II.3.1.2. The ‘like products’ standard as the relevant comparator
Methanex’s arguments as stated in its reply to the United States’ amended statement of defense are essentially based on the proposition that the GATT-WTO ‘like products’ standard is incorporated in the ‘like circumstances’ requirement. This is understandable since Methanex needs to persuade the tribunal that the appropriate comparison in treatment must be made between Methanex and the American producers of ethanol (a competing product of methanol) and not between Methanex and American methanol producers, who have been equally affected by the measure.76
As a response, the United States argued in its amended statement of defense that “Article 1102 does not set out a “like products” test and, therefore, Methanex’s argument is legally unsound.”77 In further communications with the tribunal, they reaffirmed their position, claiming that the national treatment provision of Article 1102 “does not address discrimination based on the origin of goods” and that all three NAFTA Parties agree “that jurisprudence interpreting provisions governing the national treatment of goods in the GATT is inapposite in ascertaining whether an investor or an investment has been accorded less favorable treatment within the meaning of Article 1102 of the NAFTA” (emphasis in the original).78
Moreover, the United States argues that “such an agreement among all of the Parties to a treaty ‘shall be taken into account’ in the interpretation of the meaning of the treaty’s terms” (footnote omitted).79
II.3.1.3. The ‘treatment’ determines the relevant comparators
In Methanex, the United States sustains that the tribunal must take into consideration the “activities and operations of the respective investments or investors, and the nature of the goods involved and the services provided” and in short “the circumstances in which the treatment is accorded, as indicated by the plain words of Article 1102.”80
This proposition seems to suggest that the ‘in like circumstances’ determination should not be made ‘in abstract’, exploring all the variables under which two investors or investments may be in like or unlike circumstances. Rather, we must look first at the content and scope of the measure and then determine upon these bases, (i) the universe of investors or investments whose circumstances must be compared; and (ii) which comparators become relevant in light of such content and scope. In other words, the treatment determines the relevant circumstances (comparators).
This is consistent with some Chapter 11 decisions. As mentioned before, the tribunal in Loewen dismissed the comparison between the claimants and their competitors and looked for American investors or investments that have been treated more favorable in a judicial procedure similar to that of the claimants. Since the claimant identified none, the tribunal decided that they did not have an example of ‘the most favorable treatment accorded, in like circumstances’ by a Mississippi court to investors and investments of the United States. The tribunal stated:
Claimants submit that the treatment accorded O’Keefe is an appropriate comparator, that Loewen and O’Keefe were “in like circumstances” because they were litigants in the same case. But their circumstances as litigants were very different and it is not possible to apply Article 1102(3) by reference to the treatment accorded to O’Keefe. What Article 1102(3) requires is a comparison between the standard of treatment accorded to a claimant and the most favourable standard of treatment accorded to a person in like situation to that claimant. There are no materials before us which enable such a comparison to be made.81
Therefore, instead of looking at the funeral home and funeral insurance business sector in Mississippi as the relevant universe to determine likeness, the tribunal looked at the universe of litigators who could have been treated as the claimant and who were nevertheless treated more favorably. The O’Keefe’s situation was therefore irrelevant because for instance, they did not file an appeal and consequently they could not possibly have been required to submit an appeal bond or denied a petition for the reduction of such bond.
Similarly, in Marvin Feldman, the tribunal concluded that the claimant was in “like circumstances” with Mexican owned resellers of cigarettes for export, but not with Mexican cigarette producers, notwithstanding that: (i) both categories competed in the cigarette export market (at least they could); and (ii) Mexico adopted measures that discriminated between both –measures which by the way were considered unconstitutional by the Mexican courts. The arbitrators decided:
In the Tribunal’s view, the “universe” of firms in like circumstances are those foreign-owned and domestic-owned firms that are in the business of reselling/exporting cigarettes. Other Mexican firms that may also export cigarettes, such as Mexican cigarette producers, are not in like circumstances. While the Claimant’s Amparo decision held discrimination between producers and resellers of alcohol and tobacco products (at least as to the availability of the 0% tax rate for exported goods) to be unconstitutional, such discrimination is effectively reinstated by the 1998 IEPS law that limits IEPS tax rebates to the first sale, excluding any subsequent purchaser/exporter from the benefit, and has effectively been upheld in the other litigation brought by the Claimant in 1998, also discussed earlier. The Tribunal also notes that Article 1102 says nothing regarding discrimination among different classes of a Party’s own investors.82
Accordingly, the Tribunal holds that the companies which are in like circumstances, domestic and foreign, are the trading companies, those in the business of purchasing Mexican cigarettes for export….83
Shall we interpret this decision as determining likeness entirely on the basis of the categories created by the measures? Did the tribunal conclude that Mexican and foreign resellers were in like circumstances whereas Mexican resellers and producers were not, simply because it decided to look at the measures that discriminated between resellers but not at those which discriminated between resellers and producers? In other words, did the tribunal determine first the existence of differential treatment (as in ‘less favorable treatment’) and secondly ‘like circumstances’ under the bases provided by the categories created by such a differential treatment? We believe that the answer to this questions is no and that the tribunal determined ‘likeness’ first and only then, the existence of ‘less favorable treatment.’ This analysis however, must be looked for in a different section of the award, specifically in that relative to the expropriation issue.
