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Lessons From Lago Agrio Environmental Pollution Case

New York Law Journal

September 15, 2011

Two weeks ago U.S. District Judge Lewis Kaplan issued the latest federal court decision in the long-running litigation against Chevron Corporation by residents of Ecuador's Oriente province, part of that nation's Amazon region. [1] Previous columns ("The Second Circuit 'Texaco' Decision," Oct. 23, 1998, and "A Most Inconvenient Forum," April 23, 2010) described the first two chapters of the residents' attempt to recover damages for the widespread pollution of tropical forest by Texaco Petroleum Inc. (now a Chevron subsidiary) and to compel Chevron to remediate the remaining groundwater, soil and forest pollution from operations that Texaco had conducted from 1964 through 1992 in partnership with Petroecuador, an Ecuadorian government agency.

This column reviews the extraordinary third chapter of this dispute, which has important lessons for environmental lawyers, transnational corporations, developing country governments, the State Department and U.S. federal courts.

Background

To recapitulate, Petroecuador's joint venture arrangements with Texaco (and other U.S. and European firms) contributed significantly to the country's export earnings but also resulted in severe environmental damage to its Amazon rainforest and the health of indigenous communities through soil and water contamination. The extent of the destruction was publicized in a 1991 report by the Natural Resources Defense Council, "Amazon Crude," which portrayed both Texaco and Petroecuador as engaged in exploration, drilling, waste disposal and pipeline practices long repudiated in the United States.

In 1993, a group of Oriente residents sued Texaco in the Texas state courts. Texaco removed the case to federal district court and then successfully moved to have it dismissed on grounds of forum non conveniens. A somewhat different group of Oriente residents then sued Texaco in the federal district court in New York, where Texaco has its headquarters. After limited discovery ordered by Judge Vincent Broderick, District Judge Jed Rakoff dismissed those cases for the reasons cited in the Texas decision.

On appeal, U.S. Court of Appeals for the Second Circuit remanded the case to the District Court for further consideration of the plaintiffs' claim that Ecuador's legal system could not fairly adjudicate their claims against Texaco or provide adequate class action or injunctive relief if the plaintiffs did prevail.

On remand, Texaco consented to be sued in Ecuador, argued that Ecuador's legal system was both honest and competent and agreed to comply with any judgment rendered against it in Ecuador. After considering these factors and the State Department's most recent human rights reports on Ecuador, Judge Rakoff again dismissed the case on forum non conveniens grounds in 2001. The Second Circuit unanimously affirmed.

The following year the plaintiffs sued Chevron (Texaco's new owner) in Ecuador seeking both damages and remediation of the remaining forest contamination. The trial court phase of the case lasted more than six years in a makeshift courtroom located in Lago Agrio, a small town in the Ecuadorian rainforest where both the judge and visiting reporters could see firsthand the contaminated soils and water systems and hear from residents from the surrounding community.

The original trial judge was replaced midway through the proceedings, and his successor, Judge Juan Nunez, appointed an "independent expert" geologist—similar to a special master in U.S. practice—to review the relevant facts and submit recommendations to the court. After visiting the contaminated sites, the expert, Richard Cabrera, recommended damages against Chevron in the amount of $27 billion. Judge Nunez then announced that he expected to issue his decision, which many thought would adopt the Cabrera recommendation, by the end of 2009.

Chevron was not pleased at this turn of events, and accused Ecuador's President, Rafael Correa, of personally interfering in the Lago Agrio trial and orchestrating criminal prosecutions against two Chevron lawyers who had negotiated a 1995 settlement agreement between Texaco and Petroecuador. Chevron also accused the plaintiffs of improperly trying to bribe Judge Nunez and sought, unsuccessfully, to persuade the Obama administration to strip Ecuador of its U.S. trade preference for allegedly breaching the 1995 agreement. Chapter two of the Lago Agrio dispute thus ended with Chevron on the defensive and objecting to the results of the very Ecuadorian litigation that it had told Judge Rakoff it preferred to trial in the United States.

Chevron's Counterattack

If Chevron seemed hoisted on its own petard by the imminent Lago Agrio judgment, it found relief in an unexpected corner—the hubris of plaintiffs' lead counsel and overall strategist, Steven Donziger of New York. In 2005, Donziger, who had devoted the past decade to representing the plaintiffs, had approached New York filmmaker Joseph Berlinger to make a documentary about the Lago Agrio campaign (and Donziger's role in it). Berlinger agreed and, beginning in 2006, had access to many of the plaintiffs' private meetings. Eventually he compiled 600 hours of raw footage for a documentary called "Crude" (not to be confused with the 1991 NRDC report, "Amazon Crude") about the Lago Agrio trial.

