Case of the Day: Chevron v. Donziger
Posted on August 9, 2016
Steven Donziger, the Lago Agrio plaintiffs’ US lawyer, was caught on tape telling members of his litigation team: “Facts do not exist, facts are created.” What does that mean? There’s the nefarious interpretation of course—lawyers should make up the facts they need to win a case, without regard to what’s true. Everyone should reject that idea. But there’s another interpretation: the facts of a case are what the finder of fact finds that they are. Everyone knows that judges and juries can make mistakes. But when a court renders a judgment, it is based on the facts that the fact-finder found, 1 and those findings of fact, within limits, are conclusive even if mistaken. This truism might go a long way toward explaining the outcome of the Second Circuit’s long-awaited decision in Chevron v. Donziger, which affirmed Judge Kaplan’s judgment in favor of Chevron on all points.
Because the Second Circuit decision is such a milestone in the case, I am going to repeat some of what I wrote in an earlier backgrounder, with some modifications, to bring you up to speed on the overall dispute.
- What is the overall dispute about?
- What happened in the Ecuadoran courts?
- What happened in the District Court?
- What other litigation is pending?
- What did the Second Circuit decide?
- What happens next?
What is the overall dispute about?
Beginning in the 1960s, a subsidiary of Texaco, the American oil company, explored and drilled for oil in the Oriente region of Ecuador, in the northeast of the country. While parts of Ecuador are mountainous, the Oriente is in the lowlands, part of the Amazon rainforest and, especially at the time, undeveloped and still home to many of its indigenous inhabitants, including the Huaorani and the Cofán. Texaco was part of a joint venture with PetroEcuador, the Ecuadoran state-owned oil company. The joint venture lasted to 1992.
There’s no question but that the Texaco/PetroEcuador joint venture led to oil pollution in the Oriente. The scope of the pollution and its effects on the environment and on the inhabitants of the region are sharply disputed, as is the attribution of legal fault, but the fact that pollution and contamination occurred is not.
In 1993, Maria Aguinda and other residents of the Oriente brought a putative class action against Texaco in the Southern District of New York. Aguinda and the others pleaded a claim for relief that would be familiar to any American lawyer: Texaco, they claimed, had been negligent, had caused a public and private nuisance, had trespassed on their land by discharging oil onto it, and had violated customary international law, among other things. The Aguinda case resulted in dismissal under the doctrine of forum non conveniens, which the Second Circuit affirmed in 2002. Forum non conveniens, for the unintiated, is a doctrine, of somewhat uncertain provenance, under which a court will dismiss an action even though it has jurisdiction and even though it is a proper venue if (put very loosely) trial in the chosen forum would be seriously inconvenient and there is another, superior forum available.
Texaco’s victory at this stage in the case would come back to haunt it. One of the considerations in a forum non conveniens case, is the adequacy of the alternate forum. Here is what Texaco had to say about the Ecuadoran courts when it was trying to get the Aguinda case dismissed. I quote at some length because this is such a key point:
Ecuador’s Government is a constitutional democracy with executive, legislative, and judicial branches. Its judicial branch, headed by the Supreme Court, includes special purpose courts and lower courts, which use a Civil Code based on Roman law. Thus, Ecuadorian legal norms are similar to those in many European nations. Ecuador’s Constitution guarantees due process and equal protection, and its courts provide important procedural and substantive rights, as former Supreme Court Justices of Ecuador, jurists, and practicing lawyers informed the District Court in affidavits.
* * *
In response to the District Court’s January 31, 2000 Memorandum Order, the parties submitted evidence concerning the independence and impartiality of Ecuador’s judiciary following the short-lived coup in January 2000. That evidence further proves that Ecuador provides an adequate legal forum and that its judicial system is even stronger today than previously.
Ecuador reaffirmed its commitment to democracy following the failure of the January 21, 2000 military coup. Its democratic, constitutional government continues today, and its judiciary remains independent. Ecuador’s military is not interfering with the judiciary’s or government’s activities. The current Government of Ecuador has taken and continues to take “vigorous steps to further the independence and impartiality of the judiciary.”
* * *
Plaintiffs’ next argument is that Ecuador’s courts are corrupt, but “the argument that the alternative forum is too corrupt to be adequate ‘does not enjoy a particularly impressive track record.’” The most persuasive evidence that Ecuador can and does dispense independent and impartial justice in these cases is the record of corruption-free litigation against Texaco’s subsidiary and other companies. This record provides practical proof that litigants can and do obtain fair treatment and relief in Ecuador’s courts, including in cases relating to Consortium activities. The circumstances in Ecuador are not remotely like those that prevailed in Liberia when this Court decided Bridgeway Corp., which involved a “dysfunctional foreign legal system.” The opposite is true in Ecuador.
