Canada: The UPS Decision - Victory Or Temporary Relief For NAFTA Governments?

Last Updated: September 4 2007

Article by Cliff Sosnow and Prakash Narayanan, © 2007, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on International Trade, August 2007

On June 11, 2007, an ICSID arbitration tribunal issued a decision rejecting UPS’s claim under Chapter 11 of NAFTA alleging that the Government of Canada gives its state-owned postal service, Canada Post, favourable treatment over UPS. The majority opinion appears to have taken a questionable interpretation of some aspects of NAFTA that, in the light of the detailed dissenting opinion, could be the springboard for future claims against NAFTA governments.

Overview

In 2000, United Parcel Service of America (UPS) launched a claim against the Canadian government under Chapter 11 of the North American Free Trade Agreement (NAFTA), alleging that Canada gives its state-owned postal monopoly, Canada Post, favourable treatment over other postal service companies. The final decision in this arbitration was issued on June 11, 2007, with the arbitration Tribunal ruling against UPS in its attempt to win damages. The decision ends a seven-year legal battle in which UPS sought USD 160 million in damages and has implications for a number of industries. It is likely that the decision has, at least temporarily, granted relief to NAFTA governments from claims of discrimination against a variety of government-operated services, from public highways to garbage collection. However, the dissenting opinion of one of the arbitrators points to a number of issues with the reasoning provided for the Tribunal’s decision. As a result, it is unclear as to how long the relief for NAFTA governments will last.

The Decision

On April 19, 2000, UPS filed its notice of arbitration and statement of claim before the International Centre for Settlement of Investment Disputes (ICSID). UPS alleged that its Canadian operations were being commercially harmed by unfair preferences and advantages given by the Canadian government to Canada Post, in violation of Canada’s "national treatment" obligations under NAFTA. The "national treatment" obligation arises from Article 1102 of NAFTA and requires Canada to accord to U.S. investors or investments in "like circumstances" treatment "no less favourable" than that accorded by Canada to its own investors and investments.

On June 11, 2007, the arbitration Tribunal ruled against UPS in its claim for damages. The decision of the three-person Tribunal included one dissenting opinion from UPS’s appointed arbitrator Dean Ronald A. Cass, a U.S. national. Cass disagreed with the other members of the Tribunal’s conclusion that Canada has not violated its national treatment obligation under NAFTA Article 1102. Rather, Cass concluded that Canada had violated its NAFTA obligations in respect of the customs treatment of UPS, the discriminatory treatment in pricing policies and infrastructure between Purolator and UPS Canada and in the operation of the Canadian government’s Publications Assistance Program (PAP). The merits of the conclusions of the Tribunal with respect to each of these issues, as well as Cass’s dissenting opinions are addressed below. This will be proceeded by a brief discussion of the application of the Tribunal of the legal test for determining whether investors are in "like circumstances" under NAFTA.

Test For Like Circumstances

In order to reach its decision as to whether Canada had violated its national treatment obligations under NAFTA Chapter 11, the Tribunal was first required to apply a legal test to determine if the parties were in "like circumstances." This step is an essential prerequisite to establishing a specific violation of Article 1102. It is possible to take issue with both the definition of "like circumstances" applied by the Tribunal and the method by which the test for "like circumstances" was applied in this case.

The appropriate meaning of the term "like circumstances," a term that is not defined in the NAFTA, formed the first critical point of dispute between Canada and UPS in the proceedings. Canada argued for a more strict definition, suggesting "like circumstances" implies circumstances that are identical or virtually identical. UPS argued for a wider scope to the term, suggesting that being in the same economic sector or being in competition makes investors or investments in "like circumstances." The parties also disagreed as to the role of public policy considerations in making the "like circumstances" determination, with Canada advocating for a greater role and UPS arguing for a diminished role. The Tribunal did not expressly adopt a definition. Instead it committed itself to considering "all the relevant circumstances." However, given its rejection of the claims made by UPS regarding customs treatment (discussed below), it is fair to say that the Tribunal adopted a rather strict definition that fell between those advocated by Canada and UPS.

In relation to the burden of proof, according to the Tribunal, the legal burden is solely on the investor (UPS) to establish that the parties are in "like circumstances." However, in his dissent, Cass argues that Article 1102 only requires the complainant to show that there is a competitive relationship and that two investors or investments are similar in that respect. This would establish a prima facie case of "like circumstances." Thus, once the complainant has established the competitive relationship between the investors or investments, the burden shifts to the respondent to explain why two competing enterprises are not in "like circumstances." Using this method, Cass found that in relation to each of the three allegations, UPS had established prima facie that UPS is in a competitive relationship with Canada Post, and that Canada had failed to rebut this.

Customs Treatment

UPS alleged that Canada’s customs agency discriminated in its treatment of UPS Canada in comparison to Canada Post in violation of Article 1102 of NAFTA. UPS alleged that, first, the Canada Border Services Agency (CBSA) pays handling fees to Canada Post for services that UPS Canada is required to perform without compensation; and, second, the CBSA does not levy the same fines and penalties against Canada Post for failures to comply with customs regulations as it levies against UPS Canada. In addressing this issue, the Tribunal emphasized the distinction between the treatment of products imported and distributed by UPS Canada, and those imported and distributed by Canada Post. The Tribunal concluded that there is a distinction between postal traffic and courier traffic. In light of this conclusion, the Tribunal deemed UPS and Canada Post not to be in "like circumstances," and as a result found that no violation of the "national treatment" obligation had occurred.

