[Intl-tobacco] Trade Agreement Threat to US tobacco Multi State Agreement + other tobacco and health measures

[Robert Weissman]

Public Citizen has just issued an extremely disturbing report on the use
of "investor-state dispute settlement" under the North American Free
Trade Agreement (NAFTA). Chapter 11 of NAFTA gives foreign companies a
right to sue NAFTA member governments directly for a wide variety of
alleged interferences with their investor rights. Under the trade
agreement, these rights extend far beyond what is afforded to domestic
companies under domestic law.

The Public Citizen report shows that a small Canadian tobacco firm,
Grand River Enterprises Six Nations, is using Chapter 11 to challenge
the Multi-State Agreement, the settlement between the US states and the
major tobacco firms. The suit seeks $340 million in compensation for the
ways in which the MSA has purportedly infringed Grand River's
NAFTA-established rights. Under the extreme terms of NAFTA, the company
has a good case.

The US-Central American Free Trade Agreement (CAFTA), which is expected
to come to a vote later this year in the US Congress (perhaps May or so)
includes similar provisions, and so would extend the NAFTA problem, if
approved. The US Congressional vote will determine whether this occurs
or not.

The full Public Citizen report is available at:

http://www.citizen.org/documents/NAFTAReport_Final.pdf

Pasted below is an excerpt from the report on the Grand River case, followe=
d by a news release from Public Citizen on the overall report.


GRAND RIVER v. UNITED STATES =96 U.S. TOBACCO SETTLEMENTS

Grand River Enterprises Six Nations, Ltd., (=93Grand River=94) is a Canadia=
n
company engaged in the licensing, manufacturing, packaging, production,
importation and sale of tobacco.409 Its headquarters are located in
Oshweken, Ontario. Grand River began production in 1996 and has more
than doubled its production of tobacco products every year since 2001.
The company estimates its assets, including plant, equipment, equipment
on order, and cash, at $43 million.410 Although located in Canada, it
exports approximately 80 percent of its tobacco products to the United
States.411 Other claimants in this NAFTA suit include Canadian citizens
Jerry Montour, Kenneth Hill and Arthur Montour, who have ownership
rights in Grand River and various cigarette trading operations in the
United States. They argue that their investment in the United States has
been harmed by the tobacco settlement in the late 1990s between U.S.
states and large U.S. tobacco firms.412

PUBLIC INTEREST

In 1998, 46 U.S. states entered into a settlement agreement with Philip
Morris Inc., R.J. Reynolds Tobacco Company, Brown & Williamson Tobacco
Corp., and Lorillard Tobacco Company (=93tobacco defendants=94) to resolve
claims that the states had filed seeking to recoup medical expenses
incurred for treating smoking-related illnesses of indigent smokers and
to pay for smoking reduction programs.413 The 1998 settlement agreement
followed close on the heels of similar agreements reached by four
individual states, Mississippi, Florida, Texas and Minnesota. The
agreements resulted in a combined settlement of $240 billion through
2025.414 This money was to be used to pay state costs that were incurred
in the treatment of indigent patients suffering from tobacco-related
illnesses, to fund educational programs, and to restrict marketing
directed at children.415 Also as part of the settlements, states decided
to make the provisions of the settlement agreement applicable to all
tobacco companies, including non-defendant tobacco companies, such as
Grand River.416

Non-defendant tobacco companies had 90 days to opt in or out of the
tobacco settlement, and more than 35 firms opted in. If firms opted out,
they had to contribute a percentage of their sales to escrow accounts
set up in each state by statute.417 Funds in the escrow accounts would
be used to pay judgments in the event the states decided to sue these
tobacco companies. If states took no action, the funds would revert back
to the companies. States also began enacting complementary legislation
or =93contraband legislation,=94 which barred non-defendant tobacco
company=92s products from being sold in these states and subjected the
companies to monetary penalties if they did not comply with the escrow
statutes.418