When Chevron learned of "Crude," it asked the U.S. District Court in New York to issue subpoenas pursuant to section 1782 of the Judicial Code for Berlinger's "outtakes," which Chevron alleged were essential to the defense of criminal proceedings that Ecuador was threatening against two Chevron lawyers and for the international arbitration described below. Over Berlinger's objections, in May 2010, Judge Kaplan ordered these outtakes to be delivered to Chevron. As discussed below, they proved devastating both to Donziger and the plaintiffs.

In the meantime, Chevron had also filed an arbitration demand against Ecuador under the 1993 Bilateral Investment Treaty (BIT) between the United States and Ecuador, which became effective in May 1997 (after Texaco had left Ecuador and after its 1995 settlement agreement with Petroecuador but before a further 1998 agreement in which Ecuador acknowledged that Texaco had satisfactorily completed its environmental remediation). Article VI(2) of the BIT provides that, in the event of an "investment dispute" between either country and a company of the other country, the company may either submit the dispute either to that country's courts or pursue binding arbitration under the rules of the U.N. Commission on International Trade Law (UNCITRAL). Article VI(1) of the BIT defines an "investment dispute" to include an alleged breach of the right to non-discriminatory treatment in its investment and "associated activities."

Chevron contends that President Correa (who has called Texaco's pollution of the rainforest a "crime against humanity") improperly influenced Judge Nunez and the entire Lago Agrio proceeding in violation of the BIT. Chevron therefore asked the arbitral panel, based in the Hague, to set aside the entire trial and to order Ecuador to hold Chevron harmless from any liability to the plaintiffs. Ecuador responded by asking the federal District Court in New York (the litigation's second home) to enjoin Chevron from pursuing its BIT arbitration since Chevron had already consented to the jurisdiction of Ecuador's courts. The plaintiffs, who are not parties to the arbitration, brought a separate action seeking similar relief.

Both injunctive requests were considered by District Judge Leonard Sand, the fourth federal District Court judge in New York involved in the litigation. In March 2010 Judge Sand denied both Ecuador's and the plaintiffs' requests, holding that injunctive relief was not appropriate since Chevron had alleged at least one arbitratable matter (interference by Ecuador's government in the judicial process). Judge Sand noted that all of Ecuador's arguments against the arbitration could be raised in the arbitration itself and took pains to forward to the arbitral panel the plaintiffs' additional contentions.

In March 2011, the Second Circuit unanimously affirmed Judge Sand's decision and held that neither Chevron's consent to the jurisdiction of Ecuador's courts nor its promise to Judge Rakoff to comply with a judgment of those courts was inconsistent with its ability to argue under the BIT that the judgment against it had been procured by fraud or was otherwise invalid. The Second Circuit also noted that Chevron's potential claims against Ecuador did not affect its obligations to the plaintiffs in the Lago Agrio litigation since those claims were not before the arbitrators.

Plaintiffs' Victory Undermined

Despite these setbacks in ancillary proceedings in New York, the plaintiffs finally prevailed in the Lago Agrio trial court, which on Feb. 14, 2011, issued its judgment finding Chevron liable for Texaco's damage to the rainforest environment, the health of local residents and damage to indigenous cultures. The court assessed damages of (1) $600 million for groundwater remediation, (2) $5.4 billion for soil remediation, (3) $200 million for damages to flora and fauna, (4) $150 million for drinking water remediation, (5) $1.4 billion for the delivery of health care, (6) $100 million for damage to indigenous culture and (7) $800 million for cancer deaths, for a total of $8.6 billion. The court then added an additional 10 percent for one of the plaintiffs, the Amazon Defense Fund, to administer in trust and an additional $8.6 billion in punitive damages if Chevron failed to issue a "public apology" within 15 days of the judgment. Chevron declined to issue such an apology, an act that its shareholders (or the BIT arbitrators) may someday question.

While this grand total of $18 billion was less than the $27 billion recommended by Richard Cabrera, it represented a spectacular victory for the plaintiffs and appeared to vindicate Donziger's aggressive trial and public relations strategy. Donziger and his colleagues immediately turned to enforcing the judgment, which under Ecuadorian law was subject to de novo review at the intermediate appellate level. The plaintiffs believed that the trial court judgment was nevertheless entitled to full faith and credit abroad, where Chevron had many assets that could be levied on, and perhaps attached ex parte, while Chevron's appeal was pending.

However, the plaintiffs' trial court victory arrived on the heels of two ominous developments—one in New York and one in the Hague.