These cases also have received substantial attention from the Ecuadorian government and media, environmental groups, human rights groups, indigenous organizations and other non-governmental organizations. This attention will continue regardless of forum. The public scrutiny these cases will receive in Ecuador and/or Peru will further assure a fair adjudication of plaintiffs’ claims.
I believe Texaco thought that if the litigation were dismissed in the United States the case would be over. At the time it was not clear that anyone had the will or the capacity to litigate a major environmental case in Ecuador on a contingent fee basis, or that third-party litigation funding might be available to support such an effort.
While the Aguinda case was pending, there were some important developments outside of court. First, in 1993, the Ecuadoran government made a deal with Texaco under which Texaco agreed to remediate certain sites in return for a release from the Ecuadoran government. Whether the release also extended to claims by individual Ecuadorans was later a point of contention. In any event, Texaco performed work under the remediation plan, and the Ecuadoran government effectively signed off on the work. The lawyers for the Ecuadorans, including Steven Donziger, one of the main protagonists in the story, apparently were against the remediation plan, though their motives were mixed. It’s clear that some of the sites on the list were not properly remediated, and points that the parties have disputed include: did Texaco (and later Chevron) conceal pollution to create the appearance of adequate remediation? Did Texaco/Chevron stop remediating due to political pressure from the plaintiffs? I address some of these points in my post on my visit to the Aguarico 4 site, one of the sites that was supposed to be remediated but that still (as of 2014 at least) was grossly polluted.
Second, in 2000, Ecuador suffered a coup d’etat that resulted in the military bringing Lucio Gutiérrez Borbúa to power. Gutiérrez adopted a program of neoliberal reforms at the insistence of Ecuador’s international creditors that resulted in the collapse of his government and, in 2006, the election of Rafael Correa Delgado, a left-wing, US-educated economist. One of Correa’s major initiatives was a reform of the judiciary. Whether this was a true reform of an ineffective or corrupt judiciary, or a political takeover of the judiciary, is a point of contention. I’m no expert in Ecuadoran political history, but my big-picture view is that when Texaco pushed to have the case in New York dismissed, it thought the Ecuadoran government was a friendly, right-leaning government (the government, after all, had signed off on the remediation completion), but after 2006, it was facing an unfriendly, left-leaning government.
Third, in 2001, Chevron acquired Texaco. The merger was a so-called “reverse triangular merger,” which if you have never taken a corporations law class in law school is probably gobbledygook to you. I’m not going to explain it here.
What Happened in the Ecuadoran Courts?
Defying the odds, the Ecuadoran plaintiffs went ahead with the litigation in Ecuador, specifically in a court in the provincial town of Lago Agrio. While they were represented by Ecuadoran counsel, they were also represented by Steven Donziger. The Ecuadoran case was sprawling, went on for years, and ended in a judgment of $19 billion, later reduced by half. The judgment was (purportedly) written by Judge Nicolas Zambrano Lozada. For our purposes there were two important things to note about the Ecuadoran proceedings.
First, the initial plan was to determine the truth of the claims about pollution through a judicial inspection process. Each side would conduct a “pre-inspection” using its experts, and then the parties, in the judge’s presence, would conduct the judicial inspection. The judicial inspections and pre-inspections are key to the case. On the one hand, Donziger and his team disliked the judicial inspection process because it seemed not to be producing the results they wanted. On the other hand, Donziger and the Republic of Ecuador itself asserted that Chevron was manipulating the pre-inspection process to help ensure favorable results by, for example, looking for “clean” areas in the pre-inspections and then offering those areas for inspection during the judicial inspections.
In any event, Donziger eventually persuaded the court to abandon the judicial inspection process and instead to appoint a single global expert who would be independent of the parties and who would report his results to the court. Here we come to what I consider the main point that Chevron was able to prove in the New York proceedings: the global expert, Richard Cabrera Vega, was in fact not independent at all, despite the protestations of Donzgier’s team. Indeed, the plaintiffs’ team wrote Cabrera’s report. (Donziger’s claim is that this was permissible under Ecuadoran law). The report’s true authors were from Stratus Consulting, the plaintiffs’ US environmental experts. They later disowned the report under heavy-duty litigation pressure from Chevron. (Chevron also proved a less significant instance of misleading the court: one of the plaintiffs’ experts, Charles Calmbacher, testified that the report the plaintiffs had submitted over his signature was not his report).