NAFTA ATTACK

On March 12, 2004, the Grand River petitioners filed a NAFTA
investor-state claim, seeking $340 million in compensation for alleged
violations of NAFTA Chapter 11 at UNCITRAL.419 The petitioners argue in
a general way that the major tobacco firms conspired to ensure that
non-defendant firms were covered by the terms of the settlement and
secured terms that are more favorable to defendant tobacco firms than
non-defendant firms in an effort to force the smaller firms out of
business and corner the market. Specifically, the petitioners are
arguing that the requirement to make payments into state escrow accounts
constitute an expropriation in violation of NAFTA Article 1110.420 The
firm has been the target of multiple state lawsuits for non-payment, and
the firm claims that it has already paid $1,100,000 in escrow and
penalties to states.421 The petitioners argue that their investment is
being expropriated because their cigarettes cannot be sold in states
where the firm does not comply with state escrow laws.422

The petitioners also allege they were deprived of fair and equitable
treatment under Article 1105 because they were not notified of the
settlement negotiations, nor were they allowed to participate in
negotiations, yet they are bound by the terms of the settlement.423
Grand River also argues that it is being discriminated against in
violation of Article 1102 because domestic firms that participated in
the settlement are operating in the United States without contributing
to an escrow fund.424 Lastly, Grand River claims that the United States
has violated Article 1103=92s most favored nation provision because other
foreign firms (presumably selling other products than tobacco) are not
required to maintain an escrow account while doing business in the
United States.425

IMPLICATIONS

Public Health Achievements Undermined: Largely due to the tobacco
settlement advertising restrictions, public education campaigns and
related price increases in cigarettes, the percentage of teens who smoke
is plummeting in the United States. While not all the settlement money
slated for public education has been spent as intended, there have been
some impressive developments. Today, 22 percent of U.S. high school
students report being smokers, compared to 36 percent in 1997.426 Since
most adults start smoking as teens, these statistics could translate
into a big drop in the number of adult tobacco-related illnesses and a
significant decrease in tobacco-related medical costs, which are often
borne by U.S. taxpayers. Yet these successes and future gains that might
result from further lawsuits may be frustrated if Grand River and other
non-defendant tobacco companies are allowed to use NAFTA to evade
responsibility for the harms caused by their products.

NAFTA Threatens to Undercut State Authority: U.S. state attorneys
general united and fought vigorously for the tobacco settlements in an
effort to reduce states=92 costs related to tobacco use, prevent
smoking-related death and illness, and decrease the use of tobacco use
by minors. Most attorneys general are popularly elected by citizens of
their respective states and are charged with acting as representatives
of the public interest. Yet state attorneys general have no standing in
the NAFTA investor-state dispute resolution process. They must rely on
the Office of the U.S. Trade Representative to defend their interests
behind closed doors in a NAFTA trade tribunal. If a NAFTA tribunal rules
in favor of the Grand River petitioners and finds the settlement
agreement violates foreign investors=92 NAFTA rights, state sovereignty
and democratic governance will be grossly undermined by a body that was
not elected by state citizens, yet is directly impacting state law and
public policy.

NAFTA Tobacco Firms Evade Justice?: There are approximately 1,000 state
lawsuits against tobacco companies such as Grand River that were not
named as defendants in the tobacco settlement lawsuit and that have
failed to contribute to state escrow funds. Non-defendant tobacco firms
have regularly lost these cases. Grand River first fought the escrow
account issue in U.S. federal court and failed. Now Grand River is
attempting a second bite at the apple by using NAFTA Chapter 11, an
option that is not available to U.S. firms that must abide by U.S. court
decisions. A NAFTA tribunal decision in favor of Grand River would give
Mexican and Canadian firms a back door out of the successful tobacco
settlement, erasing the level playing field for U.S. tobacco firms and
undermining the settlement as a whole.

409 Notice of Arbitration Under the Arbitration Rules of the United
Nations Commission on International Trade Law and the North American
Free Trade Agreement between Grand River Enterprises Six Nations, Ltd.
et al. and Government of the United States of America, Mar. 11, 2004, at 2.