Two weeks before the Lago Agrio judgment, Chevron had begun a separate federal action in New York against Donziger, his colleagues and his clients, charging them with fraud and violations of the U.S. Racketeering Influenced and Corrupt Organizations Act (RICO). Chevron sought a declaration that the imminent Lago Agrio judgment was not entitled to recognition in U.S. courts and a permanent injunction against efforts by the plaintiffs to enforce that judgment outside of Ecuador. The case was assigned to Judge Kaplan, who had earlier directed Berlinger to turn over his "Crude" outtakes. On Feb. 8, 2011, Judge Kaplan issued a temporary restraining order against Donziger and the plaintiffs prohibiting them from enforcing the expected Lago Agrio judgment while he considered Chevron's request for a preliminary injunction.

The next day, Feb. 9, Chevron had even better luck in the BIT arbitration. Without deciding the merits of Chevron's claim or Ecuador's challenge to the tribunal's jurisdiction, the arbitral tribunal issued an interim order directing Ecuador "to take all measures at its disposal to suspend or cause to be suspended the enforcement or recognition within and without Ecuador of any judgment against [Chevron] in the Lago Agrio Case" and to report those measures to the tribunal. This extraordinary action not only instructed Ecuador to prevent the plaintiffs from enforcing any Lago Agrio judgment, but effectively directed Ecuador's government to undermine a pending judicial proceeding, precisely the kind of executive branch interference that Chevron had complained of. A week later, the Lago Agrio court issued its $18 billion judgment against Chevron and set the stage for a future confrontation between Ecuador and the BIT arbitrators.

But what most undermined the Lago Agrio judgment was Judge Kaplan's next decision. On March 7, 2011, after reviewing extensive submissions from the parties and many of the Berlinger outtakes, he issued a 127-page opinion in which he excoriated Donziger and his colleagues for unethical and almost certainly criminal conduct (including fabricating evidence and intimidating Judge Nunez with threats of physical and other harm); characterized Ecuador's judiciary as corrupt and subject to manipulation by President Correa; found that Cabrera's "independent expert" report was secretly written not by Cabrero but by consultants working for Donziger; and concluded that any foreign recognition or enforcement of that judgment would cause irreparable harm to Chevron. Judge Kaplan therefore enjoined Donziger, his colleagues and all of the plaintiffs from taking any action during the pendency of the RICO litigation to enforce the Lago Agrio judgment anywhere outside of Ecuador.

Judge Kaplan's preliminary injunction decision is being appealed on an expedited basis to the Second Circuit, where its scope in blocking world-wide enforcement of a foreign court's judgment is likely to receive careful scrutiny, along with the District Court's jurisdiction to enjoin parties who did not appear in New York. However, it is his uncompromising analysis that is likely to prove most influential for the Second Circuit (as well as the BIT tribunal), for whom Judge Kaplan organized Donziger's numerous admissions and self-damning statements from the Berlinger outtakes. Indeed, the misconduct described in the opinion is so pervasive that it will be difficult for Ecuador's appellate courts to ignore, notwithstanding Judge Kaplan's critical comments about those courts.

Understandably eager to escape Judge Kaplan's courtroom, the two plaintiff representatives also moved for judgment on the pleadings, contending that Chevron was estopped (by virtue of Texaco's arguments before Judge Rakoff) from denying that Ecuador's legal system afforded due process or that Chevron was subject to its jurisdiction. On Aug. 31, 2011, Judge Kaplan denied this motion and noted, apparently on his own initiative, that the plaintiffs—as well as the Second Circuit and Chevron's lawyers—were wrong in asserting that Texaco had merged into Chevron since Texaco had remained a wholly owned Chevron subsidiary with separate corporate status. Moreover, said Judge Kaplan, Texaco's contention that Ecuador's legal system was impartial in 2001 was not inconsistent with Chevron's challenge to subsequent misconduct by Ecuador's executive branch and plaintiffs' counsel, as described in the preliminary injunction decision.

That misconduct, however, should not obscure the underlying merits of the plaintiffs' cause. The tragedy of this latest chapter in the Lago Agrio litigation is that, almost 20 years after Texaco terminated its operations in Ecuador, many of the nation's poorest citizens are still living with impacts from the irresponsible practices of both Texaco and Petroequador and neither the courts of Ecuador nor the United States have provided an adequate, and enforceable, remedy for those impacts. 

