By Fernando Cabrera and Damon Vis-Dunbar
29 January 2009
The Canadian tobacco manufacturer Grand River Enterprises Six Nations and the United State have filed memorials in a long-running NAFTA Chapter 11 dispute. The arbitration proceedings, which began in April of 2004, have been delayed several times due to challenges to jurisdiction and to one of the arbitrators.
The Grand River dispute 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.
The MSA settled lawsuits brought by 46 Attorneys General against the big 4 tobacco companies for their alleged youth-targeted advertising and conspiracy to withhold evidence on the addictive nature and adverse health consequences of smoking. As part of the settlement, 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 MSA included provisions that allowed other, smaller tobacco companies to join the agreement. Companies that signed up within 90 days of the MSA’s execution were offered exemption from settlement payments, as long as their market share did not exceed their 1998 market share.
Companies that joined after the 90-day period — called Subsequent Participating Members (SPMs) — were required to make annual settlement payments based on their market share.
More controversially, the agreement included a model law which signing states agreed to adopt in order to prevent companies that refused to participate in the MSA—referred to as Non-Participating Members (NPMs) —from benefiting from the lower costs inherent in their non-participation.
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 the implementation of the model law, the states saw problems with the Escrow Statutes: they felt their design allowed NPMs to pay significantly less sums if they concentrated their sales on just a few states, and the statutes were hard to enforce against foreign manufacturers.
In response to these problems, states enacted two sets of legislation. 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.
Parties clash over allegations of discrimination and expropriation
According to the Claimants, the amended Escrow Statutes violate NAFTA Chapter 11’s National Treatment and Most-Favored-Nation Treatment provisions because they require the Claimants to deposit funds into escrow; while SPMs (those that joined the MSA within 90 days) are exempt. In this respect, the Claimants do not allege discrimination between foreign and domestic cigarette companies, but rather that a general class of competitors enjoyed a competitive economic advantage.
In addition, the Claimants argue that their investments have been expropriated by the amended Escrow Statutes, given that their cigarettes are no longer competitive in comparison with exempt SPMs. They contend that because the amendments were targeted at NPMs such as themselves—i.e., companies benefiting from a regional sales strategy—the measures are discriminatory, further evidence of an illegal expropriation.
According to the Claimants, the Escrow Statures also violate the Fair and Equitable Treatment provisions of the treaty because they offend due process by forcing them to pay up front for a potential court case that may never emerge.
The Claimants allege that the reason for the Escrow Statutes and their subsequent amendments is that states want to protect the market share of companies that signed the MSA, because their settlement payments depend on it.
In response, the United States argues that the Claimants do not have a qualifying investment in the U.S., and are instead simply exporters of Canadian cigarettes.
Moreover, the U.S. highlights that the Escrow Statutes were enacted to “provide security for potential future damages resulting from the sale and use of the NPM’s tobacco products.” It points out that all amounts in deposited in escrow accounts remain the property of the depositor, who collects all interest earned.
According to the U.S., the Claimants have failed to prove violations of National Treatment and Most-Favored Nation provisions, in light of the fact that the Claimants are being treated like all others in like circumstances— i.e., companies that have chosen not sign the MSA.
As for the Contraband Laws, the U.S. argues that they were necessary to promote compliance with the Escrow Statutes by foreign companies such as the Claimant, who themselves had failed to abide by these laws in states such as Idaho.
Canada rejects Claimants’ arguments with respect to conventions on Aboriginal rights
The Claimants, who are Aboriginal First Nations, and whose business was targeted to Aboriginal communities in the U.S., bolster their argument that the U.S. breached the principle of Fair and Equitable Treatment under customary international law by pointing to a series of treaties and conventions related to Aboriginal rights. These include an International Labour Organization convention (ILO Convention 169) and the United Nations Declaration on the Rights of Indigenous Peoples (UNDRIP), which call on states to facilitate cross-border economic activities between indigenous peoples.
The UNDRIP and ILO convention, argue the Claimants, form part of customary international law, and should, therefore, be considered by the Tribunal in determining whether the U.S. has breached its obligations to provide Fair and Equitable Treatment.
In a 19 January 2009 submission to the Tribunal, Canada intervenes in order to reject the argument that ILO Convention 169 and the UNDRIP fall within the ambit of customary international law.
Canada notes that only 20 of 193 UN Members have ratified the ILO convention in question, while also pointing out that it explicitly stated that the UNDRIP is not a legally binding instrument (Canada, the United States, Australia and New Zealand all voted against adopting the UNDRIP). As such, Canada argues that neither declaration forms part the U.S.’s obligations to provide Fair and Equitable Treatment under customary international law.
The Tribunal will now have the opportunity to hear testimony on these and other issues in dispute at hearings scheduled to begin on 22 June 2009.
As reported previously by ITN, the tribunal has limited its jurisdiction in this case to events which occurred after April 2001, such as the amendments to the Escrow Laws, and are therefore not time-barred by the three year limitations under NAFTA Articles 1116(2) and 1117(2). The tribunal also rejected a U.S. challenge to the claimant-appointed arbitrator Professor James Anaya.
Documents associated with the Grand River claim are available on the U.S. State Department website at: http://www.state.gov/s/l/c11935.htm
For previous ITN reporting on this case which discusses the decision on jurisdiction see:
“ Despite time-bar ruling in NAFTA arbitration, Grand River claim will proceed in part”, By Fiona Marshall, Investment Treaty News, 10 August 2006, 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, http://www.iisd.org/pdf/2007/itn_nov15_2007.pdf