410 Peter Kuitenbrouwer, =93Natives Put New Face on Tobacco Industry,=94
Financial Post, May 31, 2003.

411 See, =93Canadian Tobacco Companies,=94 Ontario Campaign for Action,
cited Jul. 14, 2004, available at: www.ocat.org/opposition/industry.htm.

412 Notice of Arbitration Under the Arbitration Rules of the United
Nations Commission on International Trade Law and the North American
Free Trade Agreement between Grand River Enterprises Six Nations, Ltd.
et al. and Government of the United States of America, Mar. 11, 2004, at
2-4.

413 Notice of Arbitration Under the Arbitration Rules of the United
Nations Commission on International Trade Law and the North American
Free Trade Agreement between Grand River Enterprises Six Nations, Ltd.
et al. and Government of the United States of America, Mar. 11, 2004, at 4.

414 Notice of Arbitration Under the Arbitration Rules of the United
Nations Commission on International Trade Law and the North American
Free Trade Agreement between Grand River Enterprises Six Nations, Ltd.
et al. and Government of the United States of America, Mar. 11, 2004, at 4.

415 See, Dr. Mike Magee, =93The U.S. Tobacco Settlement of 1998: A Missed
Opportunity,=94 Health Politics, May 12, 2004, at 1, available at:
www.healthpolitics.com/program_transcript.asp?p=3Dprog_46.

416 Notice of Arbitration Under the Arbitration Rules of the United
Nations Commission on International Trade Law and the North American
Free Trade Agreement between Grand River Enterprises Six Nations, Ltd.
et al. and Government of the United States of America, Mar. 11, 2004, at 7.

417 Notice of Arbitration Under the Arbitration Rules of the United
Nations Commission on International Trade Law and the North American
Free Trade Agreement between Grand River Enterprises Six Nations, Ltd.
et al. and Government of the United States of America, Mar. 11, 2004, at 7.

418 Notice of Arbitration Under the Arbitration Rules of the United
Nations Commission on International Trade Law and the North American
Free Trade Agreement between Grand River Enterprises Six Nations, Ltd.
et al. and Government of the United States of America, Mar. 11, 2004, at
12.

419 Notice of Arbitration Under the Arbitration Rules of the United
Nations Commission on International Trade Law and the North American
Free Trade Agreement between Grand River Enterprises Six Nations, Ltd.
et al. and Government of the United States of America, Mar. 11, 2004, at 1.

420 Notice of Arbitration Under the Arbitration Rules of the United
Nations Commission on International Trade Law and the North American
Free Trade Agreement between Grand River Enterprises Six Nations, Ltd.
et al. and Government of the United States of America, Mar. 11, 2004, at
16.

421 Notice of Arbitration Under the Arbitration Rules of the United
Nations Commission on International Trade Law and the North American
Free Trade Agreement between Grand River Enterprises Six Nations, Ltd.
et al. and Government of the United States of America, Mar. 11, 2004, at
13.

422 Notice of Arbitration Under the Arbitration Rules of the United
Nations Commission on International Trade Law and the North American
Free Trade Agreement between Grand River Enterprises Six Nations, Ltd.
et al. and Government of the United States of America, Mar. 11, 2004, at
16.

423 If tobacco firms opted into the agreement, they were required to
contribute pro rata payments based upon the amount that their current
year=92s market share exceeded 100% of 1998=92s market share and 125% of
1997=92s market share. However, if nontobacco defendants opted not to
become part of the settlement, then they would have to contribute pro
rata settlement money into an escrow fund based upon the amount that
their current year=92s sales exceeded 0% - or basically, all sales. Notice
of Arbitration Under the Arbitration Rules of the United Nations
Commission on International Trade Law and the North American Free Trade
Agreement between Grand River Enterprises Six Nations, Ltd. et al. and
Government of the United States of America, Mar. 11, 2004, at 8.

424 Notice of Arbitration Under the Arbitration Rules of the United
Nations Commission on International Trade Law and the North American
Free Trade Agreement between Grand River Enterprises Six Nations, Ltd.
et al. and Government of the United States of America, Mar. 11, 2004, at
14-15.

