International Business Law Advisor : Miami International Business Lawyer & Attorney : Santiago Cueto Law Firm : Florida and Global Business Litigation

SEC Wants to Know: Is Your Carbon Footprint a "Material Risk" to International Climate Change Agreements?

Climate Change is a red hot area right now and is a top priority of discussion this week at the World Economic Forum in Davos, Switzerland.

It seems that everyone is throwing their hat into the ring in one way or another.  Now the Securities and Exchange Commission has, rather surprisingly, entered the climate change picture.

 In an unprecedented move, the SEC issued a directive that companies should warn investors of global-warming risks.The SEC directive is the first economy-wide climate risk disclosure advisory in the world.

This change of face marks a complete turnaround for the commission, whose former Chairman Christopher Cox refused to address investor concerns regarding climate risk disclosure. Under the stewardship of SEC's current chairwoman, Mary Schapiro, the commission has made climate change a high priority. For international business this is a big deal.

The SEC issued a press released entitled “SEC Issues Interpretive Guidance on Disclosure Related to Business or Legal Developments Regarding Climate Change” that lays out some of these potential impacts and what it means for disclosure.  Among the areas highlighted by the SEC release:

Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.

Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.

Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.

The SEC’s involvement in climate change regulation drives the federal government deeper into the climate debate, potentially reshaping management decisions at companies across the country and the world.  

What do I think? I think it’s about time that international environmental issues are put on the national agenda.  This is also good for investors. This paves the way for the development of a consistent standard for companies to report climate risk that will help all investors make better-informed decisions.

Trend to Watch: Look for Securities Regulators in Other Nations to Issue  their Own Climate Change Directives in the Very Near Future

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**Update January 15, 2010**: The Republic of Ecuador and the class Plaintiffs have both challenged Chevron's arbitration claim in New York federal court. You can read about it here and here.

First, the United States. Then Ecuador. Now Holland. Chevron's wanderlust knows no bounds, as it recently filed a parallel international arbitration proceeding in the Hague (Holland).

The Arbitration Claim

As reported in this article in the Wall Street Journal and in this article in the New York Times,  Chevron filed an international arbitration claim before the Permanent Court of Arbitration in The Hague under the Rules of the United Nations Commission on International Trade Law (UNCITRAL). The claim is based on Ecuador's alleged violation of investment agreements, international law, and its treaty with the United States--the Encouragement and Protection of Investments Treaty.

Chevron’s claims relate to the Amazon oil lawsuit I wrote about in an earlier post.  In the arbitration filed in the Hague, Chevron alleges that Ecuador’s judicial process is broken and that the South American nation cannot fairly adjudicate the long-running oil pollution litigation.

Through the filing, Chevron seeks to enforce prior settlement and release agreements that the government of Ecuador entered into with Texaco Petroleum when the consortium was terminated, and to hold Ecuador accountable for its obligations under Ecuadorian law and existing international treaties.

Forum Shopping in the Hague Must be Condemned

Chevron's latest move is the litigation equivalent of three card monty and is yet another tactic to divert attention away from the trial taking place in Ecuador. Filing an international arbitration campaign at this point in time smacks of desperation and is a clear example of forum shopping, as Plaintiffs counsel Steven Donziger stated in this Reuters article.

Chevron first fought successfully to force plaintiffs to try their lawsuit in Ecuador rather than U.S. courts. Then it sought (unsuccessfully) to win indemnification in U.S. courts from a possible judgment in Ecuador. And now it's filed for arbitration seven thousand miles across the Atlantic in Holland. 

The Hague is arguably the most hallowed institution for the resolution of high-profile international disputes. Chevron's latest tactic all but mocks the institution's primary mission to administer justice. The Hague must not be utilized to frustrate legitimate legal proceedings taking place elsewhere.

Forum Shopping Creates Broad Incentives for Abuse

As Chevron's arbitration claim illustrates, the opportunity for one party to game the system and manipulate the outcome of a case by choosing a specific forum over another creates broad incentives for abuse. Among other things, forum shopping :

1. creates legal uncertainty (particularly for the defendant);
2. drains resources by imposing substantial additional costs on defendants, who must transport lawyers, documents, and numerous witnesses to the site of the trial – an expense that is multiplied when the trial is located far from the defendant’s place of business.
3. undermines the authority of substantive state law by calling into question the equity of the legal system.

