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Foreign-Investor Protection and the Environment: A NAFTA Chapter 11 Update

November 2012

Citation: ELR 10941

Author: Robert Meltz

Imagine you run a Canadian company that mines precious metals. Your company owns a U.S. subsidiary that holds unpatented mining claims on federal lands known as the California Desert Conservation Area. You're optimistic that the U.S. government will approve your proposal to build and operate an open-pit, cyanide gold mine there because the Secretary of the Interior, Gale Norton, has just rescinded the denial of her predecessor, Bruce Babbitt--though she hasn't granted approval as yet.

But you have a second hurdle. In December 2002, the California State Mining and Geology Board, at the urging of Gov. Gray Davis, adopted an emergency regulation requiring the backfilling of all mining pits, followed by grading to restore approximate original contour. A few months later, the governor signed into law a bill making these requirements permanent, stating that it "essentially stops" your mine. Indeed, the new law is limited to projects located within a mile of a Native American sacred site, which just happens to describe your proposed project. You believe that the backfilling and contouring requirements are extraordinary for metallic mineral mines, and that they completely destroy the value of your mining claims.

You seek legal redress. But you reject the usual course: a "taking" action under the California or federal constitution against the state of California. Counsel has advised that it may be easier to get compensation under the North American Free Trade Agreement (NAFTA) pursuant to the binding arbitration it offers for "investor-state" disputes. You give the go-ahead for such a NAFTA claim, bypassing the domestic courts entirely. The claim asserts that the United States, by the actions of California, violated NAFTA's guarantee of "fair and equitable treatment" and its prohibition against direct or indirect expropriation without compensation.

The author is an Attorney, Congressional Research Service (CRS). He received his B.A., M.A., University of Pennsylvania; J.D., Georgetown University Law Center. The views expressed in this Article do not necessarily represent those of the CRS. This Article is adapted from a CRS report to Congress by the author, entitled Foreign Investor Protection Under NAFTA Chapter 11 (No. RL 31638). The author wishes to thank Jeanne Grimmett of the CRS for her comments and suggestions. Note: NAFTA arbitral decisions (called awards) cited in this Article are as yet not systematically gathered in a hard-copy case reporter, hence no cites are provided. However, they can be found at websites operated by the U.S. Department of State (http://www.state.gov/s/l/c3439.htm), the Canadian government (http://www.dfait-maeci.gc.ca/tna-nac/NAFTA-e.asp), and a private Canadian attorney (http://www.naftalaw.org).

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