Here then the question arises whether the Parties may manipulate the categories for the ‘like circumstances’ analysis through the discriminating measures themselves. For instance, if the measure recognize and ‘legalize’ a de facto disadvantage for foreign investors or investments, then it would allegedly not be covered by Article 1102 because the investors or investments in question were not in like circumstances when the measure was adopted. Moreover, the measure may accentuate or ‘perpetuate’ such disadvantages. This is a question that has been frontally explored by the GATT-WTO jurisprudence.84 In the NAFTA context however, this question has not been thoroughly discussed. In Pope & Talbot for example the panel recognized that previous measures of Canada had created certain disadvantages for certain players in the Canadian softwood lumber industry. The tribunal also acknowledged that the final allocation of exportation quotas continued these disadvantages. The arbitrators concluded however, that the challenged measure did not “create” the categories of advantaged and disadvantaged investors, but rather that it stuck to it. The tribunal said:
The special nature and character of the new entrant provisions required that allocations be made based upon where the qualified new entrants were located, and their locations were necessarily inconsistent with a tidy percentage distribution among the covered provinces. The effects of the decision to set aside quotas were shaped by those economic factors, but the Regime did not create them. Consequently it cannot be fairly asserted that the Regime accentuated or otherwise enhanced the underlying effects of the economic changes. It was the underlying economics of the softwood lumber industry in Canada that placed the Investment and other and other producers in B.C. in unlike circumstances to those in the other covered provinces….85
Another consequence of using the content and scope of the measure (treatment) to determine the universe of investors or investments whose circumstances must be compared, is that the ‘significant legal connection’ threshold allegedly contained in Article 1101 becomes irrelevant. Indeed, as Methanex noted:
Article 1102’s “like circumstances” requirement serves a key gatekeeper function. It forecloses the possibility that a remote supplier to a damaged producer could establish a national treatment violation. A truly remote supplier is not in like circumstances with a favored producer because remote suppliers do not compete with such producers.86
The point that Methanex seems to miss is that a remote supplier of MTBE producers would be in like circumstances with other remote suppliers of producers producing substitutes of MTBE. Therefore, if we expand the ‘like circumstances’ comparison to that level, remote suppliers could successfully bring an Article 1102 claim, but for the Article 1101 threshold. On the contrary, if we limit the ‘like circumstances’ comparison only to the universe of those investors or investments directly affected by the measure, then indeed a remote supplier would not be in like circumstances with a favored producer.
II.3.1.4. The national treatment clause v. the non-discrimination principle
One point should not be missed. The national treatment requirement as embodied in NAFTA Article 1102 is a non-discrimination provision. However, it only proscribes a certain type of discrimination, namely, that created by a protectionist measure. As we saw earlier, a protectionist measure for the purpose of Article 1102 is that which accords differential treatment to foreign investments or investors in like circumstances based on their nationality. Therefore, the operation of the national treatment clause always requires a comparison between foreign and national investors or investments.
An apartheid measure for instance, according more favorable treatment to Caucasian investors (foreign or nationals) as unreasonable as it is, would not contravene Article 1102 of NAFTA. Similarly, differential treatment between one foreign investors and another foreign investor is irrelevant under Article 1102. Therefore, the non-discrimination principle and the national treatment rule must at all times be distinguished: the latter is a specific kind of the former.
For this reason, whatever comparator is used for the ‘like circumstances’ analysis, it always has to be referenced to the primordial categories nationals and foreigners.