425 Notice of Arbitration Under the Arbitration Rules of the United
Nations Commission on International Trade Law and the North American
Free Trade Agreement between Grand River Enterprises Six Nations, Ltd.
et al. and Government of the United States of America, Mar. 11, 2004, at
15.

426 =93Teen Smoking Burns Down to Lowest Rate in Decade,=94 Associated
Press, Jun. 17, 2004.

-----------------------

For Immediate Release: Feb. 22, 2005
Contact: Chris Slevin (202) 454-5122
Mary Bottari (608) 255-4566

Canadian Cattlemen's NAFTA Challenge Demanding U.S. Taxpayer
Compensation for Mad Cow Import Restrictions Is Latest Example of Trade
Model's Assault on Democratic Policymaking, Vital Consumer Safeguards

New Study by Public Citizen's Global Trade Watch Analyzes 42 NAFTA
Investor-State Challenges; Illustrates How Proposed CAFTA Would Extend
Threat

WASHINGTON, D.C. - The looming congressional fight over the Central
America Free Trade Agreement (CAFTA) will be greatly affected by the
growing list of  NAFTA "investor-state" cases, now totaling billions in
compensation demands, in which foreign investors are attacking
regulatory and other government actions before closed, extra-judicial
tribunals, Public Citizen said today. Passage of the proposed
controversial CAFTA-NAFTA expansion would extend the investor-state
tribunal system, which allows private enforcement of extraordinary
investor privileges granted in international "trade" pacts, to
corporations and investors operating in six additional nations.

In a new report, NAFTA Chapter 11 Investor-State Cases: Lessons for the
Central America Free Trade Agreement, Public Citizen describes how
Canadian cattle producers are using NAFTA to demand $300 million in
compensation from U.S. taxpayer funds, claiming that the Canadian cattle
import ban instituted after mad cow disease was found in Canada violates
their NAFTA rights. In addition, a Canadian tobacco company is using the
private NAFTA tribunals to attack the U.S. tobacco settlements. The
report is available at
http://www.citizen.org/documents/NAFTAReport_Final.pdf and is being
released today at events in Washington, D.C., Sacramento and Olympia,
Wash.

These claims are among the 42 cases filed thus far by corporate
interests and investors under NAFTA's "Chapter 11" investor provisions,
which grant foreign interests more expansive legal rights and privileges
than those enjoyed by U.S. citizens or corporations. With only 11 of the
42 cases finalized, some $35 million in taxpayer funds have been granted
to five corporations that have succeeded with their claims. An
additional $28 billion has been claimed from investors in all three
NAFTA nations. The U.S. government's legal costs for the defense of just
one recent case topped $3 million. Seven cases against the United States
are currently in active arbitration.

"It's unbelievable that the Bush administration is pushing a NAFTA
expansion to Central America that would expose the United States to yet
greater liability, given the grim track record of successful attacks on
the most basic health protections and government functions and millions
in taxpayer funds already paid out to special interests under the
NAFTA-style investment model," said Lori Wallach, director of Public
Citizen's Global Trade Watch.

"That foreign producers can attack vital public health measures like
the mad cow import ban or the U.S. tobacco settlements demonstrates yet
again how the NAFTA investor protection model included in CAFTA
constitutes an extraordinary threat to policies vital to protecting
public health," Wallach said. "We wonder what role this secretive $300
million NAFTA challenge is playing in the Bush administration's
irresponsible proposal to reopen the border to Canadian beef and cattle
imports in March. It is hard to imagine why else the administration
would expose U.S. consumers to risk of such a deadly disease except that
this NAFTA-created $300 million in liability prompts the administration
to once again allow trade concerns to trump public health."

