The Alien Tort Claims Act and Other Reputational and Financial Risks Arising in Connection With Overseas Corporate Conduct

In April, two different U.S. district courts ruled that corporations must stand trial for alleged complicity in the murder of union leaders in Colombia by paramilitaries in violation of international human rights law.

Both cases were brought under the Alien Tort Claims Act (ATCA). In one case, a U.S. district court in Miami ruled that Coca-Cola bottlers in Colombia must stand trial in a case alleging that paramilitary groups working as agents for the bottlers murdered a trade union leader. In the other case, the U.S. District Court in Northern Alabama held that Drummond Corporation, its chief executive officer, and its subsidiary responsible for its Colombia operations must stand trial for alleged complicity with paramilitaries in the murder of three union leaders and the violation of the "fundamental rights to associate and organize."

In addition, an ATCA action has been initiated against a number of U.S. and foreign companies, including banks, petrochemical and mining companies, and automotive manufacturers, for actions allegedly in support of the apartheid regime in South Africa.

Passed by the first U.S. Congress in 1789, the ATCA provides a federal cause of action for violations of international law. Plaintiffs are bringing ATCA claims against multinational corporations for their alleged complicity in human rights abuses committed in connection with their operations outside the United States.

Responding to a perceived proliferation of such cases, trade associations in Washington are quietly seeking to amend the ATCA to limit its use against corporations.

Even if the ATCA is amended, multinational corporations will continue to face legal liability as activist groups intensify their efforts. In addition, boycott campaigns, negative publicity, and shareholder and pension fund scrutiny may pose risks to corporations for certain kinds of overseas activities. Managing the risk of litigation and other techniques used by activist groups in the United States will become increasingly important for multinational corporations.

The ATCA grants federal district courts original jurisdiction over "any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States." This statute remained largely dormant until members of a Paraguayan family filed suit under the ATCA against a former Paraguayan police inspector living in Miami for the torture and death of their relatives. The Second Circuit held that torture under color of official authority violates the "law of nations" and that jurisdiction under the ATCA was proper.

In 1996, plaintiffs began bringing ATCA cases against multinational corporations for alleged human rights violations stemming from their operations in developing countries. Unocal was the first corporation targeted by a lawsuit filed under the ATCA. Burmese villagers alleged that Unocal was liable for complicity in human rights violations such as torture, forced labor, rape and forced relocation committed by the Burmese military in connection with the construction of an oil pipeline in Myanmar. In reversing the district court's dismissal of the case on Unocal's motion for summary judgment, the Ninth Circuit ruled that if the plaintiffs were to prove their allegations at trial, the company could be held liable under the ATCA. The case is scheduled for trial in June.

The Unocal case sparked what has become a long list of cases filed under the ATCA against corporations for alleged complicity in human rights violations. Although the "law of nations" typically applies to sovereign governments and international institutions, U.S. federal courts have held that private companies can be held liable for a violation of the "law of nations" where they have acted in complicity with individuals or groups operating under "color of law."

To date, no corporation has been held liable under the ATCA, and most cases have been dismissed at early stages due to various deficiencies in the claims. The only ATCA suits that have thus far been concluded successfully have been those brought against former foreign government officials or agents alleged to have committed acts of torture. Although no corporation has been held liable yet under the ATCA, groups representing the U.S. business community are very concerned about the increasing frequency with which ATCA lawsuits are filed and the associated expense and reputational harm to corporations facing such lawsuits. Adding to this concern is the expansive way in which recent federal court decisions interpret the applicability of the ATCA.

In Estate of Valmore Lacarno Rodriquez v. Drummond Company, Inc., which issued from the Northern District of Alabama, the court found that a failure to respect the "fundamental rights to associate and organize" could constitute a violation of the "law of nations" for purposes of the ATCA. No prior federal court decision had extended the applicability of the ATCA to such norms.

The Drummond opinion also applies agency principles in an expansive way. The court accepted the plaintiffs' argument that paramilitaries that allegedly murdered three trade union leaders in Colombia could be shown to be agents of the defendant - a U.S. mining company, its CEO, and its subsidiary responsible for its Colombia operations. The court held that, if proven, this allegation could be sufficient for a jury to conclude that the defendants acted in conjunction with the paramilitaries in committing the murders. This holding then allowed the court to hold that the laws of war apply to the defendant companies and CEO, because under international law paramilitary groups are subject to the laws of war as if they were members of a national army. Moreover, the opinion does not say that this conclusion would be dependent upon whether the paramilitaries acted within the scope of their agency.

