Chevron Soundly Defeated In The Second Circuit: Chevron Corp. v. Naranjo

Member of the Cofán Dureno community in northern EcuadorWhat a film this will make someday!

The Second Circuit handed Chevron a major defeat today in its efforts to avoid enforcement of the multi-billion dollar judgment against it in Ecuador and vindicated the international comity concerns that have been at the heart of the criticisms I and many others have leveled at Judge Kaplan’s preliminary injunction. First, a little background for those who haven’t been following along, and then a quick analysis of the decision.

Background

Inhabitants of Lago Agrio came to the United States years ago to seek to hold Chevron liable for massive environmental contamination that its predecessor in interest, Texaco, allegedly had caused. Chevron spent years persuading the courts—successfully, as it turned out—to dismiss the case under the doctrine of forum non conveniens. Ecuador, it said, was the convenient forum. Ecuadoran justice was fair and impartial, and the Ecuadoran courts could readily handle the case. You get the idea.

When a judge in Ecuador awarded the Lago Agrio plaintiffs billions of dollars in damages, Chevron returned to the United States, telling a different story about Ecuadoran courts. To be fair, Chevron claimed that it’s story hadn’t changed—Ecuador’s courts had changed, and for the worse. According to Chevron, the Ecuadoran proceedings were corrupt and unfair. Rather than waiting for the Lago Agrio plaintiffs to try to enforce their judgment in the United States, Chevron went on the offensive, filing a lawsuit of its own in New York and seeking a declaration that the judgment was unenforceable. Chevron sought more: it sought a preliminary injunction forbidding the Lago Agrio plaintiffs from seeking to enforce the judgment anywhere in the world.

Judge Kaplan saw merit in Chevron’s claims and issued the injunction, which as far as I know was unprecedented. I’ve criticized it here on Letters Blogatory on several occasions. The Lago Agrio plaintiffs appealed, and the Second Circuit vacated the injunction. But nothing much happened for a time, because the case was still on appeal in Ecuador.

But now the Ecuadoran appellate court has affirmed the judgment (Chevron has appealed to Ecuador’s National Court of Justice). Chevron unsuccessfully tried to revive its preliminary injunction. The Second Circuit rebuffed its effort without written opinion, leaving the field clear for the Lago Agrio plaintiffs to begin seeking to enforce their judgment. Today the Second Circuit went further, holding, in a lengthy opinion, that not only was Chevron not entitled to a preliminary injunction; it could not seek declaratory relief at all. The Second Circuit remanded the case to Judge Kaplan with instructions to dismiss the claim for declaratory relief.

The Decision

The overall Chevron/Ecuador litigation, here and in Ecuador, and in international arbitral tribunals, is enormously complicated. But the Second Circuit’s decision boiled down to one issue: does the Uniform Foreign Money Judgments Recognition Act authorize a court to declare, on the suit of the judgment debtor, that a foreign judgment is unenforceable ? Or does the UFMJRA instead require the court to wait until the judgment creditor seeks recognition and enforcement of the judgment, at which time the judgment debtor can raise arguments about enforceability as affirmative defenses?

The court held that a judgment debtor such as Chevron cannot preemptively sue to seek to avoid enforcement. Why? Because the statutory scheme is intended to provide for the generous enforcement of foreign judgments, not to frustrate enforcement.

Chevron would turn that framework on its head and render a law designed to facilitate “generous” judgment enforcement into a regime by which such enforcement could be preemptively avoided.

The court then turned to what I think is the heart of the matter: comity. Although the parties conceptualized the injunction as an anti-suit injunction in their briefs, citing cases such as China Trade & Dev. Corp. v. M.V. Choong Yong (2d Cir. 1987), which sets out the test for anti-suit injunctions, the court didn’t regard that framework as particularly relevant here. Anti-suit injunctions are aimed at regulating the “race to the courthouse” in multiple fora. Here, though, the Lago Agrio plaintiffs have already taken the case to judgment. Chevron seeks an anti-enforcement injunction, not an anti-suit injunction. And in that context, the comity concerns are, in the court’s view, grave.

[T]he court risks disrespecting the legal system not only of the country in which the judgment was issued, but also those of other countries, who are inherently assumed insufficiently trustworthy to recognize what is asserted to be the extreme incapacity of the legal system from which the judgment emanates. The court presuming to issue such an injunction sets itself up as the definitive international arbiter of the fairness and integrity of the world’s legal systems.

Here the court recognizes what I have long argued is the key point: if the Ecuadoran courts are as bad as Chevron says they are, why does a U.S. court need to enjoin enforcement elsewhere? Why shouldn’t we trust foreign courts to come to the same conclusion? The worse Chevron paints the Ecuadoran courts to be, the weaker its claim for an injunction, it seems to me.

Chevron’s best point, in my view, is that it is just doing what parties do all the time in US civil procedure—seeking a declaration of its rights once a real dispute has arisen rather than waiting for the other party to sue it. The Declaratory Judgment Act provides:

In a case of actual controversy within its jurisdiction … any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such.

According to the court, the Act is merely procedural and does not create any cause of action. Since the UFMJRA doesn’t create a cause of action permitting a preemptive claim that a judgment is unenforceable, it does not permit the relief Chevron seeks.

I don’t really get the force of this argument. Parties raise affirmative defenses that are not necessarily causes of action in their own right all the time. For example: A. threatens to sue B. for breach of contract, and B. sues for a declaration that it has no liability because A. had previously granted B. a general release. There’s no cause of action for “release”. It’s an affirmative defense. But it’s a perfectly good basis for a declaratory judgment action, or so it seems to me.

Still, the comity point is, in my mind, so overwhelmingly strong that I think the Second Circuit came to the right decision, at least with regard to the injunction.

Photo credit: Caroline Bennett / Rainforest Action Network

About Ted Folkman

Ted Folkman is a shareholder with Murphy & King, a Boston law firm, where he has a complex business litigation practice. He is the author of International Judicial Assistance (MCLE 2d ed. 2016), a nuts-and-bolts guide to international judicial assistance issues, and of the chapter on service of process in the ABA's forthcoming treatise on International Aspects of US Litigation, and he is the publisher of Letters Blogatory, the Web's first blog devoted to international judicial assistance, which the ABA recognized as one of the best 100 legal blogs in 2012, 2014, and 2015.

6 thoughts on “Chevron Soundly Defeated In The Second Circuit: Chevron Corp. v. Naranjo

Leave a Reply

Your email address will not be published. Required fields are marked *