31 ELR 10986 | Environmental Law Reporter | copyright © 2001 | All rights reserved

Paying to Regulate: A Guide to Methanex v. United States and NAFTA Investor Rights

Bill Waren is a fellow at the Harrison Institute for Public Law at the Georgetown University Law Center. He speaks and writes frequently on federalism issues. Mr. Waren received a B.A. and an M.A. from the University of Illinois at Urbana-Champaign and a J.D. from Duke Law School. For 17 years, he analyzed federalism issues at the National Conference of State Legislatures. This Dialogue is an adaptation of a report issued by the Harrison Institute in March 2001. Mr. Waren can be reached by e-mail: wtw2@law.georgetown.edu.

[31 ELR 10986]

I. The Importance of Methanex v. United States to American States

Methanex v. United States¹ is one of the first cases brought against the United States under the investment chapter of the North American Free Trade Agreement (NAFTA).² In three pending NAFTA investment cases based on objections to state law and practice, transnational corporations are seeking $ 1.7 billion in damages from the United States. In effect, they seek to expand property rights beyond U.S. constitutional standards for compensating investors when governments regulate to protect the environment or otherwise exercise their police power.

Methanex illustrates how NAFTA investment cases may raise fundamental issues of state sovereignty and federalism. The Methanex corporation is asking a NAFTA tribunal to accept a very broad interpretation of NAFTA's investment chapter that would allow investors to be compensated when state environmental regulations reduce their expected profits. Arguably, an award of damages to the Methanex Corporation would establish that under NAFTA's investment chapter the United States would have to pay for state governments to regulate.³ Even if the Methanex Corporation loses or has its case thrown out on jurisdictional grounds, the case is but one of several brought under NAFTA's investment chapter, all of which challenge core government functions. The open-ended language of NAFTA's investment chapter practically invites such claims, some of which have proven successful.⁴

As this Dialogue goes to print, the Methanex case is at an important juncture.Memorials (or briefs) on jurisdictional issues have been submitted to the tribunal, and a hearing on jurisdiction is scheduled for July 11 through 13, 2001.⁵ The stage is set for the tribunal to decide, perhaps very soon, on whether to proceed with the case and consider arguments on the merits.

A. Methanex Is One of the First NAFTA Investment Cases Challenging State Law and Practice

In June 1999, the Vancouver-based Methanex Corporation filed a claim under the investor rights chapter of NAFTA. Methanex sought and continues to seek $ 970 million in compensation from the U.S. government. The company claims compensation based on alleged current and future financial losses resulting from California's phase out of methyl tertiary butyl ether (MTBE), a gasoline additive that may cause cancer and present environmental risks. The Methanex claim is now in arbitration before a NAFTA dispute panel.⁶

Two other "state-law" cases are known to be pending against the United States under NAFTA's investment chapter.⁷ In the first case, Loewen Group, Inc. v. United States,⁸ a Canadian funeral home chain objects to punitive damages awarded by a Mississippi jury as a deterrent to fraudulent practices by the corporation. Loewen Group, Inc. also objects [31 ELR 10987] to the application of a Mississippi requirement that a bond must be posted before such an award can be appealed.⁹ Loewen seeks $ 725 million in damages from the United States.

In the secondcase, Mondev International Ltd. v. United States,¹⁰ a Canadian real estate developer claims that the Massachusetts law of sovereign immunity violates NAFTA's investment chapter. In a suit against a local development authority, a jury awarded Mondev substantial money damages. A judge subsequently disallowed the award because the development authority enjoyed sovereign immunity.¹¹ Mondev is asking for $ 50 million in damages from the U.S. government.

B. Challenging Core State Government Functions

These pending cases against the United States challenge core state government functions. In none of these pending cases would there be a plausible takings claim under the Fifth Amendment of the U.S. Constitution. Claims of the type being advanced in the pending cases are implicitly based on property rights theories that the U.S. Congress, most state legislatures, and courts have rejected.¹²

Recent decisions by NAFTA tribunals against Canada and Mexico show that similar NAFTA challenges to core governmental functions can succeed, particularly in the area of public health and environmental regulation. In Ethyl Corp. v. Canada,¹³ a public health measure banning the gasoline additive methylcyclopentadenyl manganese tricarbonyl (MMT) was rolled back in a settlement agreement.¹⁴ In S.D. Myers Inc. v. Canada,¹⁵ a NAFTA panel ruled that a U.S. company's investment was expropriated by a measure imposing a temporary ban on the export of highly hazardous polychlorinated biphenyl (PCB) waste. In Metalclad Corp. v. Mexico,¹⁶ a local government's decision to stop operation of a landfill located over an aquifer resulted in a $ 16.68 million award of damages to a U.S. firm.¹⁷

C. Regardless of Outcome, Methanex Illustrates the Risk to States

A victory for Methanex Corporation would contradict the interpretation of NAFTA espoused by the United States and Canada.¹⁸ The arbitrators in this case, including former U.S. Secretary of State Warren Christopher, might naturally shy away from such a result.

Given the largely undefined standards of NAFTA's investment chapter, the arbitrators have room to read its language broadly or narrowly. For example, the arbitrators may have room to throw the case out on grounds of standing. Failing that, they might interpret NAFTA narrowly to repudiate Methanex's theory of the case. And, if compelled to award compensation to Methanex, the arbitrators might find a basis for awarding minimal money damages, thus blunting some of the political impact of the decision.

However, the possibility that Methanex might lose on jurisdictional grounds or on the merits offers little consolation. Regardless of the final resolution of the Methanex case, the outcome of future cases is unpredictable. The NAFTA panels are not bound by precedent. The Methanex case is based on NAFTA standards that bar discrimination against foreign investors, require minimum treatment under international law, and require compensation for expropriation.¹⁹ These standards mean what an arbitration panel decides that they mean in a particular case. Until the language in NAFTA's investment chapter is clarified, the outcome of future cases will remain unpredictable.

II. The Makeup and Uses of MTBE

The Methanex case is about MTBE which is added to gasoline to help it burn more cleanly. Unfortunately, many states encouraged the use of MTBE before the release of scientific research showing that MTBE pollutes ground and surface waters, fouls the taste and smell of drinking water, and potentially causes cancer.

The volume of MTBE production is among the highest for any industrial chemical produced in the United States. Over 200,000 barrels of MTBE are manufactured in the United States every day. This amounts to about 10 billion pounds of MTBE produced every year. Production of MTBE is a $ 3 billion per year business.²⁰

[31 ELR 10988]

A. The Use of MTBE as an Additive in Reformulated Gasoline

MTBE belongs to a group of chemicals called oxygenates.²¹ According to the U.S. Environmental Protection Agency (EPA), when oxygenates like MTBE are added to gasoline, they produce a cleaner burning fuel, thereby reducing tailpipe emissions and air pollution. Oxygenates replace components of gasoline that contribute to pollution such as sulfur and benzene. EPA says that by maximizing oxidation during combustion, oxygenates reduce carbon monoxide (CO) emissions as well as ground-level ozone.²² However, some scientists believe reformulated gasoline without oxygenates performs well.²³

The 1990 Clean Air Act (CAA) Amendments²⁴ require the oxygenates in reformulated gasoline used in high smog areas and in areas with high CO in winter months.²⁵ The CAA does not require the use of MTBE, but most refiners have chosen to use MTBE rather than other oxygenates because of its blending characteristics and price. About 26% of the gasoline sold in the United States is blended with MTBE.²⁶

Ethanol is the other widely used oxygenate. It is produced from fermented biomass and finds most of its market in the Midwest, where there is a plentiful supply of corn byproducts. Timber byproducts in the West are another source of biomass for ethanol. Ethanol cannot be shipped through existing pipelines.²⁷

B. The Use of Reformulated Gas by Cities and States

More than 40% of the U.S. population lives in areas where oxygenated gasoline is used.²⁸ This includes 11 cities and 12 states, which are either required by federal law to participate in the program or have voluntarily opted to participate in oxygenated gasoline programs.²⁹

Since 1992, oxygenated fuel has been required during the winter months in cities with excessive levels of CO.³⁰ Ethanol is primarily used to meet the requirements of this program. MTBE is used in wintertime "oxyfuel" programs only in Connecticut, Los Angeles, northern New Jersey, and northeastern New York.

Since 1995, reformulated gasoline with oxygenates has been required year-round in areas with a high level of ground-level ozone (or smog as it is usually called).³¹ The requirement applies to 10 cities: Baltimore, Chicago, Hartford, Houston, Los Angeles, Milwaukee, New York City, Philadelphia, Sacramento, and San Diego.³²

Other areas have voluntarily opted into the reformulated gasoline program as a means of meeting clean air goals. States that voluntarily enter the program are also free to leave it. Voluntary participants in the reformulated gasoline program include all or parts of: Connecticut, Delaware, the District of Columbia, Kentucky, Maryland, Massachusetts, Missouri, New Hampshire, New Jersey, New York, Rhode Island, Texas, and Virginia.³³

III. California's Phase Out of MTBE

Responding to complaints about MTBE contamination of groundwater, lakes, and reservoirs across the state, the California legislature passed S.B. 521, known as the MTBE Public Health and Environmental Protection Act of 1997.³⁴ The Act authorized a comprehensive study of the health effects of MTBE. It also authorized the governor to act by regulation to initiate an administrative process for phasing out the use of MTBE as a gasoline additive if the study proved that it is harmful.³⁵

Gov. Gray Davis (D-Cal.) acted in 1999 to start the process for phasing out MTBE, based on the report by a team of scientists at the University of California at Davis (U.C. Davis). The report showed that the cost of using MTBE as a gasoline additive outweighs its benefits.³⁶

A. MTBE Pollutes Ground and Surface Water

As the U.C. Davis study notes, MTBE contamination of ground and surface water has been widely reported in California and across the nation.³⁷ By far, leaking underground storage tanks are the most significant source of MTBE pollution.³⁸ Pipeline leaks, spills at gas stations, and car accidents also contaminate the groundwater with MTBE. Gasoline containing MTBE is often released onto surface waters by boats with outboard motors.³⁹

The chemical properties of MTBE make it a particular risk to drinking water supplies. MTBE is hydrophilic, meaning [31 ELR 10989] it is chemically attracted to water molecules. As a result, it spreads quickly over great distances to groundwater and tends to persist there.⁴⁰ Once it is in the water supply, MTBE is difficult to clean up. It does not readily bind to particles of soil. It does not degrade easily as a result of natural process. MTBE may persist in the groundwater for decades. No inexpensive technology now exists to remove MTBE from drinking water.⁴¹ As a result, several states have reported finding MTBE pollution in their groundwater and drinking water.

