Multinational companies doing business in the United States run a growing risk of being sued in the US courts for such things as human rights violations and environmental damage caused in other countries.

This fall, a federal appeals court in New York allowed a class action lawsuit to proceed in the US courts against Royal Dutch Petroleum Company of The Netherlands and Shell Transport and Trading Co. Plc of the United Kingdom – which together control the Royal Dutch Shell Group of Companies – alleging human rights violations in connection with the Group’s oil and gas exploration and production operations in Nigeria.

Also this fall, a class action lawsuit was filed in federal court in San Francisco against Rio Tinto Plc of the United Kingdom and its sister company in Australia alleging liability for environmental damage caused by a subsidiary’s copper mining operations in Papua New Guinea.

Alien Tort Claims Act

The legal basis for these lawsuits is the “Alien Tort Claims Act,” which was enacted by the first US Congress in 1789 and provides that “The district courts shall have original jurisdiction of 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.” “Tort” is a legal term meaning a harm done to another person.

Although the Alien Tort Claims Act has been on the books for over two hundred years, it has been described by one federal judge as “an aged but little-noticed provision of the First Judiciary Act,” and as “mostly ignored since its enactment in 1789” by another.

The original purpose of the Alien Tort Claims Act remains the subject of controversy, with some scholars suggesting that its sole purpose was to provide redress for a problem of the times: torts committed by pirates when stopping and boarding vessels at sea. Yet, in the last several years, the Alien Tort Claims Act has found a new lease on life. Initially used in the area of human rights – it served as the basis in 1995 for a landmark decision by a US appeals court allowing Bosnian torture victims to bring a civil action in the US against Serbian strongman Radovan Karadzic – it is now also being used in the hands of activists intent on holding multinational corporations liable in tort for their international operations.

Although other industries have also been targeted under the Alien Tort Claims Act – in 1999, several retail and clothes manufacturers settled a billion dollar claim for unethical labor practices filed on behalf of a class of some 50,000 garment workers in Saipan – it is undoubtedly multinational corporations in the oil and gas industries and the natural resources mining industries that have been feeling the brunt of this trend and that are facing the most highly publicized and potentially damaging claims.

Proceedings have been brought against Freeport-McMoran alleging liability for environmental damage stemming from the company’s open pit copper, gold and silver mining operations in Indonesia. The case was dismissed in 1999 on procedural grounds.

Another case filed in federal court against Unocal alleged liability for human rights violations in connection with the Yadana gas pipeline project in Myanmar (Burma). In 1999, the federal court hearing the case denied a motion for class certification following two earlier decisions in which it declined to dismiss the proceedings against Unocal, but held that it had no jurisdiction over the other partners in the project, Total of France and a Myanmar state-owned enterprise, or over the presiding military regime.

Proceedings are also pending against Chevron alleging liability for human rights violations in connection with its operations in Nigeria, and against Texaco alleging liability for environmental damage in Ecuador and Peru.

Each of the companies involved in these cases has vigorously defended itself. So far, none of the cases has led to a decision against the company. Nonetheless, the potential liability must be a source of concern from a financial and business reputation perspective, not to mention the drain on management resources that would otherwise have gone into productive operations rather than time-consuming and costly legal action.

Due Diligence Issue

The threat of class action lawsuits in the United States may speed a trend among large oil, gas and mining companies to view the environmental and social aspects of their international operations as a direct “bottom line” factor and, therefore, an integral part of the business decision-making process, rather than just one of several other, perhaps ancillary, considerations.

It should also serve as a reminder to these companies and their shareholders of the need to include environmental and social conduct in international operations as part of standard due diligence in acquisition and other corporate transactions.

A case in point is the merger announced in October between Chevron and Texaco. Both companies are the subject of separate class action lawsuits based on their international operations. Earlier this year, a federal court in San Francisco allowed a suit brought by several California lawyers representing Nigerians to proceed against Chevron. The plaintiffs allege human rights violations by a Chevron subsidiary operating in Nigeria. Also earlier this year, a federal court in New York declined to dismiss a case brought on behalf of indigenous Amazon rainforest people against Texaco alleging liability for environmental damage caused by a Texaco subsidiary’s oil exploration and production operations in Ecuador and Peru. Clearly, representatives of both companies will need to undertake the necessary due diligence to assess the potential exposure and its implications for the proposed merger, and shareholders will need to factor it into the decision whether to merge.