In considering the customs treatment allegation in his dissent, Cass concluded that any differences between postal traffic and courier traffic do not distinguish the UPS products at issue from the competing Canada Post products, and the two enterprises are in fact in "like circumstances." Cass found that it is not sufficient to claim that Purolator is part of the overall postal traffic of Canada Post to demonstrate that Purolator and UPS Canada are not in "like circumstances." He focused on UPS’s allegations surrounding the product category that is comprised of items that receive special handling, are subject to special tracking, and have characteristics that make them especially valuable in distinction to ordinary mail delivery, arguing that these products are clearly in "like circumstances" when compared.

The issue of what services should be compared to determine whether Canada Post and UPS are in "like circumstances" goes to the root of the issue, and given the differing opinions between the Tribunal’s majority decision and Cass’s dissent, suggests an opening for future challenge.

Pricing Policies And Infrastructure

UPS alleged that Canada Post’s pricing policies afford an unfair advantage to Canada Post’s products over those of UPS Canada, and are therefore contrary to the principle of national treatment. The claims by UPS on this issue included the allegation that Canada failed to prevent Canada Post from abusing its monopoly position through various acts that effectively used its monopoly services to lower the prices of its non-monopoly services. Further, UPS alleged that Canada failed to prevent Canada Post from discriminating against UPS by granting Purolator Canada, Canada Post’s own parcel delivery service that competes with UPS Canada, preferential access to its monopoly infrastructure. In respect of these allegations, the Tribunal concluded that the conduct of Canada Post was commercial rather than governmental in nature and not directed by the government. Therefore, Canada Post was not subject to a national treatment or minimum standard of treatment obligation.

The conclusion of the Tribunal on this issue is one of the least convincing elements of the decision. The Tribunal’s strict interpretation of NAFTA Chapter 11 places the commercial decisions of Canada Post outside the scope of the exercise of delegated governmental authority that must comply with NAFTA requirements. As Cass noted in his dissent, the decision of Canada Post to grant preferences to Purolator was not in the nature of a decision to purchase or sell a product, but rather a decision to approve a relatively complex commercial transaction that falls within the scope of the exercise of delegated governmental authority that must comply with NAFTA requirements.

Publications Assistance Program (PAP)

UPS also challenged the PAP of the Department of Canadian Heritage. The PAP provides a subsidy to publishers of certain books and magazines for postal costs. To qualify for the subsidy, the publishers must deliver their publications through Canada Post. UPS argued that this requirement is contrary to Canada’s national treatment obligation. In defence of the PAP, Canada Post argued that the PAP supports the Canadian publishing industry by providing distribution assistance to eligible publishers and therefore falls within the scope of cultural industry exemptions under Article 2106 of NAFTA. The Tribunal concluded that UPS was not actually asking for national treatment, but rather that the PAP be redesigned for its benefit; specifically, that the choice of delivery mechanisms be left to each publisher to decide for itself. The Tribunal viewed the delivery aspect of the PAP, whereby delivery to every address in Canada is necessary, as both integral to the attainment of the program’s objective and necessary to fulfill the statutory objective of the program. As a result, the Tribunal upheld the PAP as a measure designed to assist cultural industries falling within the scope of NAFTA’s cultural exemption clause. This finding is a broad interpretation of the NAFTA cultural exemption clause, and could have a significant bearing on future cases dealing with cultural industries.

In contrast, in considering the PAP in his dissent, Cass concluded that Canada Post’s delivery service is not itself part of a cultural industry and therefore is not within the scope of the cultural industries exception recognized by NAFTA. After reviewing the provisions under Article 2106, Cass concluded that the cultural industries exception excluded activities that are "more mechanical activities that are less centrally related to the creative acts associated with cultural industries." In this respect, Cass concluded, Canada Post is not part of a cultural industry, and more akin to a local firm running delivery trucks that might at times deliver cultural products.

While the determination of whether a particular aspect of a program that would fall under the cultural exemptions of NAFTA is fact-based, in this era of minimizing protectionist measures, it appears incongruous that the delivery aspect of a subsidy to publishers should also be considered to be an "integral" part of the cultural exemptions. Perhaps the recently announced review of foreign investment rules by the Canadian government will weigh in on this issue by suggesting the modification of the PAP to bring it in alignment with Cass’s dissent.

Conclusion

The decision in United Parcel Service v. Government of Canada was awaited with bated breath among businesses and governments involved in providing overlapping goods and services. Some aspects of the Tribunal’s decision rejecting UPS’s claims against the Government of Canada, such as the drawing of a distinction between postal services and courier services, deal exclusively with postal industry. However, other aspects of the decision have wider implications. For instance, the Tribunal’s finding that the conduct of Canada Post was commercial and not governmental in nature suggests that governmental services that are operated on a commercial basis may not run afoul of NAFTA requirements. The Tribunal’s finding that the delivery aspect of the PAP was integral to the program and therefore protected under the cultural exemptions of NAFTA suggests that where certain commercial aspects of a service that fall under a NAFTA exemption are considered integral to delivery of the service, these too may be protected by the exemption.

While these findings of the Tribunal may lead to NAFTA governments heaving a collective sigh of relief, the respite could be short-lived. The Tribunal appears to have taken a questionable interpretation of some aspects of the NAFTA, such as the definition of "like circumstances" and the protection of delivery mechanisms under the cultural exemption, and a challenge to other governmental services may not take long in developing. Indeed, the detailed dissenting opinion of Cass provides some insight into the weakness of the Tribunal’s decision, and could be the springboard for future claims.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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