MTBE is found in northern California lakes such as Donner, Shasta, and Tahoe. To the south, MTBE has been detected in lakes and reservoirs like Castaic, Perris, and Pyramid.⁴² One study estimates that MTBE has polluted 10,000 shallow groundwater sites in California. The U.C. Davis report more conservatively estimates that 3,486 groundwater sites in California are contaminated with MTBE.⁴³ California reports detecting MTBE in 30 public water systems.⁴⁴ In Santa Monica, the city shut seven of its wells because of MTBE contamination, thus losing one-half its water supply. In South Lake Tahoe, 12 of 34 wells were closed.⁴⁵

Indeed, MTBE contaminates the water supply in a large number of sites across the country.⁴⁶ A Blue Ribbon Panel appointed by EPA found that in many areas where large amounts of reformulated gas is used, between 5% and 10% of drinking water supplies contained detectable amounts of MTBE.⁴⁷ A survey by the University of Massachusetts and EPA found reports of MTBE in public water systems in 19 states.⁴⁸ Likewise, the state of Maine found MTBE in 16% of public water supplies and in 15.8% of private wells.⁴⁹ The state of New York found MTBE contamination of groundwater at 1,500 of 24,000 petroleum spill sites.⁵⁰ In New Jersey, hundreds of private wells were found to be contaminated with MTBE. Public water systems in northern New Jersey, also, were found to be contaminated.⁵¹

B. MTBE May Be a Health and Environmental Risk

MTBE has a foul taste, and it smells like turpentine.⁵² Even in low concentrations, it is easy to smell and taste MTBE in drinking water.⁵³ In addition, the U.C. Davis team noted that "substantial evidence from studies of chronic exposure demonstrate that MTBE is carcinogenic in rats and mice."⁵⁴ The study concludes that "MTBE is an animal carcinogen with the potential to cause cancer in humans."⁵⁵ This conclusion is supported by reports of EPA and the White House National Science and Technology Council. According to the latter report, there is "sufficient evidence that MTBE is an animal carcinogen" and that the "weight of evidence supports regarding MTBE as having carcinogenic hazard potential for humans."⁵⁶ Allegations have also been made that MTBE is associated with other health risks including memory loss, asthma, and skin irritation.⁵⁷

C. California's Conclusion That MTBE's Costs Outweigh Its Benefits

The U.C. Davis report found "no significant additional air quality benefit" associated with the use of MTBE in gasoline relative to reformulated gasoline that does not contain oxygenates.⁵⁸ Comparing the cost of gasoline with MTBE with the cost of gasoline to which ethanol had been added, the U.C. Davis study concluded that gasoline with MTBE had the higher "net annual cost due primarily to the costs of treating contaminated water supplies, higher fuel prices, and lower fuel efficiency."⁵⁹

D. The Phaseout of MTBE by States

In March 1999, Governor Davis issued an executive order setting in process the MTBE phaseout over three years. The California legislature then adopted the MTBE phaseout as law and required refiners to report the amount of MTBE blended into gasoline.

At least 15 states, including California, have now acted on the MTBE issue. Arizona has adopted legislation phasing out MTBE no later than 180 days after California completes its phaseout.⁶⁰ Colorado adopted legislation phasing out MTBE by April 30, 2002. MTBE is immediately banned in Denver and other areas of the Front Range where MTBE is not currently sold or stored.⁶¹ As noted above, California is phasing out MTBE over three years and imposing reporting requirements on refiners.⁶² Connecticut has recently adopted legislation phasing out MTBE over five years and increasing penalties for the unlawful discharge of gasoline.⁶³ Maine opted out of the reformulated gasoline program.⁶⁴ [31 ELR 10990] Maryland created a task force to study the issue.⁶⁵ Michigan adopted legislation banning MTBE as of January 1, 2003, and mandated a study of its environmental and health effects.⁶⁶ Minnesota adopted legislation limiting MTBE content of gasoline to one-third of 1% by weight and phasing it out entirely by July 2005.⁶⁷ In response to a resolution adopted by the legislature, Missouri's governor issued an executive order banning MTBE, provided that the federal government meets certain conditions including a waiver of clean air mandates.⁶⁸ Nebraska adopted legislation banning MTBE.⁶⁹ New Hampshire law limits MTBE concentrations in gasoline.⁷⁰ New York adopted legislation banning MTBE by January 1, 2004.⁷¹ Pennsylvania opted out of the reformulated gasoline program in 1999.⁷² South Dakota adopted a law limiting the MTBE content of gasoline to 2% by weight.⁷³ Virginia adopted a law directing state agencies to study the issue.⁷⁴

EPA has studied a nationwide phaseout of MTBE, which it could implement under its rulemaking authority under the Toxic Substances Control Act.⁷⁵ However, this administrative process could take time to complete.⁷⁶

IV. The Initial NAFTA Process

The NAFTA investment chapter provides a private right of action for foreign corporations to initiate claims for economic damages against the national government where the investment is located. Multinational corporations and other investors are placed on an equal footing with nation-states in a process for resolving an issue of public policy. Investors no longer have to work through trade ministries to pursue a claim. As a result, the volume of cases is likely to increase, and the claims themselves may be brought without the restraint that nation-states exercise when dealing with issues of international relations.

As of June 2001, the Methanex case was at the early stage of initial arguments on jurisdiction and standing. Each stage of the process is summarized below.⁷⁷

A. Notice of Claim for Compensation

At least 90 days before a claim is submitted, NAFTA requires an investor to file a notice of intent to submit a claim.⁷⁸ The notice must specify names and addresses for the claimants, NAFTA provisions allegedly breached, issues, and factual basis of the claim, relief sought, and damages claimed.⁷⁹

On July 2, 1999, the Methanex Corporation filed its notice. Methanex claimed $ 970 million in damages based on its allegation that California's MTBE phaseout violated obligations under NAFTA's investment chapter related to "minimum treatment under international law" and "expropriation." Shortly thereafter, Methanex filed its claim. In the spring of 2001, however, Methanex amended its claim, alleging that the United States also violated "national treatment" obligations related to nondiscrimination against foreign firms and investors.

B. Choice of International Forum and Rules

NAFTA allows an investor to submit a claim under the arbitration rules of one of two bodies: the International Centre for Settlement of Investment Disputes (ICSID) at the World Bank or the United Nations Commission on International Trade Law (UNCITRAL).⁸⁰ The Methanex Corporation chose UNCITRAL.⁸¹

C. Choice of Arbitrators

Under NAFTA, the investor chooses one arbitrator, the host government chooses a second arbitrator, and the third arbitrator is then chosen either by agreement of the parties or by a neutral third party such as the Secretary-General of ICSID from a standing list of arbitrators.⁸² The three members of [31 ELR 10991] the Methanex tribunal are V.V. Veeder, QC (chair of the panel), J. William Rowley, QC, and former U.S. Secretary of State, Warren Christopher.⁸³

V. The Current Status of Methanex v. United States

A. Initial Summary of Arguments

The United States filed its statement of defense on August 11, 2000. Methanex filed its reply on August 28. The United States filed its rejoinder on September 14, 2000.⁸⁴ These documents provide a bare-bones summary of the arguments each side will make in detail when they file their memorials (or briefs) on the merits later in the process.⁸⁵

B. Initial Arguments on Jurisdiction and Standing

The United States filed its first memorial (brief) on jurisdictional issues on November 13, 2000. The U.S. memorial argues that the NAFTA tribunal has no jurisdiction to hear the claim and that Methanex has no standing to bring a claim for compensation.⁸⁶ In response to Methanex Corporation's draft amended claim of February 12, 2001,⁸⁷ the United States submitted a reply memorial on jurisdiction and the admissibility of Methanex's proposed amendment to its claim on April 12, 2001.⁸⁸ Methanex Corporation was scheduled to submit its rebuttal to the U.S. reply memorial at the end of May 2001, with a further U.S. response due in mid June 2001. The tribunal has scheduled a hearing on jurisdiction for July 11 to 13, 2001.⁸⁹

A ruling on jurisdictional issues might come as soon as late summer 2001. Such a ruling could result in dismissal of the case on jurisdictional or procedural grounds as the United States is urging. If the case proceeds beyond the jurisdictional phase, memorials on the merits should not be expected before the fall of 2001.

VI. The Next Procedural Steps in Methanex v. United States

A. Briefs on the Merits

No memorials (briefs) on the merits will likely be available before the fall of 2001. Documents related to NAFTA investment cases are not in the public record. However, in the Methanex case, the parties have agreed to release documents. The pleadings and the memorials on jurisdiction provide a general outline of the arguments being made by each side. The analysis below comparing NAFTA rights with U.S. law is based on an independent analysis of the arguments presented in the pleadings and the U.S. briefs on jurisdictional issues. A complete analysis of the legal arguments in Methanex will have to wait until the briefs on the merits are written and released to the public.

B. Tribunal Decision Based on International Law, Not U.S. Law

NAFTA instructs arbitrators to decide the issues in accordance with the text of the agreement in light of the principles of international law.⁹⁰ NAFTA panels cannot directly base their decisions on U.S. law. U.S. law and constitutional principles might, in theory, be brought in through the back door if they are somehow regarded as evidence of general principles of law accepted internationally.⁹¹ But, it is unlikely that a panel would import U.S. law into NAFTA criteria in such an indirect way. The direct implication of the text of NAFTA is that U.S. law is not to be applied.

As described in part VII below, the text of NAFTA provides for three standards that are the specific basis of Methanex's claim, "national treatment," "minimum treatment," and "expropriation."⁹² These key standards are undefined in NAFTA, and international law provides little precise guidance as to their meaning. The tribunal will have broad discretion to read the standards narrowly or broadly.

Nor is this the only problem that the tribunal will face in interpreting the text of NAFTA's investment chapter. The investment chapter has a separate article on "environmental measures," but it is at best unclear whether or how this article [31 ELR 10992] limits the provisions for investor rights.⁹³ For example, the article on environmental measures provides that: "Nothing in this chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns."⁹⁴ Most likely, the phrase, "otherwise consistent with this Chapter," is the exception that swallows the rule. On the other hand, it might be argued that the parties must have intended for panels to give environmental measures like California's MTBE phaseout some degree of special deference.

C. Tribunal Decision on Damages

A NAFTA arbitration panel may enforce its judgment by requiring the national government to pay money damages.⁹⁵ NAFTA allows an investor to enforce a tribunal's damage award under the New York Convention of the United Nations, which gives the investor access to domestic courts to secure payment of damage awards.⁹⁶

Methanex Corporation claims $ 970 million in damages. NAFTA's investment chapter provides for damages to be calculated based on "fair market value."⁹⁷ There is no cap on the size of damage awards. The Methanex Corporation has not yet spelled out in detail how it calculates the fair market value of its investment losses.

Methanex says that the calculation of damages extends beyond the lost sales in the California MTBE market to include lost sales in other states as well as the "present value of anticipated losses to be suffered by Methanex from a loss of the national MTBE market for methanol."⁹⁸ The company says these losses are calculated "by examining how the negative demand shock impacts the price of methanol as a global commodity."⁹⁹ In other words, California's action is alleged to have resulted in lower demand for ethanol that depresses its price and the Methanex Corporation's margin of profit on sales.