Lessons Learned

The final chapter of the Lago Agrio dispute remains to be written. However, some important lessons are already emerging from the last dozen years of litigation in the United States, Ecuador and the Hague:

U.S. Courts: Despite the efforts of U.S. federal courts to limit their involvement in this dispute, five separate District Court judges and three Second Circuit appellate panels have spent many hours deciding either not to act on the merits of the dispute or to bar the plaintiffs from enforcing their judgment in Ecuador. With no end to the litigation in sight and complex questions of jurisdiction, judicial independence and treaty interpretation still pending, it might have been preferable for the federal courts to have accepted the plaintiffs' original case against a U.S.-based defendant in order to assure a decision that would be respected in Ecuador and elsewhere.

Professional Ethics: If U.S. lawyers wish—as they should—to hold transnational corporations to the same standards of environmental conduct that they are held to at home, those lawyers must hold themselves to the same standards of ethical conduct that they are subject to at home. Anything less risks undermining their clients' cause and subjecting themselves to professional and other sanctions. If the lawless "wild west" no longer applies to corporations exploiting natural resources abroad, it no longer applies to lawyers either.

Corporate Responsibility: Transnational corporations can no longer assume that local laws or agreements with host governments will protect them from third-party claims by communities injured by environmental pollution. The only effective way to protect against damage claims of the type faced by Chevron is through proper environmental management, prompt remediation of pollutant releases, accurate public reporting of those efforts and reasonable compensation for injured parties.

Judicial Independence: As environmental performance standards become universal, developing countries must improve, and respect the independence of, their judicial systems so that they will be able to provide fair, timely and affordable remedies for pollution victims. Absent that improvement, the U.S. courts will continue to attract plaintiffs who believe they cannot succeed in their domestic courts.

U.S. Treaties: The State Department and U.S. Trade Representative (which negotiates most BITs) should make clear that the arbitration option extended to U.S. "investors" under BITs is not intended to protect against the non-discriminatory application of environmental laws and regulations, either by government agencies or courts in foreign jurisdictions. Future BITs should require full transparency for arbitration proceedings and permit interested private parties to make submissions to the tribunal. It is not in the United States' interest to require closed arbitration for U.S. firms that violate internationally recognized environmental standards or to provide those firms with the option to forum-shop if a local judgment goes against them.


Stephen L. Kass is a partner and co-director of the environmental practice group at Carter Ledyard & Milburn, and adjunct professor of international environmental law at Brooklyn Law School. Wei Hu, a lawyer with DeBund Law Offices in Shanghai, and Katherine McGlynn, a student at Seton Hall Law School, assisted in research for this column.


This article is reprinted with permission from the September 15, 2011 issue of  the New York Law Journal.  © 2011 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

Endnote


[1] Chevron v. Salazer, 11 Civ. 3718 (LAK), decided Aug. 31, 2011, NYLJ, Sept. 2, 2011. The principal New York federal court decisions in this litigation are listed in footnote 1 to Judge Kaplan's opinion and in the March 17, 2011, opinion of the U.S. Court of Appeals in Republic of Ecuador v. Chevron Corp., 638 F. 3d 384 (2d Cir. 2011).

 

 

Addendum to Lessons From Lago Agrio

On September 16, 2011, the Second Circuit Court of Appeals in New York heard an expedited appeal by two Lago Agrio plaintiffs and their counsel, Steven Donziger, of District Judge Lewis Kaplan’s March 7, 2011 preliminary injunction decision, in which he barred all of the plaintiffs and their lawyers from taking any action anywhere in the world outside of Ecuador to enforce an Ecuadorian trial court’s judgment awarding the plaintiffs $18 billion in compensation for the pollution by Chevron’s subsidiary, Texaco Petroleum, of Ecuador’s rainforest during the period from 1970 to 1990. In my discussion of this case in “Lessons from Lago Agrio” ( New York Law Journal, September 15, 2011), I noted that the Second Circuit was likely to scrutinize carefully the District Court’s authority to issue such a worldwide injunction against the enforcement of a foreign court’s judgment.

On Monday, September 19, the Second Circuit issued a summary ruling reversing Judge Kaplan’s worldwide injunction as beyond the District Court’s authority (a formal opinion from the Court is expected shortly). While this means that the Lago Agrio plaintiffs are technically free to try to enforce their judgment in countries where Chevron has assets, the plaintiffs assured the Second Circuit that they would not do so until the first level of appellate review was completed in Ecuador.

As a result of this decision, the long-running Lago Agrio litigation now returns to Ecuador, where that nation’s mid-level appellate court will have the next say as to the legitimacy of the trial court judgment, even while U.S.District Court proceedings continue before Judge Kaplan on Chevron’s fraud claims against the plaintiffs (and their lawyer) and Chevron’s arbitration claims against the government of Ecuador continue in the Hague under the U.S.-Ecuador Bilateral Investment Treaty.
 



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