On September 6, Canadian energy company Lone Pine filed a $250 million lawsuit against the Canadian government that took aim at a fracking ban in Quebec’s St. Lawrence River. But in spite of the parties involved, the case will not be heard in a public Canadian court.
Though the energy company’s operations are based almost exclusively in in Canada, the company is chartered in Delaware. As a result, Lone Pine is able to take advantage of a provision in the North American Free Trade Agreement (NAFTA) that allows companies to sue foreign governments for allegedly violating certain provisions of the trade deal. Companies can litigate such “investor-state disputes” in special third-party tribunals — international courts of law entirely separate from domestic courts.
“The fact that a private corporation is able to sue Canada over this public interest policy in a private trade tribunal, not in public court, in an un-transparent process, is a really terrifying prospect,” says Ilana Solomon, director of the Sierra Club’s Responsible Trade Program. “Other public interest policies, whether [they’re] related to climate or our jobs, could all be subject to attack by corporations under our trade deals.”
In the suit, Lone Pine is alleging that Quebec’s June 2011 ban on fracking in the bed of the St. Lawrence River — which prohibits all “oil and gas activities” in the river — amounts to an “arbitrary, capricious and illegal revocation of the [company’s] valuable right to mine for oil and gas.” Stretching across the province from the Atlantic Ocean to Lake Ontario, the river lies within the natural gas-rich Utica Shale. Lone Pine estimates that its permit for gas exploration under the river covered an area containing as much as 3.3 billion cubic feet of undiscovered shale — a highly lucrative prospect that the ban has now put out of reach.
Lone Pine’s lawsuit specifically charges that Quebec’s law violates two core pieces of NAFTA’s investor protections: the trade deal’s guarantee that foreign investors will receive a “minimum standard of treatment” and its provisions against indirect expropriations. NAFTA does permit governments to use indirect expropriations — that is, when a government agency takes control of private property — “for a public purpose,” but Lone Pine disputes that the exception applies in this case.
Activists, however, say bans on fracking are certainly in the public interest. “It’s really discouraging that there are trade agreements that allow companies to make what look to be on the surface very ridiculous claims about what is and what isn’t a public value,” says Stuart Trew, trade campaigner with the Council of Canadians, a left-leaning national consumer advocacy group.
Polls have shown that fracking, short for “hydraulic fracturing,” is indeed deeply unpopular in the province. The fracking process, in which energy companies inject a mixture of water, sand and chemicals into the ground in order to blast apart shale formations and extract natural gas, is also associated with a number of environmental and public health concerns. Correspondingly, both center-right and center-left provincial governments have proceeded cautiously on how exactly to oversee the extraction of Quebec’s natural gas reserves.
In August 2010, Quebec’s then-ruling center-right Liberal Party government commissioned an environmental study on gas drilling in the province. That report, whose findings were released by the government in March 2011, led to the creation of another strategic environmental assessment on shale gas, and the province put in place a temporary ban on fracking until the assessment’s completion. Shortly thereafter, in response to increased pressure from environmentalists, the party decided to support a permanent legislative ban on fracking on the St. Lawrence River.
Meanwhile, as the province’s environmental assessment nears completion, environmental groups are calling for a more ambitious province-wide ban on the practice. The left-leaning Parti Québécois, for example, which defeated the Liberals in September 2012 and now leads a minority government, supports expanding the area covered by the existing ban.
Milos Barutciski, an international trade and investment lawyer representing Lone Pine, insists that activists are unfairly portraying the company’s intentions. He says the lawsuit is not targeting environmental regulations or the debate on fracking; in fact, he views the drilling ban in the St. Lawrence as an entirely separate matter.
“This case really has nothing to do with the environment or environmental regulation,” Barutciski says. “The moratorium [on fracking], I completely agree, was for a public purpose … But to annul, not freeze, but annul the permits on the riverbed without having conducted, let alone completed an assessment of the environmental impact of [them], how can you possibly defend it as being for a public purpose, especially when the minister says it was for political reasons?”
Though deputy premier Nathalie Normandeau did, in fact, call the legislation a “political decision” in the public parliamentary consultation on the bill in May 2011, she also said in the same consultation that the primary reason for enacting the ban was to reflect “the concerns of citizens” on the issue of shale gas.
And Quebec’s citizens have not been shy about voicing those concerns. Dominique Bernier of the Quebec-based group AmiEs de la Terre, or Friends of the Earth, disputes the notion that the St. Lawrence River legislation is somehow detached from the ongoing environmental debate about fracking.