Any Methanex award will be automatically appropriated. Congress has created a "judgment fund," a standing appropriation to pay damages resulting from the judgments of the U.S. Court of Claims, federal district courts, and international tribunals. It is a permanent and indefinite appropriation similar to that available to pay interest on the national debt. Payment of a judgment is automatic.¹⁰⁰

D. Potential Review by Courts

Methanex is being arbitrated under UNCITRAL rules. UNCITRAL rules authorize domestic courts to review an arbitration award. Domestic courts may decline to enforce the award if it is found to be contrary to public policy.¹⁰¹ In addition, a party may ask the courts of the "seat" of the arbitration to set aside an award because of a violation of the law of the "seat" related to arbital awards.¹⁰² For example, a British Columbia court has reviewed the award against Mexico in the Metalclad case to determine its conformity with British Columbia law governing arbitrations.¹⁰³

E. U.S. Protection or Preemption of California Law

If the Methanex Corporation is awarded damages, the NAFTA panel ruling does not automatically result in preemption of California's regulation of MTBE. There is no right of action for private parties to enforce panel rulings in U.S. courts.¹⁰⁴

If state officials are unwilling to amend policies that are popular with the public like the MTBE phaseout, federal officials may simply leave the state policy in place, pay damages to the investor, and hope the issue does not arise again as a NAFTA case. In the alternative, the federal government may seek to quietly resolve the issue. For example, federal officials acting behind the scenes might apply political or economic pressure on state officials to "voluntarily" bring state policy in line with the panel ruling.

If the Methanex Corporation wins, the United States also has the option of suing to preempt the California MTBE phaseout. Unlike private investors, the federal government can sue a state or locality at any time and seek the preemption of state or local measures that do not comply with NAFTA.¹⁰⁵ State law is in an inferior position to federal law under NAFTA. If a dispute resolution panel finds that a federal law violates NAFTA's investment chapter, an act of Congress is required to comply with the ruling.¹⁰⁶

VII. The Key Legal Issues¹⁰⁷

If presented in a U.S. court, the original Methanex arguments [31 ELR 10993] related to "minimum treatment" and "expropriation" would fail, which explains why Methanex has brought its case before a NAFTA tribunal.¹⁰⁸ However, the NAFTA tribunal may never reach these claims on the merits. The Methanex Corporation may lack standing to bring such claims because the injury it claims is so indirect. Methanex manufactures methanol, not MTBE. Perhaps not coincidentally, Methanex recently sought to amend its claim, making dramatic new allegations of intentional discrimination, which, if proved, could bolster its case and help keep its claim alive.

A. Standing and Jurisdiction

The United States argues forcefully that the Methanex Corporation has no standing to bring its claim as originally formulated:

Methanex's claims do not remotely resemble the type of grievance that the NAFTA Parties consented to submit to arbitration …. At bottom, Methanex's claims boil down to a concern that government regulation may, because of its effect on actors several steps removed on the supply chain, change the general business environment in which Methanex operates. Every government action, however, has ripple effects throughout society. Recognizing standing in a remotely affected party who alleges a government taking of expectations rather than property rights would radically expand the scope of NAFTA and potentially expose States [nation-states] to massive liability.¹⁰⁹

In other words, California is regulating gasoline and MTBE. Methanex Corporation does not manufacture or sell gasoline or MTBE. Therefore, absent a showing of discriminatory intent, California's action is not the proximate cause of Methanex's alleged damages. The United States argues that the principle of "proximate cause" is as well established in customary international law as it is in U.S. law.¹¹⁰

In addition to arguing that Methanex lacks standing because its claims are too remote, the United States makes a number of other arguments on jurisdiction and standing. For example, the United States argues that neither a customer base nor maintenance of a certain rate of profit constitute an investment capable of giving rise to an expropriation claim.¹¹¹ Thus Methanex fails to identify any right under NAFTA that was violated by California's action, and it has no standing to bring a claim.

B. "National Treatment"

In March 2001, Methanex announced that it had amended its claim to allege intentional discrimination, which is a violation of NAFTA's "national treatment" standard.¹¹²

Allegedly, the discrimination results from a secret meeting between Governor Davis and a campaign contributor, U.S.-based Archer Daniels Midland (ADM) Corporation. ADM made campaign contributions to Davis and it is alleged "improperly influenced the State of California with respect to MTBE."¹¹³ Methanex argues that California banned MTBE because it is manufactured with foreign-produced methanol, and that the goal of the MTBE ban was to open a market for ethanol produced by ADM.¹¹⁴

If Methanex can prove that Governor Davis and other public officials intentionally acted to injure Methanex's market position for the purpose of aiding a U.S. firm, then such acts arguably are the proximate cause of the damages claimed. This could rebut the U.S. argument that Methanex Corporation's alleged injuries are too remote for the tribunal to take jurisdiction. The question is whether Methanex has adequate proof of intentional acts to drive it out of the U.S. market. More generally, however, if Methanex Corporation can get past the jurisdictional hurdle and successfully [31 ELR 10994] amend its claim, then the introduction of "national treatment" arguments could bolster its case on the merits.

This is so, first, because "national treatment" bars not only de jure discrimination against foreigners, on the face of the statute, but also de facto discrimination where the practical effect of the law or policy is to disadvantage foreign investors.¹¹⁵ If Methanex can demonstrate that MTBE and methanol are mostly produced by foreign investors and that a switch to ethanol as a fuel oxygenate as a result of California's MTBE phaseout disproportionately favors U.S. firms, then the tribunal might easily enough find a de facto "national treatment" violation.

Second, as Methanex Corporation emphasizes in its draft amended claim, the public record in the United States is replete with statements by U.S. politicians extolling the advantages of ethanol as a home-grown product and an alternative to products like MTBE, which are largely produced from imported oil.¹¹⁶ For example, President George W. Bush recently stated that his support for requiring the use of ethanol to meet clean air standards is based in part on his belief that it helps "reduce dependency on foreign sources of energy."¹¹⁷ As David Gantz notes, similar statements in the public record substantially bolstered the investors "national treatment" argument in two previous NAFTA investment cases, Ethyl Corp. and S.D. Myers.¹¹⁸ Nonetheless, Methanex corporation's argument is undercut in part because Governor Davis—regardless of whether he accepted campaign contributions from ADM—sought a waiver from the CAA's oxygenate requirement, in order to avoid the mandatory mixing of ethanol in California gasoline.¹¹⁹

C. "Minimum Treatment" Under International Law

Methanex says that California's MTBE phaseout order did not give Methanex "treatment in accordance with international law, including fair and equitable treatment."¹²⁰

While Methanex complains about the scientific technique of the U.C. Davis study, the dispute would appear to be less about science than about the evidentiary standard that political decisionmakers must use and whether they have chosen the "least trade-restrictive" means of addressing the problem.¹²¹

1. The Limited Guidance of International Law

The question is what source of international law requires the use of the least trade-restrictive means as a predicate to enacting a measure such as California's phaseout of MTBE.

The Methanex Corporation says that NAFTA's "minimum treatment" standard implicitly incorporates World Trade Organization requirements such as the Agreement on Technical Barriers to Trade (TBT) and the Agreement on Sanitary and Phytosanitary Measures (SPS).¹²² The TBT, like the SPS, sets a standard for the review of science-based trade disputes that requires governments to ensure that technical regulations like California's MTBE phase out are "not more trade restrictive than necessary to fulfill a legitimate objective."¹²³ Methanex alleges that California has singled out MTBE as the problem when in fact the real problem results from California's failure to enforce its laws, particularly those related to leaking underground storage tanks.¹²⁴ In other words, California has not selected the "least trade-restrictive" approach to the problem as required by international law, which incorporates not just customary international law, but also international agreements such as the TBT.¹²⁵

[31 ELR 10995]

The United States argues that the NAFTA parties intended minimum treatment to refer only to customary international law, noting that all three parties, the United States, Mexico, and Canada, now have gone on record to that effect.¹²⁶ If applicable to this case, the United States argues that this duty is a narrow and minimum standard of international human rights.¹²⁷

2. The Failure of the Minimum Treatment Argument Under U.S. Law

The Methanex minimum treatment argument is based on a plausible reading of NAFTA, but it is uncertain whether a NAFTA panel will accept it. By contrast, such an argument would almost certainly fail in a U.S. court.

California's regulation of MTBE like other economic or social welfare legislation is largely immune under U.S. law from challenge under substantive due process and similar constitutional principles as long as there is merely a rational basis for the legislature's action.¹²⁸ The Methanex Corporation would have to prove that the MTBE phaseout was an intentionally discriminatory act taken on behalf of ADM, for its "minimum treatment" argument to have hope of success under U.S. law. It appears that California's MTBE phaseout was rationally based on the rather elaborate U.C. Davis study.

Issues about what is fair and equitable in this broad sense are political questions. In the United States, questions of this type ordinarily require deference by the courts to the judgment of elected decisionmakers. In the U.S. constitutional tradition, such deference is ordinarily accorded unless the acts of elected officials are totally arbitrary, meanspirited, or presumptively reflective of a bias against a class of people who historically have been discriminated against.¹²⁹

D. Expropriation

The Methanex Corporation claims a right to compensation based on a broad reading of NAFTA's article on expropriation of investments.¹³⁰ The Methanex Corporation alleges that the United States breached its obligations under NAFTA by taking measures that are both directly and indirectly tantamount to an expropriation.

Methanex is able to make such an argument because the language of the article is open-ended. The terms "indirect expropriation" and "tantamount to expropriation" are not defined, and international law provides only limited guidance for defining the terms. According to Methanex:

The measures taken by the State of California's Legislature and Governor have and will end Methanex's U.S. business of selling methanol for use in MTBE in California. This constitutes a substantial interference and taking of Methanex US' business and Methanex's investment in Methanex US. These measures are both directly and indirectly tantamount to an expropriation.¹³¹

Methanex further alleges that: "In order for there to be an expropriation, it is not necessary to nationalize the company or seize all of its assets. The deprivation of a part of its property is sufficient."¹³²

[31 ELR 10996]

The Methanex Corporation, also, asserts that:

The use of the words "tantamount to expropriation" are broad enough to include a measure which removes an entire market otherwise available to Methanex US. Regulation can indeed be exercised in a way that constitutes a measure tantamount to expropriation. An action that prevents, unreasonably interferes with, or unduly delays effective enjoyment of Methanex US' property is an expropriation.¹³³

1. The Limited Guidance of International Law Regarding Expropriations

In evaluating Methanex's arguments, the NAFTA panel will be guided by international law. Even in comparison to U.S. case law on regulatory takings, international expropriation law is vague and subject to multiple interpretations. An argument can be made that there is little precedent in international law for a broad theory of indirect expropriation.¹³⁴ By the same token, there is not much precedent for a narrow theory.

