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General Information on Methanex v. United States

Methanex v United States is one of the first three cases brought against the United States under the investment chapter of NAFTA.   Significantly, after six years of consideration by an international investment tribunal, every argument offered by the Methanex Corporation was rejected.  

Methanex corporation brings a claim.   In June of 1999, the Vancouver-based Methanex Corporation filed a NAFTA Chapter 11 claim, seeking $970 million.  Methanex wanted compensation from the United States government for alleged current and future financial losses resulting from California’s phase out of MTBE, a gasoline additive that may cause cancer and presents environmental risks.  The Methanex claim sought arbitration before a panel of the  United Nations Center for International Trade Law (UNCITRAL).

MTBE pollution in California.  MTBE has contaminated groundwater and drinking water at several sites across California. MTBE is found in many California lakes and reservoirs.  In northern California, such lakes as Tahoe, Donner, and Shasta  have been contaminated.  To the south, MTBE has been detected in lakes and reservoirs like Castaic, Pyramid, and Perris.   

One study estimates that MTBE has polluted 10,000 shallow groundwater sites in California.  The UC Davis report more conservatively estimates that 3,486 groundwater sites in California are contaminated with MTBE.

California reports detecting MTBE in 30 public water systems.  In Santa Monica, the city shut seven of its wells because of MTBE contamination, thus losing half its water supply.  In South Lake Tahoe 12 of 34 wells were closed.

MTBE is a health and environmental risk. MTBE has a foul taste, and it smells like turpentine.  Even in low concentrations, it is easy to smell and taste MTBE in drinking water.  The UC Davis team noted that “substantial evidence from studies of chronic exposure demonstrates that MTBE is carcinogenic in rats and mice.” The study concludes that “MTBE is an animal carcinogen with the potential to cause cancer in humans.”  MTBE has been associated with other health risks including memory loss, asthma, and skin irritation.

California's action.  The California legislature and public health authorities had moved to ban the use of MTBE in the state.  The Canadian corporation Methanex argued that this regulatory action--taken for environment and public health reasons--denied them market access and future profits, therefore constituting an expropriation of their investment. 

NAFTA tribunal decision.  The tribunal acted to protect California’s authority to protect the public and the environment.  The Methanex case is remarkable because it illustrates how NAFTA’s investment chapter allowed a transnational corporation to bring a complaint against a state law for performing a core governmental function, protecting the public health and environment.   A decision by an international tribunal to award damages to the Methanex corporation would have been politically explosive, validating allegations that no environmental or public health measure is safe from challenge under NAFTA’s investment chapter.

The case is even more remarkable in that the NAFTA tribunal hearing the case spent six years before rejecting the complaint, in a series of lengthy opinions that sought to protect California’s regulatory authority.

Other critical NAFTA decisions.  Recent decisions by NAFTA tribunals against Canada and Mexico have been more favorable to investors, demonstrating that public health and environmental regulation can be successful challenged in front of NAFTA tribuanls.  In Ethyl Corp. v. Canada, a public health measure banning the gasoline additive methylcyclopentadenyl manganese tricarbonyl (MMT) was rolled back in a settlement agreement.  In S.D. Myers v. Canada, 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 v. Mexico,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.

Given the largely undefined standards of NAFTA’s investment chapter, arbitrators have room to read its language broadly or narrowly. The arbitrators in this case interpreted NAFTA’s chapter narrowly to repudiate Methanex’s theory of the case.   This may influence tribunals to adopt relatively narrow constructions in future cases involving similar fact patt.  Still, the outcome of future cases is unpredictable. NAFTA panels are not bound by precedent.  Until the language in NAFTA’s investment chapter is clarified, its undefined terms and phrases will mean what an arbitration panel decides that they mean in a particular case.

Reimbursement the U.S., but not California.  Methanex was required to reimburse the United States government for costs relating to the defense of this case.  The State Department has jurisdiction for defending against trade and investment case challenges.  However, California—which spent thousands of hours of staff time preparing documents for the State Department’s use in this case—was not an official party to the dispute.  California did not get its staff and document costs covered.  Consequently,  even this successful defense of a state law has resulted in a kind of “unfunded mandate.”

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