“That’s ridiculous,” Bernier says. “This bill was passed by a [Liberal Party] government that is very favorable to fracking and oil exploitation. The government had to do that because there’s been an impact assessment on fracking … and the impact assessment has proven [it’s] very dangerous for many, many reasons. It was the only sensible reaction to the impact assessment. It’s not arbitrary. It’s the only reaction possible.”
Trew agrees that “public purpose” includes fracking bans like the one on the St. Lawrence River. “The province has every right, and hopefully feels it has some responsibility, to move ahead on resource projects with extreme caution — especially with a technology as controversial and contested as fracking — and that it is in the public interest to do things like put moratoriums on exploration until the safety of that process can be assured,” he says. “It’s really discouraging that a company could claim that its right not to have its profits interfered with is somehow more important than the obligation on the part of our elected leaders to protect us from this kind of activity.”
One reason the company could be pressing ahead with the lawsuit, he says, is its troubled financial condition. Lone Pine’s lawyer Barutciski fiercely contests that there is a relationship, pointing out that Lone Pine was a subsidiary of the Denver-based Forest Oil until 2011, but it is nonetheless hard to ignore the recent case of AbitibiBowater, an American-Canadian company that was also chartered in Delaware. In 2009, the company announced that it had gone bankrupt and, in the same year, closed a century-old paper mill in Newfoundland and Labrador. Shortly thereafter, the Newfoundland government expropriated the company’s assets, in addition to its hydroelectricity and timber rights in the province. In response, Abitibi filed a $500 million NAFTA lawsuit against Canada — eventually winning a $130 million settlement from the federal government. It has since been restructured and renamed as Resolute Forest Products.
Lone Pine, for its part, has already launched bankruptcy proceedings in Canada and the United States. The most recent quarterly report that it filed with the Securities and Exchange Commission indicates the company’s financial state, which has deteriorated over the last year.
Meanwhile, on October 1, Lone Pine was delisted by the TMX Group, which owns and operates stock exchanges in Canada, including the nation’s largest, the Toronto Stock Exchange. The Exchange does not comment on its reasons for delisting a specific company, but a spokesperson pointed to TMX’s general guidelines, which cite insolvency, poor financial condition, low market value or a company’s failure to comply with regulations or disclose changes to its business model as possible justifications for doing so.
Lone Pine did not respond to a request for comment.
The next frontier of investor-state disputes?
The Lone Pine case has brought into sharp relief the potential impact international trade agreements, and their corresponding investment tribunals, could have on government regulations in developed countries like Canada and the United States.
International tribunals, which are completely separate from domestic courts, have been on the books for nearly half a century — they were initially designed to protect the investments of Western companies in countries the U.S. and its allies regarded as lacking the stable rule of law. The two most commonly used court systems, the International Center for Settlement of Investment Disputes (affiliated with the World Bank) and the United States Commission on International Trade Law, were both set up in 1966. And for the first few decades of their existence, they were used relatively sparingly — there were only 50 investor-state cases before 2000.
But with the expansion of bilateral investment treaties and free trade agreements — most notably, the arrival of NAFTA in 1994 — the number of investor-state disputes has skyrocketed. Today there are roughly 250 outstanding investor-state cases worldwide, and last year featured the highest number of cases on record. The surge of such conflicts has given birth to a niche but highly profitable transnational legal industry: There are now law firms that cater towards these kinds of suits, sometimes hiring the very lawyers who have served on the third-party tribunals. In most cases, both parties each appoint one arbitrator of their choice, who together agree on an additional arbitrator. Critics have noted that panelists often come from a relatively small pool of experts with similar backgrounds in law and academia — many having served multiple times on tribunals together.
As a result, activists say, the courts are prone to corruption. “It’s a very conflict-ridden, incestuous, corporate, government-treasury raiding operation with the sideline casualties being a whole slew of progressive laws and policies,” says Lori Wallach, director of Public Citizen’s Global Trade Watch.
Typically, major corporations have filed lawsuits that target oil, gas and mining regulations against the governments of developing countries. Latin American and Caribbean nations, for instance, are on the receiving end of about half of the pending oil, gas and mining cases at the Center for Settlement of Investment Disputes, the most frequently used court, according to an April 2013 report from the Institute of Policy Studies (IPS).
