Chevron & Ecuador: Reversal of Fortune
Chevron is winning a 20-year legal battle tainted by fraud.
Twenty years after being sued in a US court over alleged environmental damages in Ecuador, Chevron appears closer than ever to victory.
“The conclusion that the Ecuadorian lawsuit against Chevron was fraudulent has been well documented, and it has been confirmed in the judgment of the international investment community, which sees now that Ecuador is not a safe place to invest,” says Jodi Hanson Bond, Vice President for the Americas, U.S. Chamber of Commerce.
Although the case long seemed to be a classical case of an evil oil-spilling company against poor Indian defendants in Ecuador, Chevron has successfully shown that it instead has been a case of an ambitious trial lawyer in the United States, Steve Donziger, who tried to use fraud and threats to force the US oil producer to pay billions of dollars for the alleged wrongdoing.
“U.S. coverage of the case has not been flattering to the Ecuadoran legal system, but the Chevron case has done more to shine the light on things like unethical lawyers and the new trend of investors, like hedge funds, financing large class action lawsuits,” says Glenn Waldman, Managing Partner at Heller Waldman.
While the original case was thrown out from a US court in 2002, the plaintiffs subsequently sued Chevron in Ecuador, where they were able to get a favorable verdict in February 2011. A court in Lago Agrio, Ecuador sentenced Chevron to pay a $8 billion fine, which was subsequently raised to $18 billion when Chevron refused to make a public apology, as required by the original ruling.
Since Chevron has few assets in Ecuador itself, plaintiffs have sought to get courts in Argentina, Brazil, Canada and other jurisdictions to freeze the US oil firm’s assets.
Chevron’s Texaco unit operated a joint venture with PetroEcuador from 1964 to 1990, when the Ecuadorian company took over management of the oil field. Texaco continued with a minority stake in the consortium until 1992. When Texaco left Ecuador completely in 1992 it undertook a $40 million remediation and in 1998, the government of Ecuador declared that the remediation was completed according to the terms and parameters agreed upon and released Texaco from any future liability.
However, with active support from Rafael Correa – Ecuador’s president since January 2007 — the lawsuit against Chevron advanced until the 2011 verdict.
This year, Chevron has scored several major victories over the plaintiffs. In April, Stratus Consulting – the main environmental expert used by plaintiffs – acknowledged that there is no scientific merit to the damages claims. It also said it was aware of misconduct by the plaintiff’s lawyers. (See the amazing statements here).
Also, in April, Burford Capital Limited announced that it had been fraudulently misled to finance the Patton Boggs law firm in connection with its litigation work for the plaintiffs. “Recent developments in the case should also be a deterrent to the participation of third party litigation funders, investment companies that finance lawsuits in exchange for a portion of the judgment, in frivolous and fraudulent cases,” Bond says.
Chevron is now suing Patton Boggs for fraud and deceit.
And last week, an Argentine court unfroze Chevron assets that had been seized at the request of plaintiffs trying to get the US oil company to pay the Ecuador fine.
Meanwhile, Donziger has now lost both his own lawyers defending him against Chevron’s counter suits as well as his longtime spokeswoman Karen Hinton, according to Forbes.
“The lawsuit began to unravel when Chevron’s lawyers discovered that Donziger’s team had ghostwritten an expert’s environmental report that the Ecuadoran court relied on in making decisions,” Waldman points out. “This is a clear no-no.”
The revelations of the ties between the court-appointed expert, Richard Cabrera, and the plaintiffs was the result of a massive effort by Chevron to fight the lawsuit rather than settle.
“Many foreign investors are quietly cheering on Chevron’s efforts to uncover the truth behind the questionable legal judgments they have faced in Ecuador,” says John Price, Managing Director, Americas Market Intelligence. “If their efforts help dissuade other opportunists from pursuing frivolous legal cases against investors, then the future of foreign investment and technology transfer into Latin America will be much brighter.”
That has meant spending a small fortune on external lawyers and experts as well as internal re-allocation of resources.
“I doubt any other US multinational in Latin America has come anywhere near what Chevron has spent on attorneys, investigators and media consultants,” says Simon Strong, president of Tenacitas International and an expert on Andean affairs. “But Chevron is on the hook for an enormous sum and the current Ecuadorian government has its friends. I think it very unlikely the Ecuadorians’ claim will prosper in the US but some countries … view it sympathetically and will pressure their courts accordingly to freeze Chevron assets. So Chevron has had no choice but to fight what has become a global battle, on all fronts.”
Bond agrees. “This must be the costliest fight of its kind, but it’s part of an unfortunate trend of the U.S. plaintiffs’ bar trying to go global,” she says.
In Nicaragua, the government passed a law in 2000 that created conditions under which American companies, sued in cases arising from exposure to a pesticide used on banana plantations, were certain to lose the lawsuits, Bond points out. U.S. lawyers got involved in the litigation in Nicaragua, and judgments have been entered against the companies that now total over $2 billion.
