Following up on some previous posts about the NAFTA Chapter 11 Grand River Enterprises dispute, the hearing in the case, held in early February, offered some interesting discussion of the National Treatment issue.
Let me first turn to Luke Peterson of the Investment Arbitration Reporter for some background:
The individual claimants, Jerry Montour, Jerry Hill, and Arthur Montour Jr., profess to be members of Native American (indigenous) tribes and seek at least $175 Million (US) for losses alleged to have been sustained by themselves and their Canadian enterprise, Grand River Enterprises Six Nations, LTD.
...The claimants signaled their intent to pursue a NAFTA arbitration in 2003, alleging that a so-called Master Settlement Agreement (MSA) consummated between forty-six US states and four major tobacco companies impacted negatively upon the smaller-scale tobacco business of the claimants (who were themselves not party to the MSA).
The MSA was the culmination of a bid by US states to sue the major tobacco companies for tobacco-related medical costs borne by state health care budgets. Under the terms of the MSA, the four major tobacco companies were obliged to make payments in perpetuity into a central account which would then be disbursed to individual states where the companies’ cigarettes are sold.
As part of this settlement arrangement, the major tobacco companies sought concrete guarantees that smaller tobacco firms would not capitalize on the fact that only the largest tobacco companies were targeted by the US states.
Accordingly, a parallel system of escrow payments was imposed upon non-parties to the MSA, so as to ensure that they did not gain market share compared with the major tobacco companies operating under the financial strictures of the MSA.
It is this system of escrow payments – as well subsequent legislative efforts by US states to close what the US Government characterize as regulatory “loopholes” - which drew the ire of the claimants in the NAFTA arbitration. ...
It's a complicated set of facts. Although that excerpt leaves out some important details, hopefully it was enough to make sense of the legal discussion here. I'm not trying to apply the law to the facts, but rather just talking about the legal standard in the abstract. For more, the various submissions are here.
Let me turn now to the hearing transcript. For those of you scoring at home, the lawyers quoted below are Mark Feldman and Alicia Cate of the U.S. State Department's NAFTA/CAFTA-DR Arbitration Division, and Todd Weiler on behalf of the claimaints. Also, I should note that I'm not sure I've mentioned every relevant National Treatment passage here, but I think got the main ones.
On to the substance. I'll first note a brief discussion of intent, at p. 55 of the day 2 transcript. There was a distinction drawn between "intending to discriminate" and "intending the result," which I'm not quite sure I followed. If the "result" is "discrimination," I don't know if I see a real difference here. (There's a bit more on intent at p. 20 of the day 3 transcript.)
But the main issue I want to focus on is the nature of the NAFTA Chapter 11 National Treatment obligations, in relation to concepts such as "nationality based" discrimination, "best treatment," treatment of "groups" versus treatment of "indviduals," "proportionality," and "rule of reason." I'll quote some key passages and then talk about them.
From Day 5, pp. 74-75:
MS. CATE
...
7 I would like to focus on the most
8 glaring flaw of Claimants' Article 1102 claim,
9 which is their failure to even attempt to show
15:00:27 10 less favorable treatment, and in particular less
11 favorable treatment by virtue of their
12 nationality.
13 The parties to this dispute agree that
14 discriminatory intent is not a requisite condition
15 here. Where the parties to this dispute disagree
16 is with respect to whether the test includes less
17 favorable treatment accorded on the basis of
18 nationality. However, the three NAFTA parties as
19 well as Tribunal's interpreting Article 1102 of
15:00:54 20 NAFTA have come to the same conclusion. What is
21 required is that less favorable element includes a
22 showing by the Claimant of discrimination whether
PAGE 1789
1790
1 de jure or de facto on the basis of nationality....
14 The NAFTA parties often file
15 interpretive submissions under NAFTA Article 1128
16 and have done so in a uniform and consistent
17 manner demonstrating both subsequent agreement and
18 subsequent practice on the issue whether Article
19 1102 requires showing by the Claimant of
15:02:00 20 discrimination on the basis of nationality....