II.3.1.5. The ‘accordion’ of ‘like circumstances’
Using the vocabulary of the WTO Appellate Body,87 the ‘accordion’ of like circumstances may be ‘stretched’ and ‘squeezed’ according to the particularities of the case. Unlawful discrimination is easily detectable for example when under all the comparators but nationality, foreign and domestic investors are identical. However, Chapter 11 tribunals will most likely never be presented with this ‘dream scenario’, nor does Article 1102 seem to require such proximity in circumstances. As one claimant noticed, ‘like’ in Article 1102 means ‘similar’ not ‘identical.’88
More realistically, the panels will have to engage in situations where the circumstances of domestic and foreign investors may be similar and yet not similar enough to trigger an Article 1102 violation. The language used by the panel in GAMI Investments exemplifies this dilemma: “[t]he Arbitral Tribunal has not been persuaded that GAM’s circumstances were demonstrably so “like” those non-expropriated mill owners that it was wrong to treat GAM differently (emphasis added).”89
But if the ‘accordion’ in its most compact form means identical, what would its most expanded version be? It is hard to accept that this limit could be, as one investor suggests, one that admits a comparison between the treatment accorded to the claimant and that “offered to virtually every other person conducting business in the U.S.A.”90
An interesting question is whether the ‘likeness accordion’ in Article 1102 contains something like a most similar investor or investment requirement. Or in the Appellate Body ‘argot’, should the accordion be expanded only up to the limit of the most similarly situated investor or investment? In other words, once the tribunal identifies the existence of two distinguishable categories, one formed by similarly situated investors and another comprising less similarly situated investors, should it limit its analysis to the first category? The United States seems to answer this question in the positive:
The function of addressing nationality-based discrimination is served by comparing the treatment of the foreign investor to the treatment accorded to a domestic investor that is most similarly situated to it. In ideal circumstances, the foreign investor or foreign-owned investment should be compared to a domestic investor or domestically-owned investment that is like it in all relevant respects, but for nationality of ownership. When nationality is the only variable, such a comparison serves the Article’s purpose of ascertaining whether the treatment accorded differed on the basis of nationality of ownership.91
The United States further sustains that adopting a different view would:
[C]ompel a tribunal to ignore the treatment accorded the identical domestic investor and investment and, instead, compare a foreign investor’s treatment to the treatment accorded a less similar group that is in some respects arguably “like” the foreign investor. This reading of Article 1102 would prevent a NAFTA Party from according different treatment to distinct groups of its own nationals whenever an investor or investment of another NAFTA Party forms part of one of those groups.92
II.3.1.6. Whose circumstances?
As Methanex pointed out, the location of the expression “in like circumstances” in the body of Article 1102 bears some relevance.93 It is worth noticing that Article 1102 does not use the expression “investments or investors in like circumstances”, although this is a common interpretation of the ‘like circumstances’ requirement in Article 1102. According to Methanex, this expression qualifies both, the investors or investments and the treatment.
This interpretation raises several interesting questions. If the expression ‘like circumstances’ qualifies both the measure and its recipients, should circumstances such as social values, consumers habits and the political situation of the Party adopting the measure also be incorporated to the ‘like circumstances’ analysis? By observing the circumstances surrounding the measure, may the financial situation of the government or the well-marching of the economy be contemplated as well? Does the deceivingly simple design of Article 1102 incorporate notions as complex as force majeure, ‘acts of God’ or ‘state of necessity’?
II.3.2 Less Favorable Treatment
In relation to the use and interpretation of the less favorable treatment requirement under the ‘alternative comparator’ method, there is not much left to say. The questions are essentially the same under both methods of interpretation and we have already mentioned that under the ‘alternative comparator’ method the order in determining ‘less favorable treatment’ and ‘like circumstances’ has apparently a greater relevance.
One more issue probably deserves comment. The ‘stretching-squeezing’ character of the ‘like circumstances’ requirement may have a direct impact on the threshold of differential treatment. The more like the circumstances are, the less difference in treatment may be needed to establish a breach of Article 1102, and the other way around.
II.3.3. The Rules of Justification under the ‘Alternative Comparator’ Method
The panel in Pope & Talbot established:
Differences in treatment will presumptively violate Article 1102(2), unless they have a rational nexus to rational government policies that (i) do not distinguish, on their face or the facto, between foreign owned and domestic companies, and (2) do not otherwise undermine the investment liberalizing objectives of NAFTA.94
In light of this critical language of the Pope & Talbot decision and considering it in the context of the rest of the award and other Chapter 11 decisions, we believe that in order to demonstrate that a measure is consistent with Article 1102 of NAFTA, a Party must take the following steps.