The second big point: Chevron has claimed that not only was the Cabrera report a fraud, but that Judge Zambrano’s judgment itself was a fraud, ghostwritten by the plaintiffs with the help of another judge, Alberto Guerra Bastidas, in return for a bribe. Now, Judge Zambrano hardly cut am impressive figure when he testified in New York. But Judge Guerra, who was Chevron’s star witness in the New York trial, lacked credibility in my eyes and the eyes of some other observers. Why believe a witness who admits to taking bribes and whom Chevron, in an ethically dubious move, has paid a lot of money and relocated in the United States? Moreover, Guerra’s story is that when he was soliciting bribes, his first choice was to ask Chevron for a bribe, which is difficult to square with Chevron’s basic story about a corrupt Ecuadoran judiciary politically in the bag for President Correa and out to get Chevron no matter what. Chevron’s attempts to corroborate the testimony were unconvincing to me; there is some evidence that the plaintiffs themselves were unaware of what the judgment would say before it was handed down; and newly disclosed forensic work, which Chevron disputes in part, casts more doubt on the ghostwriting claim. So although Judge Kaplan, the judge in the New York case, credited Judge Guerra’s testimony, I highly doubt I would have credited it had I been there to hear it.
Chevron appealed Judge Zambrano’s judgment to an intermediate appellate court, which affirmed the judgment. Chevron then appealed to the Ecuadoran Supreme Court, which again affirmed, though it reduced the damages by half (Judge Zambrano had originally awarded approximately $9 billion in compensatory damages and imposed what amounted to a $9 billion punitive damages award on account of Chevron’s failure to apologize. The appellate court held that this was improper). One point to note is that Ecuador follows the civil law, not the common law. Donziger’s team has argued that under Ecuadoran law the intermediate appellate court, following the civil law tradition, reviewed the evidence de novo, rather than simply taking the facts that Judge Zambrano had found and reviewing them against the record. This point will become important later, as we’ll see.
So as a result of the proceedings in Ecuador, the plaintiffs have a multi-billion dollar judgment against Chevron. But because Chevron has few if any assets in Ecuador, the Ecuadoran judgment, on its own, doesn’t do them much good. 2 They must seek recognition and enforcement of the judgment in states where Chevron does have assets.
What happened in the District Court?
You might think the obvious choice for the plaintiffs would have been to seek recognition in the United States, where Chevron is based, and more specifically to seek recognition in a state like Delaware, where it is incorporated, or California, where it has its headquarters. But although the plaintiffs in my view did inadvertently seek recognition of the Ecuadoran judgment in the United States by arguing that the US court had to give preclusive effect to Judge Zambrano’s findings, that was a mistake on their part and they have made it pretty clear that they won’t ever seek recognition and enforcement of the judgment here. So the New York litigation did not arise out of the plaintiffs’ efforts to enforce the judgment, but rather out of Chevron’s attempt to avoid the consequences of Texaco’s calamitous decision to have the action tired in Ecuador rather than in New York in the first place.
Chevron was aided by its masterful use of the US judicial assistance statute, 28 U.S.C. § 1782, which allowed it to use the US courts to uncover lots of juicy evidence that it was able to use in its lawsuit against Donziger. For Donziger had made a decision just as foolish as Texaco’s decision about forum non conveniens: he had invited a film crew led by documentarian Joe Berlinger along for the ride in Ecuador. Chevron, turning back a First Amendment challenge, was able to compel Berlinger to turn over many hours of “outtakes” that had not made it into his acclaimed documentary about the case, Crude. Donziger has disputed the spin Chevron has put on the outtakes, but there’s no question that upon arrival they were highly damaging and that several US judges to whom the outtakes were presented were not amused. Donziger is shown, for example, meeting with Cabrera and the Stratus Consulting team and talking about planning Cabrera’s supposedly independent report. He is shown in a car on his way to confront the judge, giving some choice views about the Ecuadoran judiciary: “They’re all corrupt! It’s their birthright to be corrupt!” My favorite clip shows Donziger in the car, on the way to confront the judge. “We’re going to let him know what time it is,” Donziger says, like he was playing a scene in The Godfather.
With this evidence in hand, Chevron sued Donziger and some of the plaintiffs under the US RICO statute, the law aimed at racketeers, and under the common law. They also sought a declaration that the Ecuadoran judgment was not entitled to recognition or enforcement. And they sought and received a preliminary injunction enjoining Donziger and the plaintiffs from seeking to enforce the judgment anywhere in the world. The injunction was too much for the Second Circuit, which vacated it in a brief order. The court’s full opinion in Naranjo, when it came, went further, holding that Chevron couldn’t even seek a declaration about the judgment’s unenforceability until the plaintiffs sought to enforce it in the United States. (I’ve questioned the wisdom of the decision and suggested it should be read in light of the evidence that the plaintiffs never intend to seek recognition in the US, since otherwise the decision seems hard to square with the law of declaratory judgments).
