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January 27, 2012 6:45 PM

The Global Lawyer: Where the Second Circuit Leaves Chevron

Posted by Michael D. Goldhaber

On Thursday, nearly a year after Chevron asked a New York federal court to block enforcement of a multibillion-dollar judgment in Ecuador over oil contamination in the Amazon, the U.S. Court of Appeals for the Second Circuit said no in the most sweeping possible terms. The appellate panel concluded that a global and preemptive "antienforcement injunction" by "disappointed litigants in foreign cases" would be "radical," unprecedented, ungrounded in statute, and potentially offensive to the principle of comity. (Click here for the ruling and here for news coverage from the New York Law Journal.)

Chevron, of course, maintains that it is not merely a disappointed litigant, but a defrauded litigant. Where does it go from here?

The Second Circuit twice made the point that "Chevron will have its opportunity to challenge the judgment's enforcement under [New York's Recognition Act] at such time, if any, as judgment-creditors seek to enforce the judgment in New York." But this is a fiction, as a lawyer for the Ecuadorian plaintiffs said clearly at oral argument that the plaintiffs do not plan to enforce in New York.

If the plaintiffs succeed in initiating enforcement actions anywhere, it is far likelier to be in the courts of nations with shaky respect for the rule of law. Chevron may then raise the defenses that it was defrauded at trial, and that the Ecuadorian courts are generally lacking in due process. Chevron has serious evidence on both scores, but I wouldn't want to gamble on a Venezuelan court agreeing, given the resistance of even some U.S. judges. In its statement of facts, the Second Circuit needlessly questioned the conclusion that Chevron was likely to show that the Ecuadorian judiciary is politically captured, calling to mind the naive ruling on forum non conveniens that set the Amazonian trial in motion. Apparently the appellate judges do not read The New York Times editorial page, which only this week pointed to "outrageous" evidence of political control in a prominent Ecuadorian case on freedom of the press. In an earlier editorial on the same affair, The Washington Post opined: "The handling of the case by the judiciary was, alas, worthy of a banana republic."

Still, Chevron and its lawyers at Gibson, Dunn & Crutcher have plenty of options in their New York RICO and fraud action against the Ecuadorian plaintiffs and their lawyers. Chevron may renew the motion to attach its adversaries' assets that was denied on January 6, this time asking only for damages that are already ascertainable. Quite likely, that would include the price of the nearly 500 attorneys and paralegals that Chevron has employed in its defense.

Chevron may also renew discovery, and press on toward a trial on all counts except the declaratory claim severed for appeal.

Most importantly, Chevron can return to the ad hoc tribunal of three international arbitrators hearing its claims against Ecuador, which are grounded in the U.S.-Ecuador investment treaty and customary international law under the supervision of the Permanent Court of Arbitration in The Hague.

Last February, the arbitrators preliminarily ordered the Republic of Ecuador to take all possible steps to halt enforcement of the $18 billion judgment--the morning after Manhattan federal district court judge Lewis Kaplan preliminarily enjoined the Ecuadorian plaintiffs from pursuing enforcement. Now it is the arbitral tribunal leading the way. On January 25--the evening before the Second Circuit finally vacated the U.S. injunction--the arbitrators made their interim measures final. Legally, this means those measures may now be confirmed in national courts. Politically and psychologically, it is a signal that the arbitrators are fully committed to hearing Chevron's grievance--and if necessary exerting their power around the world.

In a last-ditch effort to stop the judgment from becoming enforceable pending its appeal to Ecuador's highest court, Chevron argues that the arbitrators' measures require the intermediate Ecuadorian court, as an arm of the Republic, to suspend any requirement that Chevron post a bond pending appeal.

Meanwhile, the arbitrators are set to hold emergency hearings, and briefing on the merits continues. As I have explained, the final relief sought by Chevron includes an order that Ecuador indemnify the oil company for any damages the plaintiffs succeed in collecting, and the arbitrators have already opined that as a legal matter they have the power to do so under customary international law. I have argued that this places pressure on the Ecuadorian courts to overturn or reduce the award, and to delay its enforceability. If the Ecuadorian courts make me look silly by demanding an appeal bond tomorrow and affirming the judgment on final appeal, I will enjoy the continuing legal theater more than anyone.

The Second Circuit declared on January 26 that New York did not "set up its courts as a transnational arbiter to dictate to the entire world which judgments are entitled to respect and which countries' courts are to be treated as international pariahs."

"Transnational arbiter" is an interesting word choice. The understandable refusal of the U.S. courts to proactively halt global enforcement of a foreign award places the international arbitrators center stage. It may give them the opportunity to correct an injustice, but it also calls for a serious discussion of the nature and limits of arbitral power. The arbitrators had better explain the role they are taking on with great cogency. Because as the Second Circuit has just dramatized, they differ from Judge Kaplan in one very big way. Arbitrators are not meaningfully supervised on appeal.

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