A merits hearing takes place in protracted NAFTA dispute over US tobacco settlements

By Elizabeth Whitsitt

March 11, 2010

(NOTE: two corrections have been made to this article.  See explanations below.)

A three-member tribunal, composed of Mr. Fali S. Nariman, Professor S. James Anaya, and Mr. John R. Crook, has heard arguments on the merits of the dispute between Grand River Enterprises Six Nations, Ltd., et al. and the United States.

A hearing on the merits of the dispute took place last month some six years after arbitral proceedings in the long-running NAFTA Chapter 11 case began.  Over the years, arbitral proceedings have been delayed several times due to jurisdictional and arbitrator challenges.

In fact, just three months ago it seemed that proceedings might be halted once again when the claimants wrote to the tribunal asking to reschedule the merits hearing.

The request arose out of concerns related to the initiation of a federal criminal prosecution of Mr. Montour and other Grand River founders, Kenneth Hill and Jerry Montour, for “trafficking” and for “conspiracy to traffic” cigarettes under US law.  Specifically, the claimants were concerned that the US would use evidence, provided by Mr. Arthur Montour during the merits hearing of the NAFTA dispute, in its criminal prosecution of Messer’s Hill and Montour.

Seeking to safeguard Arthur Montour’s due process rights against self-incrimination, the claimants requested that the tribunal reschedule the hearing until after the pending criminal trial was concluded.  Alternatively, the claimants sought a declaration from the tribunal that it would not strike or accord less weight to Mr. Montour’s testimony should he abstain from participating in the merits hearing.

Ultimately, however, the tribunal refused the claimants’ request.  In a letter dispatched to all parties on December 14, 2009, the tribunal confirmed that hearings on the merits of the NAFTA dispute would take place in February 2010.  With respect to Arthur Montour’s due process rights, the tribunal expressed its expectation that Mr. Montour would participate in the hearing.  Additionally, the tribunal confirmed counsel’s right to object to any questions that might require Mr. Montour to provide evidence that would be prejudicial to his position in the pending criminal case.

As a result, the merits hearing commenced on February 1st.  Due to snow storms in Washington D.C., however, the proceedings were interrupted for approximately one week and finally concluded on February 14th.

Grand River Enterprises is a Canadian corporation involved in the manufacture and sale of tobacco products.  Its dispute with the US revolves around the Tobacco Master Settlement Agreement (MSA) signed in 1998 between the four major American tobacco manufacturers and the Attorneys General of 46 U.S. states.
Under the MSA, the tobacco companies agreed to certain marketing and advertising limitations, as well as perpetual annual payments in exchange for protection against future lawsuits by the states.

The heart of the dispute centers on provisions in the MSA related to – Non-Participating Members (NPMs) – companies that refused to sign on the agreement.  In order to prevent those companies from benefiting from the lower costs inherent in their non-participation, the MSA required states to adopt a so-called model law.

The model law, implemented by states as so-called Escrow Statutes, required NPMs to make annual deposits into escrow accounts based on their cigarette sales.  The amounts reflected what an NPM would have paid as an annual settlement amount if it were part of the MSA. Escrow funds are to be held for up 25 years as insurance in case an NPM is ever sued by one of the states.

Soon after their implementation, states saw problems with the Escrow Statutes. Specifically states felt that NPMs could pay significantly less sums if they concentrated their cigarette sales on just a few states, and that the statutes were hard to enforce against foreign manufacturers.

States responded to these concerns by enacting two new laws.  To deal with the perceived enforcement problems, Contraband Laws were enacted, requiring cigarette manufacturers to certify each year that they were complying with the Escrow Statutes, or else have their cigarettes automatically banned as contraband.  Second, the Escrow Statues were amended to increase escrow requirements to NPMs, such as the claimants, which had adopted a regional strategy.

As a result, Grand River Enterprises is seeking between US$ 300 – 600 million for alleged violations of NAFTA Articles 1102 (national treatment), 1103 (most-favored-nation treatment), 1104 (better of national or most-favored-nation treatment), 1105 (minimum standard of treatment under international law) and 1110 (expropriation).

Corrections: 11 March 2010

The original version of this article noted Jerry Montour as a being subject to a U.S. federal criminal prosecution along with Arthur Montour and Kenneth Hill.  However, Jerry Montour is not subject to that criminal prosecution.  Rather, as stated in the Letter from Claimants requesting to reschedule February 2010 merits hearing, the third co-accused is “the elderly father of Claimant Jerry Montour.”

The original version of this article noted that the amount of damages sought by the Claimants in this matter was US$ 300-600 million (see: http://www.state.gov/s/l/c11935.htm).  ITN notes however that in the Claimants’ memorials submitted for the merits hearing, the Claimants appear to have suggested damage valuations in the approximate range of US$ 100-260 million. (For copies of these memorials see: http://www.state.gov/documents/organization/107684.pdf; http://www.state.gov/documents/organization/120621.pdf)

Sources:

Letter to Parties Reconfirming February 2010 Dates for Merits Hearing, available here:

http://www.state.gov/documents/organization/133833.pdf

Letter from Respondent Regarding Claimants’ request to Reschedule February 2010 Merits Hearing, available here:

http://www.state.gov/documents/organization/133832.pdf

Letter from Claimants requesting to Reschedule February 2010 Merits Hearing, available here:

http://www.state.gov/documents/organization/133831.pdf

Previous ITN Reporting:

“Parties file memorials in long-running NAFTA dispute over U.S. tobacco settlements; Canada intervenes with opinion on customary international law related to aboriginal rights,” By Fernando Cabrera and Damon Vis-Dunbar, Investment Treaty News, 29 January 2009, available here:

http://www.investmenttreatynews.org/cms/news/archive/2009/01/29/parties-file-memorials-in-long-running-nafta-dispute-over-u-s-tobacco-settlements-canada-intervenes-with-opinion-on-customary-international-law-related-to-aboriginal-rights.aspx

“Despite time-bar ruling in NAFTA arbitration, Grand River claim will proceed in part”, By Fiona Marshall, Investment Treaty News, 10 August 2006, available here:

http://www.iisd.org/pdf/2006/itn_aug10_2006.pdf

For a description of the U.S. objections to one of the arbitrators see:  “US persists with challenge to arbitrator in Grand River Enterprises NAFTA case; arbitrator’s human rights work assisting Native Americans in spotlight”, By Luke Eric Peterson, 15 November 2007, available here:

http://www.iisd.org/pdf/2007/itn_nov15_2007.pdf