The parties went on to litigate the RICO case. I won’t attempt to summarize all the twists and turns here. One point of interest, though, is the way that Chevron, no doubt bringing enormous litigation pressure to bear, was able to turn Donziger’s allies against him one by one: Stratus Consulting, the plaintiffs’ third-party funders, Burford Capital and James Russell DeLeon, and even their former lawyers, Patton Boggs. As the trial approached, Chevron, which had been seeking damages and had demanded a jury trial, realized that it had a pretty sympathetic judge in Judge Lewis Kaplan, and it dropped its claims for damages, which had the effect of removing from the case the issues that could have been tried to a jury and left Judge Kaplan with the unenviable job of preparing detailed findings of fact. The RICO trial resulted in extensive findings of fact in which Judge Kaplan decided—not to put too fine a point on it—that Donziger was a crook who had orchestrated a massive scheme to defraud Chevron by corruption and by taking advantage of the already-corrupt Ecuadoran court. This is the decision that is now on appeal and on which the Second Circuit heard arguments yesterday.
What other litigation is pending?
The RICO case is not the only show in town. There have been too many cases to count, but here are some of the more important ones that are still pending:
- The investment treaty arbitration. Chevron has brought a claim against the Republic of Ecuador under the US/Ecuador bilateral investment treaty. Such treaties are meant to protect foreign investors. Disputes under the treaty are heard by a tribunal of three arbitrators. Chevron’s basic claim is that Ecuador denied it fair and equitable treatment and that Ecuador should be required to indemnify Chevron in the event Chevron makes payments on the Ecuadoran judgment. The arbitrators have ordered Ecuador to suspend the effectiveness of the Ecuadoran judgment pending the outcome of the arbitration, but Ecuador has not done so. It is difficult to find fault with Ecuador on this, since although the Ecuadoran state has international responsibility for the decisions of its judiciary, in a system based on separation of powers the executive cannot simply order the judiciary to reverse itself in a particular case. The United States has been in this pickle before. The arbitrators recently handed Ecuador a win by determining that the release Ecuador granted to Texaco after Texaco’s remediation did not bar all of the claims the plaintiffs had brought against Chevron in the Ecuadoran proceedings.
- The Canadian enforcement proceeding. The plaintiffs brought an action in Ontario seeking recognition and enforcement of the Ecuadoran judgment. The Superior Court stayed the case, but the stay was reversed on appeal; Chevron then appealed to the Supreme Court of Canada. The LAPs prevailed in the Supreme Court, and the case is now pending again in the Ontario courts. Similar enforcement proceedings are pending in Latin America, though we have significantly less information about them.
What did the Second Circuit decide?
The starting point for understanding the Second Circuit’s decision is the observation that Donziger did not appeal from any of Judge Kaplan’s findings of fact. So as I suggested at the very beginning of this post, the facts of the case are what Judge Kaplan found that they are. I don’t mean to criticize the decision by Donziger’s appellate counsel to focus their appeal on the law instead of the facts. Given the very high standard of review of findings of fact, “clear error,” they didn’t have much choice. Nonetheless, they were forced to make their legal arguments against a very bad, and unchallenged, factual backdrop. Longtime readers will know that I did not agree with all of Judge Kaplan’s findings of fact. In particular, I questioned whether Chevron really had proved the claim that Judge Guerra ghostwrote Judge Zambrano’s judgment. I’m not sure that would make much difference given the totality of the facts. Given Judge Kaplan’s findings, it may be that the judges started from the assumption that Donziger could not, in equity and good conscience, be allowed to profit from the Lago Agrio judgment, and then worked towards that outcome.
The judges rejected what I thought was the most interesting argument in the appeal. According to Donziger, even if the decision of the Ecuadoran court of first instance was obtained by fraud, the intermediate appellate court had the power to review the decision de novo and even to make its own findings of fact. Since there was no real claim that the appellate court was corrupt or that the appellate decision was obtained by corruption, the appellate decision effectively mooted the claim that the first instance decision was corrupt. But this was not persuasive to the court:
Notwisthstanding Donziger’s repeated characterization of the Appeal Division’s affirmance of the Lago Agrio Judgment as a “substitute judgment,” the fact remains that the Division did not alter the Lago Agrio Judgment at all. The only change in the Judgment entered by Judge Zambrano was made by the Ecuadorian National Court, which vacated the punitive damages award; and the National Court made clear that is role as a cassation court was to concern itself only with the law, not with the facts.