Although under extremely limited circumstances forum shopping may prove a legitimate means to achieve a more just result, it is disproportionately utilized to avoid a just result by exploiting the points outlined above--as Chevron has done.

Conclusion

While an attorney's obligation to zealously advocate his clients' interest may involve forum shopping as part of the procedural calculus, the obligation must be tempered with a keen understanding of what becomes abusive litigation.

Trend to Watch: Given the High Profile Nature of Chevron's Claim, Look for an Increase in Similar Filings in the Hague

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Some of my recent "how to" posts have offered practical advice and tips concerning various areas of international business law. This post is different--it's a "how not to" article based on Chevron's inept and unethical handling of the oil pollution trial currently taking place in Ecuador. While zealous advocacy is critical to any high caliber practice, it must never cross the line into unethical conduct.

The Lawsuit

To put the case into context, Ecuadorean indigenous groups sued Texaco (which Chevron acquired in 2001) in the U.S. District Court in New York in 1993. The suit alleges the company polluted the Amazon rain forest and rivers, causing damage to the environment and their health. Chevron moved to dismiss the case on grounds of forum non conveniens. The U.S. court dismissed the complaint and held that the case should be resolved by an Ecuadorean court. Based on the ruling, the plaintiffs filed a lawsuit in the small jungle city of Lago Agrio.

After expending an exorbitant amount of resources to have the case dismissed to Ecuador (Chevron submitted numerous Affidavits by top legal experts arguing that Ecuador would be the best venue), Chevron is now arguing that a fair trial in Ecuador is not possible and that the matter should be decided in the U.S.

For an excellent overview of the case, you must read Steven Donziger's recent commentary in Forbes Magazine, The Chevron Way: In an Ecuador Legal Battle Oil Giant Gives U.S. Companies a Bad name. Steven is a New York lawyer representing the Ecuadorean Plaintiffs in the suit against Ecuador.

Corporate Codes of Conduct

I first read about the case in a New York Times article over a decade ago. I was so disturbed by the deliberate corporate pollution of the pristine Amazon rain forest that I wrote a lengthy law journal article that was subsequently published in the Florida Journal of International Law. The article is titled Oil's Not Well in Latin America: Curing the Short Comings of the Current International Environmental Law Regime in Dealing With Industrial Oil Pollution Through Codes of Conduct. The article advanced the idea of corporate codes of conduct as a prerequisite to the grant of drilling concessions. Regarded as a cutting-edge proposition, the article was subsequently cited in leading legal textbooks, law review and journal articles.

The corporate codes of conduct I advocated in the journal article would have served Chevron well in conducting its drilling operations in the Amazon basin. Had Chevron implemented such a code, it would have prevented this decade-old public relations maelstrom.

Chevron's Missteps

Although I believe Chevron committed a serious sin of omission in failing to adopt an appropriate ethical code at the forefront, it pales in comparison to the legal pyrotechnics and machinations it has engaged in during the course of this litigation (including its change of heart concerning venue when the trial did not go its way).

To illustrate this point, the Wall Street Journal recently reported that Chevron released recordings showing the presiding Judge speaking about the case and appearing to have established liability against Chevron even though the trial was yet to finish. A second recording allegedly showed a member of the country's ruling party soliciting bribes in exchange for remediation contracts to be awarded after the verdict. Chevron says the videotapes were a "gift" from two men who, acting independently, used a hidden camera to record the Judge.

Chevron's questionable videotaping is nothing compared to the impending investigation  underway against it, as Steven Donziger reported in his article:

 New York Attorney General Andrew Cuomo--at the request of several Chevron shareholders, including the state's pension fund--has launched an investigation to determine whether Chevron is misleading the financial markets about the risk it faces in Ecuador.

Conclusion

Let's see, there's the decades of oil pollution, abuse of the judicial process, clandestine video taping and now an investigation into misleading the financial markets--all in the name of zealous advocacy? The examples of Chevron's inept and unethical handling of the Amazon lawsuit are boundless. At every step of the lawsuit, Chevron sought to manipulate, abuse and undermine the judicial process. Chevron's handling of the case in the past decade is a case study in how not to handle foreign litigation---or any litigation for that matter.

 Trend to Watch: Corporations Will Watch this Case Closely As The Ground Rules for Foreign Litigation Are Further Developed

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