The NAFTA panel in Pope & Talbot Inc. v. Canada¹³⁵ said economic regulation, even when it is an exercise of the state's traditional police powers, can be a prohibited indirect or "creeping" expropriation under customary international law if it is "substantial enough." If "substantial enough" is understood as the effective confiscation of the property in stages, then California's MTBE phaseout probably falls short of an expropriation under international law. On the other hand, the Third Restatement of the Foreign Relations Law of the United States says that an action that "unreasonably interferes" with "effective enjoyment" of an alien's property amounts to an expropriation under international law.¹³⁶ That definition would seem to leave room to argue that California's action was "substantial enough" to constitute an indirect or creeping expropriation.

Even if California's action did not amount to an indirect expropriation, it still might be "tantamount to expropriation." It is an open question whether the drafters of NAFTA in inserting the phrase "tantamount to expropriation" intended to create a new and more powerful protection of property rights.

An argument might also be made that the phrase "tantamount to expropriation" simply restates the international law of indirect expropriation. Statements by United States, Canadian, and Mexican trade authorities that it was not their intent to create a new category of property rights might be offered as evidence in support of this argument.¹³⁷ The NAFTA panel in Pope & Talbot came to a similar conclusion.¹³⁸ Nonetheless, absent an official reinterpretation of the expropriation article by the three parties, a panel might reasonably assume that the phrase was inserted in the text of NAFTA for a purpose.

In short, NAFTA's expropriation standards are so vague that they invite panels to substitute their political judgment for that of elected officials. The door is open for NAFTA panels to engage in standardless inquiry about when a governmental action constitutes an expropriation.

The question is whether the arbitrators will walk through that door. Or, will they find creative arguments to substantially narrow the apparently over-broad language of expropriation in NAFTA's investment chapter?

2. The Methanex Expropriation Argument Would Fail Under U.S. Law

The persuasiveness of the Methanex expropriation argument is uncertain under NAFTA. Under U.S. law, it would not prevail.

Extensive U.S. constitutional case law construes the analogous Fifth Amendment Takings Clause much more narrowly. It draws a line that makes it almost impossible for an investor to successfully claim compensation for a government economic regulation that makes investment less profitable.¹³⁹

Assuming that the U.S. Supreme Court makes no about-face on existing doctrine in the pending case of Palazzolo v. Rhode Island,¹⁴⁰ it is safe to say that U.S. courts generally find that a government regulation amounts to a compensable "taking" of property only when the regulation eliminates all or substantially all of its economic value.¹⁴¹ The Methanex Corporation makes no such claim here. To the contrary, Methanex seeks compensation for the reduction in the value of its expected future profits. Such a claim for compensation fails under U.S. law. The Supreme Court has held that so long as it does not constitute a physical invasion of property, the "mere diminution in the value of property, however serious, is insufficient to demonstrate a taking."¹⁴²

[31 ELR 10997]

Indeed regardless of Palazzolo, the Methanex investment would not likely even be considered the kind of property interest under U.S. law for which compensation must be provided. In the United States, the courts generally uphold takings claims only with respect to physical or intellectual property.¹⁴³ By contrast, NAFTA's definition of investment is extraordinarily broad, for example, including enterprises or interest in the assets or profits of any enterprise. Any interests resulting in the commitment of constitute an "investment."¹⁴⁴

VIII. The Potential Outcomes

If the NAFTA panel were to award the Methanex Corporation a substantial amount of compensation for California's MTBE regulation, it is safe to say that the decision would be politically sensitive. Assuming that the arbitrators have been selected for their political sensitivity as well as their grasp of international law, such a result might seem unlikely. Nevertheless, given that a large body of "precedent" has yet to develop in NAFTA investment cases and given that the text of NAFTA provides little guidance to a panel seeking to understand its investment obligations, the outcome of Methanex cannot be predicted with any certainty. Thus, all the potential outcomes must be discussed.

A. If Methanex Loses

1. The Panel Could Dismiss the Case on Jurisdictional Grounds

As noted above, there may be several grounds for denying Methanex access to NAFTA dispute resolution. For example, the panel might find that the case is not yet ripe for adjudication because California has not yet issued its final regulation banning MTBE. Or, Methanex might be found to lack standing to bring a claim because it manufactures methanol, not MTBE, and therefore is not directly affected by California's action.¹⁴⁵

2. The Panel Could Reject the Claim on Its Merits

The arbitrators could choose to reject the Methanex claim on its merits. They might write an opinion that sets standards for minimum treatment and expropriation in an attempt to discourage similar claims in the future. Likewise, they might reject Methanex's "national treatment" claim, absent solid evidence to support its accusations.

The Methanex panel is obliged to decide the case in accord with the provisions of NAFTA and the principles of international law. As noted above, this means the panel should not directly apply U.S. law and U.S. constitutional standards.¹⁴⁶

a. The Tribunal Could Narrowly Interpret "Minimum Treatment" and "Expropriation" Obligations

The panel might conclude that international law does not contemplate either as a matter of "minimum treatment" or "expropriation" that governments are obliged to pay compensation for exercising their traditional police powers to protect human health and welfare, in other words, they do not have to pay to regulate. Or, even if governments sometimes must pay to regulate, the panel might find that the regulatory interference by California in this instance is too insubstantial to justify an award of compensation.

Martin Wagner of the Earthjustice Legal Defense Fund argues that:

It is "an accepted principle of international law that a State is not liable for economic injury which is a consequence of bona fide regulation within the accepted police power of states." Thus, antitrust, consumer protection, securities, environmental protection, land planning and other legislation, are non-compensable takings. These regulations are regarded as essential to the efficient functioning of the state.¹⁴⁷

Unfortunately, Wagner's views are not universally accepted. The NAFTA panel in Pope & Talbot took quite a different tack, at least with respect to the question of expropriation, as noted above.¹⁴⁸ However, even if it applies the Pope & Talbot interpretation of the NAFTA expropriation article, there is room for the Methanex panel to dismiss the idea that the phrase "tantamount to expropriation" creates broad new property rights previously unknown to international law. In much the same way, the Methanex panel could find based on the facts of the case that California's regulatory interference with Methanex Corporation's investment was not "substantial enough" to constitute an indirect or creeping expropriation.¹⁴⁹

And in a similar fashion, without going so far as to accept Wagner's assertion that nondiscriminatory and bona fide [31 ELR 10998] regulation within the police power of states is immune from challenge, the "minimum treatment" article of NAFTA's investment chapter can easily be given a construction narrow enough to dismiss Methanex's argument. For example, the panel might find that the parties to NAFTA never intended for NAFTA's minimum treatment obligation to incorporate the World Trade Organization's (WTO's) obligations that states employ the "least trade-restrictive" means of achieving their public policy goals.

b. The Tribunal Could Demand Proof of Discrimination

Methanex's "national treatment" claim is hard to evaluate absent solid evidence of its accusation that Governor Davis and other U.S. officials were working at the behest of ADM and intentionally discriminated against Methanex.

Nonetheless, a "national treatment" violation may be proved in international law based on an effects test, but intentional discrimination may be required for Methanex to show that California's action was the proximate cause of the damage to its investment (arguably a necessary element of standing).

It seems reasonable that a politically sensitive panel might require substantial evidence of the accusations made in Methanex's revised claim. Otherwise, unsupported accusations about the integrity of Davis and other officials could damage Methanex's credibility in the eyes of the panelists, making a decision on the merits in favor of the United States more likely.

c. Dismissal Is No Permanent Solution

Dismissal of the Methanex Corporation's theory of the case would be very helpful, especially if it is based on Martin Wagner's understanding of how international law relates to NAFTA's investment chapter. It would not, however, be a permanent solution to the problem created by an overly broad statement of investor rights.

In theory, NAFTA panel rulings have no precedential value. Nothing prevents a future panel with a different philosophy about international law from endorsing theories of minimum treatment and expropriation similar to those proposed by the Methanex Corporation.

B. If Methanex Wins

If the arbitrators feel compelled to award damages to Methanex Corporation, one might assume that politically sensitive arbitrators would search for ways to soften the political backlash to their decision. The easiest way to do this would be to award minimal damages, which the United States could easily pay out of the judgment fund without attracting undue attention from Congress or the public. If the financial pain were modest, then the federal government might feel no compulsion to force a change in California's MTBE policy.

The precedent here could be the recent Metalclad decision, in which a NAFTA panel found that Mexico had denied an American investor its rights by allowing local environmental and land use regulations to stop development of a hazardous waste landfill facility. Nonetheless, the damage award was a relatively modest $ 16.685 million.¹⁵⁰

C. If There Is a Compromise Settlement

If the NAFTA panel does not dismiss the Methanex claim on standing grounds and especially if Methanex brings forward strong evidence of intentional discrimination, the United States may want to settle. It could probably negotiate a settlement by offering to compensate Methanex at a level far below the original claim without the need to concede to the company's theories on minimum treatment and expropriation. Nonetheless, a settlement would only postpone resolution of issues about how NAFTA's "minimum treatment" and "expropriation" articles are to be interpreted. Other similar cases are pending, and a settlement would encourage more investor claims.

IX. Appropriate State Roles

There are several options for California legislators and public officials from other states to play an active role in the Methanex litigation and in the shaping of U.S. policy on NAFTA investor rights cases.

A. Legal Defense

The United States is aggressively defending California law in this case and has been consulting with the California Attorney General. Nonetheless, it has still been difficult for state legislators to obtain information about the legal arguments and status of the case. By requesting periodic briefings or written updates, legislators could promote public awareness of the case and could better educate themselves on the broader implications of NAFTA investment provisions for law making. Mississippi and Massachusetts legislators could seek similar consultations and commitments in connection with the Loewen and Mondev cases.

California legislators similarly could seek assurances from the president that NAFTA's investment chapter will be officially reinterpreted to clarify and narrow expropriation and minimum treatment provisions (as a means of bolstering the U.S. legal defense in Methanex and in future challenges to California law under NAFTA's investment chapter).¹⁵¹

B. Legislative Oversight and Public Awareness

California's Senate Select Committee on International Trade Policy and State Legislation, chaired by Sen. Sheila Kuehl, has been studying the impact of NAFTA and other international trade agreements on the authority of the legislature to regulate in the public interest.¹⁵² The Committee could develop its own analysis of NAFTA's investment chapter, the Methanex case, and the potential impact on California state sovereignty. Such an analysis coming from the legislature of the largest trading state would likely be of interest to Congress, the U.S. Trade Representative (USTR) and the U.S. Department of State.

[31 ELR 10999]

California legislators also might consider communicating with other state and local officials. The California Select Committee could be a model for other state legislatures. If California raises public awareness across the country about the potential threat to federalism posed by the open-ended language of NAFTA's investment chapter, then the message would be much more likely to get through to Congress and the president.

C. Law Making on Trade-Sensitive Topics

California and other states can adapt their legislative procedures in response to NAFTA's investment chapter and similar international agreements that cover state legislation. State legislatures may want to repeal some state laws that appear to conflict with international agreements or they may want to amend laws to minimize the conflict and strengthen the text of the statute and its legislative history against potential NAFTA or WTO challenge.