II.3.3.1. Reasonable relationship with a reasonable policy
Earlier in this paper, we referred to the part of the Pope & Talbot award where the panel expressed its opinion that a formulation focusing on the ‘like circumstances’ question, demands that it be justified by “showing that it bears a reasonable relationship to rational policies not motivated by preference of domestic over foreign owned investments” (emphasis added).95
I interpret this language as meaning that a Party must prove that the difference in treatment is the result of the application of a comparator or set of comparators different to nationality, under which foreign and domestic investors or investments may be considered as pertaining to different categories, in pursuance of a reasonable public objective. In other words, the Party must demonstrate that (i) it has set an objective –different to protectionism– as a matter of public policy; (ii) in pursuance of this objective, the categories of individuals, products, assets, activities, etc. are acknowledged or established, and (iii) that each one of these categories deserves a different treatment.
I believe that the expression ‘reasonable policy’ refers to the first one of these steps, whereas that of ‘reasonable relationship’ relates to the second and third.
The term ‘policy’ necessarily implies the existence of a public objective. Although the word may suggest the idea of a highly elaborated governmental plan, I think that it may include governmental action as simple as building a new road and as complex as undertaking a land reform. Does the expression then mean that the tribunal must engage in assessing the reasonableness of the public objective itself? This issue is reminiscent of the GATT-WTO discussion of the “admissible level of risk.” Unfortunately, this question once again, has not been as explored in the NAFTA jurisprudence as it has been in the GATT-WTO context.
However, as a matter of fact, Chapter 11 tribunals have engaged in the evaluation of the reasonableness and legitimacy of the Party’s policy. In S.D. Myers for example, the tribunal concluded that Canada’s objective “to maintain the ability to process PCBs within Canada in the future” was a “legitimate goal, consistent with the policy objectives of the Basel Convention.”96
Similarly, the panel in GAMI Investments decided that Mexico’s “measure was plausibly connected with a legitimate goal of policy (ensuring that the sugar industry was in the hands of solvent enterprises).”97
In Marvin Feldman, the tribunal concluded that there were some policy objectives that may justify according different treatments to the categories cigarette producers and cigarette resellers.98 However, the tribunal considered that no such objectives existed in relation to foreign and domestic resellers. The panel decided:
[T]here does not appear to be any rational justification in the record for SHCP’s less favorable de facto treatment of CEMSA other than the obvious fact that CEMSA was owned by a very outspoken foreigner, who had, prior to the initiation of the audit, filed a NAFTA Chapter 11 claim against the Government of Mexico. Certainly, the action of filing a request for arbitration under Chapter 11 could only have been taken by a person who was a citizen of the United States or Canada (rather than Mexico), i.e., as a result of his (foreign) nationality.99
Here, the question arises whether there are certain impermissible objectives under Article 1102. Which criteria should be used to determine the reasonableness of the objective? Some goals may be reasonable for the government embracing them and yet be unfair, immoral or even illegal under other Chapter 11 provisions.
The borderline between legitimate and illegitimate objectives is not always clear. For example, in its Article 1128 submission in Methanex –trying to support the position of the United States– Canada expressed its view that providing favorable conditions for ‘starting-up’ business only was a legitimate measure. Canada declared:
If the determination of whether treatment is accorded in “like circumstances” were to be based on a single criterion, it would expand the scope of Article 1102 in manifestly unreasonable ways and conflict with the ordinary meaning of the provision. To give a single example, well-established foreign-owned companies would be entitled to the privileges granted to start-up businesses offering similar products or services in the same sector – privileges granted specifically because they are start-ups.100
As a collateral answer to this remark, Methanex replied:
Moreover, were Canada to give its infant industries “start up” privileges in order to protect it from foreign-owned industries that are directly competitive, that would itself be a violation of Article 1102, unless some specific treaty exemption exists. Thus, Canada’s example is inapposite.101
`This situation raises the question whether the Parties agreed to this second guessing in the use of their police powers or if it should be considered an impermissible limitation of their regulatory autonomy. However, in the absence of a catalogue of ‘legitimate objectives’ and having the need to make Article 1102 operational against disguised protectionism, there seems to be no option but to rely on a ‘reasonableness’ parameter.