2 MS. CATE: Claimants must therefore
3 demonstrate that a measure, either on its face or
4 as applied favors nationals over non-nationals.
5 Based on legal argument made on day two
6 of this hearing, it is clear that Claimants and
7 the United States agree on the following: You
8 don't need to look for specific intent, that the
9 result is manifest in the facts.
15:05:24 10 Claimants have not even attempted to
11 make this showing of less favorable treatment on
12 the basis of nationality, nor could they on the
13 facts of this case.
So for the U.S., the discrimination to be shown under a NAFTA Chapter 11 National Treatment claim is based on "nationality": "Claimants must therefore demonstrate that a measure, either on its face or as applied favors nationals over non-nationals."
By contrast, here's the view of the claimants. From Day 7, pp. 15-16
4 MR. WEILER: One question that did come
5 up yesterday which I thought would be important to
6 cover is the question of treatment for whom.
7 The Respondent takes the position that
8 it's about a de facto class of investors,
9 Canadians, that its treatment to Canadians as
08:53:16 10 opposed to treatment to the investor, and I would
11 refer you to the Pope & Talbot Tribunal's very
12 lengthy consideration, very detailed
13 consideration, 37 paragraphs, thinking about this
14 particular issue, and I think its conclusions are
15 very powerful. The NAFTA plainly contemplates a
16 single investors invoking the national treatment
17 requirements to obtain damages from a party where
18 particular governmental measures have accorded its
19 investment less favorable treatment.
08:53:50 20 The Canadian Government took a position
21 in that case very similar to the Respondent in
22 this case. That position is, again, that it's
SHEET 15 PAGE 2473
2474
1 somehow a weighing of groups of investors, that it
2 is all Canadian investors or it's all foreign
3 investors. We would submit that that's not the
4 test, and we would submit that there's good reason
5 for that.
6 We think that Paragraph 72 of the Pope
7 & Talbot Tribunal is right on spot, simply to
8 state this approach is to show how unwieldy it
9 would be and how it would hamstring foreign-owned
08:54:26 10 investments seeking to vindicate their 1102
11 rights.
Thus, the claimants don't like the "group" test, that is, "a weighing of groups of investors, that it is all Canadian investors or it's all foreign investors." Instead, they argue, it's about the "best treatment," in the sense that individual foreign investors should get the "best treatment" available to any other investor:
3 MR. WEILER: The national treatment
4 test, the 1102 test, is essentially an equal
5 opportunity test. The question is whether or not
6 an individual who qualifies by nature of
7 nationality to be able to ask for the test, to ask
8 for the treatment, that national says, I deserve
9 the best treatment that someone else is getting.
This part will likely be familiar to people who have come across the individual versus group approach to national treatment at the WTO. Basically, the question is whether you compare (1) the treatment given to foreign investors as a whole to that given to domestic investors as a whole (the group test), or (2) the treatment of an individual foreign investor to that given to another investor (possibly a domestic investor, possibly any investor).
The claimants also add some additional elements:
12 MR. WEILER: The next step after that
13 is, since we know that they're getting better
14 treatment -- the test ends up becoming a balancing
15 requirement -- or you can call it balancing
16 proportionality, you can call it a rule of reason,
17 whatever language you want to use -- we see it in
18 constitutional law and we see it in trade law, we
19 see it in many places.
So, for the claimants, there is also "proportionality" and "rule of reason" as well.
I'm not sure how all of these standards -- best treatment, proportionality, rule of reason -- fit together precisely. Are they alternative approaches? Different versions of the same test? All apply together? I've always thought that standards such as proportionality and rule of reason could be used as elements to prove intent (e.g., if the measure does not accomplish what it is purported to, this is evidence of protectionist intent), but I don't think that is what is meant here.