In another recent case, Sinaltrainal v. Coca-Cola Company, the plaintiffs alleged that the manager of a Coca-Cola bottler in Colombia conspired with paramilitaries that murdered a trade union leader employed by the bottler. The complaint also alleged that under Coca-Cola's agreement with the bottler, Coca-Cola U.S.A. had "control over all aspects of the bottling operation . . . including labor policies and employee security." The court found that nothing in the agreement gave Coca-Cola U.S.A. the right, obligation or duty to control the labor policies or ensure employees" security at the bottler's facilities. The court's careful treatment of this allegation, however, suggests that if provisions granting such control to Coca-Cola had been included in the agreement with the local bottler, such provisions might have been sufficient to establish that Coca-Cola conspired or acted jointly with the paramilitaries that murdered the union leader. The court dismissed the case against Coca-Cola U.SA. and Coca-Cola Colombia, but ruled that the local bottlers must stand trial.

Anxious to stem activist groups' liberal use of the ATCA for the purpose of suing corporations in U.S. federal courts for abuses allegedly committed in connection with their operations in foreign jurisdictions, several business organizations are considering seeking legislation that would limit the use of the ATCA as a basis for suing corporations in the United States and have quietly begun discussions on the issue with congressional lawmakers and staff.

Other Sources of Reputational and Financial Risk Even if efforts to limit the ATCA succeed, multinational corporations will continue to face perhaps greater financial and reputational risks under other legal theories, legislative initiatives, and market-based techniques by various activist groups.

• Vicarious Liability Under Traditional Tort Law. In addition to a federal suit under the ATCA, Unocal was sued in California state court in 2000 in connection with the human rights abuses allegedly committed by the Myanmar military during the construction of a Unocal pipeline. The plaintiffs alleged that Unocal and the Myanmar government were joint venture partners in the pipeline project, such that Unocal is vicariously liable for the acts of the Burmese military. In June 2002, the California Superior Court applied California state law rather than Myanmar law as the standard against which the alleged conduct would be judged, and held that Unocal must stand trial. The case is set to go to trial in December 2003.

• State Unfair Trade Practices Laws. In April, the U.S. Supreme Court heard oral argument in connection with a suit filed against Nike in California state court alleging that Nike's public relations campaign, which denied that Nike underpaid workers, operated factories in violation of local health and safety laws, and ran sweatshops in Southeast Asia to make its athletic shoes, was misleading advertising under California's unfair competition law. Nike has claimed that its statements in this regard are protected under the First Amendment and thus cannot serve as the basis for the lawsuit. The U.S. Supreme Court is expected to issue a ruling by the end of June. If Nike's constitutional argument is rejected, prior decisions from California's courts indicate that Nike will likely face a trial on the claim.

• Transparency and Reporting Initiatives. In recent years, there has been a dramatic increase in efforts to hold corporations accountable for the effects of their overseas activities through transparency and reporting initiatives. In some cases, the misdeeds with which the activist groups are concerned may not even be those of the multinationals that are targeted with the transparency campaign. For example, following press reports that U.S. chocolate products were being made from cocoa beans harvested by child slave labor, human rights advocacy groups sought U.S. legislation that would have required U.S. chocolate manufacturers to label their products to indicate that they may have been made from cocoa beans harvested by slave labor. This campaign focused on U.S. chocolate manufacturers even though the reports of slave labor came as a great surprise to the companies, which simply purchase cocoa beans from brokers in New York and London. (Hoping to head off this legislation, a major U.S. chocolate manufacturer hired Piper Rudnick to help craft an industrywide solution. Piper Rudnick worked with a coalition of U.S. chocolate manufacturers, non-governmental advocacy groups, and members of Congress and the State Department to develop an aggressive program for improving labor conditions in cocoa-producing regions with the involvement of industry, advocacy groups, and public agencies.)

• Ratings by Financial Advisors and Shareholder Actions. A growing number of firms are providing investment rating services that take into account issues of corporate responsibility such as companies' social and environmental policies. Corporate social responsibility rating agencies include Innovest Strategic Value Advisors, based in New York, KLD Research & Analytics, based in Boston, and Oekom Research, based in Munich. There are also a growing number of investment funds that choose their holdings on the basis of companies' practices with respect to human rights, labor rights, and environmental protection. Domini Social Investments, for example, seeks to avoid investing in companies that are involved in international labor disputes and that purchase materials from sweatshops.

• Consumer Boycotts and Initiatives. Boycotts and protests continue to be used as additional market-based techniques that activist groups employ to pressure companies engaged in activities to which these groups object. For example, in March, as part of Greenpeace's "Stop Esso" campaign, activists climbed onto the roof of ExxonMobil's UK headquarters in protest of the company's international environmental policies. Other "Stop Esso" activists dressed as tigers and chained themselves to gas pumps, forcing the closure of approximately 100 Esso stations. In another example, a recent boycott of Taco Bell protests the low wages paid to workers harvesting tomatoes. This boycott, which targeted Taco Bell only because the franchises are among the largest purchasers of tomatoes, was endorsed in March by various coalitions of farmers.

