated with the current Chapter 11 model, I'd like to talk briefly about how my amendment addresses these flaws in the model. As my colleagues know, Senator Baucus made a small change to the bill earlier this week.

However, there are still three very significant areas where the Baucus bill, as amended, falls short.

1.) Expropriation. The Baucus bill as amended does not ensure that long-held U.S. caselaw on expropriation is upheld. The Baucus bill still allows cases to be decided against the U.S. when regulatory or statutory actions result in a partial taking. Such a case would stand on far more tenuous ground in U.S. courts, based on U.S. law and legal precedence.

My amendment would ensure that foreign companies could use investment-dispute mechanisms against states only when a government action causes a physical invasion of property or the denial of all economic or productive use of that property. This limitation is consistent with US Supreme Court holdings. In the Concrete Pipe case decided by the Court in 1993, the Court said that "[O]ur cases have long established that mere diminution of in the value of property, however serious, is insufficient to demonstrate a taking." Just recently, the Supreme Court affirmed its long-standing views on takings, by ruling in the Lake Tahoe case that "A rule that requires compensation for every delay in the use of property would render routine government processes prohibitively expensive..."

While my amendment echoes the Supreme Court's holdings, it does not rule out the possibility that an investor could bring an expropriation case. Instead, it simply limits the use of the expropriation standard to those cases in which U.S. law would recognize a regulatory taking. If the U.S. government, or any government, truly overreaches, the investor-state dispute mechanism will remain available.

2.) Protection for Legitimate Public Interest Law. The amended bill does not ensure that legitimate domestic laws are protected. The Kerry amendment provides safe harbor for federal, state and local laws and regulations protecting public health and safety and the environment except when a government action is for a primarily discriminatory purpose.

The current bill still allows claims to be decided on the question of whether the free flow of goods or capital is impeded by a public health and safety measure.

3.) Upholding the Principle of Due Process. The principle of due process is somewhat akin to the concept of international law known as "fair and equitable treatment." Fair and equitable treatment is a very vaguely defined standard. It can mean a great many things. One thing that we have tried to say should be included under the broad umbrella of fair and equitable treatment is the due process clause of the U.S. Constitution. If the concept of “fair and equitable treatment” remains a guiding principle of the investor-state dispute panels without further clarification, there is a real risk of these panels importing other legal standards into their considerations.

So it is clear that the concept of "fair and equitable treatment" needs to be bracketed with a more concise explanation. This section will provide clear rules for all international investors, both U.S. investors overseas and foreign investors operating here in the United States, and it will prevent arbitrary and capricious actions by foreign governments.

HOW THE AMERICAN INVESTOR WINS Unfortunately, some have unreasonably claimed that this amendment will make life more difficult for U.S. investors operating abroad. That is simply wrong. This amendment has the practical effect of making future investor-state arbitral panels base their rulings on concrete, well-defined U.S. laws, rather than nebulous, uncertain international precedence.

Under my amendment, an American investor can win before an arbitral panel if:

1.) The investor shows that he is discriminated against on the grounds of national treatment or if the offending regulation as enacted or applied is discriminatory in purpose. If a foreign government passes legislation that is discriminatory, of course an investor would be able to seek compensation. That doesn't change with this amendment.

2.) An investor wins if a performance requirement – some kind of arbitrary standard that a product must conform to – is the basis of the offensive state action. This is exactly the same protection that exists in the underlying bill.

3.) An investor wins if he or she shows that there is wrongful expropriation under the standards set by the U.S. Supreme Court. This means that if a foreign government seizes any part of your property, or renders it valueless, of course you are entitled to compensation, just as you would be through the U.S. legal system.

4.) If the investor shows that the foreign country is violating the principle of due process, he or she will win. As I have said, “fair and equitable treatment”is a vague, ill-defined notion. Tying that concept to the due process clause of the Constitution ensures that all investors will know exactly what the criteria are for adjudication of cases.

WRAP-UP The question before us this afternoon is this: Do we want to make certain that our states, our cities and our towns have the ability to make laws to protect the health and safety of our constituents? Every single member of this body has been contacted by mayors, state legislators and other local elected officials in their state in support of this amendment. It's critically important to them, and it's critically important to our constituents.

Mr. President, we know - we all know - that there are some inherent flaws in Chapter 11. That's not surprising since it's the first of its kinds. No one ever gets anything right on the first try. Unfortunately, we have a Trade Representative who refuses to acknowledge what even the National Association of Manufacturers has admitted. That the Chapter 11 model merits improvement. As it now stands, our public health and safety laws are threatened. We should not place those laws in jeopardy in the name of broadening our trade horizons.

The underlying bill takes a baby step toward correcting some of the problems that I have outlined. But we need to do better. If we all agree that some of the outcomes that I seek are indeed laudable, let's make sure those changes get made and we protect the ability of governments at all levels to protect public health and safety. I urge my colleagues to support this amendment.