Committee reports and drafts of new legislation, similarly, can be adapted to reduce the risk of international challenges. In addition state legislatures may want to make more frequent use of the interstate compact process both to address international complaints about the lack of uniformity in American law and to prepare for challenges with a multistate political coalition already in place.

D. Advice to the Federal Government

State and local officials may want to develop their own proposals to fix problems in the text of NAFTA's investment chapter and to ensure that similar problems do not arise in the drafting of future investment agreements such as the proposed Free Trade Area of the Americas (FTAA). (Appendix I presents examples of possible reforms.)

NAFTA's investment chapter may be officially reinterpreted by agreement of the United States, Canada, and Mexico.¹⁵³ Canada is already pressing for such a reinterpretation to address some of the problems raised in this Dialogue. Few state legislators in the United States, however, have lobbied USTR or the president on reinterpretation of the investment chapter.

Even more important, an agreement on an FTAA, including an investment chapter potentially based on the NAFTA model, is currently being negotiated by 34 countries in the hemisphere. American state legislatures have a great deal at stake in the FTAA negotiations, but they have so far failed to effectively communicate their concerns to the U.S. negotiators.

According to a University of Maryland poll, a large majority of Americans believe that trade policy is not balanced because it favors the interests of multinational corporations "too much," and the interests of ordinary Americans "too little."¹⁵⁴ The public generally supports trade liberalization, but does not want such liberalization to go too far and override the authority of government to protect the environment and promote humane working conditions.¹⁵⁵ In other words, Americans want trade and investment policy to be balanced.

Participation in the debate about NAFTA's investment chapter by provincial governments and the public have already led to a more open public debate in Canada.¹⁵⁶ An equal level of awareness and participation by California legislators, other state legislators across the country, and the public could prove similarly influential over U.S. policy. A more balanced U.S. policy could result.

[31 ELR 11000]

Appendix I

Examples of Possible Investment Agreement Reforms

There are real opportunities for state legislators to make proposals for effective reform of hemispheric investment agreements and to make a change in national policy. For example:

(1) Eliminate or limit investor-to-state dispute resolution. What reason is there to put nation-states and private investors on an equal footing like two parties to a commercial arbitration, when issues of public policy affecting all the citizens in both countries are at stake?

. Eliminate investor-to-state dispute resolution. The surest way to ensure that the most striking unintended consequences of NAFTA chapter 11 are not repeated in the FTAA is to eliminate investor-to-state dispute resolution.

. Limit investor-initiated claims. In the alternative as perhaps a more politically feasible proposal, limits on investor-to-state arbitration could be included before NAFTA is expanded. For example, provisions could be made for:

—Diplomatic review of claims, which already exists for tax issues under NAFTA art. 2103.6. This would enable either country connected to an investment dispute to stop either a claim or an award from proceeding.

—Domestic court review of awards, which could be expanded from provisions from the United Nations convention on arbitration awards, which are codified at 9 U.S.C. §§ 201-208.

(2) Define vague investor rights under NAFTA in accordance with domestic takings law. The investment chapter of NAFTA allows the parties to reinterpret its provisions. This provides a process for defining open-ended terms and avoiding future cases like Methanex. For example:

. "Expropriation" should mean no more than: (1) physical occupation of property or taking of an asset; and (2) taking title to an asset.

. "Indirect expropriation" and "tantamount to expropriation" should mean no more than: (1) denial of all economic uses; and (2) divestment of control of an asset.

. "Minimum treatment" should require no more than: (1) treatment equal to that enjoyed by domestic investors; and (2) notice and opportunity to be heard.

(3) Provide sovereignty safeguards in the FTAA. If an investor rights chapter is included in the FTAA, safeguards will be necessary to preserve core governmental functions.

. General exceptions. A starting point would be to include general exceptions of the kind provided in GATT and other WTO agreements. A sampling of these includes:

—Protection of public morals.

—Protection of human and animal health and life.

—Protection of consumers and workers.

—Protection of national treasures of artistic, historic or archeological value.

—Conservation of exhaustible resources.

—Preservation of public order and fundamental interests of society.

—Avoidance of products made with prison labor.

—Maintenance of capacity to collect direct (income and property) taxes.

—Control of access to domestic resources that are in short supply.

. Principles of deference. FTAA dispute panels could be required to honor principles of deference to constitutional and democratic values including:

—Presumption in favor of legislative judgment of the factual basis, public purpose, and policy methods even when they are not necessarily the least-trade-restrictive methods available.

—Presumption that FTAA-member nations are not obligated to mandate compliance that exceeds their powers within their federal system as defined by domestic courts.

—Presumption in favor of measures that implement non-trade-related international agreements including: (a) multilateral environmental agreements; (b) international labor conventions; and (c) international human rights conventions.

(4) Provide sovereignty safeguards in implementing legislation. In addition to the existing provisions of NAFTA and WTO implementing legislation, Congress could include a number of state sovereignty protections in fast-track legislation or implementing legislation for the FTAA. For example, Congress could:

. Require a statement of congressional intent to preempt for a specific category of law, before courts could find that trade or investment agreements preempt state or local law.

. Limit domestic enforcement of trade rules by private parties, including a limit on using allegations of trade conflict by foreign governments as evidence of a foreign affairs conflict.

1. Notice of Intent to File a Claim to Arbitration (July 2, 1999) [hereinafter Methanex], available at http://www.methanex.com/investorcentre/mtbe.

2. North American Free Trade Agreement Between the Government of Canada, the Government of the United Mexican States, and the Government of the United States, Dec. 8-17, 1992, 32 I.L.M. 289, 605 (entered into force Jan. 1, 1994) [hereinafter NAFTA].

3. See HOWARD MANN & KONRAD VON MOLTKE, INTERNATIONAL INSTITUTE FOR SUSTAINABLE DEVELOPMENT, NAFTA'S CHAPTER 11 AND THE ENVIRONMENT: ADDRESSING THE IMPACTS OF THE INVESTOR-STATE PROCESS ON THE ENVIRONMENT (1999).

4. See generally regarding NAFTA's investment chapter, INTERNATIONAL INSTITUTE FOR SUSTAINABLE DEVELOPMENT, PRIVATE RIGHTS, PUBLIC PROBLEMS: A GUIDE TO NAFTA'S CONTROVERSIAL CHAPTER ON INVESTOR RIGHTS (May 2001), available at htpp://www.iisd.org; David A. Gantz, Reconciling Environmental Protection and Investor Rights Under Chapter 11 of NAFTA, 31 ELR 10646 (June 2001); Kevin Banks, NAFTA's Article 1110—Can Regulation Be Expropriation?, 5 NAFTA L. & BUS. REV. AM. 499 (1999); Howard Mann, NAFTA and the Environment: Lessons for the Future, 13 TUL. ENVTL. L.J. 387 (2000). For a somewhat contrary view, see Daniel R. Loritz, Corporate Predators Attack Environmental Regulations: It's Time to Arbitrate Claims Filed Under NAFTA's Chapter 11, 22 LOY. L.A. INT'L & COMP. L. REV. 533 (2000) (arguing that the agreement is not fundamentally flawed, though an interpretive statement may be required).

5. U.S. Cites NAFTA Party Agreement to Limit Investor-State Disputes, INSIDE U.S. TRADE, May 18, 2001, available at http://www.insidetrade.com [hereinafter U.S. Cites NAFTA Party Agreement].

6. The Methanex Corporation, Q&A Background on Methanex's NAFTA Claim and MTBE (June 2000), available at http://www.methanex.com. "Notice of a Submission of a Claim to Arbitration" Regarding Methanex Corp. v. United States of America (Dec. 3, 1999), available at http://www.methanex.com.

7. A fourth case, ADF Group, Inc. v. United States, indirectly involves state government. ADF is a Canadian fabricator of structural steel. ADF contracted with the Shirley Corporation to provide structural steel for highway construction in northern Virginia. Shirley's contract with the Virginia Department of Transportation included a "Buy America" clause required by U.S. federal law and regulation. ADF is seeking compensation for application of the federal "Buy America" regulation. ADF Group, Inc. v. United States, Notice of Arbitration, ICSID Case No. ARB(AF)/00.1 (July 9, 2000), available at http://www.naftaclaims.com.

8. Notice of Claim, ICSID Case No. ARB(AF)/98/3 (Oct. 30, 1998), available at http://www.naftaclaims.com.

9. Notice of Intent to Submit a Claim to Arbitration Under Section B of Chapter 11 of the North American Free Trade Agreement, Mondev International Ltd. v. United States (May 7, 1999) [hereinafter Notice of Intent to Submit a Claim] (on file with the Harrison Institute of Public Law, Georgetown University Law Center), available at http://www.naftaclaims.com.

10. Notice of Arbitration (Sept. 1, 1999), available at http://www. naftaclaims.com.

11. Notice of Intent to Submit a Claim, supra note 9.

12. Compensation for regulatory "takings" that result from only a diminution in the value of property is available in only a handful of states, notably Florida, Texas, and most recently Oregon. See Lynda J. Oswald, Property Rights Legislation and the Police Power, 37 AM. BUS. L.J. 527, 545 (2000). The Oregon measure passed by ballot initiative in November 2000.

13. June 24, 1998, 38 I.L.M. 708 (1999), available at http://www.naftaclaims.com.

14. Canada Settles NAFTA Dispute by Lifting Ban on Gasoline Additive, INSIDE U.S. TRADE, July 24, 1998, available at http://www.insidetrade.com.

15. Partial Award (Nov. 13, 2000), available at http://www.naftaclaims.com.

16. ICSID Case No. ARB(AF) /97/1, 40 I.L.M. 36 (Aug. 26, 2000), available at http://www.naftaclaims.com [hereinafter Metalclad].

17. Canada Looks to Its Courts to Limit NAFTA Investor-State Disputes, INSIDE U.S. TRADE, Feb. 23, 2001, available at http://www. insidetrade.com.

18. Canada Seeks to Limit Investor-State Provisions in NAFTA Review, INSIDE U.S. TRADE, Dec. 18, 1998, available at http://www.insidetrade.com; see Memorial on Jurisdiction and Admissibility of Respondent United States, Methanex Corporation v. United States 1 (Nov. 13, 2000) ("Methanex's claims do not remotely resemble the type of grievance that the NAFTA Parties consented to submit to arbitration pursuant to Chapter Eleven of that agreement."), available at http://naftaclaims.com.

19. NAFTA, supra note 2, arts. 1102, 1105, and 1110.

20. MARTHA BOHM, NATIONAL GOVERNORS ASS'N, CENTER FOR BEST PRACTICES, THE NATIONAL DEBATE ABOUT THE GASOLINE ADDITIVE MTBE (Nov. 12, 1999), available at http://www.nga.org; U.S. EPA, MTBE IN FUELS, available at http://www.epa.gov/mtbe/gas.htm; LEWIS SAUL & ASSOCIATES, MTBE WATER CONTAMINATION, available at http://www.mtbecontamination.com; Association of California Water Agencies, MTBE, at http://www.acwanet.com/regulatory/waterquality/mtbe.html (last visited May 30, 2001).

