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October 3, 2011 4:42 PM

The Global Lawyer: Chevron, Yukos, and Two Lifetimes of Litigation

Posted by Michael D. Goldhaber

The men who formerly owned Yukos Oil Company have promised a "lifetime of litigation" against the Russian state over the 2004 seizure of their company, which they value at more than $100 billion. Half a world away, Chevron Corporation has warned that a "lifetime of...litigation" will follow if Ecuador does not render what it considers justice in its 18-year war with residents of the Amazon over oil pollution in the vicinity of Lago Agrio. The Yukos and Chevron cases have very different histories. But both are fought on multiple battlegrounds. Both involve allegations of domestic court abuse in emerging nations. And both feature litigants with the funding and motivation to make good on their vows never to back down. 

The two megadisputes briefly converged in late September, making news within a span of less than 12 hours. First, on September 19 the U.S. Court of Appeals for the Second Circuit lifted the U.S. injunction on enforceability of the $18 billion Ecuadorian judgment against Chevron. The next day, the European Court of Human Rights issued a mixed ruling on the Yukos property claim against Russia. The common lesson is that a lifetime of litigation is apt to end in arbitration.

The Second Circuit has yet to issue a full opinion in the Chevron case, and what will be the scope of the court's rationale is anyone's guess. If the appellate judges are merely worried about ripeness, then Chevron may ask for a similar injunction later. If the Second Circuit rests its ruling on subject matter jurisdiction under the New York recognition act, then Chevron might seek a new injunction under its Racketeer Influenced and Corrupt Organizations Act or fraud claims. On the other hand, if the Second Circuit cites broad comity grounds—or a failure to satisfy the test for foreign antisuit injunctions—that would take U.S. courts out of the global game of cat and mouse altogether. Hints can be gleaned from oral arguments for any of these outcomes.

But even if the Second Circuit rules narrowly, it will create significant delay. That makes Chevron's second line of defense—arbitration—either its first or only line of defense. One way or the other, the arbitrators considering Chevron's claims against Ecuador in Europe can no longer ride in the U.S. courts' slipstream. The urgent question is whether even they have the power to give Chevron what it wants. This crucial topic will be debated at an NYU Investment Forum on Oct. 24, and will be the subject of a future column.

In the Yukos case, meanwhile, the ECHR proved itself doubly inadequate to the task of redressing a large-scale nationalization. The seven-judge ruling, likely to be appealed to a Grand Chamber of the court, deferred the question of damages. But no rational court observer could ever imagine that the ECHR will award damages seven orders of magnitude beyond its usual scale of justice. Yukos's daily interest demand of 29.5 million euros is 85 percent more than the court's total record fine, 16 million euros in the 1994 Stran Greek refinery case—and Yukos seeks that sum for each and every day of the last seven years, beyond its $98 billion base claim. The court might find any number of outs. For instance it might reason that the dead company and its agents have no standing to recover. Or it might reason that the violations found did not cause Yukos's demise, given that the court blessed most of the tax levies that cumulatively drove Yukos to insolvency.

The surprise from Strasbourg was not the court's avoidance of the damages question, but the timidity of its legal findings. To be sure, the court found that Russia committed technical human rights violations by rushing Yukos's trial and appeals and changing its time bar rules midstream. (The time bar ruling affected less than 5 billion euros of tax penalties totaling more than 15 billion euros). Getting closer to the heart of the matter, the court also concluded that Russia's enforcement proceedings against Yukos were disproportionate to legitimate public aims, given Russia's immense demands for back taxes, Yukos's obligation to immediately pay a billion-euro fee to the bailiffs, and Russia's "failure to take proper account of the consequences of their actions."  But most fundamentally, the court concluded that the tax levies were legitimate and nondiscriminatory, and rejected the claim that "the State clearly wanted to destroy the company."

This ruling is hard to swallow. The violations found by the court seem so clearly politically motivated when viewed against the backdrop of Yukos chief Mikhail Khodorkovsky's public feud with Vladimir Putin. In particular, how could Russia not realize the impact of auctioning Yukos's main unit when the court calls it "rather obvious" that doing so might deal Yukos "a fatal blow"? The problem is that Article 18 of the European Convention has effectively been interpreted to require a smoking gun memo showing improper intent, as in the case of Vladimir Gusinsky. The desire for a high standard is understandable, but surely there comes a point where indirect evidence can suffice to show political motivation. 

The contrast with the story told by arbitrators is stark. Rosinvestco v. Russia is the only Yukos arbitration to be decided so far. Although the Stockholm Chamber of Commerce arbitrators refused to give a windfall to the vulture fund claimant and noted that Yukos contributed to its own demise, they also saw a general pattern and obvious intention by Russia to destroy Yukos. The panel found that Russia applied its tax laws with inconsistency and bad faith, and "rigged" the main auction.

The task of speaking truth to power in Russia has fallen to arbitrators—and some arbitrators have already risen to the task. Now will the arbitrators hearing the main Yukos claim agree, and will they dare to make Russia pay? Will the arbitrators considering Chevron's investment treaty claims dare to rein in Ecuador's courts? As the two lifetimes of litigation wind on, the shareholders of Yukos and Chevron can only hope.

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