Companies operating overseas will, of course, be subject to civil and criminal jurisdiction in host countries. U.S. parent companies will endeavor to insulate themselves against the liabilities of their overseas or special-purpose subsidiaries operating overseas; however, such insulation may not be effective. For example, almost 20 years after a disaster at a pesticide plant in Bhopal, India, Dow Chemical continues to face protests by activist groups and pressure from survivors to assume liabilities and responsibility for the accident. In February 2001 Dow acquired Union Carbide, which was a 50.9 percent owner of Union Carbide India Limited (UCIL), the company that operated the pesticide plant. On December 3, 1984, gas leaked from a tank at the plant, releasing toxins into the atmosphere and causing residents of the area to suffer injuries ranging from temporary disabilities to death. In 1991 the Supreme Court of India affirmed a $470 million settlement and requested that Union Carbide and UCIL fund the capital and operating costs of a hospital in Bhopal for eight years at an additional cost of approximately $17 million. In a development of great concern to multinationals, criminal proceedings were subsequently initiated in Bhopal District Court against Indian officials of UCIL and also against Union Carbide and Warren Anderson, Union Carbide's chairman at the time of the accident. Activist groups continue to campaign for Anderson's extradition so that he may face trial in India.

Another example is the $ 1 billion lawsuit against ChevronTexaco that was filed in early May in Ecuador on allegations that ChevronTexaco's subsidiary dumped oil-contaminated water into unlined pits, rivers, and estuaries in Ecuador, destroying sources of drinking water and causing serious health problems in the area. Although Texaco, which was acquired by Chevron in 2001, was successful in obtaining a dismissal of related ATCA actions that had been filed earlier in the Southern District of New York, the Second Circuit affirmed the dismissal taking into account that ChevronTexaco consented to be subject to suit in Ecuador in connection with the actions of its subsidiary. It remains to be seen whether the Ecuador court will hold ChevronTexaco liable for the actions of it subsidiary and how an award from the court in Ecuador will be treated if enforcement of the award is sought in the United States.

As these cases suggest, activist groups filing suits alleging corporate abuses tend to sue parent companies in addition to, or instead of, the subsidiaries directly involved in the operations giving rise to the allegations. Note also that in these examples, ChevronTexaco and Dow Chemical must contend with legal disputes stemming from activities undertaken by subsidiaries of companies they acquired years after the conduct in question took place.

The ATCA is generating increasing concern among members of the U.S. business community. Even so, multinational corporations face potentially greater risks from claims based on other grounds of legal liability, and from vigorous legislative and market-based initiatives being led by a number of activist groups.

Even if legislation is passed that would limit the applicability of the ATCA to governments and government officials, nonetheless it will remain increasingly important for multinational corporations to limit their exposure under other legal theories both in the United States and abroad, and to minimize the likelihood that activist groups will seize upon and publicize aspects of their conduct that are perceived to fall short of global standards for corporate responsibility. These steps should include, at a minimum, a risk identification process with respect to legal and market-based risks, and a thorough compliance program, implemented throughout all of the company's international operations, designed to limit and manage all identified legal and reputational risks in a coordinated way. Indeed, it is prudent for companies to address these risks in the broader context of the company's overall compliance program for international activities, as is highlighted by the legal problems faced by the defendant Coca-Cola bottlers in the Sinaltrainal case described above. The same activist group that brought the ATCA lawsuit is urging that the defendant bottlers face criminal prosecution in the United States under the U.S.A. Patriot Act for allegedly providing material support to paramilitary groups that have been designated as foreign terrorist organizations. Should such a criminal investigation go forward, it could present legal or reputational risks to Coca-Cola, as well as its Colombian bottlers.

As companies work to manage their reputations and to control legal risks, they sometimes find their marketing advisors recommending campaigns that address reputational issues, but at the same time make claims that actually increase legal risks; indeed, the claims may even serve as a basis for a legal action, which in turn may generate an unintended negative impact upon the company's reputation. Conversely, some legal advisors approach these issues only with mechanisms intended to be protective in a possible future litigation, which approach may be insufficiently sensitive to the Company's need to be proactive in protecting its reputation. As multinationals endeavor to manage the legal and reputational risks arising in connection with their international activities, these companies are finding that the most successful strategies are those that manage these risks in a more comprehensive and integrated way.