21. Since 1979, MTBE has been used as a replacement for lead to increase the octane in gasoline and prevent engine knock. Since 1992, MTBE has been used in much larger quantities to meet the requirement of the 1990 Clean Air Act (CAA) that oxygenates be blended into the reformulated gasoline used in high pollution areas. See U.S. EPA, supra note 20.

22. Id.

23. UNIVERSITY OF CALIFORNIA AT DAVIS, U.C. REPORT. MTBE FACT SHEET (Nov. 12, 1998), available at http://tsrtp.ucdavis.edu/mtbert.

24. Pub. L. No. 101-549, 104 Stat. 2399 (codified at 42 U.S.C. §§ 7401-7671q, ELR STAT. CAA §§ 101-618).

25. 42 U.S.C. §§ 7401-7671q, ELR STAT. CAA §§ 101-618. The CAA was enacted in 1970 and amended in 1977 and 1990.

26. U.S. EPA, supra note 20; Jeff Dale, Issue Brief: Methyl Tertiary Butyl Ether (MTBE), National Conference of State Legislatures (July 2000) (on file at the Harrison Institute of Public Law, Georgetown University Law Center).

27. American Coalition for Ethanol, What Is Ethanol? (2000), available at http://www.ethanol.org/ethanol_info2.html (last visited May 30, 2001); James E. McCarthy & Mary Tiemann, MTBE in Gasoline: Clean Air and Drinking Water Issues, Cong. Research Serv. Rep., 10-13 (Feb. 25, 2000).

28. BOHM, supra note 20; see generally 42 U.S.C. §7545, ELR STAT. CAA § 211.

29. BOHM, supra note 20.

30. 42 U.S.C. § 7545(m), ELR STAT. CAA § 211(m).

31. Id. § 7545(k), ELR STAT. CAA § 211(k).

32. Dale, supra note 26.

33. Id.

34. STEPHANIE SHAKOFSKY, STAFF OF CALIFORNIA SENATE, ANALYSIS: S.B. 521 (MOUNTJOY) (1997) (on file Harrison Institute of Public Law, Georgetown University Law Center).

35. CAL. HEALTH & SAFETY CODE § 25299.37.1 (West 1997); RICHARD O. FAULK & JOHN S. GRAY, CRISIS? WHAT CRISIS? CONTAINING THE MTBE CONTROVERSY: AN EVALUATION AND UPDATE OF EMERGING UNDERGROUND STORAGE TANK LITIGATION, ALI-ABA, June 26, 2000, at 325, 341 (special edition).

36. UNIVERSITY OF CALIFORNIA AT DAVIS, supra note 23.

37. GRAHAM E. FOGG ET AL., UNIVERSITY OF CALIFORNIA AT DAVIS, IMPACTS OF MTBE ON CALIFORNIA GROUNDWATER 29 (1998), available at http://tsrtp.ucdavis.edu/mtberpt (last visited May 2001).

38. McCarthy & Tiemann, supra note 27, at 4.

39. Id.; SAUL & ASSOCIATES, supra note 20.

40. SAUL & ASSOCIATES, supra note 20; Dale, supra note 26.

41. SAUL & ASSOCIATES, supra note 20; Association of California Water Agencies, supra note 20.

42. Jim Doyle & Susan Sward, MTBE Leaks a Ticking Time Bomb: Gas Additive Taints Water Nationwide, S.F. CHRON., Dec. 14, 1998, available at http://www.sfgate.com … cle/archive/1998/12/14/MN18353.DTL; Chris Bowman & Patrick Hoge, MTBE Risk to Drinking Water Was Known for Years, SACRAMENTO BEE, Mar. 16, 1999, available at http://www.oxybusters.com/calif/sbee 316.htm.

43. FOGG ET AL., supra note 37, at 23, 29.

44. McCarthy & Tiemann, supra note 27.

45. Doyle & Sward, supra note 42.

46. BOHM, supra note 20, at 3.

47. McCarthy & Tiemann, supra note 27, at 4-5.

48. Id.

49. MAINE GEOLOGICAL SURVEY, DEPARTMENT OF CONSERVATION, THE PRESENCE OF MTBE AND OTHER GASOLINE COMPOUNDS IN MAINE'S DRINKING WATER, A PRELIMINARY REPORT 1 (Oct. 13, 1998) (on file at the Harrison Institute of Public Law, Georgetown University Law Center); McCarthy & Tiemann, supra note 27, at 4-5.

50. BOHM, supra note 20, at 3.

51. Id.

52. McCarthy and Tiemann, supra note 27, at 3-4; Dale, supra note 26; SAUL & ASSOCIATES, supra note 20; Bowman & Hoge, supra note 42; Doyle & Sward, supra note 42.

53. BOHM, supra note 20, at 3

54. ARTURO KELLER ET AL., HEALTH AND ENVIRONMENTAL ASSESSMENT OF MTBE: REPORT TO THE GOVERNOR AND LEGISLATURE OF THE STATE OF CALIFORNIA AS SPONSORED BY SB 521, at 24 (1998) (executive summary and recommendations), available at http://tsrtp.ucdavis.edu/mtberpt.

55. Id.

56. Id. at 26.

57. McCarthy & Tiemann, supra note 27, at 3.

58. UNIVERSITY OF CALIFORNIA AT DAVIS, UC REPORT: MTBE FACT SHEET, supra note 23.

59. Id.

60. S.B. 1504, 44th Leg., 2d Sess. (Ariz. 2000), Dale, supra note 26.

61. COLO. REV. STAT. ANN. § 25-7-139 (West 2000); Dale, supra note 26.

62. Dale, supra note 26.

63. Id.

64. Id.; BOHM, supra note 20, at 5-6.

65. Dale, supra note 26; MD. CODE ANN., ENVIR. § 14-602 (2000).

66. 2000 Mich. Legis. Serv. P.A. 206 (H.B. 5570) (West); Dale, supra note 26.

67. Dale, supra note 26.

68. Id.

69. 2000 Neb. Laws L.B. 1234; Dale, supra note 26.

70. Dale, supra note 26; N.H. REV. STAT. ANN. § 485:16-b (1999).

71. Dale, supra note 26.

72. Id.

73. Id.

74. Id.

75. 15 U.S.C. §§ 2601-2692, ELR STAT. TSCA §§ 2-412.

76. Dale, supra note 26; Association of California Water Agencies, Regulatory Advisory 00-01, Federal Government Announces Ban on MTBE (Mar. 20, 2000), at http://www.acwanet.com/alerts_advisories.

77. NAFTA imposes no timetables or deadlines. Several years may pass between the time that an investor brings an action and the time that the panel issues a ruling. For example, the case of Metalclad, supra note 16, took almost four years to reach a panel decision. Also as in commercial arbitration, a NAFTA investment dispute can always be settled by the parties. Settlement negotiations proceed behind closed doors. Neither NAFTA nor U.S. law requires participation of state and local officials in settlement negotiations about state and local policies. The pressure to settle rises as the risk of a loss increases. For example, Canada settled the Ethyl Corp. case, paid damages and rolled back its ban on the gasoline additive MMT in the face of a probable loss in arbitration. The Methanex tribunal may give some signal of how it will rule on the merits when it issues its opinion on the jurisdictional issues. That opinion could spur settlement talks.

78. NAFTA, supra note 2, art. 1119.

79. Id.

80. Id. art. 1120; See generally Samrat Ganguly, The Investor-State Dispute Mechanism and a Sovereign's Power to Protect Public Health, 38 COLUM. J. TRANSNAT'L L. 113 (1999).

81. ICSID arbitration is "administered" and UNCITRAL arbitration is "ad hoc." In other words, ICSID provides for a fee services and administrative support for the conduct of arbitration. UNCITRAL provides rules but no institutional support, thus putting an administrative burden on the tribunal and the parties, but potentially reducing costs. Clyde C. Pearce & Jack Coe Jr., Arbitration Under NAFTA Chapter Eleven: Some Pragmatic Reflections Upon the First Case Filed Against Mexico, 23 HASTINGS INT'L & COMP. L. REV. 311 (2000). In addition to the relative advantages of administered versus ad hoc arbitration, one of the factors that may influence the investor's choice of forum is the risk of "annulment." Under ICSID rules, a party may appeal to the Secretary-General of ICSID to annul a tribunal's award. On receiving the application for annulment, the Secretary-General appoints a three-member committee. The committee may annul the whole award or any part of it. In the event of an annulment, either party may ask for the dispute to be reconsidered by a new tribunal, which may consider only those parts of the award that were annulled. If on the other hand the investor chooses UNCITRAL rules, then it is also bound by the New York Convention. The New York Convention provides that U.S. Courts may choose not to enforce arbitral panel decision if contrary to the public policy of the United States. However, U.S. courts have interpreted their authority in this area narrowly. Richard C. Levin & Susan Erickson Marin, NAFTA Chapter 11: Investment and Investment Disputes, NAFTA L. & BUS. REV. AM., Summer 1996, at 82, 84.

82. NAFTA, supra note 2, art. 1123.

83. Minutes of Order of the First Procedural Meeting Held by Telephone Conference Call on Thursday, June 29, 2000 (on file at the Harrison Institute of Public Law, Georgetown University Law Center).

84. Pleadings and other documents in the Methanex arbitration are available on the Internet at http://www.methanex.org, and www.naftaclaims.org.

85. On August 25, 2000, the International Institute for Sustainable Development petitioned for permission to file an amicus brief with the Methanex tribunal. On September 6, 2000, other environmental groups sought permission to file as amicus. These included Earthjustice Legal Defense Fund, Communities for a Better Environment, the Bluewater Network of Earth Island Institute, and the Center for International Environmental Law. Over the next several months, the tribunal accepted memorials from parties and the petitioners on the merits of the amicus requests. On January 15, 2001, the tribunal issued an order and an opinion, declaring that it had authority to receive amicus briefs but would make this decision at a later stage. Decision of the Tribunal on Petitions From Third Persons to Intervene as "Amici Curiae," In the Matter of an Arbitration Under Chapter 11 of the North American Free Trade Agreement and the UNCITRAL Arbitration Rules Between Methanex Corporation and the United States (Jan. 13, 2001), available at http://www.naftaclaims.com.

86. Methanex Corporation v. United States, Memorial on Jurisdiction and Admissibility of Respondent United States (Nov. 13, 2000), available at http://www.naftaclaims.com.

87. Methanex Corporation v. United States, Claimant Methanex Corporation's Draft Amended Claim (Feb. 12, 2001), available at http://www.naftaclaims.com.

88. Methanex Corporation v. United States, Reply Memorial of Respondent United States on Jurisdiction, Admissibility and the Proposed Amendment (Apr. 12, 2001).