More specifically, the appellate court made no factual findings of its own and “expressly approved Judge Zambrano’s apprahc and conclusions.” The court seems to have concluded that the appellate court didn’t really do a de novo review or act as though it were reviewing the judgment de novo. But I think something else is going on, too. The court quotes some particularly puzzling language from the appellate decision in a way that makes me think it thought the appellate decision wasn’t worth much:
In sum, as stated by the Appeal Division … “the [trial] judge in his judgment [did] not assess each sample and its results separately, as if they described isolated facts”; rather he made a “discretion[ary] … assess[ment of the] scientific evidence.” His “method of interpretation” was “the interpersonal, psychic form or mechanism,” which “is not subject to strict limits in any concrete, express legal rule.”
To me this is the weakest part of the decision. Sure, it’s hard to take the reasoning of the appellate court seriously, but I am not at all confident that that’s not simply a consequence of my ignorance of Ecuadoran law and legal culture. In any event, there seems to me to be something real to the argument that what matters is the court’s power to review the facts de novo, not whether it actually conducted what we would think of as a searching review. But the court’s decision on this point is clearly respectable, and I could well be wrong here—the issue is difficult.
A second point I want to note briefly is the court’s dismissal of the point about judicial estoppel. I think the court’s decision here was right given the language of Chevron’s stipulation at the time of the forum non conveniens dismissal and the grounds the UFCMJRA gives for refusing recognition of a foreign judgment. But I encourage readers to read the exchange that Doug Cassel and I had on the issue of estoppel as part of the Letters Blogatory symposium on forum non conveniens and recognition of foreign judgments.
Last, I want to focus for a moment on the claims against the handful of Lago Agrio plaintiffs against whom judgment had entered. The court correctly (in my view) held that it was proper to attribute the misdeeds of the lawyer to the clients. The LAPs were not sued under RICO, so the question was whether a claim for fraud really lay against them under New York law. The court held that it did, and that nothing in Naranjo suggested that the UFCMJRA was meant to occupy the field. This is puzzling to me. I thought the claim against the LAPs was an affirmative claim for fraud, and when I’ve written about this before, it was through the lens of asking whether New York recognized a cause of action for fraud in the absence of reliance (Judge Kaplan held that it did). But in yesterday’s Second Circuit decision, it seems that the question was not whether Chevron had an affirmative claim for fraud, but whether Chevron could establish a defense to recognition. I will take a closer look at this, but suffice it to say that after a couple of reads of the decision, I don’t really understand this aspect of the decision.
The Lago Agrio case is unique, and so I don’t think that the issues I’ve discussed above are likely to be too important in the development of the law. There are, though, two issues that I think will be significant precedents. First, the court made clear the limitations of Naranjo: “In sum, the Naranjo decision held simply that “the Recognition act does not authorize a court to declare a foreign judgment null and void for all purposes in all countries, or to issue injunctions preventing parties to foreign litigation from acting abroad to present issues to foreign courts. Other arguments were “either rendered moot by [that] disposition … or … pertain[ed] to litigation that [wa]s not properly before us.” Second, the court held that a private party like Chevron could bring an action for equitable relief under RICO even if if didn’t seek damages. There were two views on this question.
There are some options for seeking further review in the United States: Donziger could seek a rehearing by the same panel that heard his appeal, or by the court en banc. Or he could seek review in the Supreme Court. It seems to me these options would have a low probability of success.
Attention will turn now to Canada and Brazil, where we await decisions on the plaintiffs’ efforts to obtain recognition of the judgment. Given the outcome in the Second Circuit, it’s possible that the foreign courts will regard Judge Kaplan’s findings of fact as conclusive, or at least highly persuasive. We are also waiting for a final award in the BIT arbitration between Chevron and Ecuador. If the US aspect of the litigation is over, then I think we may also begin to hear about New York attorney disciplinary proceedings against Donziger. I would be very surprised if Chevron has not already made a complaint against him, and in light of Judge Kaplan’s findings, it’s clear that he’s at risk.
- Or could have found, in a jury case. ↩
- It’s a minor point in the scheme of things, but I refer you to my recent post on the apparent betrayal of the LAPs by their Ecuadoran lawyer, Pablo Fajardo. One of the “assets” Chevron had in Ecuador was the right to receive payment from the Ecuadoran government on account of a $96 million arbitral award that was more or less unrelated to the main Lago Agrio case. That right was subject to an attachment following the Lago Agrio judgment. Apparently, Fajardo consented to dissolution of the attachment at the Government of Ecuador’s request, and without his clients’ knowledge, so that the government could satisfy the award by paying Chevron what it owed. The purpose was probably to ease Ecuador’s way in the international bond markets. ↩