Advocates say these cases are generally examples of corporations pushing back against these developing countries’ attempts to protect their environment. “You see these cases in sectors where there are a lot of changes going on in regulations,” says Sarah Anderson, who authored the IPS report and previously served on an advisory committee on bilateral investment treaties to the Obama administration. “That’s what’s happening in a lot of developing countries right now. Governments are opening their eyes to how much foreign companies have really taken advantage of them, in terms of their natural resources.”
One such high-profile instance is the Canadian mining company Pacific Rim’s $315 million lawsuit against El Salvador. The company’s United States subsidiary has alleged that the Salvadoran government’s refusal to issue key permits to mine for gold in the northern province of Cabañas violated investor protections under the Central America Free Trade Agreement. Arbitration is ongoing.
But Anderson, who now directs the Global Economy Project at IPS, says that cases targeting generally progressive regulations in North America, like Lone Pine’s suit against Canada, could also be on the rise with the establishment of new free trade agreements among capital-exporting countries.
The United States is in the final negotiating stages of the Trans-Pacific Partnership (TPP) — an agreement covering the Pacific Rim economies of Australia, Chile, Japan, Malaysia, New Zealand and Singapore among others. The actual text of the agreement remains a secret, but leaked portions have revealed it includes investor-state provisions similar to those of NAFTA. Meanwhile, the USTR is also in the early stages of separate negotiations with the European Union as they draft the Transatlantic Trade and Investment Partnership (TTIP). Canada is also involved in TPP negotiations and recently completed its own free trade agreement with the EU, which includes NAFTA-style investor-state protections. Both the U.S. and Canada are expected to fully ratify the latter deal in the next two years.
According to the portions of the trade deals that have been made public, neither agreement appears to enhance the grounds for companies to sue foreign governments; they would, however, expand the existing dispute resolution system to include countries home to some of the world’s largest and most powerful multi-nationals. And given that there are 75,000 cross-registered firms between the European Union and United States, according to Public Citizen, and 30,000 between the United States and TPP countries, that’s an incredibly alarming proposition for trade critics.
“As they like to say at [the United States Trade Representative (USTR) office], we’ve seen these investment rules [used] as part of an offensive strategy to protect U.S. investors abroad,” Anderson says. “But with these new deals that have a lot more major capital exporters, we could be in a much more defensive position, having to defend U.S. laws and regulations from very expensive lawsuits from foreign investors.”
The United States has never lost an investor-state case — but that could soon change once it incorporates these tens of thousands of heavy-hitting multi-nationals and foreign-chartered subsidiaries into the system. “We’ve dodged the bullet because previous agreements didn’t have capital-exporting countries,” agrees Wallach.
The looming expansion of the system is particularly menacing to those pushing for a proactive government role in relatively under-regulated fields. In the case of the United States or Canada, activists warn, those fields could include labor relations, finance or the environment — the kinds of regulations that present possible obstacles to corporate expansion.
Under the TTIP, for example, a U.S. energy company that happens to be cross-registered in the Netherlands could theoretically challenge new environmental legislation in an American state — say, a ban on fracking — on the grounds that it violates the “minimum standard of treatment” for investors under the trade agreement. Similarly, new kinds of American financial regulations could find themselves under attack from British banks.
In general, environmentalists and trade policy critics say, the agreements leave progressive government regulations vulnerable to a regular onslaught of corporate lawsuits. And many see the Lone Pine case as a harbinger of the kinds of regulatory disputes the TPP and TTIP could usher in.
Unlike the common law systems in place in the United States and Canada, international arbitration panels do not have to follow precedent. But critics still fear the case could discourage legislators or state officials from introducing new environmental regulations. If the panel rules in favor of Lone Pine, says Solomon, it “would set an incredibly damaging precedent for governments looking to put in place moratoriums or bans [on fracking].”
That could very well be tested in the coming months. On Monday, Quebec’s neighbor to the east, Newfoundland and Labrador, announced a moratorium on fracking. The province has already issued exploration permits on the western coast of Newfoundland—an untapped stretch of shale that the oil industry estimates could be enormously valuable. Now, those permits will be rendered useless — at least temporarily.
“I think the more we expand the [trade] agreements … the more we expand the opportunities for companies to challenge what would have, prior to the agreement, been completely rational, legal, normal public policy,” says Trew. “When you’ve multilateralized or globalized this corporate rights régime, clearly your goal is for it to be used by everybody on every government, on every country.”