89. U.S. Cites NAFTA Party Agreement, supra note 5.

90. NAFTA, supra note 2, art. 1131.

91. Domestic law might be offered as evidence of a general practice accepted as law amounting to an "international custom," of the kind that is recognized, for example, by the International Court of Justice (ICJ) as a source of international law. Or perhaps, it might be argued that U.S. constitutional law is reflected in "the general principles of law recognized by civilized nations," another source of international law recognized by the ICJ. For the sources of international law recognized by the ICJ, see Article 38.-1, of the Statute of the International Court of Justice, June 26, 1945, 59 Stat. 1055, T.S. No. 993, 3 Bevans 1179 [hereinafter Statute of the ICJ]; see generally RESTATEMENT (THIRD) OF FOREIGN RELATIONS LAW §§ 101-103 (1986 Main Vol.).

92. NAFTA also imposes two other obligations that are not at issue in the Methanex case. The first of these is "most favored nation" (MFN) treatment, another principle of nondiscrimination. It prohibits favoring the investors of one country over another. NAFTA, supra note 2, art. 1103. The second is a prohibition on certain "performance requirements," which are conditions that a government might impose before allowing a foreigner to invest. Id. art. 1106. For example, a government might require a foreign investor to export a certain percentage of goods or services.

93. NAFTA supra note 2, art. 1114.

94. Id.

95. Id. art. 1135.

96. Levin & Marin, supra note 81, at 94.

97. NAFTA, supra note 2, art. 1110(2).

98. Claimant's Reply to the Statement of Defense, In the Matter of a Claim Under the North American Free Trade Agreement and the UNCITRAL Arbitration Rules Between Methanex Corporation and the United States 16 [hereinafter Claimant's Reply to the Statement of Defense], available at http://www.methanex.com.

99. Id.

100. 31 U.S.C. § 1304; see U.S. GENERAL ACCOUNTING OFFICE, OFFICE OF THE GENERAL COUNSEL, PRINCIPLES OF FEDERAL APPROPRIATIONS LAW (1994) (GAO/OGC-94-33).

101. The New York Convention was implemented in U.S. law by the U.S. Arbitration Act, 9 U.S.C. §§ 201-209 (1994). See 9 U.S.C. § 202 regarding the "contrary to public policy standard."

102. See Gantz, supra note 4, at 11; Pearce & Coe, supra note 81, at 341-42.

103. Canada Looks to Its Courts to Limit NAFTA Investor-State Disputes, INSIDE U.S. TRADE, Feb. 23, 2001; Correction, INSIDE U.S. TRADE, Mar. 2, 2001, available at http://www.insidetrade.com. As Pearce and Coe explain:

Modern international arbitration theory holds that each proceeding has a juridical "seat" often referred to as the "place" or "situs" of arbitration. The NAFTA provides that Chapter Eleven arbitration is to be held in the territory of a NAFTA party …. The choice of situs is not merely a geographic designation influenced by the convenience of the tribunal and the parties. Under the prevailing view, the situs supplies the lex arbitri, i.e., the body of arbitration law that governs a range of important questions. Moreover, an award will ordinarily be deemed to have been rendered at the situs regardless of where the hearings occurred or where the award was signed; the courts of the situs, in turn, rule upon requests to vacate awards deemed rendered at the situs.

Pearce & Coe, supra note 81, at 328.

104. 19 U.S.C. § 3312(c); id. § 102(c).

105. Id.

106. North American Free Trade Agreement Implementation Act, tit. I, § 102(a), 19 U.S.C. § 3312 (1993).

107. The analysis of arguments in this Dialogue is based on the pleadings that have been made available to the public by the parties. Because pleadings present the issues in a relatively skeletal and sometimes merely suggestive form, the analysis is a preliminary one. A complete analysis of the legal issues will have to wait until the briefs (memorials) are written and made public.

108. See Stern v. Halligan, 158 F.3d 729 (3d Cir. 1998) (landowners sued local government alleging that requirement that they connect to the municipal water supply violated constitutional principles of substantive due process, the Fifth Amendment takings clause, and contract clause. The Third Circuit affirmed a grant of summary judgment for the defendant, local government officials. Id. at 731. Judge Becker (citing Knight v. Tape, Inc., 935 F2d 617, 627 (3d Cir. 1991)) wrote: "We have made clear that when 'general economic and social legislation' is alleged to violate substantive due process, it should be struck down only when it fails to meet a minimum rationality standard, an 'extremely difficult' standard for the plaintiff to meet." Id. The court also noted that: "Because pure water is a precondition for human health, regulating the water supply is a basic and legitimate governmental activity." Id. at 732 (citing City of Trenton v. New Jersey, 262 U.S. 182, 43 S. Ct. 534 (1923)). Judge Becker also cited the possibility of MTBE contamination along with other potential dangers as a reason why regulating the water supply is in the public interest. Id. The court did not reach the takings claim because the plaintiff did not exhaust state remedies, but Judge Becker reminds us that:

Such a claim would be meritless in any event. The Supreme Court has noted that, after a finding that due process has not been violated, "it would be surprising indeed to discover a [regulatory] taking," because the relevant analysis is so similar. Connolly v. Pension Benefit Guaranty Corp., 475 U.S. 211 … (1986). Moreover, a regulatory taking, requiring just compensation therefor, occurs when there has been a deprivation of "all economically beneficial use" of property. Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1018 [22 ELR 21104] (1992).

Id. at 733 n.7.

109. Memorial on Jurisdiction and Admissibility of Respondent United States, In the Arbitration Under Chapter 11 of the North American Free Trade Agreement and the UNCITRAL Arbitration Rules Between Methanex Corporation and the United States 1-2 (Nov. 13, 2000), available at http://www.naftaclaims.com.

110. Methanex Corporation v. United States, Reply Memorial of United States on Jurisdiction (Apr. 2001) 6-17.

111. Id. 30-37. The United States makes several other arguments on jurisdiction, such as: (1) Methanex's minimum treatment claim is inadmissible on its face, because among other reasons customary international law does not apply to policy judgments of the kind at issue here, id. at 38-47; (2) Neither the MTBE bill nor Governor Davis' executive order strictly speaking imposed a ban on MTBE because neither applied to members of the public. Instead, they merely set in motion an agency process that ultimately resulted in a ban. Thus, the actions complained about cannot be the direct source of any loss or damage to Methanex Corporation, id. at 50-57; (3) Methanex cannot claim any loss independent of that suffered by its subsidiaries, Methanex U.S. and Methanex Fortier, thus it has no standing under the jurisdictional article cited in its original statement of a claim, id. at 62-69; (4) Methanex failed to submit waivers of Methanex U.S.' and Methanex Fortier's rights at the time it filed its notice of arbitration as required to arbitrate its claim, id. at 69-77.

112. News Release, Methanex Corporation, Methanex Files Amended NAFTA Claim (Mar. 8, 2001), available at http://www.methanex.com.

113. Claimant Methanex Corporation's Draft Amended Claim, In the Arbitration Under Chapter 11 of the North American Free Trade Agreement and Under the UNCITRAL Arbitration Rules Between Methanex Corporation and the United States 1 (Feb. 12, 2001) [hereinafter Methanex Draft Amended Claim], available at http://www.methanex.com.

114. Id. at 1-3, 28-33, and 42-48.

115. See Japan: Customs Duties, Taxes and Labeling Practices on Imported Wines and Alcoholic Beverages, Nov. 10, 1987, GATT B.I.S.D. (37th Supp.) 119 (1988); see generally Robert Stumberg, Sovereignty by Subtraction: The Multilateral Agreement on Investment, 31 CORNELL INT'L L.J. 491, 529 (1998).

116. Methanex Draft Amended Claim, supra note 113, at 15-20.

117. Richard Simon & Dan Morain, Gas Additive Rule Won't Be Waived, L.A. TIMES, June 11, 2001, at A1.

118. Gantz, supra note 4, at 30 of electronic copy (publication page references not available).

119. Simon & Morain, supra note 117.

120. Notice of Arbitration Under the Arbitration Rules of the United Nations Commission on International Trade Law and the North American Free Trade Agreement Between Methanex Corporation and the United States 11 (Dec. 3, 1999), available at http://www.naftaclaims.com; Notice of Intent to Submit a Claim, supra note 9, at 2. With respect to the Minimum Standard of Treatment under NAFTA's investment chapter, NAFTA Article 1105(1) provides: "Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security."

121. Curiously, the positions of California and Methanex are not that far apart on the science related to the key question of MTBE's carcinogenic effects on humans. Methanex says that the human carcinogenic effects of MTBE are unproven, that EPA regards MTBE as only a potential carcinogen, and that the studies showing carcinogenic effects in animals are flawed. Methanex Corporation, Q&A Background on Methanex's NAFTA Claim and MTBE, supra note 6, at 4; Claimant's Reply to the Statement of Defense, supra note 98, at 4. California largely relied on the U.C. Davis study, which similarly characterizes MTBE as a "potential" carcinogen, KELLER, supra note 54, at 24.

122. According to Methanex Corporation:

The principle of international law most applicable to this case is the widely-accepted WTO/GATT rule that regulatory measures are only acceptable if they meet certain conditions. Such measures are legal if: (1) they are intended to achieve a legitimate objective, (2) they are the least trade-restrictive alternative that can achieve the legitimate objective, and (3) they do not constitute a disguised restriction on international trade. These requirements are found in at least two multilateral treaties (1) the WTO Agreement on Technical Barriers to Trade …; and the WTO Agreement on Sanitary and Phytosanitary Measures ….

Methanex Draft Amended Claim, supra note 113.

123. Agreement on Technical Barriers to Trade, GATT Doc. MTN/FA II-A1A6, art. 2.2 (Dec. 15, 1993). Although California's MTBE phaseout clearly is not a sanitary or phytosanitary measure, to get some sense of the restrictions on application of the precautionary principle and the lack of deference to legislative judgment in WTO proceedings, it also is worth reviewing the even stricter restrictions on state risk assessment in the so-called SPS, the Agreement on the Application of Sanitary and Phytosanitary Measures, GATT Doc. MTN/FA II-A1A-4, art. 2.2 (Dec. 15, 1993); see generally Craig Thorn & Marinn Carlson, The Agreement on the Application of Sanitary and Phytosanitary Measures and the Agreement on Technical Barriers to Trade, 31 LAW & POL'Y INT'L BUS. 841 (2000).

124. Methanex Corporation's argument regarding the SPS is confusing. It concedes that "the California ban on MTBE does not fall within the Sanitary Measures Agreement because it was explicitly taken to protect the environment, not health." Methanex Draft Amended Claim, supra note 113, at 63. Then, Methanex proceeds with an extended discussion of why California's MTBE policy is inconsistent with the SPS. Id. at 63-64.