Corporate investors also have used NAFTA's investor-state enforcement
system to challenge domestic court rulings, local and state
environmental policies, municipal contracts, tax policy, federal
controlled substances regulations, federal and state anti-gambling
policies, a federal government's alleged failure to provide water
rights, and even the provision of public postal services. In most
instances, challengers have sought millions of dollars in damages,
claiming that regulatory measures and government actions negatively
affected their profitability. If an investor prevails in its NAFTA
claim, the losing nation is obliged to compensate the firm from the
national treasury. Among the 42 cases detailed in the report:

*=09Aspects of the U.S. state tobacco settlements of the late 1990s,
which have resulted in a dramatic drop in the rate of teen smoking in
the United States, have been challenged as arbitrary and unfair by
Canadian tobacco traders.

*=09A California regulation requiring the backfilling of open-pit
mines has been challenged by a Canadian mining enterprise, which plans
to develop a giant open-pit cyanide gold mine in Imperial Valley,
Calif., and which owns and operates similar mines around the world.

*=09UPS is seeking $160 million in compensation from Canada,
claiming that its government-run  parcel delivery system undermines UPS'
market share.

*=09Bans or phase-outs of toxic substances have been challenged
three times. A challenge to Canada's phase-out of certain uses of the
pesticide lindane has been initiated by a U.S. company. Canada's
proposed ban on the gasoline additive MMT was challenged, but before the
case was finalized Canada reversed the policy and paid $13 million to an
American firm; California's ban on the gasoline additive MTBE has been
challenged by a Canadian firm, and that multimillion-dollar case is
still pending.

"These cases show that there is a growing threat to democratic
governance and state sovereignty as more and more state and local
government policies, even court decisions, are targeted by NAFTA
investors," said Mary Bottari, a policy analyst at Public Citizen and
author of the report.

Wallach added, "In addition to the record trade deficit generated in
the NAFTA-WTO decade, the NAFTA-style investment provisions in trade
agreements are eroding the democratic process. While President Bush
speaks of a new doctrine of aggressively promoting democracy, in fact
the international trade pacts he is pushing export the worst of
anti-democratic values around the world."

The report documents how "fixes" to the NAFTA investor protection model
required by Congress in  the 2002 "Fast Track" legislation were not
included in the proposed CAFTA. CAFTA's investment provisions include
several cosmetic, ineffective tweaks to the NAFTA investor protection
language, but otherwise expand the system of new privileges and private
enforcement to investors in six additional nations. These rights include
the ability to demand compensation when public health and environmental
policies - even when applied equally to domestic and foreign firms -
might undermine a foreign firm's profitability. On this ground and
others, CAFTA fails to meet Congress' most significant Fast Track
requirement regarding investment rules in future pacts by granting
foreign firms greater rights when operating within the United States
than U.S. firms or residents enjoy under constitutional property rights
interpreted by the U.S. Supreme Court. CAFTA was signed in 2004 but has
not yet been brought up for congressional consideration; support for the
deal is limited, in part because of its investment provisions.

"Congress should reject any new trade agreement, such as CAFTA, that
contains this seriously flawed investor-protection scheme, which
subjects the U.S. government to challenges demanding  huge payments of
our taxpayer funds because of the most basic government regulatory or
legal actions," said Public Citizen President Joan Claybrook. "These
cases would not be permitted in U.S. courts for U.S. citizens, and they
undercut the ability of government bodies to act in the public
interest."

Said Wallach, "Rather than pare back these outrageous rules, which
grant greater rights to foreign corporations than U.S. corporations
enjoy, CAFTA expands the NAFTA investment model to six more nations in
the hemisphere. This not only will lead to new attacks on U.S. law, but
now large U.S. firms will have a new avenue for bullying Central
American nations. Just one or two large damage awards could severely
harm the already tight budgets of these small countries."

The United States has not yet lost a case, thanks to an array of lucky
technical breaks - such as an investor relocating into the United States
and thus losing foreign investor standing under NAFTA. However, with the
overall win-loss ratio of NAFTA investor-state cases running around
50-50, it is just a matter of time before a NAFTA claimant is successful
against the United States.

###

Public Citizen is a national, nonprofit public interest organization
with offices in Washington, D.C., Oakland and Austin, Texas. For more
information, visit www.citizen.org.