And finally, one more quote, from p. 41 of the same day:
4 MR. FELDMAN: This is from Corn
5 Products versus Mexico. The Tribunal in that case
6 found while the existence of an intention to
7 discriminate is not a requirement for breach of
8 Article 1102 and both parties seem to accept it's
9 not a requirement, where such intention is shown
10:58:50 10 that's sufficient to satisfy the third
11 requirement, that being nationality based
12 discrimination, but the Tribunal would add even if
13 intention to discriminate had not been shown, the
14 fact that the adverse effects of the tax were felt
15 exclusively by the HFCS producers and suppliers,
16 all of them foreign owned to the benefit of the
17 sugar producers, the majority of which were
18 Mexican owned, would be sufficient to establish
19 that the third requirement of less favorable
10:59:20 20 treatment was satisfied.
21 So through an analysis of the facts on
22 the ground, if it becomes clear there is, in fact,
SHEET 41 PAGE 2577
2578
1 a nexus of the treatment at issue and the
2 nationality of the Claimant, then the Claimant can
3 show, in fact, there has been nationality based
4 discrimination, but Claimants make no attempt to
5 argue that in this case and with the facts on the
6 ground, they cannot because as we've heard in
7 written submissions and oral testimony in this
8 hearing, these measures do not discriminate on the
9 basis of nationality.
Again, the U.S. focus is on "nationality." As they put it here: "So through an analysis of the facts on the ground, if it becomes clear there is, in fact, a nexus of the treatment at issue and the nationality of the Claimant, then the Claimant can show, in fact, there has been nationality based discrimination."
Now for a few brief comments.
First, it would be great if this issue could get resolved one way or the other. In my view, it's a bad thing to have so much confusion surrounding a core legal standard such as National Treatment. Too much uncertainty regarding the scope of international trade and investment rules is bad for the system.
Second, I'm going to quote what I said in an earlier post:
I think I understand the claimants' argument here, but I just want to be sure, so let me take an extreme situation to illustrate the impact of this approach. Let's say you have 10 foreign investors and 10 domestic investors (all in "like circumstances"). Country A adopts a measure that is non-discriminatory on its face. However, as it turns out, certain investors do worse than others under the measure. In particular, 9 domestic investors and 1 foreign investor receive less favorable treatment than the other 9 foreign investors and the other 1 domestic investor. Thus, most foreign investors do better under the law than most domestic investors. But that 1 foreign investor who did badly brings a NAFTA Chapter 11 claim alleging a violation of national treatment. As I understand it, the argument here would be that this 1 foreign investor should succeed on its national treatment claim because it is worse off than at least one competitor.
Let me just add that if an individual comparison forms the basis for the National Treatment standard, it's a pretty broad one (that is, there will be a lot of violations found). The same probably goes for a standard based on "proportionality" or "rule of reason."
Finally, what is "nationality" based discrimination? It seems to me you could have "nationality" based discrimination on the basis of one or both of "intent" and "effect." Along these lines, on day 3, there was a bit of discussion about whether the NAFTA text supports a view of National Treatment as "nationality" based. The following quote is on p. 20, and is from Todd Weiler:
1 And that is something that the Tribunal
2 will have to weigh based on all the evidence they
3 have. So the one thing that's pretty -- that is
4 clear though from the case law, to the extent that
5 you feel they want to be guided by it, is that
6 intent to discriminate on the basis of nationality
7 is not in the text and it's not in the case law.
8 It's probably because it's not in the
9 text. Though my friends, and my friends from the
10 other NAFTA parties in the cases that I've been
11 involved in, will continue to say that it is
12 discrimination on the basis of nationality. Thus
13 far, it appears that the vast majority of
14 Tribunals don't agree with them. And I would
15 submit you shouldn't agree with them either
16 because it's not on the face of the text. The
17 text doesn't require it.
It's not clear to me exactly what the argument is here. Is it that "intent to discriminate on the basis of nationality" is not in the text? Or is it that "discrimination on the basis of nationality" is not in the text? While you might find that either intent or effect is not required by the text, I'm not sure how you get around "nationality," in some sense, being required, given that the title of Article 1102 is "National Treatment. But what exactly "nationality" based discrimination means is open for debate.
