Unocal Court Loss Bodes Ill for Other Energy Firms, Industry

Abstract: Petroleum companies, and every company that operates overseas, should pay close attention to an important case involving Unocal and its legal responsibility for alleged human rights abuses in Myanmar (formerly Burma).

Analysis: While not quite the sword of Damocles hanging directly over the heads of petroleum companies by a single strand of horse hair, the Alien Tort Claims Act remains a weapon that can be used by opponents of the energy industry.

Unfortunately for the oilpatch, a U.S. court in San Francisco earlier this week refused to dismantle the legal catapult that allows critics to lob attacks on energy companies that have little control over conditions in foreign countries.

One of the United States' earliest laws that dates back to 1789, the Alien Tort Claims Act, was originally passed to prevent pirates from setting up a safe haven in the still-young country.

The little-used legislation was ignored for decades. However, in 1980, a U.S. Court awarded over $10 million to the family of a Paraguayan human rights activist who had been tortured by a Paraguayan police inspector who had subsequently moved to the United States. (The $10 million was never collected.) The result has been an avalanche of claims against dozens of U.S. companies operating in countries with less-than-pristine records of respecting human rights.

None have yet made it to trial, but this could soon change. Unocal Corp. was unsuccessful in asking a panel of 11 judges from the Ninth U.S. Circuit Court to dismiss actions launched on behalf of indigenous farmers in Myanmar (Doe I v. Unocal Corp., 00-56603).

Two lawsuits, originally filed in 1996, allege the El Segundo, Cal.-based oil company was complicit in extremely serious crimes, including slavery, murder, and rape, in the country formerly known as Burma.

The farmers allege the violations were performed by members of the Southeast Asian nation's military, which provided security and other services to Unocal during building of the Yadana natural gas pipeline in the mid-1990s. The $1.2 billion line connects an offshore gas field to Thailand, and it is operated by a partnership that includes Myanmar's government, Unocal, France's Total SA, and Thailand's PTT.

The case was tossed from the federal court in 2000, but last September a three-judge panel from the appeals division overturned the decision. It ruled a jury should be allowed to hear the lawsuits and decide if Unocal was liable for "aiding and abetting" the alleged human rights violations.

Make no mistake, Myanmar is a world-class abuser of human rights. It has been condemned numerous times by the United Nations, and years of intermittent house imprisonments of Nobel laureate Aung San Suu Kyi by the government have rightly garnered global condemnation.

There can be no defending the military junta running Myanmar, a leading producer of heroin smuggled into the United States. However, it may be unfair to hold Unocal responsible for human rights violations committed by foreign nationals over whom it allegedly has no control.

Lawyers for Unocal argued the Alien Tort Claims Act is being misapplied, a position that President George W. Bush's administration endorses.

Nothing in the act "suggests an intent on the part of Congress that it would furnish a foundation for suits based on conduct occurring within other nations," the Justice Department said in a brief filed to support Unocal.

After discussions on whether to apply standards established by the Nuremberg trials for firms using Nazi slave laborers following the Second World War, the 11-judge panel agreed to rehear the case.

A key issue will be which legal principles--international (which recognize human rights) or U.S. common law--take precedence. It could take up to a year for a judgment to be issued. The case will likely be a landmark for multinational companies, whether they are in the petroleum, mining, or other industries, since it will help define laws surrounding globalization.

Energy firms following the Unocal proceedings with great interest include Talisman Energy, ExxonMobil, and ChevronTexaco. All three face lawsuits brought by opponents using the Alien Tort Claims Act.

The lawsuit against Calgary-based Talisman stems from its four-year participation in a multibillion-dollar oil project in Sudan. A brutal, decades-long civil war has killed or displaced millions of citizens in the African nation, one of the poorest in the world.

The Canadian company's experiences provide vivid evidence of why the appeals court could have dismissed the lawsuits against Unocal without muzzling or disarming opponents.

Critics of the Sudanese project put intense pressure on professional money managers such as TIAA-CREF, America's largest pension fund, to dump their holdings of Talisman stock. They stacked Talisman's annual meetings with Sudanese refugees, whose colorful costumes and tear-laced questions made for great television footage.

Talisman eventually got tired of the hassle and the 10 to 20 percent discount, according to some analysts' estimates, that it had on the stock price. The company earlier this year sold its 25 percent interest in the Greater Nile project for $770 million, even though Sudan was one of the firm's most profitable assets and had upside exploration potential.

A similar publicity campaign is being waged against U.S. retailers who sell clothes made in Myanmar. Companies such as Wal-Mart, Federated Department Stores, and Saks have listened to consumers shopping with their feet, one reason why apparel imports from the Southeast Asian country dropped 26 percent last year to $303 million, compared with $411 million in 2001.

If opponents of Unocal are successful, it creates a potential nightmare of confusion from overlapping jurisdictions. Applying one country's law to another sovereign nation is fraught with peril, demonstrated by ongoing discord between Canada and the U.S. A Canadian selling water purification units to Cuba was convicted last April of violating the United States' 42-year-old trading ban with the communist nation. (A federal court judge in Philadelphia this week ordered a new trial for the salesman, James Sabzali, because of fears he did not receive a fair hearing.)

In addition, a loss by Unocal could compromise the Bush administration's efforts to fight international terrorism. For example, some prisoners captured in Afghanistan and now being held in Guantanamo Bay are invoking the law against the U.S. government.

Energy companies active in countries like Myanmar certainly have an obligation to be very informed about local conditions. They must to do their best to ensure that Western standards for human rights are respected--turning a blind eye is not acceptable. Company executives should be accountable if they ignore or cover up violations committed by employees or contracted suppliers.

If investors and consumers are unsatisfied with firms that invest in nations with known questionable standards of morality, let them show their concern by pulling their money or business. This is the quickest and most effective way of prompting change--just ask Talisman's senior managers. Trying to use an obscure law in ways it was never intended is undermining justice, not enhancing it.