Once the existence of a reasonable or legitimate objective has been set, it is necessary to prove that its achievement requires distinguishing between different categories of subjects or objects. For instance, alleging the pursuance of an environmental objective, the United States proceeded to the following categorization in Methanex:
Because of its very potent odor and taste at low levels, widespread MTBE contamination has rendered water sources throughout California undrinkable. MTBE has thus been deemed a threat to public health and the environment. By contrast, ethanol has not been proven to cause, and is not expected to cause, such drinking water contamination (footnotes omitted).102
This step is also subject to the ‘reasonable test’ according to the Pope & Talbot decision. As we have mentioned before, Canada’s categorization among softwood lumber producers was proved reasonable and therefore consistent with Article 1102.103 Indeed the panel determined:
[T]he tribunal finds that the decision to implement the SLA through a regime affecting controls only against exports to the United States from covered provinces was reasonably related to the rational policy of removing the threat of CVD actions. Since the decision affects over 500 hundred Canadian owned producers precisely as it affects the Investor, it can not reasonably be said to be motivated by discrimination outlawed by Article 1102.104
Probably the most interesting step is that which aims at justifying the discrimination; this is to say, that which tries to rationalize the difference in treatment in itself.
For Methanex for example, the categorization and the decision to allocate different treatments to each one of the categories must be based on ‘valid risk assessment.’105 On the contrary, the panel in GAMI Investments was satisfied just with some indications that Mexico’s categorization and allocation of differential treatment seemed rational on its face according to the Mexican government’s perception:
Mexico perceived that mills operating in conditions of effective insolvency needed public participation in the interest of the national economy in a broad sense. The Government may have been misguided. That is a matter of policy and politics…. The arbitrators are satisfied that a reason exists for the measure which was not itself discriminatory. That measure was plausibly connected with a legitimate goal of policy (ensuring that the sugar industry was in the hands of solvent enterprises) and was applied neither in a discriminatory manner nor as a disguised barrier to equal opportunity” (emphasis added).106
Similarly, in The Matter of Cross-Border Trucking Services the tribunal concluded:
Accordingly, the Panel determines that in connection with investments by Mexican nationals in U.S. companies established to provide trucking services for the transportation of international cargo between points in the United States, no circumstances exist that would justify differential treatment from U.S. (or Canadian) investors and investments under NAFTA's Chapter Eleven national treatment and most-favored-nation obligations.107
Finally, we must ask whether this final step embodies a ‘least restrictive measure’ requirement. This may be apparent from the S.D. Myers decision. There, Canada’s defense collapsed precisely in the evaluation of this step. The panel decided:
CANADA was concerned to ensure the economic strength of the Canadian industry, in part, because it wanted to maintain the ability to process PCBs within Canada in the future. This was a legitimate goal, consistent with the policy objectives of the Base1 Convention. There were a number of legitimate ways by which CANADA could have achieved it, but preventing SDMI from exporting PCBs for processing in the USA by the use of the Interim Order and the Final Order was not one of them. The indirect motive was understandable, but the method contravened CANADA’s international commitments under the NAFTA. CANADA’s right to source all government requirements and to grant subsidies to the Canadian industry are but two examples of legitimate alternative measures. The fact that the matter was addressed subsequently and the border re-opened also shows that CANADA was not constrained in its ability to deal effectively with the situation.108
This position has been seconded by subsequent claims. In Methanex for example, the claimant argued that:
[T]he suitability of a measure to its purported purpose will shed light on whether the measure was based on some improper motive. Evidence that a better solution was available, but not implemented, can indicate the presence of
illicit intent (footnotes omitted).109
A question arises however, is it possible that Article 1102 requires step one and two but not step three? If it is determined that there was a legitimate objective, that the achievement of this objective required certain categorization and that under this categorization the investors or investments in question fell within different categories, should a panel still proceed to the analysis of whether the measure was the least restrictive? If the respondent proves that the investors or investments belong to different categories, should it also prove that the treatment accorded to these different categories is the least restrictive in order to achieve the alleged objective? As the Government of Canada has expressed: “[t]he expression ‘in like circumstances’ is in Article 1102 to make it clear that all treatment accorded in unlike circumstances is to be disregarded.”110
What is undeniable is that new Chapter 11 claims have incorporated the language and method of the Pope & Talbot decision.111
Finally, the ‘reasonableness test’ brings about the question: in determining reasonableness for the purpose of Article 1102, may the tribunals look at the reasonable standards developed in the customary rules on treatment of aliens. And if this is so, what would the difference be between a violation of Article 1102 and Article 1105?
II.3.3.2. Consistency with the investment liberalizing objectives of NAFTA
I believe that the Pope & Talbot panel’s reference to the consistency with the liberalizing objectives of NAFTA aimed at addressing the enforcement of the measure, rather the design of it.
It is doubtful however, that such a broad and consequential requirement may be incorporated into the mechanics of Article 1102 without express normative support. It might be expected that such an adventurous movement would ultimately follow the fate of the Metalclad panel’s decision on the application of the transparency objective to the Article 1105 evaluation.