125. Methanex Corporation argues:

"International law" includes both customary international law and treaty law, to the extent that treaties reflect general acceptance of particular principles. "International law is made in two principle ways—by practice of states ('customary law') and by purposeful agreement among states (… i.e., law by conventions, by agreement) …. In our day treaties have become the principle vehicle for making law for the international system." Restatement (Third) of Foreign Relations Law, Introductory Note at 18. International law "includes law contained in widely accepted international agreements." Id., sec. 101, comt. d. GATT and WTO agreement, which are multilateral and widely accepted, contain principles of international law that … are applicable to this action.

Methanex Draft Amended Claim, supra note 113, at 48-49.

126. The United States argues that:

There is no room for doubt as to the import of "fair and equitable treatment" in Article 1105(1). Each of the NAFTA Parties has now confirmed in formal pleadings that phrase's content as used in NAFTA. The United States stated its position in the Memorial. Memorial at 39-43. Mexico and Canada subsequently took the same position in their pleadings before the Supreme Court of British Columbia on Mexico's application to set aside the Metalclad award, stating that the fair and equitable standard is "explicitly subsumed under customary international law." The agreement among the NAFTA Parties on this point is authoritative. See Vienna Convention on the Law of Treaties, May 22, 1969, art. 31(3)(b), 1155 U.N.T.S. 331 ("There shall be taken into account … any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding interpretation.").

Methanex Corporation v. United States, Reply Memorial of Respondent United States on Jurisdiction, Admissibility and the Proposed Amendment 23-24 (Apr. 12, 2001).

127. Memorial on Jurisdiction and Admissibility of Respondent United States, In the Arbitration Under Chapter 11 of the North American Free Trade Agreement and the UNCITRAL Arbitration Rules Between Methanex Corporation and the United States 40-41 (Nov. 13, 2000), available at http://www.naftaclaims.com. See OECD, 1967 Draft Convention on the Protection of Foreign Property, reprinted in 7 I.L.M. 117, 119 (1968). See also RESTATEMENT (THIRD) OF FOREIGN RELATIONS LAW § 711 (1986) (State Responsibility for Injury to Nationals of Other States). Todd Weiler of the University of Toronto Faculty of Law would appear to generally support the view that "the 'fair and equitable treatment' provision is largely synonymous with the customary international law minimum standard of treatment owed by states to foreign nationals and their investments in those states." TODD WEILER, FAIR AND EQUITABLE TREATMENT FOR INVESTMENTS: SOME OLD CASES AND SOME NEW 1 (on file at the Harrison Institute of Public Law, Georgetown University Law Center). Weiler further argues that: "The case law demonstrates that the MST [minimum standard of treatment] applies only in cases of bad faith, or manifest unfairness. If a regulatory measure is legitimately conceived and not discriminatory or arbitrary in design or application, no MST claim will exist." Id. at 6. The NAFTA tribunal in Pope & Talbot, however, appears to read the minimum treatment obligation more broadly and to extend beyond customary international law. Pope & Talbot, Inc. v. Canada, Interim Award 48 (Jan. 20, 2000) ("Another possible interpretation of the presence of the fairness elements in Article 1105 is that they are additive to the requirements of international law. That is, investors under NAFTA are entitled to the international law minimum, plus the fairness elements.").

128. See Nebbia & West Coast Hotel, 291 U.S. 502 (1934).

129. Id. Methanex's minimum treatment theory appears analogous to Justice Rufus Peckham's theory for applying substantive due process to economic regulation in Lochner v. New York, 198 U.S. 45 (1905) (a case that along with Dred Scott, another substantive due process/property rights case, that has been considered among the most discredited in U.S. Supreme Court history, see BERNARD SCHWARTZ, A HISTORY OF THE SUPREME COURT 190 (1993). With respect to the different levels of judicial restraint shown toward issues of economic regulation and the civil rights of "discrete and insular minorities," see United States v. Carolene Prods., 304 U.S. 144, 152 n.4 (1938).

130. NAFTA, supra at note 2, art. 1110. The basic standard is laid out at Article 1110(1), which provides:

No Party may directly or indirectly nationalize or expropriate an investment of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment …. except: (a) for a public purpose; (b) on a nondiscriminatory basis; (c) in accordance with due process of law and Article 1105(1); and (d) on payment of compensation ….

131. Notice of Intent to Submit a Claim, supra note 9, at 3.

132. Claimant's Reply to the Statement of Defense, supra note 98, at 12.

133. Id. at 13.

134. See generally J. Martin Wagner, International Investment, Expropriation and Environmental Protection, 29 GOLDEN GATE U. L. REV. 465 (1999).

135. Interim Award by Arbital Tribunal, In the Matter of an Arbitration Under Chapter Eleven of the North American Free Trade Agreement Between Pope & Talbot Inc. and the Government of Canada 33-34 (Apr. 10, 2001), available at http://www.naftaclaims.com.

136. RESTATEMENT (THIRD) OF THE FOREIGN RELATIONS LAW OF THE UNITED STATES § 712, cmt. (g), quoted at 35 in Pope & Talbot v. Canada, supra note 135.

137. For example, the United States made a written submission to the Metalclad tribunal in which it "rejected the suggestion that the term 'tantamount to expropriation' was intended to create a new category of expropriation not previously recognized in customary international law." International Centre for Settlement of Investment Disputes (Additional Facility), Case No. ___ Between Metalclad Corporation and the United Mexican States, Award. Form 8-K Filing, U.S. Securities and Exchange Commission 16 (Sept. 5, 2000), available at http://www.edgar-online.com [hereinafter Metalclad Award].

138. Interim Award by Arbitral Tribunal, In the Matter of an Arbitration Under Chapter Eleven of the North American Free Trade Agreement Between Pope & Talbot Inc. and the Government of Canada 28-38 (June 26, 2000) [hereinafter Interim Award, Pope & Talbot v. Canada].

139. Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 22 ELR 21104 (1992); see generally Glenn P. Sugameli, Lucas v. South Carolina Coastal Council: The Categorical and Other "Exceptions" to Liability for Fifth Amendment Takings of Private Property Far Outweigh the "Rule," 29 ENVTL. L. 939 (1999); CONSUMER CHOICE COUNCIL, ENVIRONMENTAL REVIEW OF THE FTAA: REGULATORY IMPACT ASSESSMENT OF EXPROPRIATION PROVISIONS (Feb. 6, 2001), available at http://www.consumercouncil.org.

140. U.S. No. 99-2047, argued (Feb. 26, 2001).

141. See Lucas, 505 U.S. at 1019 n.8, 22 ELR at 21108 n.8 ("It is true that in at least some cases the landowner with 95% loss will get nothing, while the landowner with total loss will recover in full."). See also Zealy v. City of Waukesha, 548 N.W.2d 528, 531 (Wis. 1996) ("The rule emerging from the opinions of our state courts and the United States Supreme Court is that a regulation must deny the land owner all or substantially all practical uses of a property in order to be considered a taking for which compensation is required.").

142. See Concrete Pipe & Prods. of Cal., Inc. v. Construction Laborers Pension Trust for S. Cal., 508 U.S. 602, 645 (1993).

143. See Lucas, 505 U.S. at 1027-28, 22 ELR at 21110.

144. NAFTA, supra note 2, art. 1139.

145. U.S. Statement of Defense, Methanex v. United States (Aug. 10, 2000), at 28-34, available at http://www.naftaclaims.com; Chemical Information Services, Inc. lists 29 producers of MTBE at http://www.chemexpo.com/news/PROFILE991227.cfm. Methanex Corporation is not on the list.

146. Nonetheless, an argument can be made that U.S. law could provide guidance to the panel. Domestic laws might be used by international tribunals to help define the "general principles of law," which are a fount of international law. In other words, the panel might bring in U.S., Canadian, or Mexican laws through the back door by treating them as general principles recognized in international law. Wagner, supra note 134, at 501. Domestic law might similarly be imported to defeat Methanex's "minimum treatment" claim.

147. Id. at 516-17; Wagner also notes that:

International tribunals have seldom, if ever, addressed whether environmental regulations affecting foreign-owned property give rise to a right of compensation. However, an examination of cases addressing indirect expropriation claims arising out of regulations promoting other governmental interests demonstrates that international law would not support an expropriation claim arising out of legitimate environmental regulations.

Id. at 520. Such international "case law," of course, does not have precedential value of the sort it would have in a common-law jurisdiction like the United States. Nonetheless, absent any other more authoritative source for defining an "indirect expropriation," an action "tantamount to expropriation," or "fair and equitable" treatment, then reliance on subsidiary sources of international law such as the decisions of Iran-U.S. claims tribunals and similar published decisions of international arbitrators would appear to be justified, even if not mandated. In short, this is all a very murky area. Wagner concedes that the doctrine of "indirect expropriations" has only developed in recent decades and that "foreign property owners have made claims for compensation based on governmental regulations, such as placing restrictions on the legal use of property, that do not actually remove the owners title to the property, but nevertheless substantially affect its value." Id. at 465.

148. Interim Award, Pope & Talbot v. Canada, supra note 138, at 34-35.

149. Id. at 32.

150. Metalclad Award, supra note 137.

151. The three parties to NAFTA, the United States, Canada, and Mexico, acting through the NAFTA Free Trade Commission can provide an official interpretation of the investment chapter that will be binding on tribunals. NAFTA, supra note 2, art. 1131(2).

152. Chris Mooney, Localizing Globalization, THE AM. PROSPECT, July 2-16, 2001, at ___.

153. NAFTA, supra note 2, art. 1131(2).

154. Robert Stumberg, Balancing Democracy and Trade: State/Local Roles in the Global Debate, Presentation to the Washington State Legislature, House Committee on Trade and Economic Development 2 (Feb. 9, 2001) (According to an October 1999 University of Maryland PIPA poll 54% of respondents thought that U.S. trade policymakers gave "too much" consideration to multinational corporations; 73% thought U.S. trade policymakers gave "too little consideration to 'people like you.'").

155. Id. (A July 1997 poll by Penn, Schoen & Berland found that 76% supported free trade; however a 1999 PIPA poll found 74% agreed that "countries should be able to restrict imports of products if they are produced in a way that damages the environment, because protecting the environment is at least as important as trade.").

156. There is an active citizens movement in Canada lobbying to roll back NAFTA's investment chapter and to stop any similar provision from being included in the FTAA. See, e.g., The Council of Canadians, The FTAA and the Threat to Democracy, at http://www.canadians.org. Provencial assemblies in Canada, also, are monitoring the situation closely. For example, the British Columbia Legislative Assembly created a Special Committee on International Trade and Investment Agreements. Information on the committee is available on the Internet at http://www.legis.gov.be or by contacting Kate Ryan-Lloyd, Committee Clerk, Parliament Buildings, Rm. 224, Victoria BC V8V 1X4. The national government in Canada is now seeking a reinterpretation of NAFTA's investment chapter. See Canada Seeks to Limit Investor-State Provisions in NAFTA Review, INSIDE U.S. TRADE, Dec. 18, 1998, available at http://www.insidetrade.com.

31 ELR 10986 | Environmental Law Reporter | copyright © 2001 | All rights reserved