“But there has been good news on this front,” she says. “To date U.S. courts have viewed the law as a significant deprivation of due process, and they have declined to enforce these judgments.”
And a court in California, ruling on cases that had been brought by the same lawyers directly into U.S. courts, found that many of the underlying personal injury claims were false and riddled with fraud. Finally, the Supreme Court’s April ruling in Kiobel v. Royal Dutch Petroleum rejected a scheme by class action trial lawyers to use the Alien Tort Statute of 1789 to make U.S. courts a legitimate forum for legal claims abroad even when no U.S. actors are involved, Bond says.
“The expense of this lawsuit and the intensity of Chevron’s defense may very well be unprecedented,” Waldman says. “But it is not uncommon for firms to expend incredible resources litigating in two different locales, with one case pressing on in Latin America and another moving forward in the U.S….In a situation like this, a defendant like Chevron is pursuing two parallel objectives. On the one hand, it wants very badly to win the lawsuit and avoid the possibility of a massive, share price altering judgment against it. One the other hand, it also wants the rest of the world to understand that if you come after Chevron, the response you receive will be an overwhelming one. This company will go at you ever way possible, including attacking your lawyers. The idea is to make it so difficult to prevail against them that you will decide to target someone else. Of the two objectives, this second is the more important one over the long haul.”
A DETERRENT FOR OTHERS?
So, can Chevron’s success serve as a deterrent to other lawsuits?
“The potential court rewards are so substantial that there will always be attorneys prepared to offer services on a largely contingency basis,” Strong says. “And the cases garner a great deal of media attention which is a nightmare for the corporation and an added strategic bonus for the attorneys and the plaintiffs.”
Waldman says Donziger may actually have lost by using the media so much. “Donziger probably had plenty of good facts that he could have used to make his case, but he was trying it in the media, rather than in court,” he says. “Using the media can be very powerful in gaining leverage in litigation, but you can’t undermine the fundamentals of your case in the courtroom.”
He believes the Chevron case won’t deter other lawsuits against U.S. multinationals for four reasons. First, each case is its own animal, with its own facts; second, while Donziger and the plaintiffs have not collected on the judgment that they won in Ecuador, they still won an $18 billion judgment that’s yet to be overturned; third, a corporation capable of writing massive checks will always be a target of litigation; and fourth, courtrooms all over the U.S., if not all over the world, are filled with egotistical litigators who believe that they will be able to outperform the last guy, even against incredible odds.
“The chance of winning a multi-billion dollar outcome will always attract someone to take a shot at the brass ring,” Waldman says.
Chevron’s revelations about the massive misconduct by Ecuadorian courts and several judges, has clearly weakened the image of the judiciary in the South American country.
“It’s telling that jurists in other countries have shown little regard for the ruling of their Ecuadorian peers,” Bond says. “Just last month, a Canadian court declined to enforce the award handed down in Ecuador against Chevron. Further, Argentina’s Supreme Court on June 4 lifted a freeze on Chevron’s assets in that country, rejecting a tie to the Ecuador case. These and other rulings — including in the United States — are a remarkable condemnation of this miscarriage of justice in Ecuador. “
However, other experts like Strong and Price believe the Ecuadorian judiciary already suffered from a poor image. “Sadly, I doubt that many observers held it in high esteem to start with,” Strong says. “Judicial corruption and, perhaps to put it more politely, arbitrariness, are still endemic to the country and, to a greater or lesser degree, the region.”
Price concurs. “I’m not sure that image of Ecuadorian judiciary has suffered much, given that it was quite low to begin with,” he says. “More accurately, the Chevron case has served to reinforce an already jaded view of jurisprudence in Ecuador.”
Most lawyers who are in the know about legal systems in South and Central America have never had a very positive opinion about how those systems operate, Waldman says. “For all its twists and turns, the Chevron case neither improves, nor detracts from this general belief,” he says.
While Correa has also done his part to scare off foreign investors, the Chevron case is seen as a key reason for the poor image Ecuador has among multinationals.
“Ecuador in 2012 received less foreign direct investment as a percentage of GDP than any other country in the region,” says Bond. “Ecuador has languished near the bottom of these rankings for several years even as FDI in Latin America has boomed in countries that respect the rule of law, such as Mexico, Colombia, and Chile.”
Last year, Ecuador saw a 13 percent drop in foreign direct investment to $364 million. As a result, its FDI-GDP ratio is now only 0.49 percent, the lowest in Latin America and six times under the regional average, according to a a Latinvex analysis of FDI data from the United Nations Economic Commission for Latin America and the Caribbean and GDP data from the International Monetary Fund for 2012. Even without comparing FDI to its GDP, Ecuador fares dismally. Last year it had Latin America’s third-lowest FDI. Only countries like Paraguay and Haiti received less.
By Joachim Bamrud-Latinvex, June 12, 2013